Middleby Corp (MIDD) 2015 Q3 法說會逐字稿

Welcome to the Middleby Corporation third-quarter 2015 earnings conference call. With us today, from Management, is Chairman and CEO Selim Bassoul, and CFO Tim FitzGerald. Management will open with comments about the quarter, and then we will turn the call over for question-and-answer. Instructions to get in the queue will be given at that time.

(Operator Instructions)

This conference call will be available for replay today, November 11, at 12:30 PM Eastern Standard Time, through November 18, 2015, at 11:59 PM Eastern Standard Time. You may access the replay at any time by dialing 1-800-585-8367, and entering the access code 74242770. International participants may dial 404-537-3406. Those numbers again are 1-800-585-8367, and for international participants 404-537-3406. AGAin, the access code is 74242770. I would now like to turn the call over to Tim FitzGerald, CFO. You may begin, sir.

Good morning, and thank you for attending today's conference call. I will go through some brief comments on the third-quarter results, and then we'll open the call to questions. Net sales in the 2015 third quarter of $449 million increased 11.1%, from $404.3 million in the third quarter of 2014. The third-quarter sales include the impact of acquisitions not fully reflected in the prior-year comparative results, and accounted for $46.3 million, or 11.5%, of the sales growth in the quarter.

This acquisition growth included sales of $11.8 million, or 3%, related to the AGA acquisition, which was completed on September 23, seven business days prior to the end of the third quarter. Sales in the quarter continued to be affected by the strength 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 into US dollars, and this impact amounted to $12.4 million, or 3.1%, in lesser reported sales growth in the quarter.

Excluding the impact of acquisitions and foreign exchange, sales increased by 2% over the prior-year quarter. This increase reflects an organic sales growth of 9.7%, at our Commercial Foodservice group, a decrease of 4.4% at our Food Processing group, and a decline of 17% at our Residential Kitchen Equipment segment. Sales at the Commercial Foodservice group amounted to $290.9 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 $74.2 million in the quarter. Although we saw a sales decline of 4.4% in the quarter, incoming order rates remained strong during the quarter, and are up, year to date, over the prior year by approximately 20%. The sales decrease in the quarter reflects the timing of shipment related to large projects with longer lead times, and the deferral of ship dates in the quarter by certain customers.

Although we continue to see certain pricing pressure in international markets, due to the strengthening of the US dollar, causing our US manufactured products to be more expensive in overseas markets, demand for our equipment solutions have continued to remain strong, due to our technology advantages of our equipment, which provide a higher return on investment to our Food Processing customers. Sales in the Residential group amounted to $83.9 million in the quarter. This included approximately $29.7 million in sales related to acquisition, including U-Line and AGA.

Excluding the impact of acquisitions, sales at Viking continued to be impacted by the disruption related to the new refrigeration launch, as those products become more widely available in the marketplace. Although we are in full production of the new line of refrigeration, we continue to add display units in dealer showrooms, and complete training of dealer sales reps on the refrigeration, as well as training on other new products introduced over the last year. Additionally, the recent product recall announcement, related to certain products manufactured prior to Middleby's acquisition of Viking, presented a headwind reflected in the sales decline for the quarter.

Despite the challenges faced during the year, we believe that the significant investments we have made in the comprehensive new and innovative lineup of products introduced in 2014 and 2015, along with the continued improvements in customer service from our investments in distribution, will result in improvements as we head into 2016. Gross profit for the second quarter -- or the third quarter increased to $177.2 million, from $162.4 million in the prior year. And the gross margin rate was 39.5%, as compared to 40.2% in the prior year.

Gross profit margins during the quarter at the Commercial Foodservice Equipment Group were 40.1%, as compared to 42.2% in the prior-year third quarter. And the margin reflects the impact of sales mix amongst the business divisions, and the recent acquisitions with lower margins, which are anticipated to improve as we realize the benefits of integration initiatives. Gross margins at the Food Processing group were 40.4%, as compared to 38.5% in the prior year. And gross margins at this group continued to expand, as we continue to realize profitability improvements during the quarter, related to our integration initiatives.

The gross margin at the Residential Kitchen Equipment segment increased to 34.4%, from 33.6% in the prior-year quarter. The improvement reflects the benefit of cost reductions in restructuring activities, offset in part by the lower sales volumes during the quarter. Selling and distribution expenses during the quarter increased to $44.5 million, from $42 million. The third quarter of 2015 included $4.9 million in additional selling costs, related to acquisitions completed during the year, offset by $1.9 million in lower reported costs, due to currency translation. Excluding the impact of acquisitions and FX, selling expenses declined slightly from the prior-year quarter.

General and administrative expenses increased to $52.7 million, from $40.4 million in the prior-year quarter. This increase includes $13 million of nonrecurring expenses, including $7.3 million of transaction costs related to the AGA acquisition. And $5.7 million of restructuring costs, related to plant consolidation and other cost savings initiatives. This $5.7 million includes initiatives to consolidate manufacturing of our baking equipment operations within the Food Processing Equipment group, consolidation of our induction and speed cooking production operations within the Commercial Foodservice Equipment group, and consolidation of warehousing operations within the Residential Kitchen Equipment Group.

General and administrative expenses also included $8.6 million in expenses related to recently acquired companies that were not included in the prior-year quarter. These increases were offset by $1.5 million in lower reported expenses, due to foreign currency translation. $3.5 million in lower non-cash intangible amortization costs, and $4.3 million of other expense reductions, including savings from costs initiatives implemented over the past year.

The non-operating expenses in the quarter increased to $1.9 million, and that's comprised of exchange losses during the quarter. That increased by $1 million from the prior year. So EPS for the quarter was $0.86 per share, and that included $0.18 per share of nonrecurring items and FX impact. So excluding these items, EPS for the quarter, on a normalized basis, amounted to $1.04 per share. The prior-year third quarter included a $6.5 million litigation gain and a $3.5 million tax benefit, which added approximately $0.14 per share to the prior year. So excluding these items, EPS in the prior year amounted to $0.91, on a normalized basis.

Cash flow during the quarter, from operating activities, amounted to $58.8 million, and for the nine-month period amounted to $167.6 million. The operating cash flow in the quarter included $15 million of funding related to AGA pension obligations paid post-closing, in conjunction with agreed-upon terms in connection with that acquisition. Non-cash expenses added back in calculating operating cash flows amounted to $15.5 million for the quarter, and $46 million for the nine months. The $15.5 million of non-cash expenses in the quarter included $6 million of intangible amortization, $5.2 million of depreciation, and $4.3 million of non-cash stock-based compensation.

The Company utilized $6.3 million in the quarter, and $17.9 million year to date, to fund capital expenditures related to investments in manufacturing equipment and enhanced production capabilities. Investments in acquisition during the quarter amounted to $185.7 million, and for the year, amounted to $262 million. And that included the acquisitions of Desmon, Goldstein, Marsal, Thurne, Induc and AGA, which all have been completed this year. And total debt at the end of the quarter amounted to $754.9 million, as compared to $598.2 million at the end of 2014. And the Company's net debt-to-EBITDA leverage ratio at the end of the quarter was approximately 2 times.

As it relates to the balance sheet, a few comments. There was some fairly significant changes in the quarter. And again, that's due to the AGA acquisition, which was completed just prior to the end of the third quarter. So to highlight some of the major changes there, or the additions from AGA to the balance sheet. AGA added $63.6 million in accounts receivable, $87.5 million in inventory, $61.9 million in fixed assets, $329 million in intangibles, $172 million in current liabilities, and $189.7 million in non-current liabilities, which primarily reflects the pension. We're still in the initial stages of completing valuations related to the opening balance sheet, which those will be further finalized in the fourth quarter.

Abigail, that's all for our initial opening comments. Can you please open the call to questions now?

(Operator Instructions)

Josh Chan with Baird. Your line is open.

Good morning. Thank you for taking my questions. On the Residential segment, what was the impact of the recall? And then also the discontinuation of the non-core product distribution? And how do those compare to your expectations?

The -- as we mentioned in prior calls, with the acquisition of the distributors, we did have some products that were discontinued. They are lessening every quarter, as we overlap, and get further away from the initial acquisition. So that subtracted just something less than 5%, so let's say 3% to 5%, in -- from organic sales growth in the quarter. As it relates to the recall, it's hard to quantify.

Josh, let me step in.

I've done a lot of research on recalls. We are not the only Company's that had had recalls. But when you get major recalls like the one we just had in March, where it affects 60,000 ranges, which is our core business. I went back and looked as companies as strong as Toyota, where they had a recall in their core businesses. And in general, when you look at -- and there have been studies after studies, and you can research that on the Internet. In general, during that year, or 12 months later, after recall, the impact on your company that has the recall is usually between 10% to 15% reduction in sales.

That's what every study, and every experience, I've had -- been studied on recalls of such a magnitude. This is a big recall for us. We're talking 60,000 ranges. So we see the impact to be no different than what would happen to a major recall in cars, or a major recall in a food product. And I think we fall into that category. In addition, we have some of our key dealers and distributors that have a policy that any brand that has a recall, for 90 days, they will basically stop ordering that product. And basically, we got affected, in the summer, and now we're feeling it in the fourth quarter, in terms of those customers.

Now they are back reordering product. So they stopped ordering, just as a policy. And basically, between those two, which would take the general guideline that it's 10% to 15% impact, that has been examined over years and years, and that's research that we've done. And I think we're not going to be different than that. And number two, we have specific large dealers that have policies in place that says, any recall per brand, we will stop ordering it for 90 days, until the companies get through the recall and understand what the fixes are.

Okay. So is it right to think of the impact as, maybe, the heaviest during the Q3 and Q4? And maybe potentially lessening, as you get through the beginning of next year? From the recall?

Yes. I think, with studies -- let's go back to studies, and let's talk about our impact, Josh. The studies will tell you that usually, that impact is 6 to 9 months, maybe a year after the recall, 10% to 15%. We've seen that happening. So recall happened in March, so we got hit in the third quarter. We got hit some of it in the second quarter, a lot in the third quarter, because of those two major distributor dealers. And now we are seeing some impact of it in the fourth quarter. My gut feel tells me that we will be starting to see lesser of an impact in the first quarter, starting in the first quarter of 2016

Okay, that's helpful. And in terms of the new products, when do you expect the new products to be shipped to all the dealers? And when do you expect to complete the training? The reason I'm asking this is, do you think the Residential business can grow organically in 2016?

Josh, I will tell you that -- I'm going to answer the question differently than talking about specific guidance, in terms of what is going to go up or down. But I'm going to give you trends. I always did, because -- let's talk about Viking specifically. At Viking, I am making specific long-term decisions over short-term decisions.

And what I mean by that is specifically, three things. One, I want the quality to be superb. So one of the challenges we have, structural challenges at that Company. And we knew, when we bought it, that it had quality issues; now we're facing bigger quality issues than we thought. And not from our product, but from the legacy products that we inherited.

And we are in the process of taking -- literally reach-changing everything we've done in the last two years. From redesigning our ranges, all the refrigeration is brand-new. Because the past refrigeration had had recalled -- several recalls, and they were not working efficiently, so we reintroduced brand-new refrigeration. It just came onboard.

Ranges, we basically introduced a complete range line called the 7 Series. Went back to the 5 Series, which is a legacy product, and we basically are fixing all the quality issues there. We've come back to our dishwasher, and basically decided to stop manufacturing our own dishwasher; now we outsource it. And we worked with our supplier to make sure that there is no quality issues there.

Most important, as I can tell you what has faced us in 2013 -- in 2015 has been the fact that we are now tackling something that came about, another structural issue is packaging. As we basically take the product to makeshift, and move the product to our distribution center, to make it available, so that our dealers don't have to stock. And it has been a huge competitive advantage for Middleby, is that owning our distribution. As we move the product, the product is being moved almost three times.

So you're taking a heavy range, and you're taking a heavy refrigerator, moving it from the factory, moving it into our distribution center. From the distribution center, it goes to a dealer or in a store, and goes into somebody's home. One of the issue is, we are finding out that we're getting damages in our shipping.

And those damages, in dollars, are not significant, but they are creating a bad will. When somebody is having a kitchen, and they are ready to go, and they open the package, and now the refrigerator is damaged. And now we have to take it back, and now they have to wait another two weeks to get a refrigerator. So we are fixing structural issues at Viking one by one.

Now, I'm going to basically set this up, because most probably, the quarter was affected by Viking, by the Residential. It's not affected by Foodservice. Foodservice is great. It's affected by Food Processing. We have the orders. The margins are the highest margin we've had. So we continue having margins. So first, I'm going to say that our margin expansion, in all our businesses, all our platforms, have increased. But let's talk about Viking specifically.

Viking, when we bought that business, reminds me of our first acquisition we made, as the CEO. It was the Blodgett acquisition that we did with -- from Maytag. So when we did that acquisition, we -- everybody accused of overpaying for that company, that's number one. I remember that. So second, we've had a lot of issues, at the time, in fixing Blodgett. It took us three years to fix Blodgett and Pitco, to get it where it is. And today, it has become a very good Company.

So this is taking us -- Viking reminds me, as a transformational business for us, as a transformation acquisition, that would get us to where we need to be. Starting, I would say, starting 2016, where we would have introduced a new product. We'd have fixed the packaging. We'd have fixed service. We'd have fixed the legacy problems. And we are putting the recall behind us, and moving forward.

Okay, yes, definitely the appreciate the complexity of this integration, Selim, so --

Yes, I think just the one thing. We have not talked -- Selim talked about it, but one thing we have not had to deal with in the past is a recall situation. So that is the challenge, in terms of the visibility, and understanding what the impact is there. I think Selim gave some good data points of what other companies have faced. But that's one of the challenges that we have, in terms of really having a good understanding of how that's going to shake out with the revenues. And clearly, one of the things that impacted the quarter.

That's fair. And if I can switch to Food Processing, what is the confidence that organic growth can come back in Q4? And do you think orders could be deferred again, potentially?

Yes, so Josh, the orders were not deferred. So we have had double-digit incoming order growth each of the first three quarters. But even when you get an order, including a down payment, sometimes the customer is not ready to take the job. Maybe they're getting a site ready for an installation. So we had the orders, and we've had a lesser sales decline in the third quarter. We had originally anticipated we'd see growth both in the third and the fourth quarter.

But some of the customers weren't ready to take the project, so that slipped out a little bit. We do anticipate that we would be in a positive growth situation in the fourth quarter. It is always difficult to tell exactly how the timing is going to line up with some of these projects. But the backlog is up significantly, the orders are there. So we're -- they are going to ship, so we are confident we are going to be seeing some growth in upcoming quarters. It will probably be even more so in the first quarter than the fourth quarter, but we anticipate we'd be in positive territory in the fourth quarter.

Okay, sounds good. And the last question is, with Viking integration, and then now AGA, do you worry that there's a lot on your plate? Or how do you think about the ability to handle both integrations at the same time? Thanks.

So let's talk about that. What we've learned from Viking is amazing, because we've learned a lot about residential from Viking. The other thing with AGA is, we definitely focused on several things. We focused, one, on the quality. So having faced significant quality issues at Viking. So part of the due diligence we've done at AGA has been spending a lot more time on understanding the qualities. So two differences, the AGA group and Viking have not had the recalls that we faced when we got into that business.

Number two, from an integration standpoint, we have now -- an easier way that -- remember, at Viking, we not only hold the company who ended up buying the distribution. So that also took a year-and-a-half of integration of buying, I think, eight or nine distributors that we don't have to[face today. So what we've done in three years at Viking makes AGA go into that system a lot better. Internationally, we also converted most of our international distributors to our Middleby worldwide distribution system, so also took some time. So basically, AGA is coming -- and the beauty about AGA, why the timing is perfect, because they are going to all into our distribution the US. They can go into our distribution worldwide, which is ours.

The other thing that we love about the fact of having AGA at this moment, it is transformational for us, in terms of the quality of the brands. We have become global worldwide. We also like the fact that they bring on a great knowledge of retail stores. So their retail stores have added value for us. In terms of being able to integrate Viking, AGA, Rangemaster, Marvel, New Line, into some of those -- La Cornue, into those retail stores. And now we can leverage the retail stores a lot better.

Yes. So Josh, we do a lot of acquisitions. So it's not only Viking, but we've had five other acquisitions this year, and we probably had five or six last year. So we're pretty good at integrating a lot of the businesses quickly. And there's a great management team across the AGA group. So we are working with them, so we feel very comfortable with that.

Viking clearly took a lot more management time than many of the other acquisitions. We don't anticipate that at AGA. So I think we feel comfortable that we've got the bandwidth to work on AGA, and get that moving in 2016.

Okay, sounds good. Thank you both for your time.

Thank you, Josh.

Tony Brenner with Roth Capital.

Thank you very much. I have two questions.

One, Selim, you talked about before a major objective being to smooth the lumpiness in the Food Processing business. Given the nature of that business, the very high price of the individual products, the degree of customization often required. I'm wondering how you propose to do that?

It's simple. We are -- since, yes, I've been working with our group to literally reduce the fluctuation year over year, which has happened. And one of those has been to create a balance between our businesses globally. So number one, what you've done is, we've basically gone through figuring out our global presence, and putting people in emerging markets, so that we can create businesses right there.

We also feel than our lumpiness has occurred in terms of specific segments. So it hasn't been across -- the lumpiness, Tony, has not been across every segment. So if you look at it, we have had segments -- we are in six segments right now, in six segments. And part of it has been, literally, the lumpiness has been coming from our Bakery group and our Poultry group, mostly. And what we're looking at is making sure that we do acquisition to make sure that those segments, those two specific segments, are attractive much more globally than they've been.

So one, we need to make sure that we continue focusing on Poultry and Bakery, and filling up some tuck-in acquisition that allows us now to take those businesses worldwide. That will reduce the fluctuation. We also need to do -- another thing that we have not done is, we need to increase our bundling of brands. So we started doing that, and it was highly successful at the meat processing show, where we bundled Drake and Alkar and RapidPak, which had not happened in the past. So we are bundling, and we are now creating similar what we created to in Foodservice in 2009.

If you remember, Tony, in the height -- in the beginning of the recession, in 2009, we invested. Everybody else was cutting back, and David Brewer, our COO, created the national accounting. The national accounting cost us millions of dollars when we started it. Why? Because it's not only hiring people; it was making sure that we back up that team with a with a concierge desk, with service, with technical ability. And we did it in 2009. We are re-duplicating in that business, for our major change worldwide, by bundling in the Food Processing business.

So we are copying the success of the national accounting in Foodservice to our Food Processing. And so, I am very comfortable that the target that I set -- I didn't say it's going to happen in one quarter. But I said within 24 months, we will basically smooth the lumpiness of that business. Now what is exciting about that business is twofold.

One, the margin expansion in that business has been amazing. And that has been the biggest challenge that everybody asks. So now everybody's talking about lumpiness. But before that, they said, Selim, what about the margin? Could you take Food Processing to be equal to Foodservice? And we are -- it's a stone's throw away from having Food Processing equal to Foodservice.

You know we will never be satisfied, Selim.

I know that. That's the problem. But it's okay.

Tony, you know what, I've been at this game, me and Tim, and you've been with me, all of you, and most of the analysts, and most of you, are the first to pick us up. We have been at this game now, I celebrate 20 years at Middleby. Exactly, at the end of the year, I would have finished 20 years. And I will tell you that I am as excited about Middleby as I've ever been.

And literally, the reason I'm excited, the new products, the new restructuring, the margin expansions, the customer loyalty we've had. I can tell you, we've had four shows this year -- I'm talking about big shows -- and I attended all four of them. We had the kitchen and bath show, and we were a huge hit. I have to tell you -- and I will talk a little bit about Viking in a little bit -- we had the kitchen and bath show, and we introduced all the new products. We had the NAFEM show, which is the North American Food Equipment Manufacturer, and we had a huge hit with waste management, ventless, speed of cooking.

Then we went to National Restaurant Show, and all our chain customers came in. And I have to tell you, one after the other continued complementing us on how easy we do business with. Then I went to the Milan show. I went, before that, to the meat processing show. And the meat processing show, which makes it the fourth show, I was so pleased when we -- we look different, so we had two proposition that changed the game for us versus everybody else.

One, customer after customer came in and said, thank you. And the reason is, we were able to deliver on the Food Processing side. And we're going to have to do it, in bakery. We guarantee the lowest cost of production for our customers. That means, for every pound of ham or sausage or deli they produce, they will guarantee that our equipment, our solution will provide the least -- the most efficient and the least expensive way to produce that ham or sausage or hotdog than anybody else. And I have to tell you, this took a lot of hour. It took us almost 7 years to be able to deliver that solution. And today, nobody can have a competitive advantage like this.

And I would challenge any of our competitors, they will not be able to guarantee what we've built in the last few years in Food Processing. Now, we're taking the same concept into Bakery, because we are not there in bakery. But I want to be able to guarantee every bakery -- industrial bakery company, the same way we guarantee in protein, to say you will have the best solution, the most effective solution, in Food Processing. And that's what we've done in Foodservice. That's why chain people stick with us, and they are willing to pay us more. Because they know that at the end, the payback is there, and we are doing it in Food Processing.

Thank you. My second question regards Viking again. What -- I know you've got your hands full at the moment with it. But I wonder what your plans are to expand Viking internationally? And how AGA, or how the AGA acquisition will ease that entry, if at all?

Tony, our plan is to take Viking international. So I'm going to share with you something that just happened. So there is an equivalent high-end kitchen and bath magazine out of France. So, and we don't advertise in that magazine. They just basically ranked all the top -- I'm looking at it right now. It's called Cote Maison Cuisine et Bain, which is Kitchen and Bath. And it's almost the Architectural Digest of France. In their fall article, Viking was named the VIP of all ranges. So they name it, and it's right there.

So I don't know how can I make it available to all of you. But if you want it, I can have Darcy send you this article. And when you look at this -- we'll put it on the website, and you can pick it up. And it's amazing, that Viking in France was the VIP of stoves. It's our new 700 Series. I want to go back and talk about, also, the type of things that -- so it is not -- when you talk how our hands are full with Viking, literally, it was, we are almost at the end of it. Because we would have been a lot better this year if we didn't have the recall that hit us.

But I will talk about the awards in 2015. We got Editor's Choice of USA Today. We had --

There are all on the new products that were introduced in the last 12 to 18 months

Which is the Tuscany, the 700 Series, the new cooktop that we just reintroduced, the new hoods, and the new refrigerator that started coming out in the second half of this year. So we have got Editor's Choice in USA Today. We had best gas range, the new 700, by Good Housekeeping. We got -- the French door oven won [winner architiser] A plus awards. We got good design award, for Viking, for all our new knobs, and just looks and design. The Builder Brands user's study gave us the number one quality rating on our new products.

In 2014, we won -- the French door won Interior Design best of the year product, we were the winner of. Then also, going back to the kitchen and bath, we got -- we were the winner of the KBB reader's choice. So when you look at all the awards we've gotten on the new products, it's working. It's just taking a little bit longer, because of all the things I've stated. But I'm very excited about Viking. I will -- go ahead.

So the -- so going international --

So Tony, we've had good success in Latin America, particularly Mexico, where we've got our own offices. And we've introduced products in the market, and we're seeing growth at Viking. We've also had good growth in the Middle East. We've not -- we've basically not moved into Europe strong, because you need CE approval. And we've focused all the engineering resources on the new products in the US, and dealing with the product recall issue. So that -- the CE approval is something that we've got on the slate, as we move into 2016.

Some of the international growth has been offset a little bit. In one particular market, which is Brazil, which was a market for Viking when we bought the Company, because there was some structural issues that we've had to clean up there, as well as the Brazilian economy, with the real going up. So we've had a little pullback in the market, but we've seen growth in the other markets that Middleby's made investments.

So answer the question, I'm looking Viking in 2017. So internationally, we will be ready, because we need to put together all the certification. And we're going to basically train all the AGA salespeople, and put them in the stores. So 2016 will be putting all -- we are going to do it right. Because we have a lot of new products coming out, we need to get the right certification, we need to make sure that our salespeople are trained. All our retail stores, over 120 of them, will have Viking product in them throughout Europe.

Will you manufacture in Europe?

Excuse me?

Will you manufacture Viking products in Europe?

We don't know that yet. We've been looking into that, to maybe doing some of our refrigeration in Europe though Desmon. And we've been looking at that. In fact, the team was there last week to look at that.

Okay. Thank you very much.

Thank you, Tony.

Gary Farber with CL King.

Good morning, just had a couple of question. Just on the refrigeration with Viking, can -- is that product -- like when in the quarter was it fully available to, say, all channel partners?

It was -- so Gary, it was in full commercial production. So we were fulfilling orders. So is just a matter of really seeding it in the marketplace.

Okay, but -- so that went on, would you say, throughout the third quarter? Or was it weighted towards a certain -- was it middle -- the middle of the quarter?

I think it's a continuing process.

Okay. Yes, okay. And then on AGA, can you just discuss, also, if you can, are there portions of the business that might not fit with the long-term strategy? And if so, what's the thought process on maybe changing the -- rationalizing part of their business?

I think, Gary, it is too early at this moment. We're committed to every one of those brands, because we like the high end of it. So even the furniture, they do kitchen cabinets, and there's some synergies between that and us. When I went and visited their stores, they have great stores.

It's a matter of, it's early to tell, but we're committed to keeping those businesses. And the tile and kitchen and bath, because they have great locations. And we are committed to keeping everything, at this moment. So let's put it this way, the commitment is to keep the whole AGA intact the way it works

(multiple speakers) I think the management team had a strategy of putting together a great portfolio of high-end brands that were synergistic. So I think we're picking up and continuing down that path.

Okay. And then just lastly, any range you can give for interest expense for next year?

Ladies and gentlemen, please stand by. The conference call will resume momentarily. Thank you for your patience. And again, please stand by.

Hi, this is Tim FitzGerald. We had a technical difficulty, so we are back on the call. So Abigail, if you can maybe pick up with the questions?

Certainly. Our next question comes from the line of Rob Nichol with BB&T Capital Markets.

Hi, good morning, this is Rob Nichol. I'm sitting in for Schon Williams this morning.

Good morning.

Good morning. My first question is about AGA. Tim, you mentioned that AGA brought in close to $12 million in sales for the quarter, which seems highly unusual, given that you only had the -- you only had it for two days in the quarter. Could you provide any additional color there?

Yes, as I mentioned at the beginning there, we actually had it for seven days. So still a short period of time, but it's substantially longer than two. So -- and most likely, there was maybe some higher sales towards the end of what would've been their quarter, as well

Okay, I appreciate that. And how should we be thinking about margin opportunities for AGA, heading into 2016?

I think it is still early days for us, with -- we're just spending time right now with the team there, developing the long-term strategy. Clearly, we believe that there are margin improvement opportunities.

So I would say the initial indications that we talked about, of being able to bring the AGA margins up to the residential platform level of 20%, we still believe that that's achievable in the long-term. And exactly how that's going to roll out in 2016, I think it's still difficult to say right now. So I think that we will probably of better visibility as we -- the next quarter, as we've got some specific action plans in place.

Okay. That' s helpful.

And then one more, if I may. Gross margins lower, year over year, in Commercial Foodservice. You mentioned sales mix and acquisitions. But could you give a little more color on exactly what changed in the mix? And why acquisitions are affecting the margins, given that you've had little acquisition activity in there, in the last nine months or so?

We actually did buy a handful of companies in Commercial Foodservice, both last year and this year. There's Goldstein, Desmon. Induc, we bought in the second quarter, Concordia was last year. I'm sure I'm probably missing one or two, also. So I think, as ordinary course, when we buy companies, they have lower margins, and it takes a little bit of time to come up. We've got initiatives around those companies.

So as they come into the portfolio, for period of a couple years, we typically see some margin expansion. So that's a little bit of a drag there. And then in ordinary course, we do have a broad line of brands now, and not everybody is exactly at the same margin. So from quarter to quarter, you can just have mix differences, if we're selling more of a particular product category then another. So that's nothing that's structural, yes.

It's not a structural issue. It's just basically some timing of some orders. But we believe that, long-term, the margins on Foodservice will continue to grow.

And overall, the margins continued to remain very strong, and our EBITDA margins were 28%, roughly, in the quarter. So what was maybe slightly less in gross margin was still very strong in EBITDA margin.

Okay, I appreciate the color. Thanks.

Thank you.

This concludes today's Q&A session. I'd like to turn the call back to Management for closing remarks.

I would like to thank everybody for listening to the conference call. So I go back, and I look at where we go, as an opportunity, as a Company. So from a Commercial Foodservice, we continue to grow, and the fastest growing restaurant segment, including the fast casual. We continue to innovate, with significant game changing technologies, from ventless to speed of cooking to waterless, and, most important, waste management.

I'm very excited about the reinvention of all the new products. I'm looking at that, and saying that 2016, 2017 and 2018 will bring a lot of business to us, from both chains, as well as convenience stores. I think the number of innovations coming into Foodservice is among the highest I've seen in many, many years. We continue to have a great customer retention among the chains, and we keep on gaining market share within that segment, the chain business.

Internationally, our global infrastructure and distribution continues to penetrate India, Australia, Middle East, China. We continue to do very, very well, including UK and Europe. I mentioned a little bit earlier about our national accounting, which is the best in the industry. And we have huge opportunities in beverage and niche cold application, including blast chillers, with the acquisition of Desmon.

On the Food Processing, our number one objective is to continue growing our margins, and we are very proud of what we've been. We've come literally from a 5% margin, less than eight years ago, to now almost 25% margin in this business. We are very highly focused on our six growing segments. We are offering turnkey solutions that we've not been able to offer even 24 months ago. We've become number one in emerging markets, where most of the factories and the demands are coming from, as the rising income of the middle class is asking for hot dogs, deli sandwiches, and baked goods. We are number one and number two in proteins and bakery.

I just also spoke about how we are guaranteeing the lowest cost of production for our customers, in terms of pound, and we have, today, the most automated and innovative solution in the Food Processing. I see that segment to continue growing, and within the next 24 to even 30 months, we will basically smooth out a lot of the lumpiness in that segment. Under Residential, we are at the end of the tail end of the structural changes within Viking. Yes, it took three years. But it's no different than what we've done in Commercial Foodservice, when we started acquiring a lot of those companies. It took us three years there.

A little bit more difficult, because we faced recalls, which we've never faced before. However, we are trying to distance ourselves in time, and with innovation, and with customer service that's unique in that residential market. The acquisition of AGA, U-Line, Viking, puts us the leader in high-end appliances worldwide. The ability to infuse commercial technology in residential appliances is starting to pay off. Many dealers, many designers, and I'm going to talk about builders, we are winning the hearts and minds of those people again.

So I'm proud to say, on the builder side, our market share on the builder side continues to grow. We need to continue affecting the dealer and the distribution. And we need to win the hearts of the dealer salespeople in the showroom, who have been burned in the past, and make sure that they look at Viking again as a high-quality, easy to do business Company. I think we are almost there, and that's why we're sending -- having training, and focus on the dealer salespeople within those showrooms.

The other features is that you're going to see features only found in our brands. No competitors can even touch the feature and benefit that we have today in our high-end residential appliances. We have a huge share of showroom displays within our dealers, now that we have U-Line, Viking, AGA, La Cornue, Marvel, we become a very strong share of the showroom, and the present now distributor -- or our dealer. And we become the strongest global presence, especially with retail stores.

I am very enthusiastic about the Company, about our products, our markets and the opportunities ahead. There are a lot of things that we are re-changing the business. From a value creation, we've been at it for a long, long time.

We are creating the following margin improvement, by consolidating and becoming more efficient, even in Foodservice. So there's a few consolations taking place. The question that was asked by Tony Brenner, about thinking out-of-the-box, and taking some of our factories overseas to produce some Viking products, is on the table. And that will reduce a lot of our cost of manufacturing, but also allows us to be more quicker to markets, from being able to manufacture some of our goods overseas.

We are also -- basically continue on focusing on the long-term value, which we've always done. We have rejected to give short-term guidances, but we always continue to create value for our shareholders. We continue basically improving the bottom line. While currency, and some freak one-time charges, made headwinds, and made the picture look ugly in the third quarter, it will pass. And we will continue taking charges as they are. We're going to be continue being transparent, because we are looking for a very strong foundation, to continue looking and moving ahead.

No reason to doubt Viking or the Residential platform. Sales might take time to build up to the level we used to be. However, our reputation is getting better every day, as we continue shipping. There are going to be a lot of rationalization at AGA. Today, you're looking at a company that is sitting in around 5% EBITDA. We believe that company within the next two or three years will match what Viking is today, above 20% in EBITDA to sales ratio. We love the incredible reputation of our brands, and we look at continuing taking that platform to 20 plus, and matching what the Foodservice is about.

I'm very excited about the time ahead; I'm excited about the next three years. Middleby will continue outperforming the market, and will continue taking market share in every one of our segments. I'm going to wish you all a happy holidays coming ahead, and thank you for listening to me and Tim on this conference call.

Thank you, everybody.

Ladies and gentlemen, that does conclude today's conference call. You may all disconnect. Everyone have a great day.