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Edited Transcript of MIDD earnings conference call or presentation 8-May-19 3:00pm GMT

Q1 2019 Middleby Corp Earnings Call

ELGIN May 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Middleby Corp earnings conference call or presentation Wednesday, May 8, 2019 at 3:00:00pm 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

* Jason Andrew Rodgers

Great Lakes Review - VP

* Jeffrey David Hammond

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

* 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 Middleby Corporation First Quarter 2019 Conference call. With us today from management are CEO, Tim FitzGerald; CFO, Bryan Mittelman; and COO, David Brewer. (Operator Instructions) Now I'd like to turn the call back to Mr. Fitzgerald for his opening comments. Please go ahead, sir.

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

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Good morning. Thank you, everybody, for joining us today on Middleby's first quarter earnings call. We are pleased to continue with our positive momentum both in the sales and profitability in the first quarter. We realized sales growth in both our commercial foodservice and residential segments with improving trends in food processing. We continued to make ongoing progress towards our long-term margin and profitability initiatives across the 3 business segments. In particular, we are focusing efforts to target profit improvement at companies recently acquired over the past several years.

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

More specifically, at our commercial foodservice division, we realized sales growth through activities with our restaurant chain customers as they continue to adopt our latest technologies. Internationally, we see continued improving trends in global and emerging markets, offset with ongoing challenges in the U.K. pertaining to the overhang of Brexit and the impact of disruption from tariffs on U.S. equipment sold into the China market.

We continue to invest in our international infrastructure, building upon the expansion over the past several years into key markets, such as Brazil, India, Middle East and Australia. We're further enhancing our service capabilities in the global markets to enhance support of our chain and regional customers as they expand operations, and we're further investing on our manufacturing, localization strategy in markets such as China.

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

We also continue to further invest in our automation initiatives following the acquisition of L2F in the past year. Although our efforts towards automation is a long-term strategy, we will expect to have a slow adoption rate with our customers, we are pleased with the level of engagement we have with our customers and have several ongoing projects as we build the pipeline of developed products solutions to offer to the market expected later this year.

We've also made significant strides in our IoT platform. Our Middleby Connect platform allows our customers to connect our high-technology equipment to the cloud, allowing for menu management, service and maintenance capabilities, and operational monitoring of equipment. We were excited to launch the Middleby Connect solution earlier this year at the NAFEM show and have seen considerable interest.

In April, we further broadened this platform with the acquisition of Powerhouse Dynamics and their SiteSage platform. The SiteSage platform has been adopted by a number of leading restaurant chains and offers a complementary solution to Middleby Connect, supporting a broad array of tailored solutions to facilitate management of kitchen operations, providing for a variety of operational benefits, including savings related to energy, labor and food safety.

We'll continue to invest and develop this combined initiative in complementary platforms to provide our customers with the comprehensive solution offering integrated equipment and IoT solutions.

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

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

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

At our residential platform, we continue to develop and launch new and innovative products to the market.

From Viking, this includes the launch of our new Virtuoso line, and a continued expansion of the built-in refrigeration offerings. We're also pleased to launch the new generation of under counter refrigeration from the U-Line made available in the first quarter. And currently, we are very excited to be coming to market with a new line of AGA branded euro style cooking lines for the U.S. market under the Elise and Mercury brands.

We continue to launch and support these new products, leveraging our Middleby residential sales and distribution platform. We continue to invest in this platform established over the past several years with added sales personnel and the investment in our showrooms, including the most recent opening of our New York showroom and planned opening of our third -- our third showroom in Southern California later this year.

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

We believe there are significant opportunities to further leverage synergies across the platform in the U.S. market through ongoing supply chain and manufacturing improvements. And during the first quarter, we realized the margin benefit from the exit of our non-core Grange furniture business, and we will continue to focus on efforts with remaining non-core businesses, which also presented diluted impacts to the margins for this segment.

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

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

At our Food Processing Group, we believe, we will return to top line growth and improving mix in the second quarter. We anticipate this improvement resulting from the measured recovery in core hot dog and sausage markets, driven in part by emerging markets, and the adoption of upgraded technologies by our customers to drive operating efficiencies and profit improvements.

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

We're very excited to have recently introduced many of these new products with a positive response, including this week at IFFA, a major industry trade show in Germany.

Now I'd like to turn the call over to Bryan Mittelman, our CFO, for further commentary on the financial results for the first quarter.

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

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Starting with the commercial foodservice segment, sales for the quarter amounted to $458 million, which included an increase of $92 million related to acquisitions completed within the last 12 months, most notably Taylor.

Excluding the impact of acquisitions and foreign currency, sales for the quarter increased 3.4%. Sales growth was 2.8% in the domestic market and 4.8% internationally.

In terms of regional contributions, Latin America and Asia were the primary drivers, while in the U.K., a challenging environment continues. In the U.S., as Tim noted, restaurant chains continue to be the main driver of our growth.

The gross margin at commercial foodservice was 37.7% as compared to 38.4% in the prior year quarter. However, excluding the impact of acquisitions and foreign exchange, the gross margin would have been just slightly down to 38.3%.

EBITDA for commercial foodservice amounted to $113 million, representing 24.8% of sales. We continue to focus on the expansion of profit margins. Our goal remains to grow margins at the recent acquisitions to levels consistent with the overall platform. Taylor certainly gives a meaningful impact on these margins, and we've made solid improvements over the past 9 months and will continue to do so.

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

The EBITDA percentage is also impacted by acquisitions over the last 2 years, especially where we have sought to increase our investments in technology and automation, namely L2F, as well as we are broadening our capability such as in fabrication and store design with QualServ. This broadening of our portfolio brands, technologies and capabilities will drive top line growth and improve profitability over the long term, but our work continues in the near term.

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

Moving onto the residential segment. Sales amounted to $137 million, excluding the impact of foreign exchange, and the closure of a noncore business, growth was 5.5%. Domestic sales increased by 6.8% as we continue to see strong results at Viking, which increased double digits over the prior year quarter.

International sales increased by 3.6%. While we are pleased by this recent performance, primarily within the AGA and Rangemaster family of products, given the continuing uncertainty around the U.K. market, such growth rates may not be sustainable in the near term.

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

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

The margin improvements reflect increased profitability at our domestic brands, driven by higher sales at Viking as well as with under counter refrigeration, along with some efficiency benefits in manufacturing and distribution initiatives.

Onto the food processing segment. Sales amounted to $92 million, of which acquisitions contributed $8.4 million. Excluding the impacts of acquisitions and foreign exchange rates, sales decreased by 3.2% for this quarter.

Gross margins at the Food Processing Group improved to 35% as compared to 31.7% in the prior year period, while EBITDA margins improved to 17.5% as compared to 16.6% in the prior year. Margins of this business have improved as we have worked to control costs.

The absence of large customer orders will be a headwind for this segment. We are optimistic that we will see improvement in both the top line and EBITDA margins as 2019 progresses, but meaningful increases remain a challenge in the absence of these large customer orders.

In terms of overall results for the quarter, as noted in our earnings press release, the agreements reached upon the retirement of our former Chairman and CEO impacted the quarter by $10 million or $0.14 and also negatively affected operating cash flows.

Cash flow generation during the quarter amounted to $34 million from operations. This represented a decrease of $11 million over 2018.

Higher working capital, substantially driven by inventory levels and payments to our former Chairman and CEO detracted from cash flows for the quarter.

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

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

Net debt at the end of the quarter was approximately $1.8 billion, which was slightly lower compared to the end of fiscal 2018, and our net debt-to-EBITDA leverage ratio at the end of the quarter was just under 3x.

So with that, I will turn the call back over to Victor and open it up to questions from the analysts.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first 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 [2]

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

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

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

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Yes. So I think it hasn't changed. I mean, certainly on Q2, I mean, we have some chain activities that carry in or start in the second quarter. So we anticipate that we have some slight improvement in terms of organic growth domestically. Kind of the broader market is kind of low single digits. So our beta is kind of driven by the chains. So we had some good opportunities kind of leading into the second quarter. We also are continuing to work on a number of opportunities for the second half of the year. As you get further out, it's always more difficult to understand kind of timing of when orders land, just because a lot of that's driven by operating activities and menu initiatives at those customers, but we do have a pretty good set of customers that are looking at a lot of our new technologies that are really helping drive the initiatives of their business.

So Dave, I don't know if you have anything related to that?

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David Brewer, The Middleby Corporation - Executive VP & COO [4]

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Yes. I would say the mega trend of labor availability and the cost of labor and the training of labor is clearly taking a leading role this year with our chain customers and even the smaller chain customers. I think that the NAFEM show was an outstanding show. We spent a lot of money strategically on it for the next year to 2 years. And so we have a lot of visibility to what the customers are looking for around automation, specifically around labor and then second to that would be around carryout. Their customers are demanding more food to be carried out. And some of the innovation that we showed off with Carter-Hoffmann on the ability to enable the GrubHub's and Uber Eats were just really well received. So I'm very positive. And then the acquisition of Powerhouse Dynamics. I mean, we now have a footprint of data management and data control systems for the restaurant operator that enables their employees to be more productive quicker, and operate their kitchens more effectively and efficiently.

We have got -- now we instantaneously have a footprint of close to 4,000 installed systems around the world in restaurants and probably that's more than the next 10 competitors we have. So it's a huge footprint of data management, data control systems enabling our cooking solutions and holding solutions and beverage systems to be more productive around labor.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [5]

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Got it. But to be clear here, your comparison, your comp here is getting about 500 basis points tougher as we look going forward. Do you think that there is enough momentum in the market and enough visibility from QSR customers for us to still be able to expect sequential uptick in growth in commercial foodservice?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [6]

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Yes. I mean, as I said -- I mean, I think, as we are going into second quarter, there is some momentum there that we're carrying in. I mean, certainly, the comps get tougher, as you said. I mean, the -- as you get further in the back half of the year, the visibility gets a little more difficult. But we know we've got some activities that are ongoing in areas such as ventless and accelerated cooking with our beverage platform, that has been an area that we've invested in over the last couple of years, particularly in things, such as coffee and Nitro Brew. So there are some good opportunities there. So I mean, those are the things that we are carrying into the second quarter so that will help us, and we're certainly following the trends of the customers, and that's where you have seen us make a lot of strategic acquisitions over the last several years and a number of new product introductions, many of those, which were on display at NAFEM which Dave just mentioned. And some of those are nearer-term opportunities. And then we think that we got some follow on, longer-term opportunities that we're starting to build the pipeline for as we move through '19 and into 2020.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [7]

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Okay. And my follow-up is on margin and actually, I have a lot of margin questions, but I'll let other people ask them too. So in commercial foodservice, if I'm sort of looking at your performance in a quarter, excluding Taylor, looks to me like margins were down on a year-over-year basis there. So my question is what's really going on here? Is it price cost and -- or potentially something else that impacted a quarter? And how do we think about the rest of the year? What are your dynamics, especially on material costs into Q2 and second half?

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

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Yes. So I'll make couple of comments and I'll flip over to Bryan as I'm sure he'll have more details. But I think on the price cost side, I mean, we've had significant cost increases related to tariffs. So that's nothing probably too surprising to anybody, and we've been talking about that and trying to get ahead of that with price increases as well as initiatives that we have on supply chain, which is one of the areas that we're really trying to leverage in and drive synergies across the organization and that's a big initiative for us in 2019. But the increases came hot and heavy in a couple of different waves late last year. And we're probably at an inflection point, where we're still catching up to it. So that was probably little bit of a detractor in Q1. I think we -- that lessens or maybe we kind of get neutral in Q2. So I think, there was an element of that.

With margins, we -- although Taylor was not accretive in margins, it was still a little bit less than kind of our historical add. So we've had significant improvement there moving to mid-20s, which is certainly respectable and a far jump from where it was when we bought the business, but we still have ways to go there. And we've bought -- we -- actually, I don't know what are the number of acquisitions over the last couple of years in commercial foodservice, but it's quite a bit. And that's still is a drag and we're moving up the margins on those companies. I mean, if you think about companies, such as QualServ, for example, we've -- we have completely retooled that business moving it from a distribution model to fabrication model. As we've done that, we've actually disrupted the business more. We're very excited about it because it strategically fits with our platform, really broadening our capabilities for our customers helping us design restaurant solutions and kind of integrated fabrication and cooking/beverage solutions. But that is kind of like 2 steps forward before we move -- 2 steps back before we move forward. But what's exciting there is we actually have a whole new lineup of customers that are coming online that were not there at QualServ when we bought the company. So we're really repositioning the business now. So we're expecting margin expansion there as we move through the second half of the year and certainly into 2020, but that's been kind of a drag on the margin. So that's really very much a strategic repositioning.

And then the other thing that I mentioned is, we are -- as we are moving forward with margin expansion really in all 3 platforms, we are making strategic investments. So that's controls. It's an IoT and it's an automation. Those are things that do not have an EBITDA. They are added investments that we are committed to making right now because we think that they really bring longer-term benefits in terms of growth in our ability to help our customers in providing more comprehensive solutions. So that is something that we think we can fund as -- through margin expansion with the 3 platforms. So that's really part of the investment that we're making this year.

So you'll see -- I've seen a little bit in the commercial foodservice side of the business, and we made those investment in the first quarter, but maybe we didn't get quite the benefits of some of the margin expansion of some of the new companies and then we had kind of headwinds on the price versus cost side of that platform in particular.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [9]

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

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

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So I mean -- we took price increases earlier in the year, right, but we didn't get the full uptake, right? So I mean, we get -- in the first quarter that you launch it, you don't get the full realization, particularly with chain customers that it takes longer to kind of run that through the cycle. So I mean, I think we're -- we get better coverage in the second quarter. So we are anticipating that we would see margin expansion as we move into the second quarter.

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Operator [11]

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And our next question comes from the line of Jamie Clement from Buckingham.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [12]

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Tim, as we -- just rewinding, like, 3 months to the fourth quarter call. I think you guys were alluding to a little bit of a lull in the action in commercial foodservice. Kind of looking back at the first quarter was that kind of early on in the quarter? And did things kind of pick? How did the quarter kind of go from January to February to March and kind of what are you seeing right now?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [13]

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I don't think things changed that much from January to March, and Dave and Bryan can add their perspective. A lot of it's really kind of driven, again, by chain activities, which are little bit lumpy. But in terms of kind of the general market backdrop that didn't change all that much. I mean, we were growing in the 5-ish percentage in the back half of the year. So I mean, we expected to take a step down, which we kind of alluded to in the last call, which we saw. Honestly, things fared probably a little bit better than what we expected. We were uncertain with how the international markets would fare. And those seem to be outside of China and the U.K. did okay in the first quarter, and we feel will probably pick up outside of those 2 markets. So maybe growth was slightly better than we might have thought in the first quarter. And then we're hoping to see little bit of improvement from here at least as we go into the second quarter with some of the chain activities picking up.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [14]

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Okay. Great. And I don't know maybe Dave, if you want to take a shot at this one. But I was intrigued by Powerhouse and 2 things that I was kind of curious about is, number one, is that like -- I mean, could that over time be just a natural cross-selling complementary fit to QualServ, that's #1. And then number two what I was a little bit curious about was, as I understood the way they kind of went to market was, they had chain customers who they did business with, and the Powerhouse would be kind of in between the chain and the equipment manufacturer. Now that you own that, are you confident that other equipment manufacturers are going to kind of be okay being involved in that kind of relationship?

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Bryan E. Mittelman, The Middleby Corporation - CFO [15]

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So obviously, little bit joking, but we're more than intrigued we bought it. So -- let me start the end and go backwards. I don't see Powerhouse in between the customer and the supplier -- the equipment supplier. I see it as an enabler for the customer to manage their restaurants completely.

So it's a solution that bolts on to anything that customer wants to buy. So you have to really get above the cooking and equipment and holding concept of the engine of the kitchen. And what we're doing is, we're embedding technology across that whole thing from walk-in coolers to the drive-through window to the menu boards, to everything about that kitchen that opens up that kitchen to the operator and allows the operator to do a better job managing their restaurant. So it runs alongside of that relationship. It does not get in between the customer and the supplier.

It -- clearly, if you step back and look at strategically what we're doing, it clearly runs in parallel with the QualServ, manufacturing and fabrication and solution capability of QualServ when you bolt-on data management and sensor solution that enables the operator. So it's a parallel strategic opportunity for QualServ and Powerhouse. When you bolt those together along with our capability of satisfying the customer with our fundamental technologies, you've got a total solution for the customer. That enables them to take care of their customer in a safe way

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [16]

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And I would imagine that combining those 2 businesses if you kind of think out 5 to 10 years or something like that as you think about the trend towards more automation and that kind of thing. I mean, you would seem that this would help drive that, right?

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

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

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [18]

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Arbitrary numbers for me, arbitrary numbers.

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Bryan E. Mittelman, The Middleby Corporation - CFO [19]

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Yes, so we can get more into this at the NRA.

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Operator [20]

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And 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 [21]

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Just to clarify and get a little more specific on Mig's question. It sounds like net pricing versus material was negative 1Q get the neutral 2Q. But how do we think with full year net pricing above material inflation? Can that get up to 2%, 3%?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [22]

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Yes, I think...

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [23]

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Thinking of the effects, obviously.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [24]

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Yes, I mean, the high-end of the range you put out there is probably a bit aggressive as I just think about the amount of pricing we took and across the division. So we do obviously expect the pricing to cover materials and to be, I'll call it, slightly positive. I'm not going to commit to 3% though.

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [25]

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Okay. Fair enough. And then, obviously, (inaudible) Viking has been doing better, albeit some of the residential stuff impacted by weather maybe in the first half of the year. But given the housing versus upgrades, how are you thinking about that residential business for North America maybe over the next year or so, 1 year or 2 given the cyclicality of the business and maybe some slowdown in housing? How do you think about that given the changes you guys have made positively versus maybe some end market headwinds?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [26]

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Yes. So I mean, on one hand, we continue to be very excited and confident in the strategy that we're executing to the new line of products from Viking as well as kind of the other brands in the portfolio are being well adopted by the market. We're seeing more and more displays go into our dealer partners. And certainly, we're continuing to come out with new products. I mentioned the Virtuoso line and refrigeration, we're still in early stages. Really, I've seen that out in the marketplace with the 5- and 7-series built-in refrigeration, specifically coming out with columns, which is really just hitting the market now. So I mean, I think, new products in the acceptance, and I would say, continued momentum with our dealer partners. That's all kind of part of the story and we feel like we're gaining market share there. And certainly, the investment that we have made over the last couple of years with our own Middleby residential distribution platform, that's paying dividends. We've got a phenomenal sales team there now. We've got a distribution platform with a strong service capability that we built. So with that, I mean, I think we are confident that we're gaining market share. That being said, I mean, if you look at some of the industry reports, particularly AHAM report over the last couple of quarters, Q4 and Q1, is actually down kind of mid-single digits, we've grown through that. And we've seen weather, kind of as we move through first quarter is second kind of effect. I think that was an element of the housing starts and certain of the remodels. But when you get in the premium category, there is little bit more of a lag on that business relative to white good appliances. So I think, we're seeing a little bit of a delayed effect on that. So I think, that's kind of where we're indicating, hey, some of that is probably going to hit us in the second quarter, but we think a lot of that is not a long-term trend. I mean, I think, the backdrop is consumer confidence are pretty well. I mean, there was -- if you look at the stock market, it was disrupted in Q4, but it is pretty solid now. So I kind of think that the appliance market will fare pretty well this year overall, and we probably have a little bit of a gap in the second quarter to overcome domestically, but then, I think, we're kind of back online as we move back through the year. If the trends are still softer, I think we'll be -- we'll better those trends just kind of given the momentum and -- that we've got in those investments made.

That's really a domestic market, kind of flip into the U.K. just kind of add-on new comments that Bryan had, I mean, we very positively saw growth out of AGA Rangemaster, which was great to see given that is still very challenging market with the Brexit. I don't want to say it's an anomaly because I think we've done a lot to enhance our sales and marketing with some initiatives that we've done with the team there as well start to launch some new products, which, I think, we're on the front end of probably a couple of years of new products coming to the market, both in the U.K. as well as the initial launches that we've got here in the U.S., which we're excited about the Elise and Mercury line, which is just coming to market with 36-inch product, which is kind of fits into the U.S. markets, which we have not had before.

So the new products should help us there. That being said, we are somewhat surprised that we were up in the first quarter. We don't anticipate that really will be sustainable until we get to the other side of Brexit. So we probably got a little bit of short-term headwinds in the U.K. as well as waiting to get to the other side of Brexit. And then -- but long term, we've got a very positive view of the -- that segment overall.

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [27]

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Okay. Can I take one more last question here, Tim. The -- I know, it was good color -- given obviously backdrop of the consulting fee paid out in the numbers to Selim. How has the transition been since you took over? Any surprises, customer discussions you can share? And what has Selim's role been? And I'll get back into queue.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [28]

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Yes. Look, I mean, so it's been -- the transition has been very smooth, right? I mean, because I've been here for 20 years and worked side-by-side with Selim building the company since 1998, right? So that's been part of a long term, putting the building blocks in place, working side-by-side for forever and a day. Dave has been here for over a decade also working side-by-side with myself and Selim and then we've got a broader management team of phenomenal group presidents that have taken on greater responsibilities and are leading actually a lot of the, I would say, broader strategic initiatives that we've got across the group. I mean, things from service to rep consolidation to the IoT initiatives. So we're very excited about that. Those were things that we were really -- had them -- been allocating to them and working with them over the last 18 months prior to the transition. And then obviously, Bryan coming on board mid last year. He is a quick learner, as I think many of you know, and done a great job. So it's been a pretty smooth transition. The relationship that we have with Selim kind of goes beyond simply a contract. It's a personal relationship and frankly, a friendship that we have for a long period of time. So he's very accessible to us and anything that we need, he is a phone call away. So really, nothing has been unexpected and it's really been business as usual.

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Operator [29]

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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 [30]

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

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [31]

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So we saw some improving trends we -- as we went through the quarter. It's always hard to read too much into it because improving trends can be, you get an order 1 week and then you don't get orders next week just because of the -- just like sales the order trends tend to be the same way. They're very lumpy in nature. I think the good news is, we've seen some positive activity with some orders coming through particularly in some of our core meat businesses, which -- that had been overdue. We are not back to where we think kind of our normalized run rate is, but that's kind of a build in the right direction. So I think that's kind of where we think we'll start to cross over into the positive side of things. We're hoping to get there in the first quarter, but it didn't fall that way. But I think, we are still kind of moving in a positive direction. As we kind of put in the press release and talked about a little bit on this call and the last one, we have made a significant investments in the product pipeline over the last year. So that is something that we're excited about with -- I would say we've had more innovation come out in the last 6 to 12 months than we have had in the 3 to 4 years prior. And a lot of that touches not only our core markets, but some expanded markets as we really have kind of thought about how do we move outside of just, I would say, areas such as the hot dog, sausages, ham into faster-growing categories I mentioned, which is bacon, pet food, sous vide cooking and jerky. I mean, that's a market that's grown pretty significantly.

Right now, if you walk into any convenience store you will have -- your choice of 20 different flavors and 10 different manufacturers. And that's something that we think we're actually pretty uniquely positioned for with a lot of products that just have hit the market in the last 6 months. So we're pushing those heavily right now. So we think as some of our core markets continue to be maybe a little bit slower growth, we'll start to come online with some of these other markets that will take time, but we've got some initial wins there and some products that are getting looked at by a number of customers. We are launching them, some of these, as we speak at the IFFA show in Germany. So I know our team was very excited to go there with a lot of these innovations on the floor and a lot of customer meetings lined up. So we think that's going to kind of come online gradually over the next 4 quarters And I think that's going to kind of position us for better results as we move into 2020 and kind of improvement as we kind of go through the rest of the year.

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Saree Emily Boroditsky, Jefferies LLC, Research Division - Equity Analyst [32]

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

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [33]

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I think I'll probably refrain or I'll let maybe Bryan add to my refrainment here if he wants to add more of a non-answer, but I maybe just kind of do with color. Look, I mean, I think we are, as I said, kind of committed to that. I mean, I think as we are realizing the benefits from profit enhancement across all 3 of our categories related to acquisition, integration, some of the supply chain initiatives that we have got going on, we feel that these are really important initiatives that we need to do to drive large longer term growth and these are things that will be important to our customers, and help us with -- expand our profits in the long run and add technology solution. So I would just say that it's -- they are not insignificant investments, right? I mean, they are millions and millions of dollars, right? So I mean, they are impactful. But what I think we're also trying to manage those relative to the cadence of our profit growth. So we're trying to fund those with profit enhancements.

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Bryan E. Mittelman, The Middleby Corporation - CFO [34]

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

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Operator [35]

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And our next question is 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 [36]

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Just to circle back on residential kitchen. Can -- do we think core growth is down in 2Q just given some of the slowness and I know there is comp issue to some degree in Viking?

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

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Yes. I mean, look, so it's still early in the quarter. So I mean, I think, we are not quite sure how the remainder of the quarter will unfold. But I mean, I think, as we kind of think about it now. It is flattish and perhaps down. I mean, I think, we would expect -- honestly, I think we were surprised that we got to growth in Rangemaster and AGA. We're not surprised that our actions have been positive and that we're taking market share. And we believe that we had seen that in the later part of the year. But I think, we are expecting they will be down in the U.K., again, and then once we get through Brexit we will see growth. But I think the domestic side of things that curve probably flattened. So that could net-net get to be on the downside negative the second quarter.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [38]

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Okay, great. And then as I look at inventories you kind of been grinding higher, if you look at some other metrics. Just talk about how you're thinking about inventory levels? Is that skewed at all by the acquisitions?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [39]

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Yes, there are variety of factors happening with inventory levels. Acquisitions are some of them as well as investments following on some of our previous acquisitions, namely in residential, we've been increasing inventory levels there somewhat robustly to ensure that we are well positioned to take advantage of the opportunities that are there in front of us whether it be Viking or AGA Rangemaster, so that has been a big driver. We also saw some impacts this quarter with a little bit of order timing where somethings didn't happen at the end of Q1 and that roll into Q2. So we got a little bit higher there as well as being somewhat opportunistic around purchasing. But there is a lot of divisions who have a lot of positive thoughts. So we -- it has been -- again, those are probably the biggest factors somewhat across the board, and is an area we also will be focusing on. We speak a lot obviously about our focus on cost control and margin expansion and will probably be increasing the pressure on the inventory management along a line that we obviously want to be well positioned. So that we're not missing opportunities, but it has admittedly been growing.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [40]

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Okay. Then just last one on Standex acquisitions. Looks, like there is a fair bit of overlap. Just wanted to get your thoughts on how you're thinking about any kind of simplification or SKU rationalization? Or how maybe they fit into different submarkets or price points?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [41]

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Yes. So there are 4 distinct brands there and -- which is kind of exciting for us. I mean, the fact that we added 4 brands that are very, not only well recognized, but they each mean something different in the marketplace. If you look at Ultrafryer that is very complementary to what we do. It really adds on well to our Pitco frying platform. We've got Perfect Fry, and we've got Anets and we've got Frifri. So Ultrafryer that kind of fits at the high end. It's extremely and perhaps the most high-efficiency fryer on the market. It's very high capacity. So that is really a product extension that it brings with it some additional chain customers. So it's really a technology and product enhancement. And with Middleby, we've got the ability to expand it not only to customers, but internationally. I mean, I think that's one of the things we bring great international support capability. And so that's great. BKI that is very complementary to what we do. There's not any product overlap there, but it really extends what was already a strategic initiative that we had going after retail and convenience stores, which we know is a growth category for us as those customers are investing. So kind of having that sales team and complementary product portfolio that really fits well in the strategy, and we're working closely, our team and their team right now to identify opportunities together to come with more comprehensive solution and realize the synergies there. So really the -- more the overlap would probably come on the APW and Bakers Pride, but there is product differences that they have in their portfolio and relative to ours. Certainly, with any acquisition, we go through in an effort of looking at SKUs and rationalization, so we would do that in ordinary course here and that would be -- we're early stages here, but that's something we'll be doing in the next quarter or so, and kind of if there are opportunities to right size to focus on core competencies and the business that probably would be something that we would take a look at. But certainly there is synergies between our platform and their platform and that will be part of the margin improvement opportunities, which will carry into supply chain, it will carry into some of the leveraging, the channels and the strength of our platform that APW and Bakers Pride brands can tap into and Dave, I don't, you might add to that?

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David Brewer, The Middleby Corporation - Executive VP & COO [42]

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Yes, real quickly. Just if you go, it would appear that way from the outside. And if you come to the NRA, I'll walk you through it, but the product lines across that Standex acquisition, every product line has a technology, a unique technology that really has a loyal customer base. And there's some really interesting technology that I think Middleby globally can exploit. And so I'm actually very excited about it. I see very little overlap if you get into the engineering side of it and the features and benefits for the customers that are loyal to the specific brands.

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

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Operator [43]

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And our next question comes from the line of Jason Rodgers from Great Lakes review.

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Jason Andrew Rodgers, Great Lakes Review - VP [44]

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

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [45]

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Yes. So, look, I mean, we are 30 days -- little bit over 30 days into it. So I mean, I think we're -- and there are 4 distinct businesses. So I think, we -- we'll come with kind of more specific criterion, although it's a very important acquisition, it's not massive either comparatively relative to Taylor. So I'm not sure exactly how much it will lay out. But I mean just conceptually they're in the mid to high teens. I mean, I think, we said that they were approaching something that was mid to high single digits when we bought the company, and anytime we buy any acquisition, I mean, fundamentally a criteria for us is that we believe we're going to get those businesses to be north of 20%. In ideally longer term, we would expect them to be closer to 30% than 20%. So I don't think there is anything different here. You've got 4 phenomenal brands, you've got -- they have got significant advantages in the markets they serve, and then they have got -- they are in core wheelhouse in terms of cooking, warming, frying. So I think those are areas that we know well, and how to leverage that with our platforms. So I think, what -- I think as we kind of move through the year, we would expect to get to a cadence that would be something that would be double-digit by the time we were certainly exiting this year, and get to a 20%-plus margin. Exactly what the timing of that would be, I think that is yet to be determined and that will be where our team is working with the teams there and they do have great management team. So we are excited to have them on board with us, and I know we have had great initial conversations and are working hard to identify those opportunities and prioritize them.

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Jason Andrew Rodgers, Great Lakes Review - VP [46]

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And just a few numbers questions if you have estimate for CapEx for the year and as well as the tax rate for the remainder of 2019?

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Bryan E. Mittelman, The Middleby Corporation - CFO [47]

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Yes. CapEx has generally been around 1.5% of revenues, maybe a tad bit higher. So that would be on that point and the tax rate will start to normalize to 25% or a little bit over that as we move throughout the year, we do expect the Q1 rates to be at the low point. We had some discrete benefits and kind of reserve reversals upon the expiration of certain periods of time that were the benefit this quarter, but will be up higher 25-ish percent for the full year.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [48]

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Just a quick reminder and Bryan can correct me if I am wrong on the number. But one of the things that doesn't reflect in our tax rate is we do have some non -- some cash benefits that don't run out through the effective rate specifically as it relates to the Taylor acquisition we had, I think it's $16 million cash benefit that run -- that we get annually that's outside of the P&L.

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Operator [49]

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

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

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Just a couple of follow-ups questions. One on resi, I understand second quarter you are going to have the tough comp in the weather and some investment. Your profitability looked pretty good this quarter. Has something changed in step up? Or are we looking at kind of similar trends to revenue and on the profit side where things can be flattish?

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Bryan E. Mittelman, The Middleby Corporation - CFO [51]

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Well, some of the improvement just to make sure that we don't lose sight of it was not having the Grange business in the results as well as then it starts to become more a factor, I would say, of volume as well as the volume at the low -- benefiting from the lower cost structure -- other efforts we put forth in the past.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [52]

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Okay. So it sounds like it will step up because of the exiting of that business in the second quarter.

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [53]

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Yes, or maybe just kind of breaking into 2 pieces. One, I mean, we have had a non-core drags for a while so 1 piece we have solved for permanently, which was Grange. So that benefit we continue, we still have some other non-core businesses that were improving as we go through the year, and so we -- that will be a drag on the overall margins, but will get positive benefits as we kind of go through the year and then there is our core business, which I mean, I think as Bryan said, certainly volume is always a positive factor, but I think, we are getting into the next mode of fine-tuning and going after efficiencies, right. I mean, I think, we went through a lot of initial stage of restructuring which we did early on with Viking and then we kind of went through a lot of heavy lifting with building our residential distribution platform, which we are on the other side of now. Where we are enhancing it, because it's built out and then AGA, obviously we took a lot of restructuring charges over the last couple of years as we rightsized AGA -- the AGA Rangemaster businesses. But I think we are going after profit enhancement opportunities certainly at Viking and then AGA Rangemaster as well. As I said, in kind of the opening comments, Viking, we spent a lot of time really getting products to market as quickly as possible and making sure that the quality was -- stood up to Middleby standards, and while we did that profits were in mind, but we rushed to market with products. So kind of as we go back and think about okay, how, what are the manufacturing efficiencies look like? Are we leveraging supply chains as we're coming to market with new products? I mean, there are opportunities there. So those are things that will kind of build on as we go through the year. So I mean, I think that's where some of the longer term journey that we make as we drive the margins on residential up towards where they are and commercial will come from.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [54]

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Okay. Great. Sounds good. And then just to follow on to the tariffs. Looks like, Friday, the U.S. will implement another round of tariffs. And so I wonder how you position for that. How important is China to your overall supply chain, and how quickly you have to react so that you don't take a hit in the second quarter?

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [55]

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Yes, I mean, so look, those tariffs are not gone through, at least I didn't read any news this morning frankly, but every day this is a new box of chocolates on that front. So certainly, I mean, if we have another round of tariffs, we're going to have to react to that, along with a lot of other manufacturers. And I think our approach should be what it's been with the last couple of rounds and certainly, we will consider price increases as part of it. So it would be impactful, but right now we're kind of monitoring and waiting to see what's going to happen on those front.

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Operator [56]

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

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Timothy J. FitzGerald, The Middleby Corporation - CEO & Director [57]

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Okay. Well, thanks everybody for joining today's call. We appreciate everybody being on the line this morning and look forward to speaking to you all next quarter. And also just kind of mentioning quickly, we have got the NRA show coming up next week. It came around pretty quickly following NAFEM. NAFEM was a very successful show for us. We are excited to be at NRA, and we will have our newest acquisitions there with us too, which will be fun to have them with our Middleby family of brands. So thanks everybody, and talk to you next quarter.

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Operator [58]

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