Middleby Corp (MIDD) 2016 Q1 法說會逐字稿

Good morning and welcome to the Middleby Corporation first quarter conference call. With us today from management are Selim Bassoul, Chairman and CEO; and Tim FitzGerald, Chief Financial Officer. We will begin the call with prepared commentary, then open up for question-and-answer. Instructions on how to get into the queue will be given at that time. At this time, I would like to turn the call over to Mr. FitzGerald for opening comments. Please go ahead, sir.

Thank you, Stephanie. Good morning and thank you for attending today's conference call. I have some initial comments about the Company's first quarter, and then we will be opening the call for questions. Net sales in the 2016 first quarter of $516.4 million increased 27% from $406.6 million in the first quarter of 2015.

The first quarter sales include the impact of acquisitions not fully reflected in the prior year comparative results, which accounted for $106.6 million or 26.2% of the sales growth in the quarter.

Sales in the quarter continued to be affected by foreign exchange variation in comparison to the prior year. This fluctuation resulted in lower reported international sales when converted into US dollars in the quarter and this impacted -- this impact amounted $6.4 million or 1.6% in report sales growth. Excluding of the acquisitions and foreign exchange sales increased by 2.3% as compared to the prior-year quarter.

This increase reflects organic sales growth of 7.5% at our commercial foodservice group, an increase of 5.9% in our food processing group, and a decline of 19.2% in our residential kitchen equipment group. Sales of the commercial foodservice group for the quarter amounted to $279 million. Sales reflects continued demand from restaurant chains, the strong international sales growth; which improved substantially from prior quarters, reflecting improvement in market conditions and impact from currency volatility.

Organic sales growth in the international markets exceeded 20% in the quarter with growth in all regions. While sales domestically were flat due to several large roll outs with US-based chains in the prior-year quarter. Sales at the food processing group amounted to $78.6 million in the quarter, organic sales growth of 5.9% reflects continued strong demand for our innovative equipment solutions. And was offset in part by the impact of consolidation initiatives that were largely completed during the first quarter. Incoming order rates outpace sales growth and accordingly we anticipate that sales growth will accelerate in upcoming quarters.

Sales at the residential group amounted to $158.7 million in the quarter, and this included approximately $98.8 million in sales related to acquisitions including the group of AGA group of Companies, and Lynx. Excluding the impact of acquisitions, sales declined in the residential kitchen equipment group, reflecting lower sales at U-Line which had reportedly in connection with a new product launch in the first quarter of last year. And the continuing impact of prior year product recalls at Viking related to legacy products manufactured prior to Middleby's acquisition of Viking.

Despite the continued challenges, we remain confident that significant investments we have made in the comprehensive new and innovative line of products introduced over the past several years, along with substantial investments made to improve service, will be reflected in improved sales as we progress through 2016. Gross profits for the fourth quarter increased $296.8 million from $157.6 in the prior year. And the gross margin rate was 38.1% as compared to 38.8% in the prior year.

The gross margin rate for the quarter was impacted by lower margins at the recent AGA acquisition. Excluding the impact of AGA, gross margins increased to 40% on a comparative basis. Gross margins during the quarter at the commercial food service equipment group were 41.5% as compared to 40.1% the prior-year quarter. The strong margins reflect the favorable impact of increased sales volumes and favorable sales mix amongst the business divisions.

Gross margins at the food processing group were 40.1% as compared to 37.4% in the prior-year quarter. Gross margins strengthened from the prior year period, reflecting profitability improvements implemented in the prior year of this segment and favorable sales mix. The gross margins at the residential equipment segment decreased to 31.1% from 37% in the prior-year quarter, reflecting lower margins at the recent acquisitions including AGA. Excluding the recent acquisition of AGA and Lynx, residential margins would have increased to 37.3% on lower sales volumes.

AGA gross margins were 28.5% in the first quarter, and we will continue have a diluted impact to the margin rate throughout the year, further anticipated to improve sequentially as the benefit of cost-reduction initiatives are realized. Selling and distribution expenses during the quarter increased to $53.7 million from $47.1 million and the first quarter of 2015 includes $11.8 million in additional selling costs related to acquisitions completed during the past year. Accounting for the increase in the first quarter, this increase was offset by favorable exchange and lesser trade show and advertising costs.

General and administrative expenses increased to $56.1 million from $39.3 million in the prior-year quarter. General and administrative expenses included $14.1 million in expenses associated with the recently acquired companies not included in the prior-year quarter. The first quarter also included $600,000 of restructuring costs associated with the residential equipment group in comparison to $4.6 million in the prior-year quarter which was primarily related to reorganization efforts at the residential distribution operations.

Non-operating expenses during the quarter included a $1.6 million increase in interest expense and higher debt balances primarily related to the AGA and Lynx acquisitions, while non-operating income of $0.8 million improved in comparison to expenses of $4.6 million in the prior-year quarter. And the prior-year quarter included a substantial foreign exchange loss associated with prior-year strengthening of the US dollar against a number of foreign currencies.

Earnings-per-share of $0.96 in the quarter grew from $0.67 in the prior year, and the prior year included restructuring and exchange losses which reduced EPS by approximately 10% the prior year. Excluding these items, EPS increased by approximately 25% from the prior-year quarter.

Cash flows generated by operating activities amounted to $14.5 million in the quarter as compared to $23.8 million in the prior-year quarter. The first quarter cash flows reflect the agreed0upon funding of pension obligations associated with AGA in connection with that acquisition; which amounted to $15 million in the quarter, and in addition in the first quarter we had significant cash severance obligations associated with the AGA restructuring initiatives which reflected as expense in the fourth quarter.

Noncash expenses added back in calculating operating cash flows amounted to $19.6 million in the quarter, and this included $8.6 million of intangible amortization, $6 million of depreciation, and $5 million of noncash stock-based compensation.

The Company utilized $7.7 million in the quarter to fund capital expenditures primarily related to investments in manufacturing equipment and enhanced production capabilities. (Inaudible) at the end of the quarter amounted to $763.1 million as compared to $766.1 million at the end of 2015, and the Company's net debt to EBITDA leverage ratio at the end of the quarter approximated 1.8 times.

Stephanie, that is all for our initial commentary. Could you open the call for questions now?

Certainly. (Operator Instructions). Our first question comes from Tim Wojs with Baird. Your line is open.

Hey, guys. Good morning.

Good morning.

Yes. I mean really good commercial food number in the quarter. I am curious just, the strength in international -- that is probably the strongest international growth that you have posted in a couple of years here. So could you just talk about what particularly improved in international in the quarter, and how much confidence do you have that type of growth can continue as we go through the year?

Yes. So it was fairly broad-based so there was not anything specific that -- that drove it. As I mentioned, we saw growth in all regions. You know, the last year was fairly challenging as I mentioned, due to the currency and other market conditions. I think we feel good that we will have continued growth for the year. I do not know if it will remain as strong as it was in the first quarter, which was a very strong quarter, you but I think we feel confident that we will kind of return into a better situation in the international environment.

And then domestically just the timing of kind of chain activities, you know, that was supposed to kind of pick up as we go through the year. Any sort of change therein terms of what you are seeing around project pipelines and things like that from the domestic chain?

So --

I could not hear you. Could you repeat the question, please.

Sorry about that. Just domestic growth was a little more flattish and I think you had talked about last quarter just the timing of chain activities was weighted a little bit more towards the back half of the year this year. So I was just curious if Q1 domestically came in in line with your expectations and if there is any change to how the project pipeline with the bigger chains convert domestically this year?

So, Tim, let me answer the question. In essence we do not -- I am not going to report on quarter-to-quarter what is going to happen, but I can give you a most probably a bigger view on where we are on commercial, since the question was domestically what is going on. Last year first quarter we had two major rollouts -- major -- in the quarter, and now we lapped that quarter. In fact, I am very pleased with what happened.

If you take away those two rollouts, it would have been fantastic growth in commercial. So what happened is just, the timing of the rollouts happened to be major last year first quarter commercial service; so what do I see going forward? I see an acceleration of our order rate and our penetration of the chains within the next three years. So you will most probably see our commercial foodservice literally start increasing the rate.

If you look at the past three years versus the next three years, I believe that our commercial foodservice will exceed the rate in next years versus the past three years, in terms of past three years in terms of revenue. Organic revenue growth.

So, Tim, just on the rollout that we had in the prior year, that carried into the second quarter, so just to give a little bit of visibility on that. So that presents a little bit of a comparative challenge in the first half. So that is where we think that we will really start to see more of the benefit of the further, you know the back half the year as we overcome that.

Okay. Okay. That is helpful. I appreciate that. And then just, is there a way to just maybe just aggregate a little bit the moving pieces on the organic side within residential? You know, you talked about U-Line being kind of lapping a bigger product rollout and Viking still kind of having some challenges from the recall. But is there a way to break out what the organic growth was at U-Line and Viking specifically? And I guess one more question on Viking is; the sales were down kind of mid-to-high teens organically from what you are reporting, but is that -- is there a component of inventory de-stocking that is impacting them? I am just curious if you have any sense for what POS that your dealers might be looking at for the Viking business.

So I can answer that question, Tim. The Viking business again, is now -- I talked about it literally in the last conference call about our business picking up. We continue to pick up -- specifically, I can tell you the biggest improvement we have had is we have had an extensive training starting in September.

We trained hundreds and hundreds of dealer/salespeople, which has been most probably our biggest opposition to Viking over the years because they have been (inaudible) between some quality issues, service issues; and I think they had the chance to see the new Viking. And that has resulted in most almost 95% of the Viking dealers resuming buying Viking products and providing support and feature the brands again predominantly.

Nobody has ever not supported the brands. I think I have had maybe one or two dealers did not, unless it is somebody with -- we felt it did not fit our strategic vision, but now we are having the dealers all behind us. We have had major dealers and customers fly into Greenwood, Mississippi to see the new products and quality and what was done.

So the quality problems are all behind us. And we are starting to see a very good pickup in order rates domestically. And we will continue to see that, so I would say we will look for sequential sales improvement through 2016 with 2017 expected to be a strong year for Viking.

So, Tim, just a little bit on kind of just aggregating that 19% to give a little bit of perspective. Viking was down about 14%, so U-Line had kind of a significant impact in the first quarter, so just to understand that.

As I mentioned, U-Line was a newly acquired company, so that showed up as acquisition growth last year and not organic growth. And then that first quarter that was essentially the first full quarter we owned the business, net of large backlog, and we bought the company because thread launched a new product line and they were shipping quite a few display products in the first quarter of last year. So if you kind of took that out of the equation, you would have had Viking down 14%.

Okay. Okay. I appreciate it. Thanks. Thanks, guys. I will hop back in queue.

Thank you.

Our next question comes from Tony Brenner with ROTH Capital. Your line is open.

Thank you. I have two questions. First of all, regarding the AGA-related restructuring expense. That was down awfully sharply versus the fourth quarter. Are those expenses now behind, or if not will they continue to taper off for the balance of the year?

Yes. I do not think we are fully through them, Tony, so we anticipate having some additional restructuring with actions that are going on right now. I would say the bulk of it was in the fourth quarter. I mean it was, you know, a pretty substantial restructuring that we had in the fourth quarter; so I think you will still have some, you know, some lingering and lesser expense what we had in the fourth quarter, but I would say we are not through it yet.

Not greater than what you showed in the first quarter?

Yes. The first quarter was relatively minor at $600,000. So I mean I think, you know, there is probably multi-million dollars' worth of restructuring expenses that is -- still would be recorded in future quarters.

Okay. My second question is, Selim, you talked about all you have done to elicit greater dealership support, but I am wondering what you would be doing to improve the perception of Viking in the mind of consumers going forward?

Okay. That is a very good question. Tony, I have to tell you that as I drive around the country I have been traveling quite a bit to dealers. In fact, two Saturdays ago, two weekends ago, I spent two full days in two different dealership, big dealership that drive a lot of traffic and where we have fantastic displays. And I have to tell you our issues have never been with the consumer.

The consumers still love the brand. The brand is literally not tarnished. People love it. They now see the (inaudible) was Middleby, which is becoming clearer and clearer as you see the new products. Our biggest frustration has been twofold. If you look at 2015, there was the recall and the recall did two things.

One, it basically shook the confidence of the dealer/salespeople again because they had to pick up the phone call that customers say, just by the way, you know, Viking has a recall, another recall. Which was not anticipated because I had gone out to the Kitchen and Bath Show in 2015 and told everybody that we are -- we were starting to see the orders come in very strongly, and I did not see it coming. And we did not see it coming, and then finally we became (inaudible).

So literally we had to recapture the dealer/salespeople; say you know what, we are going to make it easy for us to do business. We are not going to keep on having you go back to customers say well, Viking has another recall. The number two issue is, we have dealers -- large dealers -- that have a strict policy. The policy is if there is a recall they will basically stop not only selling that product that has the recall, but they will not sell the brand for 90 days.

Those are big customer powers, and they stopped selling for 90 days until they understood the recall and what was doing about it and so that is disheartening. I think that what we have done is to go back and talk about our training. We flew specifically many of those big dealers to Greenwood, Mississippi to see what they can see, and in terms of the new products testing and all what you are doing.

So it is been -- it is been a good reintroduction of Middleby. It has been a very good connection, and I would look to say that from an end user, we have some work to do but not as much.

We have more work to do with the dealer/salespeople on the floor. Because if you are a consumer coming into a dealer and you say, I want Viking, and the dealer salesperson says well, I would not be interested in selling Viking, I think you might have lose half of the battle.

Right.

It is difficult to get people to come back and be confident about us again, it was a big task, and we have done it. And I can tell you spending those two days in those dealerships not only it was fantastic to see the traffic coming to Viking, it was interesting to see the comments from the customer about our finish, about our innovation, and I think that is another thing that everybody now sees the impact of Middleby.

We have more work to do in marketing to reach out, out-phase designs, and that is where we are spending time introducing a new line of ovens and ranges that are a little bit more urban. But from a dealer standpoint we are starting to move forward; from a consumer standpoint I think the French door series, our induction, and now we are introducing TurboChef. I think TurboChef is coming up right now. So, innovations have been very, very strong on that end.

Okay. Thank you very much.

Thank you, Tony.

Our next question comes from Jaimie Clement with Macquarie. Your line is open.

Jim Seline, Darcy. Good morning.

Good morning Jim.

Hey Tim, I think you said it was -- was it $98 million of revenue that AGA and Lynx brought you in the first quarter? Was that -- is that the right number?

Yes. That is correct.

Can you help us understand the seasonality of that business a little bit more? So I think you have historically said that it kind of mimics the seasonality of the rest of your business, but I mean I would imagine Lynx is heavy Q2, Q3, right? But what about AGA? We are thinking about, let us say 8% to 10% more in Q2 and Q3 seasonally or where should we be at?

Yes. So you are right about Lynx. I mean given the outdoor growth business. The second quarter is actually the strongest where people kind of buy ahead of the summer season. So Q2 being the peak, you know, then obviously, you know, Q4 would be the slowest period. AGA is -- there is a whole mix of business in there, but the core business of AGA Rangemaster is actually very strong in the back half the year.

Okay.

So that is the most increased -- really the Q3 and particularly Q4 are the -- those are the two strongest quarters of the year for AGA Rangemaster.

Okay. (Multiple Speakers).

We typically see kind of that other Middleby's businesses, which are Q2, Q3 tends to be the peak so --

Okay. That actually leads into my next question. Is that, do you just need the extra volume to get to that 10%-plus EBITDA margin? Because it seems with restructuring charges seriously, seriously down in the first quarter it does not sound like a whole heck of a lot more to go. Sounds like on the cost side you guys have pretty much done the heavy lifting. So is it now just execution at the factory floor and getting the additional volume in?

Yes. Well, so we took the charge in the fourth quarter based on kind of the announcement of the -- or the restructuring. That does not mean that it is fully implemented, right?

Ah, okay.

So we are dealing with these companies in UK , Arlin, France, et cetera. So it takes a while, given the social kind of organizational issues. You know, over there the government had a -- getting those implemented. So a lot of the restructuring actions that were announced and recorded as accounting charges in the fourth quarter, they were not implemented until Q1 and still are being implemented in Q2.

Got it.

So that is why we are starting to see the cash impact of that kind of come through in the first half of the year, because it was only an accounting charge in the fourth quarter, not a cash charge. So that is why we are not really going to see the benefit. We will start to realize some of the benefits in the second quarter as -- but really more so in the second half of the year.

Okay. Okay. Great. And then, Selim, if I could ask one to you. Big picture. Obviously labor and your restaurants customers clearly are not going down any time soon. You guys offer some solutions to that. We have not heard much in the last two calls about talking about new product launches or new programs with large customers, that kind of thing. Can you give us a hint to what is on the horizon in the next six to nine months?

Well, big picture is that we are very excited literally our automation program and we continue looking at improving our automation, and reducing -- literally the reducing labor, and providing a labor safe for our customers. So if you look at where we are spending our energy, we have continued to increase speed, whether in the pizza oven, or our broilers, or kitchen of the future, or in our speed cooking. And then we are continuing focus on energy and labor saving.

So what is really fascinating is, is starting next week at the end of next week, we have the National Restaurant Show being held in Chicago, and there will be a tremendous display of new innovation, specifically targeting what I call labor reduction and automation. So we will have what I call a true kitchen, and it will be operated in terms of we will show the impact of how much you can reduce labor while increasing hours of operation and menu.

So we will show a menu -- a complex menu with less labor and less hours spent and more productivity; and that will be at the National Restaurant Show next week, which is most probably highly (inaudible). So we continue to push the envelope on labor saving. Of course, we have worked for years on energy, and now it will be our -- I am proud to say 16 years of complete push-on energy saving. Whether it is water-saving, utility saving of gas, and others, and then we continue to increase speed.

We continue to push the envelope on speed of cooking. Without compromising quality. So we are very excited about what is going on in automation, and it is not only talking about certain products. We are talking about solutions where we are integrating a conveyor with a moving and warming cabinet induction and mixing it with a type of infrared cooking.

There is a lot of exciting technology, and (inaudible) I think we are going to most probably do some YouTube. And you will see on YouTube that live kitchen that you will see a full array of automated product that is a solution That are for sale. They are not prototype. They are existing for sale in 2016 and 2017.

Thank you all very much for your time as always.

Thank you, Jaimie.

Thanks, Jaimie.

(Operator Instructions). Our next question comes from David Patton with Great Lakes Review. Your line is open.

Good morning. Thanks for taking the questions. Could you expand a little bit on the progress of expanding AGA into the US, and how that is going and where you are in that cycle?

Well, with AGA going into the US we have -- we are working on an AGA high-end mercury range, which features a five burner induction cooktop, burners, and three ovens. A multi-function oven with convection and customizable burner, a large oven that can fit a 25-pound to 30-pound Turkey, and a pull-out grill. And there will be -- literally it was at the show in January and that product was the rave of designers, of customers, of dealers, and we are launching that product sometime in the end of this year.

It will be launched as a full product line in the US. So AGA, we will bring AGA in the US. We are basically also working with AGA and Rangemaster to continue working on completing a line, diversifying the perspective. We are also working on something called [Alyse], also to expand the line from what you know AGA to be; a UK-dominant, iconic brand to being attractive to customers in the US.

So when you look at AGA and US customers, there is still a perception that you have to keep that oven on all the time. There is a perception that that is an oven that heats your home, and we have worked hard to make sure that the ease-of-use happens. We are going to start doing the training again on AGA as we launch the mercury range Alyse and the new US products.

We are investing a lot of time on designing products in the US, and we introduce them at the Kitchen and Bath Show, and they were the rave -- I think the mercury range got a big award at the Kitchen and Bath Show in January in Las Vegas.

All right. Thank you. And then in regard to Viking and the pickup and order rate, is there any way you can break out Viking currently from the legacy issues to give a, you know, a growth picture completely excluding all of the issues from the past?

We would love to do that. It is difficult for us to do because at the end of the day, I think as you well know, we started working on engineering. So let us go back to see why it is difficult, because we did not overnight re-create all the products. We started working on (inaudible), started working on ovens and ranges, and then we started introducing new product that will be Middleby-driven, like the French door, TurboChef oven which is a speed cooking.

So there has not been a clear cut between legacy overnight. We did not go back and say, we are going to cut the legacy products and then start completing the product line. So we started introducing a complete new product line, which is 7-Series, and then we started working our way back through the quality issues that we faced. Whether it was in refrigeration; mostly in refrigeration, and in dishwashers. And my feeling, because we did no the have much issues in cooking in terms of what I call the new product, cooking except the recall, we have not had major issues in cooking with 7-Series French door.

So it is tough for us to say this is legacy, this is not legacy. What I can tell you, moving forward our quality problems are all behind us. So we went back and we have worked on every product, every (inaudible) has been put behind us and has been redesigned for quality, for fit and finish; so that is all the problem behind us. So I can look at the future versus looking at the past.

So I will tell you as I just repeated, that 2016 we will start to see sales improvement sequentially 2016, with a strong year of 2017 with Viking. We know that because we are seeing some buildup projects coming through so I can have visibility toward 2017. We are launching a lot of new products for 2017. We basically have had a bunch of designers and dealers who are working with us on multi-home subdivision home right now.

It is all Viking and we are starting to see this happening. So we are very excited about what is going on with Viking as we move forward towards the second half of this year and specifically in 2017.

All right. Well, I appreciate the color.

Thank you.

Our next question comes from Tim Wojs with Baird. Your line is open.

Hey, guys. Me again. I just had a couple follow-up questions. Tim, could you give us what the EBIT margins were by segment in the quarter? Or what the EBITDA dollars were?

Yes. I can try to give you an idea on that. So I mean, we really focus on EBITDA more than EBIT, just kind of given the amortization from acquisitions and vary significantly from segment to segment just depending on, timing of acquisitions when they roll in. So in the first quarter we were right around 29% EBITDA margins in commercial foodservice.

Food processing was just under 25%. So that was consistent with where we were last year. And then, you know, residential was around 12%; but that includes AGA, which AGA was still in single digits in Q1. It was around 7%. So if you were to -- if you were to exclude AGA, we would have been right around the 20% mark.

Okay. And then could you talk a little bit about just (inaudible) costs in stainless steel, kind of what you guys are seeing? Because I think we started to see steel costs going up and just curious how you are thinking about that flowing through for the remainder of the year.

I think cost will continue going up. I think we are seeing it. It is -- the fact that what is going on with China and the trade impact, I think we are seeing a significant increase in steel. So it is going to be most probably affecting us as it affects all our competitors.

I think stainless steel is going up. So we do not have visibility at this moment; all we are seeing is somewhat in the second half, we are somewhat hedged so far, a little bit through most part of second quarter. But you are going to start seeing the impact of steel coming in sometime in the second half of the year.

So at this moment we are bracing for some price increases to our customers to pass on the steel pricing, and I think that is going to occur. It is substantial. So we are not seeing, it is not a 1% potential price increase in stainless steel. Which most probably will be impacted in second quarter but we will have to pass it to our customers.

Sounds good. I appreciate the color. Thanks.

Thank you.

Thank you. That concludes the Q&A session. I will now turn the call back over to Management for final comments.

So as I look at -- first of all, I want to thank everybody for attending this conference call. As we look at the picture, because we have never given guidance on a quarter to quarter, year to year; but if you look at what is going to happen in the next three years, we see an acceleration in organic growth and expansion in profit margin.

And we really also see our EBITDA margin, which has historically has hovered at about 20% should increase to a higher plateau over same period of three years. An important key (inaudible) sales gross margin is significant improvement in residential kitchen division.

So from Viking to AGA to U-Line, we will see not only an organic growth improvement in the next three years. We are going to also see a significant EBITDA margin, central/middle most probably will trail very close to foodservice EBITDA margin. On the food processing we are very, very pleased with that group, not only in the EBITDA margin but in the innovation (inaudible).

I think the food processing we are seeing the highest backlog ever given our innovative solution. I think the only disruption in that segment is our industrial baking division that we are restructuring, and we have -- it is now being led by an expert (inaudible) of our baking division is making major changes to it, and we are constantly updating some of our bakery division and we concentrated a significant technology center in Dallas. And we see that impact automated division to be starting to create fruits in 2017.

So when I look at the business from a standpoint of commercial, I see three major push. You look first at the kitchen of the future, which is automation and deliver savings, which will continue being a great tailwind for us, because we will see minimum wage rates increasing in every part of the country and automation will continue to play a part.

It will also -- automation is not only about controlling labor expenses, but as companies are adding the complexity of working toward extended menus and extended hours, they have to automate. And as the labor market continues to be tighter they cannot find people willing to work at those hourly rates, so they have to be -- become more efficient like in fact, in the kitchen, to process their cooking. To process the way they deliver the food to the table in a better way and more efficient way, and that is where the initiative of Middleby is playing a major role.

Number two, in the commercial foodservice, Middleby has had very little penetration in the QSR category of the fast food. Though we have been mostly a major player in what I call fast casual and casual dining in the casual dining in the casual dining chain and the fast casual chain. However, now we are seeing an expansion of our introduction through our innovation and through our partnership with a couple of QSR chains where we are basically starting to play a role into that segment.

So it is still early in its phase because it is been new for us, but we are seeing really a significant progress as we partner with those customers and as they teach us things to do for a solution driven; whether it is a breakfast part or making sure that we create with some a better quality product through better kitchen and better speed. While we have not seen a significant contribution yet, you will start to see that contribution next three years to be significant for Middleby.

An (inaudible) commercial is gross beverage. I think our beverage business is now a really disrupting the way we dispense soda and dispense beverages. In addition, we are seeing the beverage division working in portion control, and we look at some disruption in that business.

Finally, we look at again food processing. I talked about bakery, but I want to go back and talk about our meat, poultry, and deli processing equipment. Where we have been a major player in that business, not only in terms of the creating solutions, in terms of saving yield throughput energy to our customers. But the most important has been our service component, in the way we service our customers and train them as they install that multi-million dollar order within their factory. So there is more downtime, almost (inaudible) downtime in our product solution.

On the residential we spoke quite a bit about it, but we are very excited about Viking and its connectivity back to the dealer/salespeople on the floor. We are excited about all the new products we have, we are very (inaudible) about the quality we have had.

On AGA there is nothing but upside there, because literally not only we are going to increase revenues but we are basically take that business turn it around three to five times EBITDA to be in the next three years closer to 20%, 25% EBITDA and we are very comfortable in this.

So as we look at our new product introduction, at all levels whether in residential or disrupting with the TurboChef and the speed to clean, was a bruise only in our reputation; which basically is a disruptive technology (inaudible). Whether it is in our beverage and our aspire soda dispensing, or with our kitchen of the future, or with our breakfast, or with our Combi which is another initiative that has been very successful for us as we introduce a unique Combi ovens that are starting to disrupt. Se are very excited about the next three years.

Now, would you have setbacks in the process? Yes, we will be. We will see most probably for a limited time, a transition as we transition from a hedging on steel to basically passing on the steel increases to our customers there will be most probably a small lag. We have faced those before and I think customers are aware of those type of fluctuations in the commodity prices, they deal with it.

Most of our customers deal with pricing of chicken go up, pricing of meat goes up, pricing of tomatoes goes up, whatever due to increase somewhere. But I think we will manage this the way we have managed them in the past. However, I am very excited also about our international business that continues to grow, and we have been able to continue playing in that market by providing sales and service in local market -- emerging market, as US chains continue to go overseas.

But most important, at this time there is almost a tipping point where the local chains, the local region chains are becoming emerging and almost growing as fast as US chains in market such as the Middle East, Southeast Asia, and Latin America where we are now working with a major chain to help automate their kitchen and offer a better product.

So this concludes my comments and thank you for attending our conference.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone have a great day.