Middleby Corp (MIDD) 2015 Q2 法說會逐字稿

Thank you for joining us for the Middleby Corporation second quarter conference call. With us today, from Management, are Selim Bassoul, Chairman and Chief Executive Officer; and Mr. Tim Fitzgerald, Chief Financial Officer. We'll begin the call with comments from management, and then, open it up for question and answer. Instructions will be given at that time. Now, I'd like to turn the call over to Mr. Fitzgerald, for opening remarks. Please go ahead, sir.

Thank you and good morning everybody. Thanks for attending today's second quarter conference call. Net sales in the 2015 second quarter of $436.3 million, increased 2.7% from $424.8 million, in the second quarter of 2014. The second-quarter sales include the impact of acquisitions not fully reflected in the prior year comparative results, which accounted for $32.1 million, or 7.6%, of the sales growth in the quarter. Sales in the quarter also continued to be affected by the strengthening of the US dollar against a number of foreign currencies, in comparison to the prior year. This fluctuation resulted in lower reported international sales, when converted to US dollars. This impact amounted to $11.8 million, or 2.8%, in lesser reported sales growth for the quarter. Excluding the impact of acquisitions and foreign exchange, sales declined by 2.1% over the prior-year quarter. This decline reflects an organic sales increase of 7.9% at our commercial food service group, a decrease of 22.5% in our food processing group. And, a decline of 13.3% at our residential kitchen equipment segment. The sales of commercial food service group amounted to $288.8 million. And, sales growth reflects continued demand from restaurant chains, upgrading equipment and adopting new technologies, to improve the efficiency of restaurant operations.

Sales at the food processing group amounted to $71.9 million in the quarter. Consistent with the nature of this business, we saw volatility in the second-quarter sales, in comparison to the prior-year quarter, due to the timing of larger orders. Additionally, given the large proportion of international business, the impact of the strengthening US dollar had the greatest impact on this segment. Despite the first half sales decline, incoming order rates increased by approximately 20% in the first half. And, we continue to see positive trends in activity with our customers. And, we expect that we will have positive organic growth rates in the second half of the year.

Sales in the residential group amounted to $75.5 million in the quarter. This included approximately $14.8 million in sales related to acquisition. Excluding the impact of acquisition, as expected, sales at Viking were impacted by non-core products that were discontinued, and connected with the acquisition of distribution in 2014, and the transition to the new line of refrigeration. As a result of this transition to the new refrigeration products, sales were affected during the quarter by lack of product availability during the first half. By the end of the second quarter, we had started production on all models of refrigeration, and expect a gradual improvement in sales, in the second half, as these products are promoted.

Gross profits for the second quarter increased to $172.9 million, from $166.2 million in the prior year. And, the gross margin rate increased from 39.1% to 39.6%, driven by improved margins at the residential kitchen equipment segment. Gross profit margins, during the quarter, were 41.3% at the Commercial Foodservice segment, as compared to 41.5% in the prior-year second quarter. The margins were relatively consistent and include the impact of lower margins at the five newly acquired businesses in the segment, late in 2014 and the first half of 2015.

Gross margins at the food processing group were 37.5%, as compared to 37.4% in the prior-year quarter. The gross margins were constant at this division, as profitability improvements were offset by the impact of the lower sales volumes during the quarter. And, the gross margin at the residential kitchen equipment segment increased to 36.2%, from 32.9% in the prior-year quarter. The improvement reflects the benefit of cost reductions from restructuring activities, and improving warranty costs, offset, in part, by the lower sales volumes during the quarter.

Selling and distribution expenses during the quarter declined from $48.1 million to $45.3 million. The second quarter of 2015 included $4.6 million in additional selling costs, related to acquisitions completed during the past year. Offset by $1.8 million in the lower costs, due to currency translation. Excluding the impact of acquisitions and FX, selling costs declined by $5.6 million, reflecting the benefit of cost reduction and acquisition integration initiatives implemented in 2014 and 2015.

General and administrative expenses increased from $42.3 million to $44.2 million. This increase includes $3.1 million of incremental expenses associated with the newly acquired businesses. Second-quarter expense also included $4.6 million of nonrecurring expenses, which increased by $3.3 million, compared to $1.3 million of nonrecurring incurred in the prior-year quarter. These increases were more than offset by the impact of foreign exchange, which reduced G&A expenses by $1.3 million, and cost savings initiatives implemented during the past year.

Earnings per share in the second quarter amounted to $0.95, as compared to $0.85 in the prior-year quarter. And, the current-year quarter included a $0.05 impact related to nonrecurring charges from restructuring actions, and $0.02 related to the impact of foreign exchange. Excluding these items, EPS would have increased 20%, and amounted to $1.02.

Cash flows generated by operating activities amounted to $85 million during the quarter, comparing favorably to $75.2 million in the prior year. And, for the first six-month period, operating cash flows amounted to $87.9 million, as compared to $67.7 million in the prior-year first half. Non-cash expenses added back, when calculating operating cash flows, amounted to $16.5 million for the quarter, and $29.5 million for the first six months. The $16.5 million of non-cash expenses during the quarter included $6.9 million of intangible amortization, $4.2 million of depreciation and $5.4 million of non-cash, stock-based compensation.

The Company utilized $5.6 million in the quarter, and $11.7 million for the first six months, to fund capital expenditures related to investments in manufacturing equipment, and in enhanced production capabilities. Investments in acquisition-related investments amounted to $29.7 million for the quarter, and $76.2 million for the year, and includes the acquisitions of Desmon, Goldstein, Marsal, Thurne and Induc. So that at the end of the quarter, amounted to $639 million, as compared to $598.2 million at the end of 2014. The Company's net debt to EBITDA leverage ratio at the end of the quarter approximated 1.5 times. And, the debt at the end of the second quarter does not include the anticipated funding of the AGA acquisition, which is anticipated to close by the end of the third quarter. So, Dave, that is all for our initial comments. If you could open the call now for questions, that would be appreciated.

(Operator Instructions)

Tim Wojs, Baird.

Close enough. Good morning, guys.

Good morning.

I guess, just to start in residential, I think the organic growth in that business probably surprised people the most. How did that business trend, relative to your expectations during the quarter? And did you see some improvement in the sales trajectory, through the quarter and into Q3, so far?

First of all, let me go back to my previous conference calls. Which I had mentioned that we had done three things at Viking, that were impacting the short-term sales. Number one, we had re-basically changed our complete dealer channel. By reducing the number of dealers we are selling to, we were changing the dealer programs. Which affected, basically, a lot of the distribution. We basically had to elevate dealers and we had to take back inventory and displays. And, literally, cancel orders that were imminent, And that impacted the first factor.

The second factor was the fact that we had the new products that were coming out. And as the new products were coming out, we had to put on displays. And the displays, basically, are offered to our dealers at a significant discount. Force them to -- motivate them to put the display. So, they offer the space. We offer this display at a significant discount. And, we've had significant amount of displays going on this year. Which, while it did generate sales, did generate sales at a heavily-discounted price.

Number three, our biggest issue has been the reputation. As I mentioned to you that we were redesigning our complete reputation, to be ENERGY STAR, and meet the energy guidelines. Second, to introduce a complete slew of refrigerations that had better quality than the previous Viking refrigerator that had a lot of legacy problems. So, we look at all of those. So, literally, I had already told everybody that we do not expect Viking sales to come through this quarter knowing all that.

On top of that, we had a recall that took place in the quarter. That also affected the sales, because we were out there taking out some recalled products. So, I will tell you that I am extremely pleased with the results of Viking. Despite all the trends, we had no refrigeration to sell. We basically let go of our dealers. We were filling up displays, and we had a recall. And I'm very, very pleased with the numbers, as they showed.

Now, looking forward, I'm very excited to say that the new products are growing extremely fast. The French-Door oven, the 7 Series, our new cooktops, are flying off the shelves. And to state that example, our distributor in Beirut, Lebanon, where I was just there on business, just received the first international truckload of new product, of the French-Door in 700. He had been the Viking distributor since 1999. And when we acquired Viking, he was the most vocal about all the problems that Viking had: lack of innovation, quality issues. And since my parents still live in Lebanon, I go back to Lebanon quite a bit. He was the first to come to me and say, Selim, I sell nothing but Viking. I'm not a traditional dealer. I make my living off Viking. I need you to help us start growing again. And when he received the first truckload, 70% of that truck, of that container, was sold within less than seven days. His sales people were excited. His service people were excited. And, it's happening. This is happening. The same trend is happening in United States. And now, he's expecting to receive the refrigeration. So, the next is refrigeration coming up online. And, of course, he's waiting for the TurboChef Oven, the speed cooking oven, and the single-door French-Door, and the single-door TurboChef. So, there's a lot in the pipeline coming out, between now and the end of the year.

Okay, that's very helpful. Thanks, Selim. Should we expect the level of organic growth to improve in the back half of the year? And, in residential, could it be positive?

Well, I will tell you that, at this moment, orders have picked up. But, I am not going to make any guidance in the short term, for two reasons. One, I want our number one objective, and I want to make it very clear. My number one objective at Viking, when we bought that -- and we always had a pact, between all of us. Between us and our shareholders, between us and our Board. Between us and our employees, between us and our dealers. Is to reestablish the brand, as the high-end brand. And, this was not the case in the past. We've had many recalls. We've had legacy issues on quality. We've had pricing all over the board. We've had people on the internet, basically, offering pricing where you could buy a Viking product almost heavily discounted. We stopped all of that. And, the results have been two-fold.

One, the brand is coming up. And I will, basically, in my closing comments, talk about all the awards we've gotten since. It was very difficult for us, because it's easy to go and get orders. I can tell you, today. I can ship truck loads of orders, if I keep the internet the way it was, and managed. If I go out and sell every dealer out there, because Viking is a very strong brand. If I go and allow people to, basically, discount one product, to move our cooktop, or our ranges which are very popular, and we stopped all of that. Number two --our pact is to make sure. So, we wanted to raise the brand, which has always been something that Middleby is known for.

Number two, more important is to make sure that our EBITDA continues to grow. And, one of the issues that you've seen in this industry, in the residential appliance industry, has been the low margins. So, if you look at everybody. Whether it's GE, whether it is LG, Samsung, Whirlpool, Electrolux. [Uhsee's] the one I can capture. Siemens and Thermador, they are public, and Viking. They were all below a single-digit EBITDA number.

And, the challenge that everybody asks me, when we bought Viking. Why would Middleby enter a segment that was traditionally low margin? Specifically, when they are big players, a lot bigger than ours, that have automation? They have efficiency, they have supply synergies and supply levels bigger than ours. Well, we proved to all of you that, I think, Tim our margins in -- our EBITDA margin went how much in this quarter?

Well, for the whole first half, we are running right at 20%.

Okay, at 20%. And we will continue pushing to what Middleby is. We would like to take it to 30%. Which will be a major change. Viking, since it's existence, has never had a 20% EBITDA, from day one they started. Even in the heydays, when they were almost a $0.5 billion company, they never had a 20% EBITDA, the sales ratio. This is our number one focus, was to get the brand back up, to get the EBITDA. So, today, I will continue saying we will not take orders at the expense of the brand and EBITDA.

And, this is a big change. It's a big cultural change. Because, this was not the case in the industry. So, I can give you a perspective. Our number one competitor is out there discounting heavily, even though they have a great brand and, they discount. And, we refuse to meet and match the prices.

And, we've lost some projects because people are testing our resolve. And, we are saying no. And, as we continue bringing the new products, the Middleby technology, we hope to do what we've done in commercial. We are, basically, we will grow by being positioned as the highest priced. But, great features, great benefits. In the long run, a great cost of ownership. And, that's what we'll do.

Okay, great. No, you guys have done a great job. I'm not trying to -- you guys have done a very good job, with the business over time. I hate to concentrate on some of the short term. But, you have guys really done a great job there, over the last couple years. On food processing, is there a way to think about -- you said orders were up in the first half by 20%. Is there a way to think about what that, I guess, the base of that order book looks like, in terms of what that could translate into revenue, in the back half of the year, Tim?

I think we're going to see higher single-digit to lower double-digit revenue growth, is what we would anticipate for the back half of the year. Some of those orders will go into 2016, but we will start seeing that start coming through in Q3 and Q4, as well.

Okay, and that's on just an organic basis, not accounting for FX?

Correct.

Okay. And then, in commercial food, is there anything -- you guys are very well positioned. Is there anything that you are seeing that would change the demand trajectory there? Or is it status quo, business as usual, on commercial food?

It's been fairly consistent. As we mentioned, we are seeing continued activity, really, across our chain of business, which is strong. Some of the international markets have been up and down a little bit. Overall, we are still growing well, international. But again, given currency changes -- For example, markets like Brazil, where you have had huge swings, our equipment is becoming more expensive. So, we've seen a few pockets here and there of, I would say, slowing. But, I think that's with a backdrop of still good demand, as we see a lot of our customers opening restaurants overseas.

Okay. I appreciate all the color. I'll hop back in queue, thank you.

Thank you very much.

Tony Brenner, ROTH Capital.

Thank you, good morning.

Good morning, Tony.

I've a question regarding the 20% for sales increase in food processing orders. Given the high-ticket nature of that business, I wonder if that backlog, or the increase in orders, reflects just a couple of high-ticket items that are in the pipeline? Or, is it a broader-based increase in orders? And, if so, what might be driving that?

Tony you're getting to the heart of our strategy, which I would like to answer that question. We've been in that business now for approximately 10 years. So, one of the issues that we've done over the past, I would say five years, is to try to take the cyclicality and the lumpiness of that business away. We're not there yet. I'm not going to tell you we've taken that out. But one of the [issues] in the next 24 months is, we will basically start seeing a much more normal, flat business, than it's been in the past. And that has been a major effort by us.

So, let me give you a perspective of what we've done to take away the lumpiness. One, the number of acquisitions we've done have been -- gave us a lot more flexibility to, basically, weather one segment to another. So, if beef is down or chicken is up, we'll be in there playing, and smoothing out a little bit more of -- where we were mostly, playing was dominantly playing in sausages, hotdog, bacon. So now, with more integration and technology in the chicken market, we've become a much bigger better player in the chicken. Especially with our last acquisition. It was done this year.

I also look at emerging markets. We have, in the last two years, invested significantly in emerging markets where we see a lot more orders coming through from China, Thailand, Malaysia, Middle East. Number three, we are now in the process of expanding our core expertise into segments that could benefit from, what I call high-speed cooking, or automation. So, our bakery business, now, are going into things that we didn't have before. So, were consolidating our bakery business to attack snack goods, which we did not have before. We we're mostly into what I call baked goods. Now, we're going into snacked goods, which allows us to get there. We're going into -- some application we have continues to be interesting in the [medical] side. We are interested in looking more at seafood. We are looking more into pet food. We all have pets, and we know how much we are spending on pet food, and all this requires the same thing. We're feeding dehydrated fish and salmon, and beef and chicken to our pets.

So, I think that the strategy is working. And, our number one goal in the next 24 months, is to figure out a way to smooth that lumpiness and cyclicality. And, we are almost there. If you asked me that question 24 months ago, I would say, I don't know how to answer it. So, we've put a lot of effort. And, in the next 24 months, there will be significant effort to smooth and start growing the way we grow in food service. So, we're very excited about this.

Thank you.

Schon Williams, BB&T Capital Markets.

Good morning, gentlemen.

Good morning, Schon.

I wonder if we could talk a little bit about the restructuring that's been going on in Viking. Quite a bit of charges the last couple of quarters. Can you maybe just talk about -- is most of the heavy lifting done, first part of the question. And then, in terms of the benefits, have most of the benefits from that restructuring already been realized? Or is there still more to come that we should start to see over the next 6 months to 12 months?

Well, I would say the heavy lifting is done, Schon. We did a lot. A lot of the charges that came through in the first half of this year related to distribution. As you recall, we acquired quite a few distributors over the course of last year. And, as we streamlined that operation, we had a number of charges. Including, as we consolidated warehousing and focused on the logistics end of that business. But, we still continue to drive efficiencies, overall, in the business.

So I think, really, a lot of the heavy lifting is done. And, I think you saw from residential, improved margins in the first half of this year. Overall, as a Company, we had lower reported SG&A during the quarter. So, we are seeing the benefit of that. It's somewhat offset by the fact that we're still dealing with the volume issues, as Selim talked about, as we're moving to the new Viking. But, that being said, it's showing up in the EBITDA numbers and we do think that those will expand as the business grows. I think there still is, probably, a little bit of improvement that is still yet to come through the numbers. But, I think you did see a lot of it here in the second quarter.

Okay. And then, just fixing on Viking. If we strip out the discontinued lines, if we strip out maybe refrigeration. I don't know, would organic growth in Viking still be down because of the changes that you've made in distribution? I'm just trying to think of like --

It will be up. Let me make that clear. If you step up with (technical difficulty) products, and the refrigeration will be up. So, it will be up.

Okay. That's very helpful. And then, last question if I may. Tim, could you maybe just talk a little bit about -- we've seen some news recently about some recalls coming through, just within the past couple of weeks. Maybe just talk about, is that already built into the warranty reserve? Is there still adjustments that maybe need to be made to the income statement, as we go into the back half of the year? Is there a special charge that needs to happen for those? Can you just help me understand, are we seeing incremental headwinds here, or is that already baked into numbers to some degree?

We do have a reserve on the book for recall items. And so, we are not anticipating additional charges related to that.

All right, that's helpful guys. I'll get back in the queue.

Thank you, Schon.

Jason Rodgers, Great Lakes Review.

Good morning.

Good morning, Jason

Just to followup on the last question, I wonder if you would be able to quantify the costs related to the refrigeration rollout in the quarter? And, how should we be thinking about that for the second half of the year?

Well, I would say it'd be tough to do that for two reasons. One, we've incurred a lot of R&D cost on refrigeration, from that perspective. So, just to give you -- maybe I should give everybody a historical perspective on refrigeration. Number one, when we acquired the business, refrigeration was -- the engineering, the R&D of refrigeration, was in Iowa, in Des Moines, Iowa. So, you had the factory in Greenwood, Mississippi. And, engineering and R&D done in Des Moines, Iowa. Extremely difficult to, basically, coordinate what was going on. And what happened, every time they designed a prototype, it had to be shipped down to Greenwood. They had to ship back with the changes, and it was tough. In the meantime, we had a deadline of September 1, 2014, to deliver the energy standards on refrigeration. In July, I decided to close the Iowa R&D. Because it was not efficient.

So, here we are in the middle of trying to catch up on our energy standards, and I decide to close down the Iowa. It was precipitated by couple of things. First of all, I think the Iowa engineers realized that, at one point, I did not like the fact that we were disconnected. And, a couple of them had put their resumes out and left. And then I said, well it's time to close the thing, and we closed it. So, we have no R&D or engineering in Greenwood, Mississippi, and none of the engineers in Iowa were willing to relocate to Greenwood, Mississippi, from Des Moines, Iowa. So, we had to rebuild our total engineering group. And, luckily for us, we're not only able to find great engineers in refrigeration, we are able to, literally, upgrade our industrial engineering. We are able to work on brand-new prototypes. We had people join us and move to Greenwood, Mississippi. So, we were lucky to find a great team of engineers, both in the plant on the industrial side, and in design side.

Second, what we've done along the process, we also -- we're sourcing some product from Whirlpool. And at the time, Whirlpool decided that they did not want to supply us anymore those products. So, that was multi million dollar sourcing product and it stopped. And we ultimately had to scramble to find another source to give us our freestanding, which had been always outsourced. And, we basically were able to work with Electrolux, to be a replacement. And, that took almost 4 months to test the prototype, to make sure we had no quality issues. Electrolux were superb in working with us. And not only that, we acquired a better product, with a better warranty, from Electrolux than we had before. So the relationship, now, has become on the refrigeration. We had to almost blowup the whole refrigeration.

So, when you ask me about costs, it's very complicated to talk about costs. Because, we had to give a severance package to our people in Des Moines, we had to move production, we have to hire people. We have to have retaining fees for headhuntings, to get people. We have to locate people into Greenwood. We had to create the complete refrigeration lab. A lot of expenses went -- a lot of CapEx went into this and a lot of, what I call day-to-day expense, went into it.

In addition, we did something which we've not done before. We went out and started doing field testing. In addition to improving the 100% testing in the factory, we've been doing field testing out in the field. So, we've put in a lot of prototypes out there, making sure that they work and addressing every warranty issue, and we're in the process of launching right now. So, we just started launching the new products. They've come up. And, literally, we're starting to train people because they have a lot of features that they didn't have before. A lot of quality. Different ways of LED lights, the plasma cluster, which is extending the freshness of the food better than any other refrigerator in the world. The way the hinges work, so we don't have a hinge problem, ever. The way the capacity -- we're basically 20% to 22% more capacity, at the same size, than our closest competitor, for the same size of refrigerator. We redesigned the thing to take large pizza boxes that you can put in. We put soft close on all of our drawers inside. We reinforced all our refrigeration, our compressors, to even work in places that have high humidity, like Florida and Middle East. So, we've done a lot of work. So, for us to go back and go back together, would be difficult for us to give you the cost. But, I will tell you that a lot of efforts went into refrigeration. And we intend to make refrigeration a big part of our business.

So, we're very excited to take refrigeration to the next level. And the first reaction or response have been excellent. I will let you know when [Aussiemax], our dealer, our distributor in Lebanon, receives it, because he is our beta test. He lives and dies -- him and his son, two families in Lebanon, which is a very different market. He lives and dies by Viking. That's the only thing he represents. So, he's eager to receive the refrigerators. Because he's had a lot of legacy issues in the past and he is looking forward to, similar to the new Middleby technology that he's received in two of his shelves. He's waiting. He should be receiving our new refrigerators some time in this quarter. And then, I will let you know in November, what's to be the Aussiemax response. Because he is, most probably, the most battle tested of all distributors I've known. He's in a remote, tough country, high humidity. No electricity in the country, so everybody is on generators which, basically affects how the refrigerators -- because you don't have steady electrical generation coming into the homes, and he will be our biggest test. So, it's too early for me to tell you, until Aussiemax has received his container. So, Raymond will be able to tell us. Him and his son, Joseph, will be able to tell us, and I will report to you in November. It will be a question for all of you to remind me, how is Aussiemax responding to refrigeration.

Thank you for that detail. Just shifting gears a little bit to the commercial foodservice. Just wondering what impact the rising minimum wage, the $15 minimum wage, what impact that is having as you sell your kitchen of the future?

It's having a big impact. I will tell you one thing, that people are all nervous about it, and it's driving two things. They are driving -- well, in fact, it's impacting three key areas which is design, design of the kitchen, the equipment and the workflow. So everybody is, now -- they know it's reality. And everybody's trying to figure out a way of redesigning their kitchen. And we're seeing the impact in the fast casual. We're seeing the impact in the merging chains. As you know, the big changes take a long time. It takes a long time for them to try to change their workload and process. Not because they can't. The problem is, you take a chain that has 5,000 stores, or 30,000 stores, or 10,000 stores. Usually, they have to go and convince their franchisees to invest in that technology. That's number one.

So, you have a corporate R&D team that really believes in it. But, they might own only 200 stores. So, there's no point for them to say, well we're going to only do it in our own stores. So, they need to go and convince the franchisees. And, I will tell you what we're facing right now. We're facing -- and they're at the end of it. The last years, I've been like you, struggling to understand why the kitchen of the future, which is a no-brainer, has not taken off as fast. The payback is less than a year. It is extremely fantastic. For the over now, I think 3,000, 4,000 restaurants that are using it. They love it. The operational income, the impact has been superb. I went and asked many CEOs and, they say Selim, we'll get to it. I promise you, this will be our next impact. But, we've been spending time, money basically, upgrading our technologies so that we can be, literally, digital media. We can be able to order -- our customer order and pay online. To be able to create technology, to be able to create a more enjoyable dining experience. So, a lot of money went into technologies.

And, quite simply, we have to be able for people to order online, to ship online, to be able to have apps, to be able to upgrade our security system so that people don't hack in our system and place fake orders. So, it's been a big investment on the restaurant business, in terms of creating spending dollars on what I call technology where people can make easier to order. And, this is why I think our kitchen of the future was competing a year ago with all those technologies in the front of the house. And, I think everybody is now realizing that they've invested the money. They've done that, and we are starting to see again, people looking at labor and saying, now I have to do the kitchen of the future. I was asking same questions. Every test that we've done with those 22 chains, have been nothing but raving reviews. But then, the CFO wouldn't pull the trigger. And then, I did my own research and people were honest and said, Selim, it's on our docket. We will have to use automation in our kitchen. We need to change the workflow. We need to change the labor costs, and knew I have the solution and we know it works. But we could not spend the money. Before becoming technologically advanced, when, I can't be a pizza chain. That I can't have our customer order online, or text message and be able to track where there pizza delivery is. And they have to invest in all those technologies. And I think we are at the end tail. Maybe another quarter or two, but I'm looking forward to saying 2016 will be a big one for our kitchen of the future.

Thank you for that. Final question. Tim, what should we think about the tax rate for 2015 to be?

That's a good question. I think we're still looking at 33% to 34%. We were a little bit lower than that in the first half of this year, due to some kind of favorable items. But I think the 33% to 34% is the range we are looking at.

Thanks, very much.

Gary Farber, CL King.

Good morning. I just have a few questions, just on the Viking business. In the US, the dealer network that it's going through now, now that you've made a lot of improvements and changes, can you give us a sense of what percent is just the large electronics chains? Or, just large retailers of the distribution network in the US?

Gary, can you clarify the question?

Like a P.C. Richards, or something like that. Within the chain that's reaching out, that's touching the customer, what percent of the total footprint that you have in the US for distribution for Viking is comprised of those type of chains, would you say?

So, I would say we have switched, significantly, to those big chains. Prior to that, we -- let's talk about P.C. Richards. P.C. Richards has always been a Viking dealer, but the relationship was not the best. Why? For one reason is, we do not support them in displays. We did not support them in training. And, the relationship was, literally, not the best. So, when Middleby bought Viking, it was one of my objectives to target people like the P.C. Richards. So, I went and met with Gregg and we've created a relationship that's not based on price. Gregg Richard didn't come to me and say, Selim I'm not making money at Viking. His biggest issue was, Selim, I want three things to happen in my store. I want your salespeople to support my salespeople better. Let me add, he had a lot of stores. And he said Selim, I want your people to be more present in our stores which has been a big issue for us, from a sales standpoint, because of our direct sales force. So, we have to reinvent ourselves with our sales force, because our sales force is superb. It's just a matter that they were too spread out. We had too many dealers. They were calling on everybody. And P.C. Richard didn't feel that they were privileged because, we had around 2,000 dealers. Let's say it was truly around 1,600 dealers. Which was a lot of dealers to cover.

Number two, we wanted to make sure the display of the new product were upgraded. So, what we've done is, we work together to upgrade and put the commitment on both sides. He invested in displays. We invest on displays. And, literally, it was a multi million dollar initiative on both sides. He also spend money on our displays, because he believe in the Middleby. He truly believes in Middleby. He always loved the brand, but he believes in Middleby.

And number three, we talked about significant training. So, we've done training to -- he has roughly 500 appliance salespeople. And we trained, or are in the process of training, all his 500. And, the trainings have been going on all 2015. Now, that's on specific data. On the subject side, we have built a trust where we told P.C. Richards that we stand behind the new product. Not only do we stand behind it, it will be supported by service and by, what I call white glove installation, which we're in the process of putting down.

Next one was parts. We did not have a part system for us. So, if you were a customer of P.C. Richard, or in that case, Pac-sales or Ferguson, or Perch, or the big one, ABT. And, your customer is down and you needed that part, there was no way, today. You had to call our call center to get the part. You had no way to track it online. You had no way to understand if it's ongoing or not. So, we changed our proto-part business. And, if you're online, if have an ability to do, so you can go to MiddlebyAdvantage.com. Correct, Tim? It's called MiddlebyAdvantage.com?

Correct.

You can see that, right now. So, Middleby installed an electronic part system. Where anybody can track their orders. They can track which part they know. So, the biggest issue as it changed a lot, introduced a lot of new product, it was tough for everybody, including service, to recognize which part which is what. Which knob works where? So now, you can go and see how easy it is to order parts.

So, if you have an old Viking range, let's say 10 years old, and you don't know your part number, or the service technician is new. They can go on their app, on their tablet, or on their computer, or on their phone, and go on to MiddlebyAdvantage.com, which was cut-released in December, and for Viking, our release is April 1. And now, you can basically recognize which knob you need, which thermostat you need, what's wrong with your oven. It's very intuitive and it has got rave reviews by both our foodservice service people and the Viking service organization.

So all of those make people, dealers like P.C. Richard, Pac-sales, Ferguson, very much connected to Middleby now. It's not only auto Viking. It's not only the ability to sell, but the ability to tell that customer you're going to have a unique and different-shaded experience with Viking now being owned by Middleby. Viking could not have done it, I could tell you that. Our competitors in residential, high-end competitors don't have that system. It's a unique system. It's food service that's unique. And it's open. It's on MiddlebyAdvantage.com.

Okay, thanks. So would you say, practically, all the product is now going through P.C. Richards-type dealers, as opposed to being more fragmented than that before?

No, Gary. It still is a diverse dealer base.

Pretty diverse?

Yes.

If you took like the top five distributors, would they comprise a fair -- more than 15% or 20% of the sales? Or is it less than that?

That's not something we really want to disclose. You can assume it's a meaningful, full number. But, there still is hundreds of dealer customers. So, Selim just went through an example. We've invested heavily in relationships with a number of key partners, which some of those are the larger dealers. But it is a broad base of customers. So, it's not heavily concentrated with one or two.

Okay. All right, thank you.

Jamie Clement, Macquarie.

Tim, Selim, Darcy, if you're back there, good morning.

Good morning, Jamie.

Thematic question for you, big picture, most of the basic ones have been asked and answered. But as you look at commercial foodservice versus residential, these are two markets where you've got to deal with price competitors. Now, over the last decade plus in commercial foodservice, there's clearly been ongoing pricing pressure. But you all have been able to demonstrate a return on invested capital case, to your customer base. And you all haven't had to discount your sales, have doubled or tripled everybody else's. On the residential side, you're dealing with potentially a less sophisticated buyer. And when they go into a retail location, maybe they see a competitor where it's, hey, you by the refrigerator, we'll knock $1,000 off the price of the range. How long does it take upgraded quality at Viking, to break that kind of mindset, and allow those customers to come to Viking?

So, I'm going to answer. Jamie, it is a fabulous question, because it was something I wanted to present, to talk about it a little bit. So, let's talk about Viking, then I will go to foodservice. On the Viking side, people buy Viking because of its looks. It's very different than Wolf Sub-Zero. It's very different than Thermador. And, one of the things that we continue, and I'm going to share with you some of the awards we've got in 2015 alone. We continue to upgrade. So, we beefed up the handle, we beefed up the looks. We kept the integrity. And that's what makes Viking unique. If you get a Viking product in your kitchen, it still looks better than any body else, if you want that commercial-looking design. If you want a slick, urban look, and you want the modern? Transitional Viking is not your cup of tea. Your going to go to Amelia. You're going to go Agogino. We're not into that business.

Our core customers want that look. And what happens is, literally, we continue investing in that design, integrity that Viking has always had. Now, as the quality gets better, we are going to stay away from people discounting, which is surprising to me. But in both foodservice and in residential, people -- I don't know if it's the upper management or because they do not really man the stores the way we do. I see discounting that doesn't need to be.

So, I give you a great example. A friend of mine is building a project in the Caribbean. It's a timeshare type of project. He had the first project, it's all Viking. And even before we bought Viking, had always loved Viking. Had no issue with it. As we say, because they were supported. And it's not used heavily, and it was done almost over 10 years ago. So, it was when Viking was producing good products. So, he decided to buy in the second project to buy Viking and now that he knows me, we have a relationship. There's more reason now to buy Viking.

Well, our competitors came in and offered him -- remember it's in Caribbean, that means you have to create warranty service. You have to ship it. So, direct from my competitors, they were, and say, a top competitor of ours. It's a good brand. It's not a second-tier, it's top-tier, which I consider a very good brand. Offered them, compared to our price, 30% less. Okay? So, he called me. He says, Selim, what do I do? I said you should buy my competitor at 30%. He said, but Selim, in my first project I have Viking. In the second -- I said, no, no, Stan, go and buy sub-zero at 30%. Because I will not even discount.

And I will give you perspective. In food service, Middleby bucks the trend. Early on, 15 years ago in the year 2000, when I became CEO, there were a lot of pressure on me to discount and we said no. In 2009, when the recession came, all our competitors -- and one of them, right now, who you all know. My number one competitor is out there giving things away. They are trying to win business, in light of the strategy that they have to do next year, to shore up their business by discounting heavily. Despite the fact that they have great brands. So, I don't do it. I won't allow to do it. And I'm going to give you a testimonial to that effect.

Seven years ago, a big pizza chain hired a supply chain executive. So, the first thing this guy came because we're exclusive with that chain, almost. Not exclusive, but we're 90% of their business. They decided to -- they get an offer from a competitor that, at the time, was substantial. So, they didn't ask me to match the price. But, they said Selim, we would rather stay with Middleby Marshal, would like you to reduce the price to meet that price, at least halfway. We know Middleby Marshal is better. We have it in the system. I said no. We're not in the game plan. Go and do that. So, ultimately, they made a decision to switch their domestic business. Not their international business, their domestic business. Which that manufacturer could not support them, internationally. So, we kept the international business. We lost the domestic business. So, a year ago, they decided to come back to us. Why? Because, over the five years to seven years, they realized that the cost of ownership was a lot bigger, higher, than the discount they got up front. And, they realized that Middleby, in those five years to seven years, in the domestically, they did not benefit from the speed of cooking, from our ability to create a better bake, a better pizza. And, ultimately, they can back. Now, it helped that their CEO came from the international market and never switched and went back and scratched his head, and said why? And, now, they've come back. And, they were here this week, testing our latest technology and they are rolling out our latest product. That's rolling out, again, at that chain.

So, over time, we are going to lose orders. Because, everybody's tempted by such a price discrepancy. Nobody's coming to me and saying, Selim, I'm losing an order for 3%. I'm going to have to walk away. It's usually over 25% to 30% difference. And many of our customers have come back and say, Selim, we know yours are most expensive, but we stick with you because of your service, of your innovation, of your solution and what you provide. And this is why, if you look at us and our competitors in food service, they don't carry the margins we do. They are always packaging, doing something. And I'm seeing that in residential and we are now bucking the trend, and saying no. And that most probably has cost us orders this year. Because, people are trying. They don't know us. They don't know Middleby, and they are trying to test my resolve and say, wow, I can't believe that Middleby is not going to buckle down. So, there has been projects that were all Viking, a building project. They come back to us saying, we want another 20%, 25%. We say no, sorry. We're not going to give you that price. Because, we're not going to discount the brand. At which time you're going to realize, as Middleby infuses that technology, your customers are going to come back to you.

And our technology is so differentiated on Viking right now, Jamie, that you cannot ignore it. Our plasma cluster, which extend the freshness of the food. Our ability to be -- the way you can now categorize your food in the refrigerator, it is amazing. Amazing. Our ranges, our burners, our ovens, we are the only basically true technology from commercial on all our ovens. Whether it's a range oven or the wall oven that has zero preheat. Zero preheat. We continue introducing technologies, in terms of cleaning the oven. In terms of the way -- how fast we boil the water, and how fast we create even bake.

Remember, this is our technology. This is what we do for a living. And I remind people that chefs are more demanding than any home chef. Because they make money off our equipment and we're trying to take that technology back. So, the trend is in our favor. And now, people are starting to realizing that Middleby -- it took some time to realize that Middleby is infusing some unique technologies in what we do.

So, price point? I can't, after all those years, our competitors haven't copied us. In food service, they remain a lot less priced than we are. And, you know what? They have great brands. I don't want to discount their brand. In some cases, they have some good technology. But, they are not disciplined the way we are on pricing. And, you know what? Some customers who are always, can I look at that? Some bidding customers that are always bidding, have never been customers of Middleby. And they are not great concepts. So, I will tell you, there is not a single great concept out there.

I will tell you that every winning concept in fast/casual have never come back and said, wow, you're 30% higher. I'm not going to buy your equipment. So, I name all the winners. Dunkin' Donuts. I win Five Guys. I ask Chipotle. I ask all those customers who have used us, who are number one in their concept, that use us. Price is not an issue, because they need the solution and the innovation. So, Jamie, I hope I was able to answer your question.

And then some. And then some. Thank you all, very much, for your time.

Thank you, very much. So, is there any other? If there's no more questions, I'm going to, basically, wrap up. I'm talking about some interesting trends that makes Middleby very excitable, for the next three years. So, I will start to release -- Technomic just released their Top 500 Report. And, the 500 biggest US chains have something to celebrate in 2014 and in 2015. Their sales, their food sales, rose 4% last year, up from 3% in 2013. And in 2015 the trend seems to be even slightly higher. The number second biggest event is that, it's the first time ever that food sales at bars and restaurants surpassed sales at grocery stores, according to the US Department of Commerce. Big, big number for us. Meaning, people spending money eating out has now surpassed, in actual dollars, people buying food in grocery stores.

The third data shows that reliance on eating out grows with each new generation. And the millennials are considerably heavier users of food service than baby boomers, which trends well for our industry, in our segments. Finally, premium fast/casual remains hot, hot, hot, where Middleby is extremely well-positioned. It grew at 11% in 2014 while overall QSR growth was flat. The attraction to fast/casual stems from the fresh made-to-order menu items and the ability to create innovation in menu. And to serve, literally, items in a fresher environment and more made-to-order.

Again, I would say it's a take-share market for most operators these days. To help surge per growth, creativity is rapidly becoming the norm. Restaurants and institutions continue to come up with all sorts of ways to differentiate their operations. And it's maybe small tweaks to significant shifts, but I tell you, everybody is trying to elevate the dining experience. Whether it's a McDonald's. Whether it's a Chipotle. Whether it's a nursing home.

Some fast/casual concepts are now hiring corporate chefs to take their menu to the next culinary level. In addition, comfort food is becoming more and more part of the menu. Which is great for Middleby, because comfort food requires more and more cooking and preparation. QSR are fighting back by fast-casualizing. Seeing their market share getting squeezed, fast food chains are responding by renovating both their physical operation and their menu item. Taco Bell just introduced several upgraded menu items, and they are working with Miami chef Lorena Garcia to come up with items that will compete with fast/casual rival Chipotle. It's new Cantina Power menu doubles up on protein in offering such items as grilled chicken bowl and using ingredients like black beans and corn salsa. So, what you're seeing is additional equipment is used for preparation of all those menu items and cooking. Not to be left out of the competitive fray, food service restaurants are also investing in makeovers. So, we're seeing the introduction of induction cooking, combi oven, speed cooking as trends in kitchen with small footprints and who are hiring chefs who like the convenience that those equipments offer.

So, another interesting trend for Middleby has always been something that we've never given up, which is nursing homes. As baby boomers will start entering senior-living facilities, they do not want the traditional food served to their parents. So, when they enter retirement living, whether it's a private apartment or assisted living or a nursing home, they want gourmet choices. So, they are asking those institutions to execute restaurant-quality menus, to satisfy their new demands, which requires new equipment. So, we're starting to see nursing homes moving away from just standard ranges and ovens, to more sophisticated solutions that Middleby offers. So, from that perspective on the food service, we remain the very excited about food service.

On food processing, we continue to now work on smoothing out the cyclicality of this business and it's lumpiness. Like you, when we bought that business 10 years ago, it was one of the most frustrating items. And we've worked hard to start diversifying our offerings, offer items that were not only a project that requires a $20 million investment. So, we are tackling helping solution to smaller manufacturers, to be a regional or emerging markets. And, we are entering new segments. And, we are going after emerging countries, whereas safety of food processing is a big issue. Where the middle class is becoming more sophisticated, whereas they are now wanting the same items, whether it's processed ham or sausage, or chicken. So, we are very excited about food processing. And, as I promised on this call, within the next 24 months, we'll be able to have a strategy that's started being executed, where it takes away the cyclicality the lumpiness. We are very excited about that, and it's going to start being implemented this year. So, by end of 2017, we'll be very much out of the cyclicality that has plagued that industry for many, many years and that's suffered for Middleby. Because one of the things that you've heard, year in and year out, is the cyclicality of this business.

On the Viking side, I'm so excited about how people have perceived us. So, I'm going to take you through what happened since we owned this business. In 2013, we became the first brand of choice of affluent customers for cooking appliances, by Dwell Insights Survey Group. In 2014, we received the best kitchen appliance Worth the Splurge by Epicurious. Woman's Choice Award was recommended to -- basically to Viking. It was the number 1, most recommended luxury range. We won the Kitchen and Bath Business reader's choice award in 2014. We've had the 1st, 2nd and 3rd place product winners on our new product, which is the French-Door, the 7 Series, by Kitchen and Bath Business industry people choice award. The French-Door Oven was picked as a product innovator award in 2014.

I have a lot more to share with you, but let's go to 2015. In 2015, the builders surveyed ranked Viking ranges and cooktop, the new ranges and cooktops, as Number 1 in quality rating. Good Housekeeping named us as the best gas range in 2015. We were the winner of Architizer's A+ Award, for the Viking Professional French-Door Oven. Then, we received a special mention, for the Viking Professional Cooktop in 2015. USA Today Editor's Choice award gave our Viking Professional gas cooktop, the new one, its number 1 rating. And then, the Harris Poll EquiTrend just now, recently, named Viking as one of America's most beloved brands in 2015.

So, I'm very excited of where we've taken Viking. I'm very excited about our EBITDA. I'm very excited about how the new products have grown and we can't keep them in stock. Now, what are the challenges at Viking? The challenge at Viking is that we continue facing a legacy problem that we need to basically overtake. So, literally, we have gone back and fixed most of our legacy issues that we've inherited. We have worked on our 500 Series, on our 300 Series. We have redesigned all our refrigeration. We have redesigned all our outdoor. We are now working on our wall ovens, to retrofit our wall ovens so they have the same sturdiness of our French-Door, which came from Jade and Blodgett. We have re-changed all our hinges on all our door ovens. We have retrofitted all our zero preheat cooking on our 700, and 500, and 300.

So, we've done a lot in 2.5 years. However, for somebody who bought Viking in the last 5, 6, 7 years, they've had a bad experience. Our claim is now to go back to those people, and prove to them, and prove to the dealer/salesperson who sold them Viking in the past that now, they can trust that brand again because our product will have great features and they won't break down. So, we'll continue working hard with our sales force, with our distributor, with our dealers which have been reduced, who believe in us. Some people do not believe in us, and they've parted ways with us. But we've had new dealers that have been convinced that, under Middleby, Viking will become number 1 again, the way it used to be. And I'm very comforted by the P.C. Richard, The Perch, The Pac-sales, The Ferguson. And, most important, by a small distributor in Lebanon, who makes his living, him and his son, only through Viking. And who has been, since 1999, a Viking distributor in a tough market and where they received the first shipment, and it was a big, big success.

So for that, I ask Raymond to listen to that call. I hope he is listening from Beirut, Lebanon. More great products are coming your way. And, the next truckload with have our new refrigeration. And we'll be here to support you as we mostly, as Beirut, Lebanon, so that you don't have the problem that you experienced in the past. This closes my comments, and thank you for listening to me.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may all disconnect.