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Edited Transcript of MIDD earnings conference call or presentation 26-Feb-20 4:00pm GMT

Q4 2019 Middleby Corp Earnings Call

ELGIN Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Middleby Corp earnings conference call or presentation Wednesday, February 26, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan E. Mittelman

The Middleby Corporation - CFO

* David Brewer

The Middleby Corporation - Executive VP & COO

* Timothy J. FitzGerald

The Middleby Corporation - CEO & Director

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Conference Call Participants

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* James Martin Clement

The Buckingham Research Group Incorporated - Analyst

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* John Phillip Joyner

BMO Capital Markets Equity Research - Senior Associate

* Lawrence Tighe De Maria

William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure

* Mircea Dobre

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Saree Emily Boroditsky

Jefferies LLC, Research Division - Equity Analyst

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst

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Presentation

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Operator [1]

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Thank you for joining us for the Fourth Quarter and Year-end Middleby Conference Call. (Operator Instructions) With us today from management are CEO, Tim FitzGerald; CFO, Bryan Mittelman; and COO, David Brewer.

At this time, Mr. FitzGerald, please proceed with your opening remarks.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [2]

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Thank you. Thanks, everybody, today for joining the call. I have -- I'm going to jump into comments real quickly here, and then I've got Bryan here to follow up with some additional comments on the financials.

2019 presented challenging market conditions. However, we reported record sales and profits for the quarter and year. And we are pleased with the many accomplishments of 2019 as we executed on our profitability initiatives and made strategic investments in our long-term growth. Our focus on profit improvement resulted in realized margin expansion across all 3 of our business segments, despite significant increases in cost from tariffs. Efforts from acquisition integration, supply chain initiatives and other operating efficiency improvements contributed to margin expansion, while savings from facility consolidations completed in the second half of 2019 will add to cost savings in 2020. Although industry demand was challenging across all our business segments, we made strides in positioning each of these businesses for sustainable long-term revenue growth, introducing a strong lineup of product innovations at all of our segments focused on industry growing trends.

Additionally, we invested in excess of $12 million in transformational technology development initiatives. This included the introduction of our recently launched Open Kitchen IoT platform and the development of our Middleby control to be introduced in 2020. We are also investing in digital marketing initiatives and cloud-based sales support tools as we made efforts to improve and enhance our sales processes.

In 2019, we reached a milestone topping $1 billion in revenues internationally, and we continued to build our infrastructure and capabilities in growing emerging markets. This included the opening of a new production facility in China, now manufacturing equipment for the local China and broader Asian market. This facility started up operations in the fourth quarter. We will continue to add equipment offerings, manufacturing at this new facility, as we continue to grow our business with global chains and localized concepts in the Asian region. Late in 2019, we also invested in our distribution partner, Levens, located in the Benelux as we further expand our footprint and capabilities in the broader European region with a long-standing partner.

Also in 2019, and we continued to execute on our long-standing and proven acquisition strategy, completing 8 acquisitions and adding 12 brands to our portfolio. These acquisitions furthered all 3 of our business segments and added to our portfolio of brands, products and capabilities and strategic growth areas, such as beverage, ventless cooking solutions, automation, IoT and controls technologies, while also further bolstering our core Foodservice cooking platform.

At our Commercial Foodservice segment, lower spending across the industry, particularly at our largest restaurant chain customers continued to impact revenue growth. The impact of the coronavirus will be an added headwind as we start the year. Although we anticipate continued market challenges in the near term, we are investing in areas of growing and emerging trends and are well positioned as operators invest in equipment to address challenges such as labor, facility costs, energy and food safety.

In 2019, we made significant progress in the continued development of our beverage platform, which we have created just within the past 5 years. This platform today represents one of the broadest and most innovative in the industry, representing approximately 1/3 of our Commercial revenue -- Group revenues. We are pleased with the margin expansion of this group of beverage companies. Although less than our long-standing cooking platform, EBITDA margins within this platform reached 25% in 2019, as we continued with efforts to realize synergies at the many recent acquisitions.

In 2019, we continued to add to the beverage platform with the acquisition of Ss Brewtech, which extends us into on-premise beer brewing, kombucha and coffee cold brewing. Most recently we acquired Synesso, a Seattle-based manufacturer of traditional espresso machines, adding to our highly innovative coffee platform and joining our JoeTap line of Nitro Brew products and our Concordia fully automated lineup of coffee and espresso equipment.

In addition to acquisition, we are pleased to continue introduction of new products to this platform with our Concordia single-cup brewer, the fastest automated brewer in the industry. We further expanded the JoeTap line and are now able to offer both hot and cold nitro beverages. We introduced our Skyflo smart and automated bar system, introducing savings -- significant time savings, labor and liquor cost savings for our bar and night club customers. And from Taylor, launched the ZAMBOOZY, which provides for a wide variety of alcohol-infused frozen beverage offerings.

We also continued to invest and expand in our ventless kitchen strategy. We are the clear industry leader in this category, and have the broadest lineup of ventless equipment solutions, allowing us to provide customers with a complete ventless kitchen from ovens to fryers, speed cook, grilling and combi ovens. Today, we can entirely obsolete the need for traditional ventilation, providing a more cost-effective, flexible, green and sustainable solution for our customers.

In 2019, we expanded our capabilities in this category with the acquisition of EVO, a leader in ventless with a patented downdraft solution for grilling applications. And just recently, we are pleased to have received the NRA Kitchen Innovation Award for our just introduced ventless soot solution integrated with our lineup of Blodgett convection ovens.

We've continued to develop our capabilities and solutions for ghosts, mobile and pod kitchens and are working with early-stage customers. We have further invested in our automation and cloud-based data intelligence capabilities, bringing those together with our broad portfolio of commercial equipment and highly automated solutions from our industrial food processing group to develop an integrated concept that can only be found within Middleby. Our automation team from L2F is focused on developing these concepts that can maximize labor, space utilization, capacity, speed of service and menu flexibility.

We have continued also to develop products supporting the growing food service delivery trends, launching our Smart PUC Cabinet from Carter-Hoffmann, which allows restaurant operators to hold both hot and cold food and stage products for delivery services and end-user customers. This cabinet provides QSR codes via mobile devices, greatly simplifying the Foodservice delivery and pickup operations, reducing labor and service times, improving the customer service experience, enhancing the food quality at our customers.

As we completed the year, we were also very excited to launch Open Kitchen, our IoT-based connected smart kitchen platform that communicates with all commercial kitchen equipment, regardless of the manufacturer. To be clear, this solution can be used on all brands of commercial equipment, not just Middleby products and cover all operations of a restaurant, including lighting, HVAC and equipment and processes inside and outside the kitchen. This technology, which has the potential to change our industry is from Powerhouse Dynamics, the company we acquired in April. They have the knowledge-based resources and capability to marry their solutions with our existing IoT Middleby Connect platform and bring this unique technology to market very quickly.

Besides being an open solution for all equipment, other benefits are 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.

As we continue to invest in new products and technology initiatives, we have also continued to focus on our profitability with efforts to realize synergies across the platforms and raised the margins in our most recent acquisitions. In the fourth quarter, we completed the consolidation of 2 factories related to the Standex businesses just acquired in the second quarter of 2019. This included the integration of Ultrafryer to our New Hampshire Pitco facility and the BKI brand into a new facility at Blodgett in Vermont. These initiatives should bring $10 million in cost savings and support our effort to double the margins of the business acquired from Standex in 2020, which also included the APW and Bakers Pride brands.

At our Residential segment, 2019 has been a difficult year for the appliance market, which has reported declining demand for each of the 4 quarters of 2019 both in the U.S. and also in the U.K. market with a continued backdrop of Brexit. Despite the continued near-term market situation, we are optimistic that early indicators pointing to improving market conditions will translate to revenue growth as we progress into the year. We continue to introduce new products across our portfolio of premium brands.

In 2019, this included the introduction of built-in column refrigeration from Viking, the recent U.S.A. launch of our euro-styled Mercury and a lease ranges from AGA, under-counter ice and bar centers under the U-Line and Marvel brands and the latest introduction of our Viking designer series of ranges.

We were also very excited to announce the addition of Brava to our Residential platform late last year. This state-of-the-art oven provides consumers with a fast, flexible, space savings and eco-friendly cooking product for the kitchen. This is a significant technology addition to the Residential platform and Middleby. Brava adds not only a patented, fast and flexible cooking technology, but a unique cloud-based menu-driven control, which we are now working to bring to Viking and other residential brands on upcoming planned product launches.

Our completed profitability actions at the Residential segment included the closure and exit of a loss-making noncore business in France earlier this year followed by the consolidation of our Lynx outdoor cooking operations into Greenwood, Mississippi at the Viking Campus, which was completed in the fourth quarter and should bear fruit as we progress into 2020.

At the Food Processing Equipment Group, order rates significantly improved late in the year as we began to convert the pipeline of customer opportunities. During 2019, we introduced a record number of new product innovations and expanded our sales efforts to address markets such as cured and dried meats, bacon, pet foods and alternative protein. We're pleased to say that recent order activity included business in several of these targeted categories as we broaden our addressable market opportunities.

As we continue to invest in new products and technology innovations, we have also continued to focus on profitability with efforts to realize synergies across the platform and raised margins at our most recent acquisitions.

Sorry about that. I came off comments here a little bit. But actually, I'm just going to close it out now. So as we enter 2020, we expect the market challenges to continue, including the most recent impact of the coronavirus. However, we remain optimistic on the upcoming years, we benefit from 2019 actions and we remain focused on the execution of our sales and margin activities while at the same time, we remain committed to our strategic investments in long-term growth initiatives.

So with that, I'm going to pass it over here to Bryan Mittelman.

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Bryan E. Mittelman, The Middleby Corporation - CFO [3]

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Thanks, Tim. Getting into the numbers, for the fourth quarter, we generated GAAP EPS of $1.96 versus $1.70 in the prior year.

As you may recall, last quarter, we began reporting adjusted EPS. In the fourth quarter, it was $2 versus $1.87 in the prior year. Adjusted EPS, which is fully reconciled to GAAP in the back of our earnings release, seeks to exclude items that are nonrecurring or not operational as well as those that do not correspond to current cash expenditures or inflows, which is amortization of intangible assets and the actuarial valuation gains from our pension assets. Those are excluded as well. We believe this is a relevant metric to use as it aligns with areas that management focuses on as we operate the business.

When evaluating the impact of recent acquisitions on earnings, the ongoing operational impact, primarily from the acquired brands of APW, Bakers Pride, BKI, and Ultrafryer as well as Powerhouse Dynamics, Ss Brewtech, EVO, Pacproinc, Synesso and Brava -- as you can see, we've been busy, as always -- was a $0.05 drag for the quarter. This excludes the impacts from restructuring activities in the inventory purchase accounting, which we would have otherwise separately broken out.

Our Commercial Foodservice segment sales for the quarter amounted to $513 million, which included an increase of $29 million related to acquisitions completed within the last 12 months, most notably from APW, Bakers Pride, BKI and Ultrafryer. Excluding the impact of all acquisitions and foreign currencies, sales for the quarter increased 0.4%, which includes overcoming a prior year rollout that presented a 2% headwind. In the U.S. market, where this rollout occurred last year, we saw a decrease of 3%. However, sales growth was 6.8% internationally, with increases in Asia, Europe and Latin America.

Our overall growth was obviously modest this quarter. As Tim noted, major rollouts by U.S. restaurant chains are continuing to take longer to materialize, which is leading to lower-than-expected organic revenue growth. We are not confident that growth in this segment will continue in the near-term as current challenging market conditions are likely to remain.

Additionally, the coronavirus outbreak will impact us, including decreases in sales in the near term. It is difficult to estimate a longer-term impact at this point, given the volatility of the situation.

In spite of the top line challenges, we are pleased to have improved margins sequentially and achieved a level relatively consistent with the prior year. The gross margin in Commercial Foodservice was 37.7%. And excluding the impacts of acquisitions and foreign exchange, the gross margin rate would have been up to 38.8% as compared to 37.8% in the prior year quarter.

Adjusted EBITDA for Commercial Foodservice amounted to $139 million, representing 27% of sales or over 28% when excluding the impacts of foreign exchange and recent acquisitions. This compares to 26.6% in the prior year quarter. The margin expansion was broad-based improvements we're seeing in mature businesses as well as those acquired in recent years and during 2019.

As I start to look forward, given the seasonality seen in this segment, Q1 of '20 margins will be lower than Q4 with the lower sales levels. However, we also expect pressure on them in Q1. While we remain committed to margin expansion, given the expected mix in volume as well as the developing coronavirus impacts and still being in the early stages of operating the newly integrated facilities, our expectations on achieving such margin expansion in Q1 is somewhat low. We will be delivering improvements in recent acquisitions as plant consolidations complete to mature and [as] the other acquired businesses drive operational efficiencies throughout the year.

While margins are expanding, it's important to understand the impacts of other factors as we execute our strategies. Our acquisitions in recent years have typically been in businesses with margins lower than the historic averages of the segment and also a significant amount of R&D investment is also associated with some of them as we are aggressively developing new innovations for our customers. While R&D investments will generate increasing revenue in '20, they will still be dilutive to the overall segment margins, with expansions predicted for '21.

As I commented last quarter, creating shareholder value through margin expansion and strong cash flows are key to our success. Our goal remains to grow margins in acquisitions to levels consistent with the overall platform. This corresponds to achieving 30% in the midterm.

We will deliver these improvements through: one, integration efforts and recent acquisitions; two, continuing to execute on supply chain initiatives to leverage our scale; and three, harnessing our capabilities and best practices to improve business processes.

The margins for businesses we acquired prior to 2017 stand at approximately 29% for the full year and were actually above 30% for the fourth quarter. Total segment margins are obviously below these levels. This is a result of the acquisitions, which, obviously, broaden our product offerings and allow us margin expansion and cash generation opportunities over the long term, as well as the strategic investments we are making in technology to maintain our leadership position.

For example, we are developing the customer-facing technology around controls, IoT and automation on which we're investing approximately $12 million annually. We're investing in our ventless combi and steam platforms and the internal teams to drive growth in these areas. We're growing our fabrication and design capabilities. We're developing and implementing tools to support enhanced sales effectiveness. We're acquiring businesses that have an opportunity for margin expansion over a period of years. And we are expanding our innovation-driven beverage platform. So I thought it would be useful to stratify our margins further, and I'll be looking at full year data in order to present the balanced view of how we operate.

Our mature cooking businesses are the foundation of the segment and collectively have our highest margins at over 30%. In recent years, we've added numerous businesses focused on beverage product offerings. Most of that have been part of our portfolio for only a few years or even less. The EBITDA business -- the EBITDA across these businesses is currently lower at 25%. As you all know, we have a strong track record of improving businesses and expanding margins.

Looking at the few large divisions that represent the dominant portion of beverages, our journey with them is in the early stages, but we have already accomplished great things. I believe what we've delivered is noteworthy, because if you look at their margins on a weighted average basis, you would say they started with margins in the mid-teens and now they are above 25%. As we are growing our margins across all the operations, we are also investing in new unique technologies. So when analyzing the overall segment margin, please recall that this is the detractor of approximately 0.75% on the segment.

Moving on to the Residential segment, where sales amounted to $154 million. Excluding the impact of the foreign exchange, an acquisition and the closure of a noncore business, we experienced a sales decline of 0.6%. In the U.S., we were able to generate growth of 3.9%, largely from Viking, while headwinds persisted impacting under-counter refrigeration sales.

Overall, our new products are driving increases in our market share as consumers positively react to our offerings. Internationally, we have not seen improved market conditions in the face of Brexit and experienced a 6.5% sales decline across all regions.

Margins for the quarter were meaningfully impacted by our transition of manufacturing for Lynx and to a lesser extent, from the acquisition. During Q4, we closed the former Lynx manufacturing facility and transitioned to the new facility in Mississippi. Operational efficiencies were the largest driver of the margin declines in the segment this quarter. In Q1 while actively manufacturing, we will still be in -- ramping up to full efficiency levels. We expect this impact to be behind us as we work through the second quarter.

Our acquisition of Brava expands our technology investments. Beyond the benefits from its cooking-with-light technology, it also expands our innovative control offerings, which will be an advantage for all Middleby companies. With the acquisition, we also expanded our digital marketing capabilities, again, which will benefit the Middleby brands as a whole.

Personally, I'm excited about having this appliance in my home. We make a tremendous amount of great products at Middleby, but this is one of the very few that my family and I get to use just about every day. So I think I'm going to take a second here and kind of go off-script for a moment and share some personal experiences and put in a little bit of a sales pitch as well.

I will admit that there might have been some skepticism in my house about putting this new cooking appliance to use. But I will say, once we worked through that, there really has been no looking back. I was talking to my 9-year-old son last night, and I asked him, tell me what you like about the Brava, what would you want to tell others about it because he's always looking to use it or play with it maybe, but his answers were simple. His first one was, "I can make dinner in it." And then he added, "If you eat 1 week of food from the Brava, you will not be disappointed, it will be delicious." So I don't pay him directly for those endorsements and I do believe them to be true. I mean he really relishes the opportunity to put his meal together on his own and to be the chef. And really, the whole family has been delighted with the unit.

I could go on and on about it, but I will stop by saying it's amazing in terms of its quality of cook, its versatility. It's got lots of cooking functions. We've recently started using the defrosting function on it. It's easy to use and the customer service behind it is amazing. So I do encourage everyone listening to go and order one at brava.com. You won't be disappointed. And by the way, we guarantee it.

So I should probably get back to what Brava means to our results, as they unfortunately did negatively impact margins by less than 1% in Q4, but it will represent an approximate 2% drag as we work through 2020. As I discussed last quarter, we've driven margin improvements across all our major residential brands in recent years. Our under-counter refrigeration businesses have our highest margins. Thus, as a result of the weakness in their revenues this past quarter, margins were further negatively impacted.

So looking back to Q4, gross margin at the Residential Group decreased to 34.6% compared to 37.2% in the prior year period. EBITDA decreased from 19.2% in the prior year period to 16.7%. Excluding the impacts of FX rates, the acquisition and the remaining noncore businesses, EBITDA for the current year would have been 19.3% and 21.4% in the prior year quarter. I believe it also may be useful to note that on further analyzing EBITDA, if you were to take Lynx completely out of the results in both periods, our margins would have essentially been flat year-over-year. While we will start off 2020 at lower EBITDA levels than in the corresponding prior year period, we will expect to see improvements as the year continues, especially if market conditions improve as we think is likely.

As in Commercial, we will continue on our path of expanding margins and investing in new technologies. Recall again that Viking has improved from losing money when we acquired it to now being in the mid-20s. AGA has improved from low single digits to the mid-teens, and we are undertaking efforts at these divisions and across the entire segment to achieve the medium-term goal of 25% EBITDA margins.

On to the Food Processing segment. Sales amounted to $121 million, of which an acquisition contributed approximately $8 million. Excluding the impacts of such and from foreign exchange, sales decreased 3.9% for the quarter. Gross margin in Food Processing improved to 35.9% as compared to 35.1% in the prior year period, while EBITDA margins also improved to 23.1% as compared to 22.6% in the prior year period when adjusting for foreign exchange and acquisition.

Looking forward, we have a positive view on the revenues of this segment. The backlog has improved meaningfully. Our Form-K that will be filed this evening will show that we started 2020 with a backlog almost $35 million higher than from where we started 2019. As such, we are confident that we will see growth both in the top line and EBITDA margins as we progress through 2020.

Having gone through the 3 segments, I also wanted to spend some time on full company performance. For 2019, total company adjusted EBITDA was up 12% and exceeded $638 million. Our EBITDA margin improved from 21.6% -- sorry, improved to 21.6% from below 21% last year. We achieved this while managing through challenging market conditions and while making many investments in the business. This is a result that the entire leadership team at Middleby is proud of. While our expectations are always high and we seek to deliver even greater results, we do take pride in having delivered this growth in this market. We certainly expect to deliver future growth in 2020 all while increasing our commitments [to] developing cutting-edge technologies by approximately $10 million.

As I look at our 2019 results, SG&A expenses did increase in line with our revenue growth and were up $45 million for the year. Acquisitions actually added over $64 million for the year. However, we mitigated this. We focused on taking actions to generate savings, ensuring we are delivering expanded margins. To do this, we've undertaken numerous restructuring actions. The restructuring charges and associated transition costs, which do not qualify as restructuring under U.S. GAAP, were $3.7 million and $4.3 million, respectively, in Q4. We will incur further expenses in Q1 as we complete the efforts currently underway. Savings are being realized in 2020 and should annually exceed $20 million.

You'd likely noticed that we did add cash flow disclosures to our press release. We did generate record operating cash flows of over $377 million in 2019. Our free cash flow is slightly below last year as we increased capital expenditures by over $10 million. For the year, nearly $18 million was spent on new facilities or making substantial improvements, which, in turn, allow for the successful integration of acquisitions and provide the associated margin improvements. This spending also includes our new protein innovation center, showcasing our capabilities in the food processing area.

And for 2020, we'll continue this trend as we have 2 residential showrooms opening and also our professional innovation kitchen, showcasing all our Commercial Foodservice capabilities. There are also plans at a few facilities to allow for improved manufacturing efficiencies. We will still seek to maintain our CapEx spend in the 1.5% to 2% of revenues range.

Our year-to-date free cash flow to net income ratio is 94%, in line with our average over the past 4 years. I will acknowledge that this is below what we achieved in 2018. That year benefited from abnormally low cash tax payments and also a large benefit in timing from accounts payable. It's also important to recall that we do have a significant noncash pension income benefit in our earnings, which is $29 million for 2019 and will likely be $10 million higher for 2020. We are committed to maintaining a high conversion rate on our free cash flow.

Net debt at the end of the quarter was approximately $1.8 billion. The financing activities, use of cash in Q4 of $87 million represents pay downs on our debt. Our net debt-to-EBITDA leverage ratio at the end of the year was 2.7x and continues to trend downward. As we've demonstrated, we continue to use our free cash flow to either pay down debt or fund our acquisitions.

That concludes my comments on our 2019 performance. With that Gigi, if you'd please open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jamie Clement from Buckingham.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [2]

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Tim, it seems like there's some evidence that the market may have further slowed in Commercial Foodservice in the fourth quarter, certainly did not see that in your numbers. Is that a function of specific rollout business you had with some chains that had been in the pipeline for a while, could you just comment?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [3]

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So no, actually, no. I mean chains was actually a challenge for us in the first quarter. I mean coming out of last year, we actually had a fairly significant rollout with a customer, which didn't recur. We did have a small rollout this year on our Nitro Brew line, which was meaningful for us because that's a new product. But actually chains was negative in the fourth quarter. We saw strength in the international market. So we did fairly well in Asia. Latin America was a bright spot. And we did okay in our -- the general market overall. So kind of with our channel partners, our dealer partners. So that was -- that kind of held up to offset the chains decrease that we saw.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [4]

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Okay. And then shifting -- changing gears a little bit over to Processing, the language in the press release sounded a little bit more optimistic, I think, read a little bit more optimistic than it had in the last couple of quarters. Are you starting to see any signs of some of those elusive protein orders kind of coming in?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [5]

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Yes. I mean, they have been coming in. So I mean, I think as Bryan alluded to, I mean, we lucked with a very solid backlog for the year. We saw orders come in. They were very late in the year. We've been working on them for a while, and time is always a challenge with the lumpiness of that business, but we did see orders strong to finish the year, a strong backlog that's continued somewhat in the beginning of the year. So I would say that a lot of the heavy lifting that the team did through the year in developing new products, which, I mean, I would say it is -- was really one of the strongest periods, probably, as I mentioned, a record new products that came out over the last 12 months that's touching a lot of our brands that contributed to that. I mean we're seeing a lot of interest there. And I think one of the things that is exciting is that it is broadening out beyond, I would say, we're -- we've been heavily concentrated in ham and sausage and some of the meat processing customers to a broader base.

So I mean, I think it is new products as well as new markets is embedded in that as well as some of the kind of longer-standing projects that we've been working on really for the last couple of years coming through. So that all turned to be a very positive way to finish the year from an order standpoint.

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Operator [6]

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Our next question comes from the line of John Joyner from BMO Capital Markets.

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John Phillip Joyner, BMO Capital Markets Equity Research - Senior Associate [7]

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So I really appreciate the additional details for margins and the Brava pitch, I guess I'll wait for Tim to give his feedback on JoeTap at some point.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [8]

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That's available for sale as well, so-.

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John Phillip Joyner, BMO Capital Markets Equity Research - Senior Associate [9]

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All right. So I realize that the visibility is limited for the commercial business and that it's clear that the first half of the year looks rather tepid but can you offer any details around how the year might unfold kind of particularly for the first quarter between large chains and general markets? I mean are we thinking kind of closer to flat organic or down organically?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [10]

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I think that we're looking at being down somewhat in the first quarter. I think some of the challenges that we saw in the fourth quarter with chains continue. I think as the year goes on, we expect that we'll do better with chains in the back half of the year, just given some of the things that we're working on and the fact that chains were light in the -- finished the year in 2019. So we suspect given kind of the list of things that we're working on, Murphy's Law always applies, and it doesn't all hit. But certainly, we think we'll have more chain activity in the back half of the year, particularly, with a lot of the new product categories that we're working out that we think really resonate to some of the trends that are going on in the industry.

I would say also that it was a tough year from the standpoint that a lot of our chain customers, there was a lot of CEO and management changes as well as a lot of M&A activity where private equity firms and other strategics were buying a lot of restaurants in the industry. So any time that happens, that pushes off or teams reevaluate some of the strategies. So it kind of gets caught in a hold pattern for a little bit.

So you never know what 2020 will bring. But it was really a record number of changes, both from a management perspective as well as from an M&A perspective. So I think some of that stuff will kind of -- will move through in the year. So I -- we would anticipate that purchasing decisions would come back on a little bit at a better cadence as we finish out the year. So those are 2 things as well as just from a Middleby perspective, I mean, we mentioned that there are a lot of new product initiatives that we're focused on that we think go to current trends. And so I think they resonate where our customers will spend money and provide them kind of with immediate returns. So as we're launching and seeding those, we think that that will also be kind of a specific item that will help us as we move through 2020.

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John Phillip Joyner, BMO Capital Markets Equity Research - Senior Associate [11]

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Okay. And maybe just one quick follow-up. The -- when you talk about management changes and things like that, the feedback that you get from customers when projects, as they get delayed or they kind of sit on them, how much color do you get from them?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [12]

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It varies quite a bit. I mean, certainly, when there are changes, they're -- often, they are looking to improve business opportunities. So I think that's where things that we might have in a pipeline with them resonate, and we think that we always can bring a lot of value-added solutions that can help them with their business, whether it's menu or operations. But there's quite a bit, and there's always a story behind each one, and I'm going to ask Dave to maybe further comment, given he's -- came from that side of the world.

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David Brewer, The Middleby Corporation - Executive VP & COO [13]

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Yes. We -- actually, I think it's one of the strategic strengths that Middleby has. It has been a record-setting amount of change at the CEO-, COO-level of our customers, our chain customers.

The bad news is that causes some delays. We're in there. We get a lot of color because of our inherent technology that we offer to lower their food costs, to lower their labor cost, to increase their speed of service, to increase their pack-out rates and accuracy across the counter. Those CEOs see the need to make those changes.

The good news, I have to say, the good news is a lot of the CEO changes and COO changes are people that we know that go to other brands, and they pull us along with them because we deliver solutions very quickly. And so while it delays in one spot, we get sucked into another chain so quickly because we can get solutions in the marketplace in their restaurants, making a difference for their customers. So I could cite 10 great examples -- obviously I'm not going to do that -- where we've been pulled along with CEOs that were appointed new, very powerful positions.

The other thing, too, is a lot of these CEOs are being sucked up by the venture capital guys and asked to run those venture capital start-ups, and they know us. We get personal phone calls, asking them to develop the restaurant with them. And so that's -- it's an exciting part of our business. It allows some of our best people to really excel in delivering solutions to these customers. It's really a lot of fun.

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Operator [14]

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Our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [15]

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Just a question back on commercial food. Just one, if you could just give us a better understanding of what drove that international strength? I know you had the tough comp there. And then I think the margins, you had said 3Q to 4Q would be kind of flattish. And certainly, they popped up nicely. So I just want to understand what really drove that relative to kind of your original external plans?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [16]

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Bryan, the margin.

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Bryan E. Mittelman, The Middleby Corporation - CFO [17]

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Yes, on the margin, as I said, it was somewhat broad-based. We've been talking a lot about kind of, I'll call it, the not-yet-mature businesses in terms of using the term to describe how long we have owned businesses. And those processes have yielded the results that you've seen. Some of our businesses, we take kind of big jumps quickly. Other ones are a little bit slow and steady. So I'd say we had contributions at both ends of the spectrum there as well as we have -- I think you're seeing the discipline on our cost management come through. Obviously, we did some restructuring earlier in the back half of the year, so those benefits are coming through as well. And we've been really disciplined in pricing, too.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [18]

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And Jeff, I'm sorry. I think your question was, what is driving the growth in the international in the fourth quarter. So I assume I've got that right. So...

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [19]

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Yes.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [20]

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We saw some pretty strong chain activity actually in Latin America. We've also been fairly successful in introducing some of the newer brands and products that we've got in the portfolio. I mean, I think one of the strengths of Middleby is the fact that we do have this international platform. So when companies come into the portfolio, gives them the ability to plug into a proven, existing distribution platform. We've got very strong sales teams that can sell solutions and support them with service. There's probably an element of that in Asia as well. We continue to do a bit better with some of the global chains that had initiatives going on in the fourth quarter as Asia as well. We're in the early stage of kind of broadening out the opportunities in Asia. As I mentioned, we've invested in a new facility there, and we had some of the new

(technical difficulty)

that came online.

The counter to that, unfortunately, is the coronavirus, which I will say, the timing of us making the investments is very good for the long term, and it will give us an opportunity here as we expand the production to an exciting portfolio of products. But in the first half of this year, that will obviously severely be impacted as restaurant starts are coming to, I would say, a screeching halt in the, I would say, in Q1 and Q2. We do expect that to come back online in the second half of the year. That's a very preliminary read, obviously, and that's through conversations with customers there locally. So the long-term trend exists, but that will be impacted in the first half of the year.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [21]

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Just on that with the coronavirus, is there a way to impact what you think the revenue impact would be in the first half of the year or bottom line impact?

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Bryan E. Mittelman, The Middleby Corporation - CFO [22]

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Getting to the full bottom line impact is a little bit challenging right now as we are walking through all the cost side of things and just starting to see a little bit of that. The revenue side, I would say, could be in excess of 1%. And again, we're very early here. And obviously, as Tim's noted, China has largely shut down, but things are still developing. So my fear is that we don't -- haven't seen the full impacts into adjacent geographies.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [23]

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Yes. So I'll just comment. I mean, our -- that's specific to China and in our Asia business. We do have a significant supply chain from China. We are a U.S. manufacturer, so you'll see all the finished good products really being developed here or manufactured here, but we do have component parts coming from that region, so just kind of to add on to it. Something that we've been proactive is assessing what risk there is in the supply chain, which I think we are dealing with some initial issues for Q1, which we think are manageable, and we're continuing to monitor that for Q2. And I might ask Dave to kind of comment on kind of operationally what we're doing there as well.

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David Brewer, The Middleby Corporation - Executive VP & COO [24]

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Yes. Sure, Tim. Clearly, the virus is a horrific situation, and our thoughts and prayers go out to anybody touched by it. But looking back at the Middleby team, the supply chain management team on the P&L side of this, it was amazing the agility and the capability across food processing to residential to commercial foods around the world, the purchasing people, the supply chain management people, the engineers. I'm telling you, within days of the virus being announced, I knew exactly what components were going to be affected and a tactical plan on addressing it. And so we have a high degree of confidence of dealing with the situation.

And I have to draw it back to the culture of Middleby of being very lean with young, experienced, capable people that know what they're doing, and that was honed even last year. I'll talk about the tariff wars. Last year, we honed that capability, and I couldn't be more proud of the supply chain management, purchasing people around the world, the success we had last year dealing with the tariffs. And that played out in a positive business way immediately this year with the virus. So I have a high degree of confidence in our supply chain, our very lean, capable supply chain management team around the world.

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Operator [25]

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Our next question comes from the line of Mig Dobre from Baird.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [26]

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I also want to ask a couple of questions about Commercial Foodservice. And I guess my question is this: if we were to leave aside the coronavirus matter, which obviously is nearly impossible to forecast, and you just think about the trends in your business, the things that you know vis-à-vis your customers, and you think about how 2020 might play out, I understand that Q1 is going to be down but you're talking about potentially seeing some better CapEx from QSRs as the year progresses. I'm curious, can you frame the potential growth here relative to Middleby's historical growth rate or even within the framework of this kind of 3% to 5%, that would be kind of a normalized industry growth rate? Can we get back to those sorts of levels? Or is there something else either in the general market or maybe on the aftermarket side that could potentially be holding us back?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [27]

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So look, I think we can get back to those 3% to 5% levels. I think the first half of this year, I mean, so take -- again, taking out the coronavirus, I mean, the market is sluggish, both the general market and then the chains really being down. Again, we think the cadence of that in the short term is not going to change. We gave specific reasons with some of the changes going on as well as some of the investments that they're making are more strategic. But I think as -- we do expect some of that spending to come back online.

The chains business has been light for us, so I mean from a comparative standpoint, given what's in the pipeline and the opportunities, again, nothing ever comes through as expected with the timing. But it ultimately, it will come through. I think we've gone through an extended period. And I think given what we see in the pipeline, that there would be more business coming through.

Does that get us to 3% to 5%? I think that kind of also depends on how the general market performs as well as the international. But I would say, if our chains business was to perform relatively well in the back half of the year, you could get to those types of growth rates.

Mig, I think, Dave wants to add one thing to that.

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David Brewer, The Middleby Corporation - Executive VP & COO [28]

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Yes. And so just to support Tim's point and to add a little color, coming from the chain side of the business, our customer, the chains, and even the general market, as I've talked to many of you one-on-one, they need to increase their same-store sales. They need to increase their traffic count. They need to build new stores. Otherwise, their business doesn't grow. They need to satisfy their customers.

Every time they make that move to add a menu item, every time they have that move to enhance their same-store sales, they need equipment and solutions, more importantly solutions. So it is like gravity. Eventually, they have to do it to hit their earnings, to hit their ownership returns, to satisfy their customers. So it's about our ability to have solutions be connected to them, to know what they need and to have solutions, not single pieces of equipment, but total solutions that deal with their food costs, that deal with their labor issues, that deal with their speed-of-service issues. So it's like gravity from -- for our customers. They have to make those changes so they can achieve their returns and satisfy their customers.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [29]

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I appreciate that. And that was really sort of the spirit of my question because the comparisons here seem to be quite easy, given some of the disruptions that you've had on the QSR side. And you're talking about a lot of enhancements that you have to your product from the ventless discussion that you had earlier to Open Kitchen, and some of the ghost kitchen opportunities and so on. So it seems like at least in theory, you should have the ability to outgrow the market. But I don't know if you have some internal benchmarks or goals that you can share with this audience that as you get...

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [30]

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Well, so we don't share internal benchmarks and goals, and they're always higher internally than they would be externally. But look, I mean, I think to your point, these are why we are investing in those areas, right? Beverage, there's trends there that are existing that can help our customers with revenue, with profitability, right? So I mean that's why we're investing in those areas. That was -- kitchens, that's a growing trend. That's not a hypothetical concept, right? So I mean I think we're working hard to educate customers, look for opportunities going to other segments, right? So we are expecting that to continue to gain traction.

Ghost, mobile, cloud and pod kitchens, that's early on, right? But it is also something that we do believe is not a fad. We think that is a trend that is here to stay and is a business model that is getting proven out and will evolve and get perfected over time.

And as I said in the commentary, we're very uniquely positioned from our IoT platform to be the brains of that to the automation capabilities that we have through IoT, what they bring with robotics and data and then their ability to integrate all these solutions across Middleby, looking at the most automated equipment that we have, conveyor oven systems, for example, which we're the leader in, and then actually pulling in food processing solutions by which definition are highly automated. So we've just got a very unique platform. We've actually spent a fair bit of time this year really evolving those concepts. So we can bring those to customers as they start to roll them out.

And you can see a lot of activity now, I mean not only from existing restaurant chains and retail customers and foodservice operations that are in process of opening operations, to private equity firms and kind of new outsiders that are coming into this space that are thinking about new business models.

So we're engaging with customers on all sides there. So look, I don't think that's -- we're going to say that that's going to be significant revenue in the back half of the year. That's a longer-term thing. But if you look across, we're hitting a lot of growth trends, and delivery is the other one. I mean I mentioned the PUC cabinet. But delivery is everywhere right now, and that is an operational issue that needs fixing at most of our customers. So we have a solution for that.

So some of these things can help buck the trend a little bit even when there's not the spending going in because we're really trying to target areas where spend should occur. And to your point, the comps -- look, it's never easy for us, frankly. But there wasn't a lot of chain activity. I mean that was a headwind in the growth that we squeaked out for the quarter. I mentioned a rollout. But I mean, we had a rollout that added about 2% to our growth in the fourth quarter of last year relative to this year. So as we kind of line up against next year, we hope that will be a little bit of an easier comparison to comp.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [31]

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Understood. Then my follow-up is on the margin side, where you've provided a lot of detail. But I, for one, am a little bit unclear as to how you're thinking about Commercial Foodservice margin for 2020 as a whole. If I understand your comments on the top line, we should be expecting for the full year some revenue growth, some volume growth. How should we think about margin on that? How do we think about incremental margins? I'm presuming they're going to be up, but some color would be helpful.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [32]

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Okay. So I'll just frame a little bit, and then Bryan will kick in. So I mean, I think we're certainly not giving a growth projection on this other than, hey, we'll -- the front half of the year looks to be down, given market conditions and corona. And then we kind of move to the back half of the year, which we suspect we could be up. And we think net-net, that could get us to an up year, which is where I think we're comfortable right now, and we'll see how the back year unfolds. We do believe that without growth, we put together a business plan that may not roll out perfectly quarter-to-quarter, but there is margin expansion that's embedded in there based on some of the things that we touched on.

So certainly, the facility consolidations that we did complete, which we haven't seen the benefit from that, will start to really roll in the second quarter. We -- they are completed, but I would say the operations aren't at perfect efficiency yet. So I think as we go into Q2 and beyond, we'll see that supply chain initiatives, which has been something that we've -- Dave and the team have done a lot to really lay the groundwork for that. So we've got an opportunity that we'll execute on in the year and other areas that we're going after, which is really just kind of the core, integrating the acquisitions that we bring in. And we've done 16 acquisitions in the last 2 years, 8 this year, 8 last year, right?

So I mean, just -- it's kind of embedded in Bryan's comments, but right. I mean we are basically -- when you look at the overall margins, it really is important to understand how much is going behind the scenes there as we have a lot of companies that are at far less than the industry average -- or not the industry, the Middleby average, and we're bringing them up. So those are all things that we're really continuing to push on as we move into the year.

So from a numbers standpoint, Bryan, I'll kind of let you pick up.

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Bryan E. Mittelman, The Middleby Corporation - CFO [33]

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Yes. I -- and Mig, as you know, I'd say our margins tend to move up as we work through the year as well. So my comments were meant to be that Q1, the expansion opportunity, same quarter to same quarter is going to be a challenge for us. But we've certainly talked about a lot of things we're doing on the cost side of things. So I do expect for the balance of the year to be generating improvements related to all those all those areas. So we still believe that that will be delivered even in kind of the current market conditions. So it was more of a, I guess, a tepid view on Q1 but still being overall positive after that.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [34]

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So Mig, one other thing I just want to add to that is we're continuing to invest also. So I just want to point out a couple of things: One, we've mentioned a few times here that we've invested $12 million in technology initiatives. That's going to increase going into next year. I mean we're very committed as we continue to transition the company to focus not only on fast-growing segments, but to really bolster our technology initiatives, which is Open Kitchen, it's controls, it's automation. So that $12 million is going to likely double in 2020. And it's going to touch not only commercial, but with the Brava acquisition, we're taking that, and that's a platform that we'll bring into other products. And there is investment there.

So I want to mention that as well as we spent a fair bit in 2019, which is embedded in the numbers that we've delivered, adding to marketing tools and initiatives, which included opening some additional showrooms. But that -- those investments will continue. I mean we're very excited, but we're going to be opening an innovation showroom likely here in the second quarter, which, in addition to the residential showrooms, is going to be for commercial. So we've got now an innovation center for Food Processing. We will go from 2 to 4 showrooms in Residential, and then we're going to have a really state-of-the-art innovation center supporting our commercial business, which with all the technology, brands, solutions, the ability to serve segments, that's going to be a very unique asset in the company. So that's going to be a CapEx initiative, but it will be -- also be an operating initiative as well.

So I just kind of consistent with 2019, where we focused on moving the business forward from a profit standpoint, investing in acquisitions and also investing in what growth as that continues into 2020. So as Bryan's talking about margin improvement, we're going to also be reinvesting some of that back in the business.

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Operator [35]

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Our next question comes from the line of Saree Boroditsky from Jefferies.

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Saree Emily Boroditsky, Jefferies LLC, Research Division - Equity Analyst [36]

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On residential, could you provide more color on what positive early indicators give you confidence on the 2020 outlook? And how should we think about the cadence of growth through the year?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [37]

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So the trajectory as we start the year, we think is going to be similar to the end of the year, which is the appliance market was down, and we look at indicators like AHAM, which tracks appliance sales. And then obviously, what's just going on in the U.K., which -- there's the never-ending saga of Brexit. So I think the start of the year, that doesn't change. However, as you look at new home starts, they started picking up in November. And so we've seen in the last 3 months where home starts have improved rather than declined. And if you look at other industries that are around kind of the housing market, they've fared better. That -- those businesses see the impact of that ahead of the kitchen, which is the last piece. But I think that is one of the things that we're looking at. We think that there's a lag there, but I think that gives us some confidence that, at least domestically, we will see some of that as we kind of get to the middle of the year.

And I think then, again, outside the industry, I mean, we're continuing to pump along on all the things that we're doing, which is the new products, which -- a lot of what we launched in 2019 really takes a while to get traction. I mean, so again, there's a longevity to get that seeded as well because that's tied to remodels and home starts. And frankly, it's -- you got to get that training out to designers and dealers and products and showrooms.

So a number of the products that I had mentioned, early designer series: the ranges from Viking, certainly the column for the built-in from Viking, which we're excited about; really great products coming from AGA that we're just launching in the U.S. now, and that's also with the capabilities that we've built up over -- with distribution over the last number of years. I mean, we would not have been able to do that otherwise. So I mean, I think that's really great that we can execute, bring products such as that to market quickly.

So the new products, hopefully, start to take hold as we move through the year.

And then also the investments that we're making in our sales team and with the showrooms, digital marketing is something that we're also focused on. So the last couple of items I mentioned are really things in our control that we continue to invest in. But I think the backdrop of the market, we're hopeful that picks up. And again, those are the leading indicators that we've been watching closely.

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Saree Emily Boroditsky, Jefferies LLC, Research Division - Equity Analyst [38]

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I appreciate the color. Then just sticking on residential, you talked about margins lower year-over-year in the first quarter. Would you expect the full year 2020 margins to improve?

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Bryan E. Mittelman, The Middleby Corporation - CFO [39]

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Yes, I would expect them to pull back to even and hopefully start to improve. A lot of this is, though, volume dependent as well. Some of the investments we're making are kicking off and will take a little bit longer to pay off. So again, I'm -- I think there's more -- it reacts a little bit more to volume in the short term or at least that will have more dramatic impacts on it.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [40]

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Yes. I'll just add, I mean, we did consolidate the outdoor line, which -- Lynx is a piece of that into Viking. So we do expect to see the benefits of that as we move through the year, talked about, hey, we're still really in ramp-up mode right now. So there's a lot of training going on and some inefficiencies just that are related to start-up. But as we kind of move through those, I think the benefit of that will be seen, certainly, in the second half of the year, perhaps in the second quarter. That, frankly, has a little bit of a disruptive impact as the Viking team is really pitching in with the Lynx team to get all that rocking.

But I think outside of the first quarter, we do -- we've been consistently expanding margins at Viking as well. It was a record year of margin for Viking, and we keep tweaking that up. And certainly, manufacturing efficiencies, particularly on the new products as they start to season at Viking, that will be a benefit as we go through the year. And supply chain is also an area there that is of focus, is a piece of our broader supply chain initiative. So I think those are some of the things that we expect to come through in -- as we get to the latter parts of the year.

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Operator [41]

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

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [42]

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First, on the -- obviously, we could all debate the market outlook. When you talked about some of the changes you guys are doing, affiliate consolidations, supply chain initiatives, et cetera, can you just give us a number? What's the structural increase in dollars year-to-year just on those internal things you're doing that we can bank on, even if all else stays equal?

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Bryan E. Mittelman, The Middleby Corporation - CFO [43]

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The number we've talked about this morning is $20 million.

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [44]

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$20 million, and that's all in CFS?

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Bryan E. Mittelman, The Middleby Corporation - CFO [45]

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No. Mostly CFS, I think, if we go back to things we've talked about, there's also a little bit of a carryover through food processing as well. And certainly, the Lynx factory consolidation is the biggest driver in the near term for residential.

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [46]

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Got you. And then last question. There's been a lot of noise in the market and talking to clients about, obviously, a large chain thinking about adding a chicken sandwich. Just curious what your thoughts are and how you're positioned to potentially participate in that and potentially win that business. Do you expect the timing? Do you expect it to go to one player? And just how you think that may play out? And could it be significant?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [47]

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What -- Dave is going to add a comment. I'll just start by, hey, we don't comment on any specific customer opportunity. I'll just say that our products cook the best chicken sandwiches in the industry, but I'll let Dave pick it up from there.

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David Brewer, The Middleby Corporation - Executive VP & COO [48]

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Well, Tim has gotten farther than I would. But yes, we will not talk about our customers specifically. Yes, there's a lot of activity out there. As I referenced earlier, these CEOs of these large chains need to drive same-store sales, new store development, customer satisfaction through new menu items. And when they make those changes, most of the smart supply chain management people at our customers take advantage of that by bringing in new technology that lowers labor and improves speed of service and food cost. And when you do that, from an engineer's perspective, which I have to go to on my background, we have the right solution that enables that operator to do the best job possible. Whether that's a pizza or a chicken sandwich or a protein, a plant-based burger, we have literally the best solution to bring those products to life for their customer. That's it.

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Operator [49]

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Our next question comes from the line of Walt Liptak from Seaport.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [50]

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So I wanted to ask about the Commercial Foodservice growth rate, and I was wondering about the M&A that you've held for over a year, like Taylor? Are those -- are you getting growth out of those? Is that part of the reason that your growth rate was better than some of your competitors?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [51]

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No. I mean, so Taylor specifically, no. I mean, actually, with Taylor, I mean, we went through an SKU rationalization. It wasn't massive by any means. But if anything, there was a headwind there. I mean we've -- our focus in the first year has been on margin expansion. So I mean, I think there's a whole variety of things that we look at when we're thinking about how to improve profitability. But with Taylor, certainly one of the things that we went through is we culled out some of the SKUs that were either low margin or they complicated the manufacturing operations. So that actually was a detractor.

So really on the beverage side, I mean, I think you look about that ice coffee, some of the unique products that we've got coming out from Wunder-Bar, which we didn't talk about, which is front-of-the-house, touch-screen dispensing, which we're excited about. And we're really focused now on building the pipeline of new products.

For Taylor, they had a number of things that came out this year. Probably one of the things that I've mentioned in the comments that we're very excited about is a ZAMBOOZY, which, at this stage, it's -- we're just seeing the marketplace of the -- but we expect to continue to add new products from Taylor, such as that, that will help Taylor grow rather than detract and where we're cutting SKUs. So that's where we're kind of moving into that mode of new product introductions.

And just with mentioning ZAMBOOZY, I'm going to turn that to Dave, because I know he'd like to give a quick pitch on ZAMBOOZY. So...

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David Brewer, The Middleby Corporation - Executive VP & COO [52]

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So yes, kind of the theme of the call here. I'm not going to try to one-up Bryan. But ZAMBOOZY is just a working name of a product that changes how the restaurant operates. And it has surpassed the CTX product line, which we -- I've handed the CTX that -- the long-wave infrared oven that's remarkable conveyor oven -- I've handed that over to James, and James is going to -- one of our group presidents, he's going to grow that. So he's feeling the burden of picking up the CTX. And I've taken on the ZAMBOOZY. And I know Jeremy is listening, and we're going to drive ZAMBOOZY to record sales this year.

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Bryan E. Mittelman, The Middleby Corporation - CFO [53]

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Yes. And I would say, I haven't introduced my kids to the ZAMBOOZY. But we are big fans of the Taylor ice cream machines. And taking it back to the margin story as well. I mean Taylor is obviously a large operation and really has been a strong part of that margin expansion story for us. So as Tim said, it is not immune from some of the market pressures on the top line, but it's obviously really important for us and makes its fair share of contributions to the bottom line.

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Operator [54]

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Our last question today is a follow-up from Jamie Clement.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [55]

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Dave, this one's for you. If you look back over the last couple of years, it seems like a lot of large chains diverted CapEx and a lot of management focus to front of the house, the apps, to delivery, to drive, all that. If you want to think about a 9-inning game, with the ninth inning being the money flows back to the kitchen kind of, how far along in that process do you think we are? And how close are we to seeing that money flow back to the kitchen?

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David Brewer, The Middleby Corporation - Executive VP & COO [56]

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Well, I would say a couple of things. First of all, I think our investment in beverage technology, that beverage system is right there at the counter. And actually, in many ways in self-service, it's across the counter. And so we're participating near term, thanks to JoeTap, Taylor and the Wunder-Bar solutions, in that spend there.

To run a restaurant, which the good news is we have a lot -- tremendous amount of talent in Middleby that actually has run restaurants. And to run a restaurant, you have to have a balanced system. So if your front of -- the front counter and 2 steps in front of the front counter, it's out of balance with your manufacturing process in that kitchen or at the drive-through, you've got to balance that production system. And that's where that innovation that we're bringing, that we're demonstrating through the ghost kitchens and the cloud kitchens and -- which is not a new concept. It's a concept that's here to stay, but it shows off our ability to transform the kitchen and balance it against the front counter and drive-through and carryout needs.

So we're participating, I think, with the invention of the PUC system, with the management system that's supplied by Open Kitchen, to run the whole restaurant. And then, I think in the next 24 months, they're going to need to pull through the manufacturing process through cooking and holding in the kitchen. So I'm looking at the next 2 years very bullishly from a solution perspective, not a one-off, I'm buying an oven or a grill or a fryer. They're looking at [holding] connected to cooking, connected to customer service. And that's why we're so proud of the Open Kitchen concept that we launched in Milan at the Host show that's just gotten tremendous traction because they see it as a manufacturing process. And so I'm very bullish over the next 24 months.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [57]

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But do you agree that over the last 2 years, that spending has been redeployed, and that that's one of the reasons why Commercial Foodservice has been more sluggish than you'd like?

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David Brewer, The Middleby Corporation - Executive VP & COO [58]

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Yes, we've talked about it. You and I have talked about that.

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Operator [59]

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At this time, we're showing no further questions. I would like to turn the call back over to management for closing remarks.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [60]

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Okay. Well, thanks, everybody, for joining us on the call today. We appreciate it greatly, and look forward to speaking to you next quarter. Thank you.

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Operator [61]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.