Middleby Corp (MIDD) 2013 Q2 法說會逐字稿

Welcome to the Middleby Corporation second quarter earnings conference call. My name is Hilda, and I will be your operator. At this time, all the participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this session is being recorded. I will now turn the call over to Mr. Tim Fitzgerald. You may begin.

Okay. Good morning and thank you for attending today's conference call. I'm Tim Fitzgerald, CFO of the Middleby Corporation, and joining me today is Selim Bassoul, our Chairman and CEO. I have some initial comments about the Company's 2013 second quarter results and then we will open up the conference call for questions.

Net sales in the 2013 second quarter of $363.8 million increased 40% from $260 million in the second quarter of 2012. The second quarter sales reflects the impact of acquisitions completed in the past 12 months including Viking, Nieco, and Stewart Systems. These acquisitions are not fully reflected in the prior year comparative results, and accounted for $76.1 million in sales, or 29.3% of the sales growth, in the quarter.

Excluding the impact of these acquisitions sales increased 10.7% over the prior-year quarter. This increase reflects an organic sales growth of 11% at our Commercial Foodservice Group and a 9.4% growth at our Food Processing Group.

At the Commercial Foodservice Group, we continued to realize growth driven on by increased sales to restaurant chains looking to upgrade equipment, and adapt new technologies to improve efficiency of the store operations. Sales in emerging markets remain strong, with overall growth in excess of 10%. Sales in Latin America, Mideast, and Europe all grew at double digits rates, while Asia slowed in the quarter, impacted by a temporary slowdown in store openings with a major restaurant chain customer in China. While we expect continued growth in the second half of the year, the growth rate will likely moderate from the second quarter due to completion of a major chain roll out in the first half of 2013. However, we have continued strong demand across our broad portfolio of restaurant chain customers and expect growth to continue at mid-to-high single-digit rates for the balance of the year.

At the Food Processing Group, we continued also to realize strong growth, reflecting demand by food processing customers looking to modernize existing production operations and new customers developing operations in international markets. While we anticipate continued strength and demand in orders at this segment, we anticipate sales growth will moderate during the second half of 2013, as the 2012 comparative period realized particularly strong revenues related to a large customer project late in the year.

Sales at Viking amounted to $58.8 million during the second quarter and reflected a general improvement in industry conditions. Included in these revenues are $1.9 million related to non-core business operations which were divested in the second quarter. Additionally, sales in the quarter reflected a positive impact of distributor acquisitions, which added to revenues in the quarter of approximately $4 million. Included in these revenues are certain non-Viking products that will be discontinued in future periods. We expect to be in the $55 million to $60 million range for the third quarter and (inaudible) continuing initiatives related to disposition of non-core revenue streams, the discontinuance of buying below-margin products, and the temporary disruption and distribution channels may affect the sales in the third quarter.

Gross profit in the second quarter increased to $136.6 million from $101.8 million in the prior year. The gross margin rate was 37.5%, as compared to 39.2% in the prior-year quarter. The gross margin rate reflects the impact of lower margins at the recent acquisitions including Viking, a greater mix of food processing sales with lower gross margin. Excluding the impact of recent acquisitions completed during the past 12 months, the gross margin rate would have increased to 39.4%. Viking had the greatest dilutive impact to the gross margin in the quarter, impacting the gross margin rate by 1.4%.

At Viking we reported a gross margin rate of 30.7% for the quarter. This was an improvement of 2.2% from 28.5% in the first quarter. The lower margin of this business will continue to dilute the overall margin for the balance of the year by 1% to 2%. However, we anticipate the gross margin will show continued improvement in the second half of the year, reflecting the benefit of purchasing savings, SKU simplification actions, gains in production efficiencies, and other ongoing initiatives.

Selling and distribution expenses in the quarter increased $10.4 million to $38.6 million. The increase in selling expenses was entirely attributable to additional expense from recent acquisitions not included in the prior year. Excluding the incremental expense from acquisitions, selling costs would have remained constant with the prior year.

General and Administrative expenses increased by $9.4 million to $37.6 million. The increase in G&A expenses for the quarter was primarily attributable to $7.9 million of incremental costs from acquisitions. This includes $3.5 million of noncash and tangible amortization costs associated with a recent acquisition. There were minimal non-recurring costs in the second quarter associated with Viking, and we do not anticipate significant further restructuring charges in the second half.

The provision for income tax amounted to $18.7 million at a 33.5% effective rate, as compared to the prior year provision of $12.7 million at a 29% effective rate. The prior year second quarter tax provision reflected favorable reserve adjustments for reduced state tax exposures, and as a result the second quarter provision increased in comparison. We estimate that the effective tax rate will continue in a range of 33% to 35% for the remainder of the year.

Cash flows used for operating activities amounted to $24 million in the quarter as -- well, for the year compared to $54.3 million in the prior-year period. Cash flow in the first half of 2013 reflects increased investments in working capital associated with increased sales. It particularly related to the residential business and certain large food processing projects.

Noncash expenses added back in calculating operating cash flows amounted to $14.4 million for the quarter, including $7.3 million of intangible amortization, $4.2 million of depreciation and $2.9 million of noncash stock-based compensation. During the second quarter the Company utilized $11.7 million to fund investing activities, including $14.9 million associated with the acquisitions of Viking distributors, and $4.1 million in capital expenditure net of $7 million in proceeds related to the sale of non-operating assets.

Total debt at the end of the quarter amounted to $618 million, as compared to $638.4 million at the end of the first quarter, reflecting repayment from operating cash flows. The Company's borrowings are supported by its five-year $1 billion revolving credit facility which matures in 2017.

As it relates to the Viking acquisition, we are pleased with the continued progress made during the quarter to reduce operating costs, improve product quality and customer service, and realize synergistic opportunities with our commercial foodservice business. We anticipate that the EBITDA margins, which improved from 12% in the first quarter to 15% in the second quarter, will continue to progress in the second half of the year. We remain confident in our initially stated expectation that we will achieve EBITDA margins in excess of 20% for this business and our target to reach this run-rate by the end of 2014, ahead of our initially-stated expectations.

That's all for the prepared commentary. Hilda, could you please open the call now to questions?

Thank you. We will now begin the question-and-answer session. (Operator Instructions). We have a question from Tony Brenner from ROTH Capital Partners. Please go ahead. Mr. Brenner, Your line is now open. Please go ahead. The next question comes from Peter Lisnic from Robert W. Baird. Please go ahead. Mr. Lisnic, your line is open. Please go ahead.

There must be some problem with the call.

Can we establish if people can call in, please in there must be some issues with people calling in and asking questions.

The line is open let me go ahead and move to the next party. One moment. (Operator Instructions). The next question comes from Schon Williams were BB&T Capital Markets. Please go ahead.

You know, Hilda, is Robert helping you with the other calls on the other line if can he hear the people?

Yes. One moment.

Please, for the other people who are on the phone, let me most probably talk a little bit about some of the initiatives we have done at Viking.

Since we have owned Viking, it could be almost basically we're finishing up seven months of owning Viking, and the five things we've done at Viking is literally -- one, making sure that we are listening to customers to understand what they want. And to that extent in fact we have worked with introducing the D3 line, and we basically also made many changes to some of our cooking products as well as our dishwashers and our refrigeration. So number one we have spent a lot of time listening to our customers to understand what they want as we double up in lieu of new products coming up in the fourth quarter of this year.

The second thing we have been doing, in line with our sales people and our service organization and our distributor, is we are testing ideas in advance. We launched our remarkable warranty in Southern California, and it has been a resounding success. And as we listen to feedback from our customers and our dealers, we will continue implementing those ideas as we take them nationally.

Number three, we have been focusing on our core customers. Viking has the largest installed base of any other luxury appliance company due to the fact that it was the brand that started it all. It has a strong allegiance among Baby Boomers and retirees. We have to make sure we do not alienate them with edgy designs and features. We love our traditional customer base and they have been loyal to us and we would like to remain loyal to them.

Number four, we love the Viking brand. The brand is fabulous. As I talk to people who have owned a Viking range for over ten years, they won't buy anything else. They love it, they have a great connection to it, and in many cases they go back and buy it again and again and again. I am one of them. My family bought our range in 2000 and it still looks beautiful and it works. And we are a family that cooks at home. As we are working with our dealers to tweak all of what we have done in basically selling, designing, and modeling, and gently reshaping the Viking brand we want to connect back with our core customers.

Number five, Middleby and Viking is a great match. Our culture of taking care of our customers, the culture of innovation, the culture of taking care of service to our end-users, are just a few beginning items that are in common between us. I will tell you that the employees at both companies have a passion to win and to basically build great products. I love the morale at Viking, as we have taken over and they have embraced Middleby very fast and very quickly.

What makes Middleby and Viking unique is they have a culture of executing swiftly. They do not adhere to the old saying, if you build it, they will come. I can tell you that Viking learned from their experience in refrigeration. It was a clunker. They did not build great refrigeration product in the past. Today they have done back to every service lull they've had and learned from it. They redesigned, retooled, and worked with their supplier to get it right.

We are launching a new line of refrigerators that be very high-quality that is synonymous to what Viking has stood for. So I'm very excited as we reshape the Company and look at what we are doing as we launch in the fourth quarter of this year a complete new line of cooking, refrigeration, outdoor, and dishwashers that connect us back to our core customers. Both products have been designed with the help of our dealers, designers and our core customers, people who have owned Viking forever.

I don't know now if we can open up to asking questions and the lines are open again.

Yes. Hilda, please try to open the line to questions.

Hilda, can you hear us?

Can you hear me?

Yes, I can hear you, Selim. Martin, is that you?

I think anybody heard -- did anybody hear my comments?

Well, they -- yes. Yes, they can hear us. I'm exchanging e-mails with investors and they're trying to unmute them right now.

We should ask people to call back in five minutes when we figure that out, Tim?

Tim and Selim, can you hear me? This is Greg Halter.

Greg, I can hear you now. Thank you.

All right.

Greg, I would ask given the switch in did you hear my comments about Viking?

Yes, I did. Your five things you have done in the seven months owned.

Yes. Okay.

Thank you for the information while they got the line straightened up.

Thank you.

Alright. First question I have -- they're both related to the cash flow statement. There's two line items there in the investing activities. One is the sale of assets and the other is a purchase of trade name -- the first one for $7 million and $5 million. I just wondered what those two items were.

Yes. So the first one the sale of assets I kind of referred to non-core assets. So Viking had a plane, it was a corporate jet which we sold in the second quarter. The second one was a -- it was an acquisition actually that we announced, Spooner Vicars.

Okay.

Which that -- that was a purchase of trade name that was kind of the key asset related to that acquisition, and that's a leading manufacturer of baking ovens and products for the Food Processing Group that we did earlier in the year.

Okay. And any comment on the direction or what happened with steel costs in the quarter and what you expect the electric going forward?

Steel has been fairly stable this year so it hasn't had a significant impact one way or the other, and I don't think we expect any major change in that.

Okay. And relative to the distributors, you mentioned four have been acquired, are there plans out there to purchase some of the others that remain?

Yes. We continue to evolve our distribution strategy and we're we are kind of planning on finalizing all that through the second half of the year. That may include the addition of some additional distributors in the back half of the year. So we actually completed one shortly after the quarter, too. So there has been a total of five added in the year, and as in the press release that represents about 40% of the revenues of Viking to date that we're now handling through our own distribution.

So 40% is through those five?

Correct.

Okay. And one last one relative to what you're doing on the acquisition side. Obviously, Viking is a larger transaction. I just wondered what your thoughts are going forward and looking at potential other opportunities?

Well, as with the other two platforms, we do view that -- that there is some other brands out there that are complementary to residential so that is a pipeline too we're developing on the residential side.

And on the Commercial Food and Food Processing as well I presume you're still looking for things there also?

Yes. Absolutely. I mean the pipeline is strong. You know, clearly in those two segments as well, so we would anticipate similar to the last five, ten years that we will continue to add on to those platforms with strategic acquisitions. So, again, focused on brands and we think technologies and innovations.

All right. And I had one other one that just popped up here. On your cash flow from attritions I think you said "used" in your comments. I think you meant "provided by," correct?

Yes. If I said "used" that was in error. Yes we generated it was positive cash flow in both the first and second quarter.

Okay and I know it was positive, but it is still down about $30 million year-over-year from last year's number. Any comment there on how the rest of the year looks and the working capital changes that caused that?

Well, we would expect cash flows to be pretty strong in the back half the year. Typically it is stronger in the latter half than the first part. We did have increased working capital needs in the first half, some of that related to Residential and some related to some large Food Processing orders. Also, we -- just the timing of tax payments were a little bit ahead of schedule this year relative to last year. So we've got some prepaid taxes and that will probably help us be more of benefit to cash flow in the second half of the year.

Alright. Thank you very much.

Thank you, Greg.

The next question comes from Schon Williams from BB&T Capital Markets. Please go ahead.

Good morning. This is Aaron Reames sitting in for Schon. Congratulations on the quarter. I just wanted to follow up a bit on the Viking product rollout. I know you mentioned that a number of products are slated to hit the market in the second half. Could you just again remind me of what the range of those product offerings are and maybe you expect most of them to be released maybe in the third quarter or are we looking for in the fourth quarter.

We are -- we're starting to release some. We released some in July. We released some in September. So it's not coming all at one shot so we're going to start seeing future length of release of the new product that will allow, they are coming up as we speak. And they will be most probably -- the bulk of them will be completed by I would say October, November. So you're going to start seeing some coming as they come online.

So we started with redesign of the D3 that came online in July. We will basically introduced a new line of cooking equipment, which will come up in -- sometime in September, and then we will continue with some cold side which is coming up in -- starting coming up also starting in October, and then we will start going through to the end of the year.

So I think you are going to see most -- I have to say the bulk of those products and happen I would say towards the end of the third quarter and November 1. I think from and impact of sales we will most probably start seeing the sales impact most probably in the first and second quarter of 2014.

Okay. Great. Thanks for the color. I had one follow-up as well on the margins. Good job on getting EBITDA margins to 15% on Viking. That was a bit more than we had modeled. I guess my question is what are some of the levers that you've already pulled to get to 15% EBITDA margins, and then what's left to take us to 20% by the end of next year?

Well, I'm going to -- some flavor to it. I think one of them has been literally doing some headcount reduction. We basically became a lot more -- we did some restructuring that we're more in line of what we wanted to do, and also reduced SKU. So part of it has been an efficiency play. The other thing as we reduced SKUs at Viking we also were able to eliminate some people.

The other thing we've done also is to do some CapEx allowed us to take-away some labors in the way we were doing some publication there. The other part the purchasing improvement because of the leverage of Middleby, using Middleby's purchasing power with came onto us on steel buying or motors or controls. And the other improvement have been literally some quality improvement projects that drove down cost, and increased reliability.

So that's the thing -- we looked at their range versus the way we built our ranges. Remember, we build a lot of ranges. For us, especially when you look at cooking, we have a lot of expertise. We have many, many divisions that today are involved with burners technology, involved with the way we do our motors on convection ovens. So we have taken some of that technology and taken it back to Viking in terms of improving quality. I think if you look at all those three, headcount reduction, purchasing leverage from Middleby, SKU reduction, and improvement in terms of the way they build the range, whether it's making sure we use different motors, or we use different way of conducting the wiring, all have basically increased the margin.

In addition, I would have to say that the engineers at Viking have done a superb job, and I want to give them kudos for stepping in as we have reduced SKUs and there was a lot more focus on our core product. They all stepped in because there were a lot of additional product -- project they had on the line. They were also supporting commercial, they were also doing a lot of other things. Today the engineering at Viking, which is the same people they've had in the past, have stepped up in terms of focusing on core technology instead of being basically spread all over the place.

Tim, if you want to add something else, also. I think distribution might be a little bit --

Yes. I will just kind of add that from the timing perspective the -- a lot of the headcount savings and the scrutiny on just -- on operating expenses, that's kind of what's gotten us reflected in the 15%. But getting to the 20%, which is kind of second part of your question, is some of the other items that would favorable impact margin that Selim mentioned like the purchasing savings as well as new product design which might be higher margin or reduced warranty costs a lot of that still has to yet roll through as we introduce new products or we roll in new prices from suppliers or engineering changes or run through the factories. So those things kind of are additive or roll in quarter after quarter.

Alright. Thanks, guys. Appreciate it and good job on the quarter.

Thank you Aaron. Thank you very much.

Our next question comes from Peter Lisnic from Robert W. Baird. Please go ahead.

Good morning, gentlemen.

Good morning, Peter.

Hi Pete.

That works. Fantastic. So just, Tim, a quick one going back to the purchase of the distributors. Just as you look forward, I assume that the cost to acquire any remaining distributors would be modest or nominal, nothing of significance. Is that a fair way to think about it?

Yes. I can't comment on specific numbers, but you can see, we spent $14.7 million in the first half of the year. It could be more or less, but it's not going to be $100 million for example. So it's a manageable number. A lot of those costs associated with the acquisition is actually buying inventory that's in the channel so it's really almost and investment on working capital.

Got it. Okay. And then the -- I guess the big question for me is just the acceleration in the organic growth at Commercial Foodservice. I mean if I look at the first quarter, you had Europe being a bit of a weight on that piece of the business to the tune of I think 100 basis points or something. So I would guess A, that has perhaps that subsided a bit.

So if you could A, first comment on Europe and what you are seeing demand-wise there, but B, maybe Selim could chime in as well, just as you look to the second half of the year it seems like the organic growth here really picked up in the second quarter and maybe talk about what you're seeing in terms of customer inquiries, or being able to replace a larger customer that might be rolling off, and just how that growth rate -- and I know Tim you mentioned a little bit of deceleration here in the back half the year -- but just some color around the back half of the year and really 2014 on organic growth at the Commercial Foodservice business would help.

Tim, do you want me to ahead and answer the international or you want me to do so?

Why don't you just, just comment on you start off with Europe. So Europe we did see a return to growth in the second quarter. That was primarily driven by the UK, so we actually did have double-digit growth in Europe. That kind of flowed toward Asia this quarter just because one of our customers had a slowdown in-store openings, so I mentioned that. I think Europe still continues to be a challenging, continental Europe, we've -- we have kind of overlapping some reduced numbers, so we expect that Europe is kind of stabilizing, you know, from this point moving forward.

Okay. And then just, Selim, go ahead if you could on the second half and what you're hearing from customers. That would be great.

I think what we're hearing from customers as they do steady capital spending of commercial appliances and capital equipment. So if you look at the number of remodeling and expansion, it is most probably in line with what you have seen in the first half. But so I don't think there is a slowdown.

I'm going to give some example to give a little bit more clarity. You look at today Wendy's, which has had strong lift to its remodeled units following the examples of what Chili's has done, and you look at Bloomin' Brands, which is Bonefish, Outback, Carabba's, and Fleming's, which is owned by -- which is under the Bloomin' Brands umbrella, they are all remodeling their kitchens and they're all doing extremely well.

So I think everybody got to the perception that remodeling is the new way to basically generate cash flow. The payback, especially if you're using some of our equipment to get you the future, whether it's Wendy's using some of our cooking equipment, you are seeing a lot of remodels continue to take place.

So I think lots of operators will increase their plans for capital spending in the second half and in 2014. I don't see this stopping. In fact, I look at despite the fact that sometime sales and traffic at restaurants were maybe a little bit challenging in June and July, I would say that the spending on capital with the payback of less than 24 months is no brainer. And we're seeing it across the territory, whether it's casual dining or fast casual, or breakfast menus. So we continue seeing that becoming a big driver of -- continue to be a big driver for us.

The only problem, Peter, that we're going to face and I mentioned that on the last call, is there are going to be a lag between finishing a rollout with one of our customers which is -- now everybody knows about that is Chili's. It ended up basically in the second quarter. So I always say they're going to be somewhat of a lag -- I think one quarter by the time we offset that. So I see somewhat of a lag occurring in the third quarter as we finish Brinker, and we picked up some other initiatives that will show -- and I'm positive it will show the Brinker initiative. They might not be all in one customer, but there are going to be many, many rollouts that are taking place that will basically fill the gap between the finishing, the end of rollout of the Brinker and the start of all those new rollouts.

Okay. Alright. That's helpful there. Then just last question is (technical difficulty) activities at the restaurant.

If I look at the gross margin numbers, at least in Commercial Foodservice, and try to adjust for acquisitions, it looks like the mix has gotten a bit richer. So as we continue to see strong demand, should we think about the Commercial Foodservice business as being stronger gross margins than what we have seen historically and I don't know if you could put any color around that or quantify it to any degree, but just any comment on how the margins look as you get sort of this build-out or replacement cycle occurring with the restaurant customers would be helpful.

Peter, I'm going to answer that. As we have integrated many of those acquisitions, we're starting to see us becoming a large player in the food processing. I think if you define food processing, I would look at protein versus bakery. So from a protein standpoint, our margins have hit what we expect them to hit. They have done a great job. I think the leaders of all those divisions have done a great job in getting us to what nobody expected those margins to be.

I think our introduction in the bakery side, in the bakery process segment, where we have now made three acquisitions -- I think those margins continue to be much lower than what we expected it to be. And I think it was in the next 18-months we will see the bakery side of the business to become equivalent to the protein side of the business, which is the ham, sausage, bacon and chicken. So my feeling is that the next move in margin is going to be through our bakery division. We have the orders. It's just a matter of being able to get the efficiencies among those companies that we have acquired. I think a year and a half to go or less and I see that business to be most probably from 10% by 18 to 24 months to almost 18% to 20% margins.

Okay. And that was Food Processing. I'm also wondering about Commercial Foodservice, though. Is there opportunities to drive margins up -- outside of acquisitions, is there opportunities to drive margins higher in that core business?

I think that there might be some there. I think we're more interested right now to make sure that we're getting our customers the payback they need. I don't think we're as much focused on margin in foodservice. I think we're very pleased with margin of foodservice. The key is today we'll most probably spend a little bit more margin dollars on innovations.

I think we continue testing some new products and having to do with water consumption. I think the biggest interest for us is literally if I look at one initial substantive -- let's take one initiative that's (inaudible) high margin initiative in line, which is the combi oven business. You have a market that's almost $1 billion dominated by one large supplier and another 42 other players around the world. So you have almost 43 players, we're one of them. And we have put a lot of energy in going after the combi oven business. And to that extent, we see us gaining -- starting to gain market share in that business as we've invested in the selling organization. We've expanded the selling organization. We've also invested in features and benefits that makes our combi oven much more expensive to produce because it saves water, it has unique controls, for us to attack that market and become a player.

So today basically we are an insignificant player in that business, and we believe within the flex five years we will become a large player in that business, $1 billion, high margin. Today should reflect how our sales have come about with the technology and innovation that we have put into our combi oven. And the combi oven, just to explain to everybody, is a combination steamer/convection oven, and it's used in mostly institutions and some fast casual and some chains. And it's a $1 billion market, and we see it -- we see us introducing significant energy.

So to go back to your question, are we interested in literally expanding margin or taking market share? I look at the combi market and say we would like to continue to infuse it with the right elements, whether it's adding chefs, adding sales people, adding technology to become a player in that business, which today we are not. We are insignificant today in that business. But given the numbers that I'm looking at right now, since the beginning of this year, our business in that business is up hugely because of what we've done.

So to answer the question we are not going to basically sacrifice growing organically at the expense of to go on and increase our margin in foodservice. We would like to basically work with our customers to double our product that gives them the payback and the features that they need, even if it's at the expense of some margin in that case.

Okay. That is very helpful. Thank you for all of your time. Nice quarter.

Thank you. Thank you, Peter.

Our next question comes from Tony Brenner from ROTH Capital Partners.

Thank you. Can you hear me now?

Loud and clear, Tony.

Thanks. A couple of questions. First of all, regarding Viking and the rollout of distributors -- what are the gross margins and EBITDA margins of those distributors? And I'm wondering how those acquisitions will affect the timing of your goal and achieving a 20% EBITDA margins?

So, Tony, the numbers vary significantly across the distributor base, but the gross margins depend to be in the 15% range and the businesses tend to be a little bit better than breakeven. So we think we can improve on that as we drive efficiencies through the structure at least on the bottom-line side and it will help our gross margin. Now, there's costs associated with that that we will be taking on related to logistics, distribution. They were carrying some of the service and marketing costs. We'll be handling that, we're managing our own distribution.

Okay. Well, if it's 15% -- okay. So then the EBITDA margin I guess is higher than your current Viking EBITDA margin? Is that right?

No, no, no. No, no. That's the gross margin and I'm saying the EBITDA is a little bit better than breakeven.

Oh, okay. Second, so with the Chili's kitchen renovation completed, I know you've been -- I know there are a handful of casual dining chains that are in various stages of tests for similar types of programs. Have any of these chains committed to proceed with that renovation and, if so, what kind of a timeline might you provide?

Well, I can give you some color to this. Thank you, Tony. We have right now nine chains that are in field tests. So looking at nine chains and they have basically -- every chain has more than one -- basically one to some of them have almost 20 stores in test . So we go from some of them have two stores in test, some of them have 20 stores in tests. So I believe that more than one will come through because of the results of being -- they have moved from a -- let's look at it in the lab, we like it, they have taken to their management.

So we have nine chains right now that are in test, and those chains represent approximately total number of stores around over 4,000 stores. So when you look at that, I would say that we are very hopeful from the field tests that the kitchen of the future that we have done at Brinker -- now it might not be exactly the Brinker model, in fact, a lot of them have complete different menu items then Brinker, so they are not competing with Brinker's, but what I will call a similar let's say evaluation from the kitchen of the future of Brinker consider today we have nine chains and I'm comfortable that in 2014 we will move to having closed one or two chains in 2014 given the number of tests that are now in field testing.

Okay.

The only question, Tony, that you might ask is there being to be a lag and so my feeling is as we finish Brinker in the second quarter, I think most probably one of or two will most probably sign up with us sometime in the fourth quarter. And I think roll out in most probably the first or second half of 2014.

Again, I'm going to summarize your question, yes, the kitchen of the future is successful for us. We have basically nine chains with over -- which consist of over 4,000 stores of which are now in field tests going forward. Behind that we have basically eight chains that are in lab testing, behind those others. So a total of 17 chains are in the pipeline of the kitchen of the future as we speak.

One other item. You've talked about bakery product margins increasing over the next several quarters, possibly doubling. And previously you've talked about disruptive design changes in that segment that you've developed. I wonder if you could elaborate a little on what exactly that you're doing that's going to produce that margin improvement.

Well, from a designing pattern you're right. We have significant technology in the bakery product pipeline, I think from Auto Bake's patented technology and automation, to Stewart Systems to Baker, we have some phenomenal products. And it's reflected in the orders we're having, and the connection with the customers.

The problem we have is having three companies that have capacity and production that are most probably they won't be fulfilled. Every one of those companies have more capacity than they can need so one of them we need to think of consolidation. We need to think about also SKU reduction. Some of them tend to overlap. When we bought them a year and a half ago they were competitor -- not competitor but maybe extensions of what they did and maybe two of them were slight competitors.

We need to basically integrate their operations, have them talk to each other a little bit better, very similar with what we've done with ALKAR-RapidPak, Cozzini, and Drake. We've done a fantastic and more authentic, a great job working on the food processing on the ham, the bacon, the hotdog, the chicken. We've worked very well together and we're trying to do the same thing into the bakery product. And when you look at what we've done in the food processing side, not the bakery side, we used to be 5% margin, 5% EBITDA margin. And today 20%, 18% to 20% margin. And I think we're going to do the same thing with the bakery. We have compact same footprint, the same maturity to make it there. So I think we're starting to do that.

So, again, (inaudible), consolidation of some of the operations, and interchange of trying to see where the SKUs would be better placed. When we bought them they were totally independent companies and now we're trying to integrate them.

In addition, we are doing -- just to let you know in the bakery system our customers are consolidated so they expect us to consolidate and work with them as they once thought the way we did in the food processing. Today when you get somebody a large food processor, they look at us as one entity. They end up buying RapidPak, ALKAR, Cozzini, Drake, as one customer and we are try it to do the same thing in the bakery business.

Thank you.

Our next question comes from Jamie Clement from Sidoti & Company. Please go ahead.

Selim, Tim, good morning.

Good morning, Jamie.

Can you hear me okay?

Very well.

Okay, great. A couple questions and obviously most have been asked and answered, but just some questions of clarification. In your Food Processing segment right now, Tim, or Selim, what is the rough percentage breakdown between protein and bakery from a revenue perspective?

It's probably 20% to 25% bakery.

Okay.

Most of those companies, we've talked a lot about bakery. Those are our most acquisitions so.

And that's what I was going to get to -- do you think that disparity in margins between the two categories under processing, is a lot of just simply a question of you have just been in the protein business than you've been in the bakery business?

Yes. That's exactly right. Yes. I mean if you look at the last three acquisitions we did in Food Processing. It was Baker Thermal Solutions, Stewart Systems, and Spooner Vicars, and those were all completed in the last year. So we're still in the early stages of the integration of those companies, and we have seen margin improvement so things are headed in the right direction there and it's really just more the function of timing and we're still on the same path that we have seen with the overall food processing business.

Now, if you were to back out those recent acquisitions, our gross margin in that -- in the kind of upside of let's say the companies we bought in the last 12 to 18 months is north of 35%. I think I mentioned it was about 36% in the quarter and we saw expansion in that and we have EBITDA margins that are in the low to mid 20's, so let's say 22%, 23%. So that's you know where we're bringing up the most recent acquisitions, and the recent acquisitions always have a drag on the margin whether they're in Food Processing or on the Commercial side. So that's just what we're experiencing here. And we've got integration plans, and we're executing to those.

Okay. So there's nothing -- there's nothing inherent about the bakery side of the processing business versus that would inherently make it lower margin, is there?

Correct.

Changing gears to two more and I think they're brief. With respect to a customer that you mentioned in Asia slowing down some store openings -- is that related to some things we have seen in the news regarding concerns about certain type of product on the protein side? Is that -- am I on the right track?

Yes. There's some food safety issues.

Yes.

And we expect that to work itself kind of through the system.

So. Yes so that -- okay. I just wanted to Mike you're that I understood what you were talking about there.

I mean we view that as a temporary disruption.

Yes. It's been well discussed. I just wanted to make sure that we -- that I was -- I was interpreting your comments correctly.

And then, Selim, finally maybe this question should go to you. As you look at Viking, and you look at what their sales were before the recession and where they are now, can you -- do you all have information with respect to the age of the installed base of Viking ranges that are out there in the market? And on and approximate sort of -- any research that says well, they typically stay at in a home for eight years or ten years or what have you? And basically what I'm just getting at is there a replacement cycle play that you will start to see at some point on the residential side?

Yes. I could give a big on this one because if you think of the market in the US of the high-end luxury market, you're looking at $1 billion, $1.1 billion. And when you think about the (inaudible) point, Viking used to be 40% of that business, and today they are at 20% of that business. So they have 20% versus 40%. So part of that has been in the last few years the building, the housing market and the new home construction has done down and affected them because they were very strong in what I call the new home.

Right.

And as the new construction went down, they have been affected. However, one of the things that Viking has done very, very well and I have to give them credit that even before the acquisition of Middleby is they have come back and started replacing that business and targeting renovation and remodeling. And I would say today as the economy got better and people are willing to spend a little bit more on renovating their kitchen, and staying home because they don't want to sell their home or they cannot sell their home because they are so much under water, people say "Well, I'm not going to go, let me go and renovate my kitchen."

And what's happening is literally the new products that Viking has done is to go back after renovation. And I am going to give on example about that one, the sizes. Sizes. They have produced sizes that allows them to come back and innovate not only in places such as home, but in high-rises where they were able to redesign product to get it there. I think also they've done a very good job in getting after what I call International. One of the things that makes Viking pretty interesting is that International play, and that was something that we did not expect to be as strong. So as I visited dealers overseas and we looked at places like Brazil or we look at places in the Middle East and Asia, we are seeing significant interest in the brand. The brand is alive and kicking and the distributor needed specific product geared to International market that Viking had basically had not supported --

Right.

-- over the years and that is starting to come through as they have redesigned a special ranges that fit those markets overseas because some of them are driven by propane versus natural gas --

Yes.

-- and electrical requirement that they did not have. So we are very excited about what's happening from an engineering standpoint. We talk about new product, but in all fairness in the last seven months that I have not given kudos to what Viking is has done I guess literally come up to standards specification to be able to sell in Europe, to be able to sell in the Middle East. As I travel and met the distributor I came back with wish lists and not having to do with features and new product, but, "Selim, can I get this for my market because I have a market where electricity goes up and down it's very volatile we have a lot of shortage but I need this to be built into it."

And almost every request that I came back with, the Viking engineering and production team had delivered for me. And that is going to give us significant boost for those distributors who have suffered who have not lost and not been able to sell those products because they did not have the ability to get there whether it's in refrigeration or in cooking.

Okay. And regarding your comment about wish lists, some of your big customers have done a terrific, terrific job on the beverage side. And I'm not talking about sodas I'm talking about coffee and I'm talking about blended drinks, too, smoothies that sort of thing.

You are in the coffee business to a certain extent through Bloomfield. I don't believe you are through any of your other business lines. One of the things that I hear from restaurants -- and again, this seems like a lot of these restaurants now are offering these smoothies and they have done very, very well with them. They have great margins that kind of thing, but I have heard as a complaint that within the kitchen delivering those to the counter in the quick serve model is not so efficient. So is that a market where you actually think is something that might be viable something for you going forward? I mean I'm not suggesting you're going to get into the soda dispensing market or anything like that, but where there's more labor involved, where the system is a little bit more committed for example in smoothies that kind of thing -- is that on an area of the market you think you might want to play in?

Jamie, I can tell you our customers ask us all the time because you're right. So far today I get asked because everybody is spending more money on beverages in general and they ask us, they say we wish you were in that business. But so far we haven't been, we don't play. We've been very focused on cooking alone.

Right.

But I see an opportunity there. Whether it's Middleby or somebody else that's an opportunity that I see from our customers.

I would tell you that, Jamie, where I see Middleby going. I will tell you my number one objective from a foodservice standpoint and then I will talk about food processing -- because you gave me a way to address that issue. Thank you. I'm going to tell you -- one, when you look at foodservice and as you talk about the combi business. Combi business is basically a $1 billion-plus business, dominated by literally one company. They dominate what's probably 60% of that business.

And we are literally our core business and we have two companies today that play in that business and we are not even a player. We've never put the resources on that. We haven't been focused on that. We have been more focusing on working on the kitchen of the future, we've been working with speed of cooking, we've been vendors, we've been working on fryers that produce less oil. We've been on that.

But on the combi front, it's been our first, literally first push this year. So I see that as saying, it's exciting for us. You have a $1 billion market, high margin, and there's really no reason for not us to be number two player in that business.

No. Yes. The combi oven market certainly seems like a very rational place to be focusing.

Exactly and the way, Jamie we just put it in. I have seen the numbers. I'm looking at the numbers right now. While it's still -- the numbers, aggregate dollars or small because we're a small player in this, you look at this we are at 2% player in that business, okay?

You're talking globally, right?

Globally. We are 2% in that business, 2% player in that business. There's no reason for us not to become a 10% player very quickly in that business. None. And once we focus on it, and we put the features and the technology -- we have seen the numbers, I'm looking at them, they are significant result.

The other thing is we continue spending a lot of time on your energy savings, our energy saving, whether it's water saving, and we walked about our waterless steamer that just got launched, and I talk about our waterless steam table that also got launched with two major chains and it's rolling out as we speak.

I talked about our ability to work with literally Wendy's, Buffalo Wild Wings, Bloomin' Brands, just to name a few while, we're helping them remodel their kitchen. You look at Starbucks expanding into food by levering the Blodgett platform. And Starbucks is also in its early stage of International expansion.

I look at our pizza chains. They are all benefiting from the shift to online mobile ordering and I look at those as they expand internationally. So from that perspective.

So I look back and I say okay, where does Middleby stand? Okay do I really need to expand into beverage? I will tell you, no I am not desperate. I have so much runway still in sharing with you between kitchen of the future, waterless steamers, combi oven, new pizza oven, and then I look at Foodservice alone I have ten new products in Foodservice launching in 2013. Ten new. They are all disruptive. Some of them aimed at breakfast menu that most probably disruptive to the breakfast menu offering. Some of them are done for what I call waterless base product. Some of them having to do with automation.

Then on the Food Processing part, I am introducing nine new products in 2013. So when you look at Foodservice and Food Processing, in 2013 we're introducing 19 new products. Nineteen. So we're not stopping and I'm not talking again they are totally disruptive.

And then I look at the Viking on top of that and what we're doing with Viking and revamping it, and then I look at what we have done with our distribution at Viking. We looked at penetrating the markets, continuing our penetration in India, continuing our penetration in Brazil, and I look at our investment in China. And then you take the Middle East, which has has been a big penetration for us as we continue expanding our sales force there.

I am very optimistic as I look at our business. I am not in desperate need to go and say wow, what's happening next. Middleby is literally, still has a lot of run way. So I look at all the customers looking at us and saying help me remodel my product. My store. And I look at them and I have a list of them that is humungous, and they are looking at us so.

Thank you. As always for your time.

Thank you, Jamie.

Our next question comes from Jamie Sullivan from RBC Capital Markets.

Thanks.

Good morning, Jamie.

Two quick questions. The first one, Tim, you mentioned selling costs flat excluding acquisitions, yet double-digit organic growth. I just wondering if you could explain how you were able to hold the selling costs flat in that environment.

We had some initiatives around efficiency. There was also some marketing costs that we had in the third quarter last year that were non-recurring and that kind of offset some of the variable costs associated with the second quarter growth.

Right. Okay. And you mean against the second quarter of last year?

That's correct. Yes.

Alright. Okay. Great. And then one on Viking. Selim, you emphasized the core customers a number of times and you had also previously mentioned a white space in a lower price point area of the landscape. Are the initial products that you're launching notice second half are these legacy price point products or are these the initial foray into that white space you had previously mentioned?

Yes. Basically, we introduced what I call our lower price unit to attract new customers to bring people in and it was launched in July, which I call the D3. So the D3 product line priced around I would say between $3,000 and $3,500 has been launched in July. But all of the new products that we're seeing are all about the legacy customers. We want to make sure we don't abandon our core customers. I want to make sure I don't do the JCPenney disaster where we go in and try to bring people into our stores and we lose our customers.

Viking has significant loyalty among people -- me and my wife love Viking. We don't to basically -- if we want to buy something else, we will buy Viking. One of the reasons we have been attracted to that brand because we're loyal it. It has served us well, and as I went and visited dealers went, and as I went and visited customers in fact many, many customers called me.

Now, has the brand had service issues, yes. And I think part of that service issues have been mostly in refrigeration. And I talked about it. They delivered their design, the clunker. It did not work. They had huge issues with it as they launched it ten years ago, or less, I don't know if it was even ten years ago.

However, one of the reasons that you buy into the distributor today has been the connectivity to our customers. Viking has been let's basically sell to ten customers and that's what they did. They had 10 or 11 customer they tell to in the United States and that's who they did to. All their business was to those people and those people obviously connected to the customer. So if a dealer sold the Viking product and an end user had an issue, dealer would say let me put you in touch with the distributor.

If the customer called Viking, Viking had no -- they didn't have record of the sale. They didn't understand what happened. One of the reason we want to own the distributor is to own the connectivity to that end user. I want to be able to own the experience in the United States with Foodservice. Today us and our dealers are connected, number one -- as in, our national account and our chains are one.

If there is an issue with my Blodgett convection, I will know about it. I don't think that take responsibility and say, "Sorry, it was my distributor." Today at Viking they have no way to basically understand what was going on until they customer so upset and that customer was willing to raise basically the stakes by calling Viking and being very upset or yelling and screaming, Viking did not understand what was happening because all the consultation of the sale and the service was happening at the distributor and the dealer level.

By owning the distributor, it is a strategic decision for us to own the customer relationship. Period. It is owning the customer relationship.

So going back to your question about the legacy product, we want to go back and reconnect with our legacy customers. I am not trying to go back and own new customers. I want to make sure -- and that has been always the story of Middleby. If you look at Middleby, when we started if you look at me as the CFO in 20 shall and there must be transcripts somewhere, in 2,000 or 2001 when I became the CEO, I talked to people. They said, "Selim, how are you going to grow market share? How are we going to go and acquire new customers? I said no. Our philosophy is to go and become more connected with our existing customers.

If you look at today's relationship between our customers, if you look back it's only recently that new customers come to us. If you look at why 90% of the time our core customer base has never left us. At Middleby we have almost 100% customer loyalty when it comes to us because we take care of our customers. We don't take them for granted. We don't go back and say you know what you took me to the dance and now thank you now I'm going to look for seasons. What we have done and it's been part of our culture at Middleby I would rather forego a new customer if I cannot support my core existing customers.

And I want to do the same thing at Viking. And I want to make sure, and I think they support me on this. I don't think that was the case with the distributor. Distributor did not have -- the distributors is about volume because they have very low margin and they had to most probably go and grow the volume. I want to go back and say -- I want to keep customers that are mine. I'm not trying to go after other people's customer. I want to make sure that you bought the Viking, you're going to buy another Viking again. And I think there are plenty of them because we have the largest installed base. We have created that category.

So that's where I'm coming from. That's my Philosophy.

Thanks very much for the color.

Thank you.

We have no further questions at this time. I would like to turn the call back over to Mr. Tim Fitzgerald for closing remarks.

Okay. Thank you, Hilda, and thank you shall everybody today for being patient on the call as we worked through some of the technical issues and we look forward to speaking with you next quarter. Bye.

Thank you, everybody. Bye-bye.

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