Middleby Corp (MIDD) 2016 Q4 法說會逐字稿

Thank you for joining us for The Middleby Corporation fourth quarter conference call. With us today from management is Selim Bassoul, the Chairman and CEO, and Tim FitzGerald, the Company's CFO. We will begin with comments from the management. And then later open the lines for questions. Directions on how to get in the queue will be given at that time. Now I would like to turn the call over to Mr. FitzGerald for opening remarks. Please go ahead.

Thank you Kevin. Hello, this is Timothy FitzGerald, CFO, and I have some comments about the Company's 2016 fourth quarter and full year results, and then we will open up the call for questions and answers. Net sales in the 2016 fourth quarter of $596.8 million, increased 11.6% from $534.7 million in the fourth quarter of 2015. The fourth quarter sales include the impact of acquisition activity, not fully reflected in the prior year comparative results. Which accounted for $51.3 million, or 9.6% 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 to US dollars in the quarter, and this impact amounted to $21.9 million, or 4.1% in lesser reported sales growth, and reflects the significant impact due at AGA, due to the strengthening of the US dollar versus the British pound. Excluding the impact of acquisition activity and foreign exchange, sales during the quarter increased by 6.1% as compared to the prior year. This increase reflects organic sales growth of 7.1% in our commercial foodservice group, an increase of 20.3% in our food processing group, and a decrease of 2.2% in our residential kitchen equipment segment.

Sales at the commercial foodservice group for the quarter amount to $335.3 million. Organic sales growth of 7.1% reflects continued growth in international markets, with sales supporting new restaurant growth, and increasing business to replace and upgrade existing equipment at our existing customer restaurant operations. Organic sales growth in international markets amounted to approximately 20% during the quarter, with growth in all regions, but strongly weighted to Latin America and Asia. Sales domestically were relatively constant with the prior year quarter, as slower order trends from several larger restaurant chains continued to offset general market growth. There is a strong pipeline of development activity with our major chain customers, that we anticipate will benefit the latter part of 2017, however, domestic activity in the early part of the year is expected to continue to reflect slower activity with larger chain customers.

Sales at the food processing group amount to $97.9 million in the quarter, and organic sales growth of 20.3% in the quarter reflects revenues associated with the record backlog carried into 2016, along with continued strong incoming orders realized throughout the year. We see continued demand by our customers looking to upgrade facilities and equipment, to more efficient production lines with higher capacities, along with increased demand in emerging markets, as food processors developed new operations to support growing market needs. However, given the normal variability in the timing of orders and shipments at this segment, we anticipate that revenues in the upcoming quarters will be relatively constant with the first half of 2016, due to the timing of certain larger projects.

Sales in the residential group amounted to $163.5 million in the quarter. Foreign exchange translation adversely impacted revenues at this segment by $15 million in the quarter, again primarily due to the translation of the UK based revenues at the AGA group in the US dollars. Excluding this impact from acquisition and foreign exchange, organic sales declined by $3.9 million, or 2.2% in the quarter. The organic sales decline reflects single-digit declines at Viking, while the aggregate group of companies was relatively flat in revenues on a constant currency basis. The revenues at AGA reflect the adverse impact of SKU rationalization, and new pricing and discounting disciplines, as we have focused on profit improvement at this business. The impact of currency translation and product rationalization efforts are expected to carry into the early part of 2017.

Gross profit for the fourth quarter increased to $239.2 million from $198.9 million the prior year. And the gross margin rate was 40.1% as compared to 37.2% in the prior year. Gross profit margins during the quarter at the commercial foodservice equipment group were 41.2%, as compared to 41.8% in the prior year. Gross margins continued to be strong throughout the year, but were slightly less in the fourth quarter, due to the sales mix amongst the various business divisions at this segment. Gross margins at the food processing group were 42.7%, as compared to 40.2% in the prior year quarter, and gross margin improvement reflects the impact of favorable mix, strong fourth quarter sales volumes, and cost savings initiatives in the bakery group.

The gross margin at the residential kitchen equipment segment increased to 36%, from 27.1% in the prior year quarter. And the gross margin rate reflects the favorable impact of benefits from integration initiatives implemented at AGA throughout the year. Selling and distribution expenses during the quarter decreased to $55.6 million from $56.4 million in the prior year quarter. The fourth quarter of 2016 included $5.1 million of additional selling costs related to additional businesses acquired during the past year, offset by $1.7 million in lesser reported expenses, due to currency translation and reduced costs associated with structuring and integration initiatives.

While general administrative expenses increased to $54.7 million from $52.8 million in the prior year, and this increase in general and administrative expenses included $5.2 million in expenses associated with recently acquired companies not included in the prior year. Offset by $2.2 million in lesser reporter costs due to currency translation, and benefits of other cost reductions. The fourth quarter also included $2.4 million of restructuring expenses, as compared to $16.9 million in the prior year, in connection with continued restructuring integration activities at the AGA group.

Earnings per share of $1.41 in the quarter improved from $0.88 in the prior year quarter. Excluding the impact of restructuring expenses in AGA transaction costs, which reduced earnings per share by $0.03 and $0.22 respectively, EPS increased 30.9% to $1.44 in the quarter, as compared to $1.10 in the prior year. During the quarter, cash flows generated from operating activities remained very strong, and amounted to $119 million in the quarter, as compared to $82 million in the prior year fourth quarter, and for the year cash flows generated operations amounted to $294.1 million, as compared to $249.6 million. The strong cash flows in the fourth quarter reflected the benefit of improved profitability and lesser cash requirements at the AGA group.

Non-cash expenses added back in calculating operating cash flows amounted to $24.1 million in the quarter, and $84 million for the full year. For the quarter, this included $6.7 million of intangible amortization, $6.8 million of depreciation, and $10.6 million of non-cash stock based compensation. The Company utilized $6 million in the quarter, and $24.8 million for the full year, to fund capital expenditures primarily related to investments in manufacturing equipment and enhanced production capabilities. And that at the end of the quarter amount to $663.6 million, as compared to $771.5 million at the end of the third quarter. And the Company's net debt to EBITDA leverage ratio at the end of the quarter was approximately 1.25 times. Kevin, that's all for our initial commentary, if you could open up the call to questions and answers now, that would be great.

(Operator Instructions). Our first question comes from Tim Wojs with Baird.

Hi everybody, good morning. Nice job on the quarter. Just touching on commercial first, is there a way to think about what the full year 2017 outlook could be in terms of organic growth, and I'm thinking about domestic a slower in the first half, does that get back to mid to high single-digit growth in the second half of the year? And just as you guys are lapping some of this stronger international growth, how should we think about growth in that segment? Just a little discussion of how we should think of the organic growth rate in 2017, specifically in commercial?

Tim, this is Selim, good morning. I am not going to give guidance, and I am not going to start giving guidance on anything. That is very clear for us, that we give guidance, you've been with us for many many years. But I can give you some of the historical organic growth on commercial has between on average 6% to 8%. If you look at it over the many years. If you look at numbers at least eight years, I think that probably has been roughly the historical organic revenue levels. Between 6% to 8%, and we believe that we're going to continue managing the organic growth within that range. But we're not going to be telling you what's happening in this quarter or this year.

And the reason is, one of our philosophies has been very important to us, and it has been something that our investors and shareholders have learned over the years, and I think our analysts have, I'm not going to commit the customer to buy our equipment unless they're fully tested, and that's something that we have been very clear upon, because we want our people to get the pay back that what we say is what we're going to do. So in the past people have basically said, but Selim your testing was so many change, how come the kitchen of the future it's not coming faster. I remember both discussions, and my response is very clear. We have, basically, have a commitment to make sure that our customers are not rushed to make a decision, when they test our equipment, and they can validate and check, and cross examine the pay back, and the real value of the solution that we are providing.

For us, as we work with our customers, I am not changing that philosophy. And that's why we have had the loyalty of our customers, and that's why it has been amazing, because literally, our solutions do not fit everybody, and when they fit, they work beautifully well, and when those people realize that this is a commitment, long-term, when they invest millions of dollars for our solutions, that they are going to work for them. So that's why I am not going to be boxed into talking about what the organic growth of foodservice is going to be. Because we just came from a show, and you were there, and I think you've seen how much our customers are find out, you see the innovation in our booths, and how confident we are. I would say that we're very confident that the future of foodservice, as least far as our innovations, and our solutions, are very prominent and very positive.

Okay. I know you don't give guidance, but I always ask the question.

This is a color, and as you now, we had very strong international sales throughout the year. We were in excess of 20%. And that could moderate as we go through the year. Domestically our sales were a little bit lower with reduced chain activity, which I think in the early part of the year, that may carry, but I think domestically, we might see, we would expect domestic to tick up next year, so just directionally that might happen. Domestic moving up, geared to the latter part of the year, and maybe internationally, as you mentioned, tough comps, because we were north of 20% for the whole year internationally.

Okay. That's helpful. And Selim, then just with maybe NAFA, I mean the booth was busy, everybody talks about a restaurant kind of CapEx slow down, but the traffic didn't seem like that. So anything you can share just around the pipeline development, and the enthusiasm that you're seeing from your customers around the equipment spend?

Tim, we just say hundreds of chains at NAFA coming, looking for solutions. They were all people that I have talked to, traditional restaurants, and non-traditional, to convenience stores, and outlets where they are expanding into menus, where it is movie theaters, or non-traditional outfits like airports, or stages, or country clubs. They were all feeling good about their businesses in the future. And literally, what we saw, there was a lot about interest about investing in labor costs. That's the biggest theme that I saw, was labor costs, and I'll talk about it a little bit. There were a lot of things about the simplifying the menu, and looking at solutions, say how do I simplify my menu so I can speed up the operation, and service my customer faster? So there was a lot of shanking the menu, but the biggest thing that was interesting to me, of all of the people that came, and it has happening not only at the show, but it has been happening for the last 18 months, is finally, our customers are doing what we do as in manufacturer.

They are looking at reengineering their kitchen and their process. They are now working the way we work in our factories, to make sure that their kitchens are running smoother. That the work flow is doing well. And that is something exactly where Middleby, and where we position our Company in terms of creating this work flow. Through the kitchen of casual dining, fast casual, because as you would say, you can't survive today if you don't optimize your labor and your work flow. and we have seen that becoming prominent. I've been preaching that for the last five years, and we have put a lot of solutions that talk specifically with reengineering the kitchen. So when you have come to our Analyst Day meeting, and you talk about whether it was in it, as an analogy, we talk about specifically how our equipment works together to create a work flow. And I've been talking about seconds and inches, I think has been my mantra now for most probably over five years. What makes Middleby unique is we are about seconds and inches. That has been our motto. And now finally it is resonating with them.

Great, and then Tim, just the last question for me, could you give us EBITDA margins by segment for the fourth quarter?

Yes, so it was roughly, we were 29% at commercial foodservice. We were 27% at food processing, and we were 20% at the residential segment.

Okay, great. Good luck on 2017. Thanks for taking the time.

Thanks, Tim.

You have next question comes from James Picariello from KeyBanc Capital.

Good morning, guys, so just talking about residential kitchen, under the working assumption that Viking's warranty issues are now fully behind it, how are you thinking about Viking's ability to grow in 2017? What were the key drivers, what makes you feel good about that prospect, and then how are you feeling about the residual impacts for AGA, in terms of the SKU rationalization, and walking away from certain customers that were accustomed to discounting those, two those two factors would be of interest? Thanks.

So I can talk about the quality. I think now we have mentioned quality. And accepting the recall, which was something outside, and have gone back to what's called a first-year warranty claim. and the data has been for the last 24 months, have dropped over 80%, so we basically now and that is warranties due to redesigning all of our products, and we have redesigned and reintroduced new products, like the 7 Series, the reauthorization, and we have gone back to redesigning every product that was in the pipeline. So from that perspective, our quality has been superb. I think that I talked in the last two calls about servicing our customers in parts, and now we can say that the parts availability are back to normal. So from that perspective, I'm feeling very good, now on where do I see, let's talk about Viking. I underestimated the impact of the recall, so from that perspective, I was wrong. I think that the impact of the recall was a lot stronger that we expected, we have 60,000 ovens. I personally received tons of emails and phone calls from people asking me, my oven, I'm afraid about safety. I'm afraid what happened to ovens sold. I have heard that the oven comes on and off, and what happened? And I truly believe that we will be through the recall. Perception on our brand will be a lot better. And I underestimated a year and a half later, where I'm sitting at today, I'm telling you, it's my fault.

I did not expect it to have such an impact that continues to linger for us, and affect our top line growth at Viking. We're facing that, we're basically trying to overcome it with the new products. We're starting to pick up the builder business. We have just finished an investment in dealer sales training. We have trained hundreds of dealer salespeople that came through in the fourth quarter. In the end of the third quarter, fourth quarter and sales of new products, and we continue to basically turn the corner on Viking. But again, I want to reinforce to everybody that the recall basically continues to linger, and I underestimated it's impact. So it would be something that continues to be, until I can tell you that the recall is no longer impacting us. At this moment, I'm still feeling that the impact is still there on the recall.

On AGA, I think AGA is a mix of, when we took AGA, we worked on profitability, and we have introduced product, we have continued to do the same innovation done at Viking, and done in foodservice, that we are doing at AGA. So AGA introduced a bunch of new products. They have several new products they have introduced for the US market. And AGA, basically we feel comfortable that within the next 24 months, AGA supply will move very nicely, and start increasing. But our number one focus has been with AGA to simplify the business. They had a lot of SKUs and make sure that we look at the profitability. When we bought AGA, I think that it was breakeven. Or close to 3, single-digit. And our objective was to get it to 20%, and then ultimately to 30%, given the rationalization. That's number one.

So I think we're really not expecting much growth on the top line of AGA this year, because of those detractors. A lot of what we do with discounting and pricing, as well as the SKU rationalization. So what we saw in the fourth quarter was roughly constant revenues, so I think there's still a lot of activity going on, but that's kind of our expectation going into the year, that the growth is coming in 2018, is when a lot of the new products get developed, as we kind of move to that phase. So just to kind of do a little bit more--.

I appreciate the color. And then just on the journey to 27% EBITDA margins by 2020, last quarter, you did mention a sourcing initiative, 3% sourcing savings over the next three or so years. Can you just provide more color on how you are thinking about the actions that maybe you have in place, or expect to have in place for that, and then just how does that correspond with your thinking on price costs for 2017? Thank you.

I mean, there are a lot of initiatives going on right now internally, so I mean it's just, we've got a team that's focused on sourcing across the country. We have always had a team, but I think we're doing it a little bit more holistically, and aggressively, particularly as we have gotten a lot of companies in the last three years, so we're really going back to a broader reach of purchasing across the country, where I think our approach, over the last, as we have bought companies, really have been to focus on the new ones coming into the group, without necessarily going back to the ones that have been part of the group for ten or more years. So I think that's going to be the approach. I mean, in terms of specific initiatives, I don't think we're going to walk through that. It's kind of a three-year journey, but we do think there's a lot of opportunity and synergies there. We are expecting a lot of that to show up more in 2018 than 2017. We clearly do have initiatives that will add to EBITDA this year. But a lot of the work that we're doing this year will pay off in 2018.

So I can add a little bit more flavor to the supply chain initiatives. That we have not been involved with in the last few years, we are building the innovation of our product. There is a simple one, which is the company sends out parts, what we have seen across, we are buying many, many numbers of motors, we buy, have a supplier of grates. We have different suppliers of pans, we have different suppliers of burners, we have different suppliers of racks. And from that perspective, I think it all is starting to drive business with fewer suppliers, and standardizing some of those parts that we have not done. So there have been big pushes in the millions of dollars. Hundreds of millions of dollars.

So we see a lot of today's standardization of parts that is the low hanging fruit, that is very much achievable. However, we have a company buying a motor, a blower motor, we have another company buying a different one for the same application for our ovens, and there's no reason for us to not start working between those two suppliers, to see who will deliver a better value for us down the road. It's not only pricing it could be for delivery, it could be better quality, it could be a better upgrade. But I think it's the low hanging fruit that we see is achievable. Literally you can see it being set back within the next 12 months.

Thanks, thank you. I will get back in queue.

Thanks.

Our next question comes from Jason Rogers, Great Lakes Review.

Yes, a question on AGA, where did the EBITDA margins end up at year end?

For the full year, we were between 13% and 14%. It was higher than that in the fourth quarter. The fourth quarter, so we continue to see it rise from the single digits in the first half of the year, and then we actually did get to 20% in the fourth quarter. The fourth quarter also is the strongest quarter in terms of volumes there, so we had the benefit of volume. So I think that we'll dip back down below 20% in the front part of the year, but we are well on the way to our journey of getting to 20%.

All right. And Tim, where do you see CapEx D&A in the tax rate for 2017?

Well, CapEx, for a long period of time, we have been in that 1% to 2% of sales range. And 2016 was very consistent with that. So I would say that range probably closer to 1% than 2%. Which has kind of been the historical average. That will continue. The tax rate moves around quite a bit, as our international platform will change, and obviously, we don't know where US tax rates are going, but assuming that all is the same, we were at that 32.5% for this year, so I think in that range of 32% to 34% is where we see the tax rate in 2017, kind of absent of any major tax law changes in the US.

And then as far as the steel costs, what are you seeing there, and have you raised prices to help offset any increases?

Yes, the steel is higher this year than last year, so coming into the year relative to both, I would say 3rd, 4th quarter of last year, and also up Q1 overlapping 2017 overlapping Q1 of 2016, our steel costs are up 5% to 10%, so mid to high single digits. We did have price increases across the different segments, particularly in commercial foodservices, we come into the year that should offset that.

And then finally, Selim, the press release mentioned emerging markets several times, I wonder if you could talk about where you see emerging markets as far as percent of sales for Middleby over the next three to five years?

You're talking about emerging markets, correct, Jason?

Yes.

Well, emerging markets continue to be a big driver for us. As you see in our investments, we have invested heavily in emerging markets, and I just basically was there, visiting many of our emerging markets, I was in the Middle East, visiting in Dubai, and then I went from Dubai to visit basically many of our emerging market chains. There was a big conference that I attended in November, and they were all there. And the mood in the emerging market is also the growth of local chains that have embraced Middleby's technology and innovation. So our people have done a great job getting those local chains, regional chains, emerging chains to embrace our precooking, to embrace our automated cooking, and it's unbelievable how exciting many of those chains have basically booked up, even faster than the US in adopting our technology.

So when I look at that, there might be some small chains. So from that, those are local chains. The other thing is the continuation of the US chains penetrating emerging markets, continues to be a big driver for many of the US chains going into emerging markets, because it's where the rising middle class has been happening and it has been good for us. We have invested heavily in those markets by adding our own direct sales force, warehouses and service. so in certain markets, we have added even the ability to create design capabilities to help emerging chains look at how they design their kitchens, their menus, so we added chefs, we have added design capabilities. A huge investment for us that has happened I would say in the last three to four years in the emerging markets, in people and facilities, and resources and CAD capabilities, and growing, and trucks and service, we had service trucks to service our emerging markets and emerging chains.

Thank you.

Our next question comes from George Godfrey, CL King.

Good morning, thank you for taking my question. Nice job on the quarter. I just have two questions. Selim, you've been quiet on the acquisition front, at least for Middleby over the last several months, and I'm sure that you've been active in discussions. I wonder if you've been focused internally on improving the operations or if the prices have been right, or if you have not found willing partners. What are you thinking there?

I think that we have always been involved in two things. In fact, we have been involved in three, if you look at our strategy, it's basically retaining our customers and working with them to test, to help them test to win. So if you look at that, one of the biggest things that we have done, is have helped our customers test solutions without pushing them to buy more equipment. It's to say if there's something that has a better pay back for you. And one of the things that you'll see the theme of everybody here at Middleby. We're not here to push equipment. We're here to try to drive a solution that works, and if it doesn't work for them, then we recommend that go somewhere else, because we want you to win.

And that is the legacy of what I brought, over 20 years at this Company, my legacy is to make sure that customers, whether they are big ones, or they are people who left the job, which I met with last week. Two people left their IT jobs, husband and wife, came to Middleby, and I spent almost a full day with them. Because they're starting a new concept, a new chain concept, and my heart was for those people to succeed. They took every savings they made in working as IT software developers, and they left. Husband and wife with no safety net, to open a concept that they dreamed of opening for many, many years. A field they have never done. No expertise, and my number one objective, despite all of the pressure of having a Board meeting this week, and having basically an earning release, they were here testing. They brought their concept, they brought their own ingredients, and I spent almost a full day with the husband and wife, with my team, making sure that we give them the best equipment they have. So the payback, a return on that investment happens in less than a year. So that's my first legacy.

My second involvement is to make sure, me and Tim and David Brewer, and our division presidents, is to make sure that our operations remain efficient, our employees have the tools and resources to get the job done, in terms of the factory, so we make sure that our engineers are designing products that can be easily produced in the factory. So that it works like a Lego system, it's not cumbersome to design and build. So that's my second objective, in addition to making sure that the customer wins, I look at it and say, how do I let my employees have a fun job day in and day out. And that's why it goes back to the retention of our employees. Over 90%, almost 98% retention in our employees across the board. Because we empower our people to get their job done, and they have done a great job for us.

Number three has been acquiring companies, and making sure that they fit within the Middleby form, and that continues to be an area where we continue to focus. In all three aspects, residential, food processing, and commercial. And the difficulty we have, the difficulty we have is not whether the pipeline is full enough. It's making sure that company fits our culture, and we fit them. Because in every instance, if you look at this we don't parachute Middleby people into that new acquisition, we rely on the existing management to adapt to our culture, to adapt to our DNA. And that is the key. In many ways, either the prospective seller walks away from us because they don't fit our Company, or we walk away from them, because they will not be able to run independently, autonomously. Underneath our banner, which is highly entrepreneurial, but has high metrics of performance. Has high innovation, we demand significant R&D. We demand also that they work in growing their business internationally.

From that perspective, I give you the three aspects of what I do most, making sure that our customers are winning, making sure our employees are enjoying their jobs, and finally, making sure that what we acquire adds value to our shareholders from the get-go. We are not a five year, okay, we're going to buy something and then maybe in five years it will win. It has to be accretive within the first 12 or 18 months, so I hope I answered your question from where I am spending that time. And literally, we're busy on all three fronts. Our customers are coming here in droves, testing. I was in Dallas last week with a new customer of ours, that I was very excited to be with them, because they are a fast growing chain. A large fast growing chain, and they were there testing, and I told them the same thing I told you today. I'm not here to sell them equipment. I want to make sure that what we offer them is better than what already exists in their stores.

And they left very impressed, and left knowing that the commitment of our people is not to sell them a piece of hardware, but to make sure, to be there to help them win. And my commitment has always been, that if we sell you something that doesn't deliver what we say it delivers, we'll take it back and refund your money. And I make that clear to everybody. I made that clear since 1999, and I make it clear to everybody. And at the show at NAFA, I tell my people, do not oversell, because if we oversell something and it doesn't work, I will take it back from the customer. I will take it back. and that has been a commitment from me. Morally I'm not here to sell people things that they don't need. I don't know if that answers your question.

Yes, understood. I love the passion. And then Tim, I just want a little bit more on AGA, can you quantify how much the lack of discounting, or telling customers we're no longer discounting, and how much that impacted the sales? Can you comment if competitors try to take advantage of that lack of discounting to get in there? I'm sure it's not the first time that you told someone that we're not discounting?

It is really hard to measure that. AGA is made up of many companies, I think we have been very close with what's going in all of those businesses, so we have put forth plans, where we knew we were walking away from business, but to kind of roll that up, and put it in percentage terms, it's not something that we have done specific math on.

Okay, thank you, and nice job on the quarter, thank you for taking my questions.

Thank you.

Our next question comes from Larry De Maria with William Blair.

Good morning, and you just mentioned Dallas, so I'll start there maybe. In terms of speed cooking, I think one of your competitors mentioned that their offering was doing very well. Just curious, do you see anything in the market, that suggests any kind of change for TurboChef or increased competition, or any general thoughts about that? First of all, thanks.

Well, speed cooking is one of the biggest trends today. And I think that what I would like to say, people call speed cooking, and I will tell people think of speed cooking at Middleby and they think only TurboChef. I have to tell you that our speed cooking goes beyond TurboChef. So that's where the difference between us and many of our competitors on the cooking platform, is we do speed cooking in many of our offices, if you look at our speed cooking in our Combi and our Houdini. We basically shave off compared to our competitors, we are almost 30%, 40% faster. If you look at our cooking in our convection, in our South Bend we're faster than any other. So our speed cooking to me, you look at basically baked, Middleby Marshall, you look at our conveyer ovens. They are faster than anybody else. We shaved off, we are faster than anybody else in delivering pizza, or in delivering proteins, on our CTX or on our Middleby Marshall, by far.

I don't want to even talk about our competitors. I want to go back to talk about eight years ago. Our pizza oven, our Middleby Marshall, wire oven, not even home to the 570 that used to be 12 minutes, which was the norm in the industry. We went to basically 6.5 minutes. We went to basically a 4.5 minutes, and we're basically now at 2.5 minutes, which is amazing. There is nobody in the industry that has gotten better. I take another one, which is a fire oven, which goes to 90 seconds cooking a pizza. It's the fastest oven in the industry. So when you look at speed cooking, I want to say that when people come to look at our solution, we have been at speed cooking beyond TurboChef. And that is big deal to us. So when I look at speed cooking, I look at many of our arrays, so we have shown people where they can basically cook breakfast beyond the TurboChef. TurboChef and beyond in our toaster at store. Much faster than anybody else by far.

All right.

So that's what I wanted to say. Making sure that speed cooking goes beyond TurboChef. So from that perspective, let me answer your question, when you say how do we compare? I think speed cooking, everybody is looking at speed, customers are looking at speed. Speed is the key. And I think it's a growing market. It will continue growing, and I think everybody is attempting to go after speed cooking. I ask every competitor that is looking at it, to go after it, and I think that people are testing everybody. The key is to make sure at the end, it's not to serve something faster, but to serve the quality product that people want. So the key is today, I'll share with you a new interesting thought. Speed cooking has been in your house. I bet you most people have had a speed cooker. It's called a microwave. It cooks things in seconds, but the quality of the product is lousy, and what people are doing at Middleby is to make sure that the quality of the product is enhanced, as we reduce speed. And that's why when I look at the 90 seconds, that is why people are blown away by the fire oven, by the way it is one of our fastest growing platforms. When they look at 90 second pizza. People are amazed at the quality of the pizza that comes up. And you are welcome to see it again, we demonstrated it during our Analyst meeting, and we'll demonstrate it just now at NAFA, and we are going to demonstrate again at the National Restaurant Show in Chicago. It has been a major, major mover for us in terms of growth.

Okay, thank you. If you can help me speed cook a piece at home better than a microwave, I would be interested. I guess what I'm getting at, the category is growing, but the TurboChef, you're not concerned about competition share. It has obviously done very well for a long time. Not to put words in your mouth, but it sounds like you are saying that the category is growing, but you're not concerned about share, or maybe there are some share changes?

I'm not concerned about share.

Okay. Great. And then secondly, I know obviously the commercial side has been, the industry itself has been going through a bit of transition, and I think you said that it would be slower for first half organic and a better second half. And I guess what I'm curious about, is that specifically around timing and the testing that you talked about? Or if the market is going through an inflection post-election, and obviously that does not happen overnight. It takes some lead time for that to happen. So I'm curious what your thoughts are about, is the market inflecting, or is it just timing, and just some better thoughts around there? Because it sounds like it might be flattish organic, and then a better second half. So I want to understand that a little bit more?

I will help you cook faster at your home. I will have the Viking speed cooking coming to you. That I will promise you. And in eight months, I will make sure that I can resolve that issue, maybe you can help me resolve the timing of customers. Maybe we can talk about that. That I cannot resolve. I think to answer the question is no, we do not see a deflection in the market. I think it's a timing issue. I think from all of the testing, so I always go back to what I always have always said for the past ten years. For me, the way I measure the market is not by whether restaurant sales are up or down. Our consumer confidence, our customers are established, they're mature. They're growing, they're big organizations, they are good at what they do. I think that the restaurant business today, after the major recession have done a superb job in running their business. I admire all of the leaders of all of the restaurant chains. And when you're not good, or you don't have a product, either they design or they move somewhere else, and they take their intellect somewhere else to start another chain.

So my question has always been, what is the backlog of people looking at solutions? As I look at that, and I say, wow, there's nobody coming flying into our divisions to look at solutions is where most probably will become my worrying state of mind. So I see people coming, and they might be with testing with our competitors too. But as long as they're testing for solutions and innovation, I feel confident that the market is going to grow very well. And I can tell you, the number of customers seeking solutions, and coming to us to test, is at the highest I have ever seen. So we came from a show, we were busy in terms of testing, people are testing, chains are testing, so this is where when they test, that means that they have a problem, and they need a solution. And ultimately, we always seem to capture our share of the market, I'm sure that our competitors do too. So they might have a solutions that might be more effective than ours in certain aspects. But I will tell you, that the number of chains testing is high.

The other thing, I am going to attest, which is important. Is the fact that there is another phenomenon that is taking place, which is literally going to be great for our industry. Not only for Middleby, but the whole industry, is that Millennials consume more meals prepared outside of the home, more than any other generation in the past. That data today is validated, it's cross-checked, and it's public. So Millennials consume more meals prepared outside of the home than any other generation. So if you look at those two data. One that is anecdotally mine. That is how many customers are coming in to test our test kitchen. And the macro data, which is Millennials, and I would say that it's going well. The other data that I would like to talk about, is sales in restaurants and bars, surpassed sales at grocery stores in the past year and a half. That has never happened. So we are well-positioned in terms of commercial foodservices.

Thank you very much for the color.

Thank you.

Ladies and gentlemen, this is all the time we have, and I would like to turn it back to the host for closing remarks.

Thank you all for being with us, and listening to us, and being with us today. I think I would always like to talk about two things that are important to us. One is, we just came from two major shows. One is the NKBA Kitchen and Bath Show in Las Vegas, that happened in mid-January, and I will tell you what was cooking in that show, and I can also give you data from HGTV, which is running a very expensive trends in kitchen appliances, in high end kitchen appliances. And they basically validated both on the show and with HGTV, and they seem to cross correlate. French door ovens are now becoming highly stylish, and they are becoming a great choice in places where people want to go away from a conventional door, that folds down in front of them, and going back to a door that opens the way a commercial oven works. And this has been and continuously, we introduced our French door, in fact, we were the first to introduce a French door, and now there are a few more players in it, but we seem to be a dominant player in that. The next thing is induction cooking in residential, it's now becoming the rage, because it's fast. It allows you to master the control over your simmering, and it's basically cool. It basically keeps your kitchen cool, and you can put it in your island with a downdraft. And that has been on HGTV trend, that they did in their research. We're seeing that in our business, and we're basically upgrading our induction.

And given our commercial induction into residential, where there has been a lot of connectivity between CookTek, which is our industrial commercial induction, which is one of the leading inductions in the world, into our residential. The next one is steam ovens, a steam oven is cooking food much faster than a conventional oven, and helps retain nutrition and flavor. And today we have introduced a bunch of steam ovens at the show, and they were very well received. The next one is literally synchronizing appliances. and Middleby Connect has become a very big one. Where we can connect literally, synchronizing our cook time for the range and the oven, so that the main dishes inside all arrive at the finish line, and they are perfectly cooked. So we are doing a lot of the work, doing work on service, so I can now tell you, that you need to maybe change your filter on your refrigerator, Maybe you need to change your basically, your fan is not calibrated, or your burner on your gas is clogged. All of that is coming through Middleby Connect. On the refrigeration side, in residential, we're seeing that people are looking at a simple crisper drawer, it's no longer what people, is gone, is no longer what people are looking for. They're looking at highly specialized storage, they are looking at places where it extends the freshness of their food. And that's where we have introduced a new zone, in the plasma cluster. We have basically tested and validated the free stand shelf life in our refrigeration, not in terms of hours or days, but by weeks versus our competitors.

The next interesting part is not only happening in residential, but another trend that is happening in commercial, what I call chewable ice. Chewable ice is now the rage. So just to give you perspective, five years ago, the ice market was 10% chewable ice and 90% cubed, and today it's doubled. It is 20% chewable ice and 80% cubed. And trending in our favor. And we saw a lot of interest, both at the Kitchen and Bath Show, and as well NAFA show, which is our food equipment show. So chewable ice, where we basically, is Follett which we acquired a year ago is the leader. Is now integrating chewable ice into the residential.

Finally, another interesting trend is also, is if you do lots of cooking at home, you need to make sure, that it is going to be used, which is now everybody is going back to this esthetic industrial kitchen mode, where everybody is going back to a professional looking stove and hood, that looks like it is made for an industrial kitchen. It has to be constructed of heavy-duty stainless steel. It might come in colors, but people are looking for, I want to cook the way my steak ends up being as mostly, I want to be able to look at my griddle, and look like the griddle that they have at Five Guys, or Culvers, or Steak Shake, or you name it. Or Shake Shack. From their perspective, we are well-positioned for the residential market. And it seems like the trends that we have a product with viewers fits well with HGTV research that they did, and released earlier this year.

On the commercial side, we just came from our NAFA Show, and literally customers were very confident, our restaurant chains were very complete, it was the largest show ever in attendance and attendees. And we saw hundreds and hundreds of chains looking for solutions. They felt good about their industry, their business in the future. and they all are looking at how do we connect our appliances, and they were excited about our Middleby Connect, and how we do diagnostics, how they can basically look from a corporate headquarters, look at how people are using their oven, are they changing the oil to keep the quality of the fries, and the nuggets, and the chicken nuggets and the wings correct, now they can do that. And we introduced an amazing amount of innovation technology, and we really wowed our customers at that.

So on that footprint, I look at the foodservice and I look at the playbook, and I talked about it earlier. 82% of operators reported labor cost increases over the past year according to TechNomics, so 82% are now seeing their labor in their restaurants going up. Specifically in the kitchen. and those labor expensed, or labor cost hikes are forcing the restaurant CEOs, to search for to implement new cost savings initiatives, as an alternative to raising menu prices. They can't keep on raising menu prices. They're looking at cost saving initiatives. So one of the issues is automation. I want to report that our kitchen of the future, which is our automated platform, away from pizza, which is taking our conveyors and automating kitchens a way of pizza, and we have now exceeded 7,000 stores are using now our automated kitchen of the future. So remember, we kept on talking about that, and it started with Chili's a few years ago. And people kept on saying, well what is beyond Chili's? What's next? I am happy to report, that at the end of 2016, we had 7,000 stores using our automated kitchen of the future. Reengineering the kitchen is also a big thing, we are working, we are doing a lot of work, working with major chains to do that. We are working with a coffee chain right now, to help them introduce more hot food in their kitchen. And helping them reshape the restaurant experience by streamlining the work flow. So speeding the kitchen, make sure that their employees are trying to deliver consistent food every time. And we're also helping a lot of people customize their options on their menu. Helping them customize menu.

So the biggest impact that's going to happen in 2017, 2018, 2019, is the labor crisis. We continue to revolutionize the foodservice landscape well beyond 2016, so I'm very excited about that. I am excited about where we're going. I'm excited about how our customers are now looking at new upscale concepts, where QSR are becoming more like fast casual, fast casual continues to grow, and casual dining now is forced to change the way they are looking at their menus, at their service, and at our values. And all of that bodes well for Middleby. In fact, we are working at prospects both with QSR, fast casual, and casual dining to improve their energy efficiency, and their labor optimization in their kitchen, and streamlining their menus. Thank you very much for the conference, that ends my prepared comments. Thank you.

Ladies and gentlemen, this concludes today's presentation, you may now disconnect, and have a wonderful day.