Middleby Corp (MIDD) 2017 Q2 法說會逐字稿

Thank you for joining us for the Middleby Corporation Second Quarter Conference Call. With us from management are Selim Bassoul, Chairman and CEO; Tim FitzGerald, CFO; and David Brewer, COO of Commercial Foodservice.

We will begin today with comments from management and then we will open up the call to Q&A. Instructions to get in the queue will be given at that time. Now I'd like to turn the call over to Mr. FitzGerald for opening comments. Please go ahead, sir.

Thank you, Brian. As Brian mentioned, I have some initial comments about the quarter and then we'll open the call to questions and answers.

Net sales in the 2017 second quarter of $579.3 million decreased 0.2% from $580.5 million in the second quarter of 2016. The second quarter sales include the impact of acquisition activity not fully reflected in the prior year comparative results, which accounted for $29.2 million or 5% of sales growth in the quarter. While the impact of foreign exchange amounted to $10.7 million, or 1.8% of [indiscernible] reported sales growth for the quarter.

Excluding the impact of acquisition activity and foreign exchange, sales during the quarter decreased by 3.3% as compared to the prior year quarter. This reflects an organic sales decline of 3.3% at our Commercial Foodservice Group, an increase of 8.5% at our Food Processing Group and a decrease of 9.1% at our Residential Kitchen Equipment segment.

Sales at the Commercial Foodservice Group for the quarter amounted to $333.8 million. Although sales in the general market increased, this was more than offset by reduced purchases from our major chain customers in comparison to the prior year. We continue to have a robust pipeline of revenue opportunities across these customer accounts as they are in the process of approval of a number of our new product innovations. These opportunities include replacement and upgrade of installed base of equipment which has impacted our replacement business in the short-term as restaurant operators had slowed purchases awaiting the next generation of (inaudible) products.

Sales internationally at the Commercial Foodservice Group were relatively flat in comparison to the very strong prior year. This reflects modest growth in Latin America and Asia, offset by lower sales in Europe.

Sales of the Food Processing Group amounted to $92.3 million in the quarter. The organic sales growth of 8.5% in the quarter reflects demand by our customers looking to adopt new technologies to support growth initiatives in development of new operations overseas. Modest growth expected for the second half is dependent on the timing of finalization for orders on larger projects that are currently in the pipeline.

Sales in the Residential Group amounted to $153.2 million in the quarter. Foreign exchange translation adversely impacted revenues at this segment in the quarter, primarily due to the translation of U.K.-based revenues from the AGA group into U.S. dollars. Excluding this impact from foreign exchange, organic sales declined by 9.1% in the quarter. This reflects declines at the AGA group of companies in connection with the restructuring initiatives which included substantial cost reduction at non-core businesses within the group and rationalization of low-margin products.

Despite the sales decline, we continue to make substantial progress toward our long-term profitability objectives for this business and realize operating EBITDA margins of approximately 17% during the quarter.

Continued sales at Viking remained lower, reflecting the impact of the Viking recall and legacy issues prior to the Middleby ownership. However, we remain confident in the investments that we continue to make in new products, product quality and after sales service and expect this will result in improving sales trends in the second half of 2017 and into 2018.

Gross profit for the second quarter increased to $234.6 million from $233.5 million in the prior year. The gross margin rate increased to 40.5% as compared to 40.2% in the prior year. The gross profit margins during the quarter at the Commercial Foodservice Equipment Group were 41.2% as compared to 43.7% in the prior year quarter. The reduced margin reflects the impact of acquisition due to lower gross margins at Follett which have continued to improve since the acquisition in mid-2016.

Margins also reflect the impact of higher steel cost which we expect will largely be offset in the second half by price increases and other efficiency gains.

Gross margin at the Food Processing Group were 41.6% as compared to 38.4% in the prior year quarter. Improved gross margins reflect the improvement in the profitability of the newer baking businesses related to integration initiatives, along with more favorable sales mix.

The gross margin at the Residential Kitchen Equipment segment increased to 39.8% from 35.5% in the prior year. The gross margin rate reflects the impact of benefits from integration initiatives implemented at AGA and across the entire residential platform as we further our efforts to leverage synergies across this business segment.

Selling and distribution expenses decreased during the quarter to $113 million from $115.2 million prior year quarter. The second quarter of 2017 included $10 million of additional selling costs related to businesses acquired during the past year and $3.4 million of noncash amortization adjustments related to the finalization of purchase accounting for Follett. These expense increases were more than offset by $1.5 million in less reporting expense due to currency translation, lower cost associated with the restructuring initiatives and reduced sales volumes.

During the quarter, we recorded $11.5 million of restructuring expenses largely associated with ongoing initiatives at AGA, including the anticipated exit of several production facilities which we anticipate will be completed in the fourth quarter of 2017.

During the quarter, we also realized a $12 million gain on the sale of a manufacturing facility related to our Blodgett Oven operation. The proceeds from this sale were reinvested to purchase a nearby state-of-the-art facility which will allow for the relocation of this business to a more cost-efficient footprint. This new operation will also allow for the consolidation of several existing manufacturing operations to a single facility, providing further cost savings in 2018.

Earnings per share of $1.35 in the quarter improved from $1.28 in the prior year quarter. The net impact from nonrecurring items in the quarter reduced earnings per share by approximately $0.04 per share.

Net debt at the end of the quarter amounted to $738.4 million as compared to $663.6 million at the end of 2016. And it reflects $119.3 million of acquisition-related investments during the year related primarily to the purchase of Burford, CVP Systems and Sveba Dahlen all completed in the second quarter. The company's net debt-to-EBITDA leverage ratio at the end of the quarter remained consistent at approximately 1.4x.

Operating cash flows for the year amounted to $86 million in the quarter as compared to $95.7 million the prior year quarter. Operating cash flows reflect the timing of increased tax payments in the first half of this year as compared to 2016. We anticipate continued seasonally strong cash flows in the second half of the year.

Noncash expenses added back in calculating operating cash flows amounted to $20.9 million for the quarter and $40.8 million for the year. And the company utilized $14 million in proceeds from the sale of the prior mentioned manufacturing operations to invest in the newly acquired facility while $9 million was invested in other capital investments related primarily to manufacturing equipment and enhanced production capabilities.

Brian, that's all of our initial prepared commentary. If you could open up the call to Q&A now, that'll be great.

(Operator Instructions) Our first question will come from the line of James Picariello with KeyBanc.

Just for starters, can we get the EBITDA margins by segment? I think you mentioned, Tim, 17% for Residential Kitchen?

No, that was 17% just for AGA. For the Residential group as a whole, it was approximately 25%. And then we were north of 28%, both in Commercial Foodservice and also Food Processing.

Okay, got it. Thank you. So yes, within -- unpacking Commercial Foodservice Equipment a bit, I think we all understand the national chain timing dynamic and the testing visibility there. But what are you seeing in the general market? You mentioned some growth in the quarter. But are you seeing any changes in the pricing environment from a competitive standpoint? Any share gain mix up that you could talk about or reference?

I think the growth remains -- I would say volumes in the quarter were low single digits. So I think that with -- I don't think we saw really any substantial changes kind of in the general market there. We certainly -- we were -- that we saw a market share loss, I think we feel like we're kind of gaining share in the general market.

Okay. And then you mentioned price increases to offset steel inflation in the back half. Can you provide more color on maybe what the price cost dynamic was in the first half? And then what your expectation is for the back half here?

Yes. I mean, I think steel was a minor drag on the margins. I would say less than 0.5%. I think that we're basically overlapping that as we move our way through the third quarter.

Our next question will come from Larry De Maria of William Blair.

A couple of questions. First off, how much was the pension benefit to operating income? I think you mentioned in the filing of the FASB could change the way you present your numbers. So can you give us an idea of how to assess that or how you might present them going forward?

So the pension benefit is -- was about $6 million in the quarter. It's relatively consistent with what we had in the first quarter. I mentioned that the 17% of EBITDA margins for August did not include that benefit. I mean, if we included that benefit, AGA would have been probably around 25% EBITDA. So I just kind of clarified it, when we're talking about AGA, we're really talking about the operating business and separating the pension kind of almost as a corporate cost. As we move into next year, I'll be honest with you, I probably should freshen up for the next call or maybe go through a little bit more detail of the accounting. But a lot of that gain will be which is now classified in operating, would be moved down into the nonoperating section and interest cost. As much as what we're realizing as a benefit, it's returns on the asset that are there in the plan.

Okay, but you -- the 25% resi EBITDA margin would include that, correct?

Yes.

And then secondly, obviously, you guys talk about timing and some push outs and stuff. Are we pushing out our beliefs that initially, I think Selim had talked about the second half having better organic? Or do you still believe that? Or we just don't have visibility on that now? Can you just give us some color on that?

Yes, Larry, I could give a lot of visibility on what I see. So let me start with talking a little bit about the state of the industry. I think we have an expanding economy that's helping restaurant sales continue to advance in 2017. Even as the restaurant operator faced continued margin pressures, a tightened labor market and some lingering consumer uncertainty. So 2017 projected restaurant sales are projected to grow at 1.7% gain over 2016 adjusted for inflation. This is slightly below what it was in 2014 and 2015 and in line with 2016. In 2015, 2016 and 2017, restaurant operators have been investing in social media marketing, online ordering, kiosks and mobile payments. So to address your question, Larry, in 2018, restaurant chains will focus on new menu trends to fit dietary preferences, to bring customers back in the store. And the food trends have become more concept-based than ingredient-based with an evolving focus on production, sourcing and preparation. So where does Middleby come in to this? So I can't speak about one quarter to the second. But I will tell you that today, sometime in -- starting the first quarter and going into 2018, we have basically 9 chains that will account for over $300 million within the next 24 months, starting in the fourth quarter, of rollouts. What is different about those 9 chains than the previous rollouts we've had is the fact that 3 of those 9 accounts are totally new to us. They've never been a Middleby account. We are displacing all technology and all our other competitors to our new innovation. In addition, we have always been a second player place player in QSR. So we are not #1 in QSR. We've always been the #2. Today, we are rolling out $150 million with two of the largest QSR in the world in the next 24 months. Which means new customer opportunities are coming online, not only in QSR, fast casual, but in convenience stores, in hospitals, nursing homes and in fast food, which is the new area for us as you well know. We've always been lagging QSR in the past. So I see a lot of opportunities coming back with our new revenue opportunities in the new products in the pipeline. And I look at it and I say, would I basically point it between 1 quarter and other? But I would tell you that sometime, starting in the fourth quarter and going into 2018, we are having major rollouts taking place in the Commercial Foodservice.

Okay, thank you. That's very helpful, Selim. So just to clarify, obviously, we've underperformed the market in the first half. But things look better into next year. But are we seeing this mostly a function of where customers are spending? Or is market share and your -- discounted market share is not an issue, is that what you're saying?

No, market share, we have not. I will tell you. I will repeat. We have not lost a customer on a chain basis. And as Tim (inaudible) we have 2% in the general market, growth in general market. The general market is basically growing -- if you look at [the economic] and you look at all the research, the market's growing probably at 1.7%, 1.5%, 1.7% to 2%. We are in line with that. I don't think we lost market share there. There's not specific data to say. This industry is not sophisticated enough to pinpoint specifically versus other industries like pharmaceuticals or agriculture where they can specifically pinpoint market share. I don't think we've lost customers. We haven't had customers coming in and saying, we're not buying from you. I think the biggest thing that I face and I made that comment in the fourth quarter of 2016, when I say to everybody, our new equipment, our new innovation takes longer time to test and implement. It's technology that basically works on delivery. It's app-enabled, it's longer testing. And it basically totally changes the makeup of a kitchen, whether it's ventless or speed of cooking or it's our new TurboChef batch cooking that displaces 3 pieces of equipment. It's a big mindset change for our customer where they implement those changes. So from that perspective, a lot of the chains are saying, I am willing to forego replacing a piece of equipment for a year for me to invest into that new technology and that new innovation. And we pay the price for that. Because in the meantime, we're introducing unique innovation that's costing us basically several quarters until we launch and test much more innovative technology. And I can talk about that. I talk about basically our SOS fryer, our convec broiler, which is very different than (inaudible) . I could have gone back and replaced nickel broiler at one of the chains. But we went to a much more advanced safety features broiler which takes longer time to implement and test. But this costs more. We look at our NU-VU artisan proofer and baking oven, a completely revolutionary oven from that perspective. It takes a lot longer time for that specific sandwich chain or subway chain to basically implement it. I look at our Houdini combi ventless oven, a unique technology in what we do. Have not been implemented before and we're implementing it in breakfast and now we're implementing it beyond breakfast to do sous vide. So we have a lot of technology that's coming in place that is taking longer time for our customer to implement. And finally, we are beyond testing. And that's why I was able to talk about 2018 and beyond and the $300 million that's coming our way.

So Larry, the top -- our top accounts is not one, it's really across the broad base of chains. That's what's causing us to be down. But those are the ones that we're -- we have a pretty equipped install base, a real good view to and that's really what we know is going to actually drive revenues higher in the long term. So that's really -- we got a pretty good visibility to it. So that's -- and that's what's causing us to be down right now. It's actually what's going to be the driver of revenue growth as we move into 2018. And just one more comment, more on the EBITDA side of your question. Just to clarify, so Residential, our EBITDA margins, including the pension benefits for the quarter, were 25.9%. Excluding the pension benefit, it would've been 22.3%. And AGA was at 17%. So then you can see -- which AGA accounts for a bit more than half of the residential financial portfolio. So that tells you we're kind of 25% plus on the kind of the remaining portfolio.

Our next question will come from the line of Jamie Clement with Macquarie.

Selim, could you take a little time and run us through Middleby's bakery strategy, particularly in light of opening up the Plano facility? I'm not sure how much of that is Commercial Foodservice or is Processing. But can you talk a little bit about where the technologies overlap in the two? And really, what the company strategy is there?

I will let Dave --- why don't you take that on because you've been more involved with that bakery than I have been?

Yes, that's -- just so as everybody on the line understands, we opened the first-ever integrated bakery production on food processing, integrated with restaurant operations. So we have established a facility that literally you can develop a large-scale manufacturing of breadsticks and muffins to buns and then actually take it within the end of the line and this facility is literally 300 yards long and 100 yards wide. It's an R&D facility. You can actually take the product from a core bakery to develop it all the way into our finishing equipment that would appear right in a restaurant. And we just launched that a month ago and it's been a huge success. We've had both bakery, large bakery processing companies from all over the world visiting us and working with that equipment and actually using it to demonstrate to produce new innovative products. At the same time, we've brought in at least a half a dozen global chains, R&D people working backwards from finishing products that appears in their restaurant thanks to some of our technology to -- back to the bakery equipment, full scale bakery equipment. So it really is the first time ever that we've connected in-store cooking equipment to upstream food processing equipment. And...

David, when you say first time, is that first time in bakery or is it first-time across all of Middleby's product lines?

It's the first time in the industry that in one place, you can develop products and finish it off just like an end-user consumer would have it. So I can go from farm to the consumer within 200 yards. I know, it's great, it's very cool.

Yes. And Dave, roughly I was trying to do some work on this and I didn't really get much good information. I think like -- I think I read roughly 1/3 of restaurants have -- on baking, have in-restaurant baking equipments. And that's been growing over time. Does that sound about right to you?

1/3, yes. I would go with that number and I think it is growing. Don't forget, that's where our -- that's where this really plays because we can demonstrate through control technology, heat transfer technology, we can make it easy for a person to operate it in the restaurant. So while it's being utilized in in-store bakery, it's actually almost fully automatic. So you get all the aroma and feel of an in-restaurant bakery. But it's thanks to the upstream bakery production system which we also produce, it's very -- it comes through consistently and easy to use. It's a great combination.

So James, the reason you are addressing this, it's a dream of every restaurant and every chain to have in-store baking. It's the aroma, it's the scent, it looks fresh. And the reason only one certain restaurant have done it is the complexity and the consistency of making this happen. And the margins. Now we're adding, having to bring a baker and the chef, a pastry chef and whatsoever to do this. So very few have been able to do it. What we've been able to do is now through our technology to reduce the cost and the complication and the complexity of in-store baking. And that's why chains had talked about that, have flocked to Dallas to see this. Because everybody would love to be able to differentiate and say, I provide fresh baked goods on-premise. Because remember, millennials want freshness, they want quality food, they want to think it's healthy. And in-store baking is definitely better than getting frozen stuff, if you could do it. The problem is the complexity of working with your supplier all the way to the store becomes very complex. And that's why literally, we have bridged that gap from sourcing to industrial supplier to in-store baking becoming almost one line.

Our next question will come from the line of Timothy Wojs with Robert W. Baird.

I guess maybe just, Selim, just to clarify on that $300 million. I mean, would you characterize that as firm orders?

I would characterize them as -- there's nothing like firm orders. I think firm orders only, if I got it a PO. So for me, that's not a firm order until I get the first orders. I don't have the first order. But I can tell you, we've done all the work and we've tested and some of them have being going into store testing. So we're way into this. I would not have brought that number if I was not confident at a high level of orders. Let's put it in probabilities, 70% that's going to occur. So in my perspective, things could be deferred, could be done. But at this moment, it's going well. It's 9 chains accounting for almost $300 million. And will one of them slip? Maybe. But it can happen. But it's such inside a big number. That's a focus of 9 chains. Now behind them, there's a lot of them I did not count for because literally, I don't have -- we are not as advanced with them. But I'm hoping between now and then, we would. And I'm going to turn over and talk about specific example of what happened yesterday and that's one of the reason Dave is here today. Dave, could you turn around and talk about what happened yesterday? I think, Tim, this is what differentiates us from everybody else in the industry and what makes our margin be where they are.

You're right. I think that the big chains and the spectrum of projects Selim is talking about across beverage, to baking, to speed cooking to everything was across the whole portfolio, which is very exciting. But let's go to the other end of the scale. And yesterday was -- actually, is was basically because Selim and I were in the same spot at the same time, we didn't ask for these meetings. But they occurred because we just happened to be in the same room which very rarely happens. We have four distinct meetings basically with titans of the industry. We've hired titans of the industry that have came in, solicited us, asked for time with us, we never talked to them, they came searching for us.

They flew in.

They flew in, they came here. And it's always fun to talk about the big chains, but it's also just fun to talk to individual owners that know what they're doing, that have run large corporations and now are taking their own money and investing in what they consider billion-dollar ideas and they have come exclusively to us because we have the unique abilities thanks to our experience in solving small kitchens on cruise lines to fast casual to full scale, high end restaurants. Our ability to bring our technology like (inaudible) and control technology and implement a solution literally in days for them. And they all saw that independently. And we were back to back with very distinct meetings with opportunities that almost boggle your mind by people that are investing their own money, and truly, if you guys knew who these people were, they are titans of the industry and they came to ask us exclusively to partner with.

So in the meantime, I asked the simple question. I said, why did you come to Middleby? Why Middleby? And everybody has heard of Middleby. They have used Middleby products. But they came here knowing that when they're going to put their money in their investment and bring investors, they have investors online with them to open that new concept, they were very comfortable by what you've done in trying to give them the consistency of what they're trying to do. So the technology and the after sales service. So I said, well, have you gone to everybody else? They said, we have. And we've gone to others, we've talked not at that level maybe, but they've come to -- Dave?

They inherently know everything. They've been in the industry for 30-40 years.

Right, Dave.

They know every one of our competitors in detail.

You're right, Dave. They know, I'm very impressed in them, some of them I haven't met before, but some of them I have met, I have known and I respect and admire what they've done. It's interesting they came back and said, Selim and Dave, the reason we're here is because of your innovation. The reason we're here is when we used your product and it went down. Our product are not flawless. Sometimes, they went down. You fix them, you service them. You get it up and running, very quickly. And I'm proud to say, and I have statistics here that I have wrote down that differentiates us and everybody else which goes back to our ability to service. I think our service rate today, I'm looking at that number, to make sure it's correct in what I'm saying. Today, we can service 84% or 85% of our repair rate are done within 24 hours across all our platforms. We are the best in the industry. And we are even quicker in major cities. What brings this down to basically 24 hours is the number of installation we have in rural locations. So when he talked yesterday about our service capabilities, because they're going to be operating long hours, they are basically, the concept is long hours, many, many unique locations, they came back to us and they talk about service. And that's why I went back and I said let me understand our service rate. That's why in light of this meeting, I wrote it down. I went back and wrote down our repair rate which we manage, which we basically monitor and manage at every division on every product.

I think the fun part of yesterday was the accumulation of investments and hard work by a lot of people for the last 4 years. The fact is, all these gentlemen, they know the business. And they realize, they first hand realize that while menuboards are important and the table and the colors of the restaurant are important, the most critical elements of the restaurant was speed of service, food quality, labor content and menu flexibility is the cook line. And that's why they started with that. Once they solve the most critical component of the restaurant, then everything else falls in place. It was fun.

Great. That's a lot of helpful color. I appreciate that. Is it fair to say that some of the business that you're seeing with the bigger chains, would that come on at an accretive margin? Just given some of the unique products you just talked about?

Yes, our newer products tend to be coordinated so they've got a quicker payback for our customers that are higher margin.

Very high margin. So Tim, you already know high margins. So basically, come -- people don't come to us to seek discounts. We don't offer them. They want turnkey project when people come back to us say well, I'm going to buy everything from you, give me 10%. That's not what they come to us to do. Everything we do is niche and that's what differentiates us from (inaudible) and most of our competitors, which is, that's what you do. And we'll talk about restructuring in a little bit. I talk about that structure.

Okay. And then 2 other quick ones. Tim, I think you mentioned some improvement in the residential growth in the back half. I guess is that organic or is that just due to some better FX? And then lastly, what's the payback I guess in terms of timeframe on the restructuring this quarter in AGA?

Okay. So I think we're going to continue to see disruption with AGA. I mean, just given the substantial initiatives that we've got going on. A number relates to the noncore business, I think, when we bought the company, we identified a number of the businesses that were -- that's really in the kitchen equipment side, they were the residential products and I think we're doing things to right size those businesses, including reducing the product line. I think that's going to continue for the rest of the year. Exchange likely will be more favorable given where rates are right now. So that headwind for AGA should lessen in the back half. The comment I made really was really more towards Viking. Obviously, we've had a long road with Viking. I mean, we've made -- we've really done so many great things over the last few years with all new products. Quality is totally different. We've seen our warranty rates go down by 85% from where they were a couple of years ago. As you know, we've restructured all the distribution, acquiring the distributors and really now have a great customer service and after sales service. So I think now, I think we feel like we're making a lot of progress on the sales front, some things too. The comment there I think it's just that we continue to be down in the second quarter. I think we're just saying that we believe that trends will improve. I don't think we're even seeing that they're going to be up. Although we do expect that we would turn the quarter moving into 2018. But I think we would see things move kind of in the positive direction.

But Tim, remember -- I would like to follow up. We've never been a quarter-to-quarter. We're not a quarter-to-quarter company. We don't compare quarter-to-quarter. So at that moment, you've been with us for a long time. I think many of you in the call have been with us for a long long time. We are basically focused on what's best for our customers. We're not going to push somebody to play -- to place their orders until we fully test. We fully show them what we do. And the most important, that I love what we've done yesterday comparison. We talked about payback. At the end, we have been focused on payback more than anybody else. I would say for the last 10 years, I've talked about payback. Payback is trying to deliver value below 2 years. My concept is every new product that you put in place have to deliver payback, whether it's in energy or speed or labor savings or menu preparation in less than 2 years. We've been more probably striving to 18 months which has been an amazing record. And that's why part of those rollout that comes to us has been to validate the payback. Because that's important to us. We keep on telling them, please validate. Please make sure. And that something new. We push them to do that thing that nobody else does this. Well, it's important to validate the payback. We want you to come back and figure out that when you buy that piece of equipment and you go back to the franchisee and say I want to spend $10,000 on that piece of equipment that they can go back and say we selected Middleby and that piece of equipment because it's had a unique payback. It makes -- it will make you money. On a return on investment, it makes you money.

Our next question will come from the line of Jason Rodgers of Great Lakes Review.

I did want to ask about the Food Processing segment performance. There was better than you had expected last quarter. And wondered if you pulled forward any demand or anything special happened in that quarter and do you think that performance can be sustainable? Thanks.

Yes, so actually, it was a very strong quarter for Food Processing. I think in the last call, we talked about it maybe being more modest growth and seeing stronger in the second half. I think there was -- some of the business we anticipated that might be in the third quarter did come a little bit earlier. So I think we saw the benefit of that. And so as we go into the -- so that's going to take maybe a little bit in the second half. And as I mentioned in the prepared commentary, we see growth in the second half but kind of the level of that will be kind of the timing, some of the larger orders there in the pipeline, given kind of the lumpiness of the business. So I think it's difficult to predict now kind of how the fourth quarter's going to kind of roll out right now. But I would expect that we would see lesser -- that we would be more modest in the back half than what we saw in the second quarter at 8.5%, which was pretty strong.

And then I did want to ask about some areas that we haven't heard of from a while. Those would be the Pepsi Spire rollout in the U.S, food waste and the progress of introducing Viking internationally.

Tim, so we'll talk about Spire. I think we continue to work with Spire. We launched Spire in the U.K. and that we are launching generation 2. And we are going on to that. I think Dave, you've been more involved with it than me on that point too.

We can't obviously share the details.

Have confidentiality agreements.

Yes. But from an engineering and manufacturing perspective, everything is on schedule. I could not be happier with the performance of Wunder-Bar and what we've done there and specially for the group president that's running that. I think that's about all we can say without giving numbers or names.

I would just add that. It's really, it's not only Spire today. Also we are broadening the product line. I think we're moving Wunder-Bar from really what was kind of back of the bar to front of the house with touch screen automated dispense controls. So I think we're really becoming an industry leader in that area. It is a long (inaudible) we said to get a lot of these products and technologies approved but I think it's a really big opportunity for Wunder-Bar (inaudible)

Endeavors.

(inaudible) to be exciting for the long-term.

We are excited about it. Just to say where we're going specifically on that. Let's talk about the next one which is waste management. I think waste management continues to be doing well. We have basically worked mostly overseas. I think we've gotten a lot of installation overseas. I think we have not cracked U.S. market yet. And in full transparency, we have not. And that's a huge opportunity for us. But we're doing well overseas, in Europe. Our neighbor up north have put several installations in Toronto. But however, specifically in the United States, it's been very slow. And that's a huge opportunity and I think it's being slow as we need to build the infrastructure to launch the product better than we have done. I think we have not put infrastructure that we need to put down to this. We've seen the success overseas and I think we need to come around this one and build enough infrastructure here of sales and marketing and service to seed that product here and that's most probably will be done somewhere in the second half of 2018. I think we're busy doing all the other stuff. But I think that's a good comment. Go ahead.

I think both with beverage and with our waste, the fact is this is what Middleby does best. The situation that -- I challenge any of you to do walk-through a restaurant kitchen and look at all the semi-solids to liquids that need to be portioned, from cleaning chemicals to ketchup -- it as an opportunity for Wunder-Bar in this technology. On waste management, it's exactly the same story. The labor-intensive, the intensity of labor around waste management is huge. It's just a matter of time before the customer needs it. We're so connected to the restaurant that we are anticipating. We know logically the need and the demand because of the pressures on the business to be profitable, our customers' pressures, ahead of even their needs, I'm just absolutely convinced that waste management is this year. Take a walk through a kitchen and you'll agree.

On Viking internationally, I think we've really focused heavily on the domestic market. I mean, that somebody talk in the pipeline, I think the focus is more important than trying to go all around the world. I think our -- the efforts really been in Latin America which we had significant success when you look at markets like Mexico and some of the other regional areas that's been somewhat offset by Brazil because the more difficult economy there. So the push has really been just Latin America internationally as we focus domestically. And if you like -- I mean, we actually got a long pipeline of products that come out over the last year. But even as you look at this year, we launched the 7-series refrigeration which is just getting put on floors right now and demo'd. But TurboChef oven which we talked about for a while is in production and that is actually going out to our customers and you'll see that coming out on floors. And the other product that we're just launching now is the Virtuoso line. So I think given all the new products that we've had domestically, when you go with international markets it requires a lot of approvals and testing so we've really just focused on Latin America until we get everything launched here in the U.S.

Our next question will come from the line of George Godfrey with CL King.

I just want to follow up on the restaurant investment that you talked about where they're making it now online, kiosks, social applications. Have you thought about making acquisitions in that area? Or can you give us examples where the cooking equipment that you sell takes advantage of those trends?

That's a very good point, George. We have not basically made investments into this. I think it's something that is not close to us but we work with them. So I'll give you a great perspective that happened yesterday. So one of the things that customers do not know about, we are today, we have many of our equipment that are tied to POS system. So without naming specifically the customer, know that we have this line of customers that we have technology that have been in place now for 2 or 3 years that ties our ovens to the POS. I'm going to give you a great perspective. Our pizza oven today is tied to a POS system that a customer uses. So when people call in or text in their order, the POS receives the order, the oven reads the POS and knows that this is a breadstick versus a pizza or wings because now remember pizza operators are not only cooking pizza in our oven, they are offering wings or breadsticks or biscuits. And what happens -- or it's a cheese pizza versus a 10-topping pizza and it adjusts immediately according to that to speed up the oven. So we've done a lot of interaction between POS and control. We're doing the same thing now in our coffee business, we're doing the same thing in our beverage business. We're doing the same thing in our combi business where we're tying a lot of the technology that is in front of the house to us. We're doing a lot between our ventless technology and the air conditioning within the unit. So we're working very closely in to figuring out the air make up in the kitchen so that it's the redirected air back in or out. Before, before our technology, let me give you exactly what happens, you had a cook line of equipment and you had the hood on, the vent on. And what did it do? Not only it sucked the heat and the grease of that oven and that range and that fryers, it also sucked out the heat and the air-conditioning out of that restaurant. So utility bills went through the roof. And finally, we have been able to work through interfacing and connecting between our ventless technology and our hood technology at Britannia and the air-conditioning unit through Bluetooth technology and interface that allows us to do that. So we've been very strong in technology. And we've put a lot of effort into connectivity. Now we've not gone and bought one of those companies. We've stayed on the side but we work very closely with them especially in the example of the POS system.

That was very helpful. And then Tim, one question within Residential Kitchen. Given the improvements, refrigeration, series 7 line, the Viking, the Virtuoso line that's coming, the organic growth, would you expect that Viking turns the corner before the segment as a whole with the other piece being AGA or do you they turn it simultaneously?

I'm going to answer that question since I'm involved with that. I wish I knew this answer. But I would tell you honestly. At this moment, we have all the new products. So I'm going to bring the question differently, I'm going to bring the question from a different perspective. So I'm going to look at it and I'm going to talk a little bit about in the last 12 months, some of the award and recognition we've gotten. So online, right now, as you go online on a Viking review which is one of the best online, call it consumer affairs, which is a top appliance rating in the world, basically that's where people vent and they do rating, they do 3 stars, 4 stars, 2 stars, 1 star. It's live. I think it's called consumeraffairs.com. So if you go there and you put Viking reviews versus all our competitors, whether it's range or refrigerator, you can see where we've come in terms of reduced -- from a customer, it's not -- it's an independent, we have nothing to do with it. It's a totally independent online site like Yelp in a sense. And you can see we've come a long way. Basically, our Viking induction was won the 2016 Kitchen and Bath Show People's Choice Awards. Our French door oven won the (inaudible) A+ award. Our, basically, our barbecue grill (inaudible) won the best built-in gas grill of 2017. When you look at our 7 series, it won the biggest award in terms of rating and housekeeping awards. So we've gotten some amazing awards on Viking. I have not catch up -- I did not catch up with AGA. I don't know if they've gotten awards in the U.K. But I would tell you that Viking is right there again in the movement. What I said in the last quarter, I will repeat today, our new products are growing very fast. We'll continue managing the legacy product because unfortunately, we have not done much to the legacy products. We've started to phase them out. And as I said, by 2018, by the first quarter 2018, 100% of the products that Viking carries from refrigeration to hoods, to ovens, to ranges, to outdoor, will be 100% new by Middleby. They will have Middleby technology with them, Middleby reliability with them, Middleby quality in them. And they will be 0 legacy product. And that's what we've been shooting for. And it took us a long time because we needed to get the technology there. We needed to get approved. We need to get all done. Got distracted by the recall. So that's where we are right now.

The last question we have time for today will come from the line of Walter Liptak with Seaport Global.

I wanted to just ask a couple of follow-ups because I know we've covered a lot already. But the Food Processor sector seems to be going very well, as you indicated, and the strong growth. I was wondering if you can help us understand what moved better in the quarter, was it on the meat side or on the bakery side? And when you talk about some visibility in the back half, was there order growth that will ship in the back half? Or is there business out there that you have to go get? And then also, sorry for the long question, are you turning those systems faster? Because those are longer lead time, I believe. Are you able to -- if you get an order tomorrow, will you be able to turn it before the end of the year?

I'll answer that quick question. That first one, we basically are moving a lot faster. That's a very good observation. Yes, we have expedited delivery of our system. We've reorganized our factories and our plants and we've invested in equipment that allows us to churn those orders faster than we use to do it 2 years ago or even 1 year ago. That's one. However, I need to remind you that today you are happy with food processing. You could be unhappy if it had a bad quarter because those are lumpy businesses. So I want to make sure we remind ourselves that it's lumpy and cyclical, which means over the long term, we've always said that Food Processing, why we love that business because the margins are being good, we're a dominant player and people are investing in factories and especially in emerging markets, it's cyclical, meaning it goes up and down and you need to manage it over, I think managing Food Processing, if you want to model the business, you need to model it over 18 months, Tim?

I would say it's 2 to 3 year period.

Two to 3 year period.

And if you look at Food Processing for 5 years I believe we were -- or even longer, we're at 7% to 8% growth. But last year you saw -- I mean, we were up substantially. I mean, we had double-digit growth all year and as Selim said, you're going to have quarters that are going to be down. The extent of the ups and the downs, I mean, we used to be up 30% to 40% and then down 30% to 40%. I think, the band has shrunk over time just because we have a more diverse portfolio of brands. But it's going to be lumpy. And I think even though we have the ability to manufacture quicker, as Selim said, our customers don't always want it quicker. If it's a larger project, they may say we want it 9 months from now and then decide they really want it 14 months from now. I think that's one of the things that we can't manage. It's not in our hands. It's on the customer side of the business. And that's why we thought -- and that can move from quarter-to-quarter. And that's always the difficulty of determining really what that -- when you have an order book. Now incoming orders, even when it’s in your backlog, sometimes it's difficult to predict when it's going to turn.

And I love this business. We've been at this now for almost 12 years. It's a great business. I think when we started the business, I don't think you were an analyst -- you weren't covering us at the time. And I think if you look back, we came from less than 5% EBITDA to sales ratio to now I think overall margin of closing on the commercial, almost. Correct, Tim?

Yes. We were at 28.2% in the quarter. So very, very strong.

Very strong and we feel good about it. I think the innovation that we've done in that market.

Yes. And coming out of (inaudible) meat processing plant. I love the industry. The thing that you have to realize also is we've actually solved problems for our commercial side customers. Sourcing, trying to figure out where to source meat or bread. We can connect our Commercial customers to our Food Processing customers and it's been a great marriage of solving for both solutions at the same time. It's been a lot of fun. Great, great opportunities for us.

The order growth though in the quarter was it very good? Was it on the meat side? Or the bakery side? Or was it on both of them?

Okay, well, I know we talked a lot about bakery and meat and I think it's -- we've wanted to distinguish the bakery, it's been the newer piece of it in the lower margins which we're bringing up. But I think we see -- we're developing that bakery business so we're very excited about it. Even though we just recently added (inaudible) to that acquisition. So we're kind of building our capabilities there. I don't think we want to kind of distinguish (inaudible) growth.

Let me tell you the reason. Some of our customers are both in bakery and in meat. So if you look at Sara Lee, if you look at Nestlé, you look at some of those customers, where they're buying ham and they're buying bakery, so we have a lot of customers that overlap. They're buying both equipment from us and we've been basically -- we're not telling them that this is now you have to -- you cannot buy from this and that. We keep -- we kept the Food Processing group tied together synergistically in many, many ways even though we have 2 presidents running it, there's a lot of corporation between the 2 and we've not made a differentiation because I think that there's been a lot of synergies, at least some of our customers -- we have a lot of bakery customers that are unique but we continue to see customers that transcends both.

Some of these, I've mentioned another acquisition we did, CVP Systems, which is a great company in the packaging side that actually cuts over both lines. They can package meat and they can -- they package bakery. So got great synergies across our product portfolio. I do want to clarify, orders were not up in the quarter. They were down. We have several large projects that you can have a couple of projects come in and you go from negative incoming orders to positive incoming orders. So that's kind of an inflection point that we're at right now is we have a strong pipeline of activity going on and we're working on realizing some of those orders that are in the pipeline that we have pretty good visibility to.

Okay, good. Thank you very much. I realize we are over. So -- but if it's okay, I'll just had one quick follow up.

Okay, go ahead.

Okay, great. So when you were talking about the $300 million rollout and I just want to clarify that, that was for kitchen refresh and not from new store openings? And also the timing of it, I think Tim, you said over 24 months maybe starting in the fourth quarter or in 2018. Is that -- did I get those numbers right?

Correct. So let's start -- I think your question, the first part of the question is it's definitely totally refresh. So it's not a new store opening. It's all refresh. And second, when it comes to the timing, as we talk about December through maybe starting in the fourth quarter, most probably late fourth quarter and most probably -- most effectively 2018. So this is not a 2019, it's not a 2020. It's literally within the next 12 months that we start seeing the majority of those rollouts taking place.

So I would like to go back and talk a little bit, do some prepared comments that I had.

So I look at our innovation and I look at what we've done. But before I start with innovation, what's next for Middleby? I would like to continue parsing what has been our forte which is our EBITDA margins and profitability. I'm very proud, as Tim and Dave mentioned before, that we are industry-leading margins in all 3 segments. That continued in the quarter. Our Commercial was 28.4%. Our Food Processing at 28.2%. Our Residential is 22.3%, excluding the pension. Including the pension was 26%.

We continue to focus on price discipline and we continue to have price increases that are in effect. We have record consolidated EBITDA margin of 24.8% and 23.8% year-to-date. So that brings us to basically midterm toward my only guidance I've ever done in my tenure at Middleby, I've given one-time guidance, which was a 27% EBITDA margin goal, which I said will happen by 2020. And we are basically going, crossing that threshold and going straight at that goal.

Now we're hitting all of those despite some short-term revenue headwind on our most profitable business. Now we see improvement in Q2 from restructuring initiative, and we continue looking at that in the second half. We'll see the full benefit of some of those restructuring initiatives taking place in the third and fourth quarter.

We also see a continued integration of our residential platform related to sales channel and improved mix as new product come online. So our mix of product will have higher margin as the new product and the innovation come online and those rollouts take place. In addition, our supply chain initiative targets for 2017 continues to be well in place. We feel very comfortable with the supply chain initiatives and it's multimillion dollar initiative that's taking place. So they took place -- half of it took place in the first half and we see the second half to be even more accelerated.

On the acquisition pipeline, we added 4 brands, enhancing both Food Processing and Commercial segment. And we see a very active pipeline. We anticipate a completion of several acquisitions in the second half.

When I look at our innovation and I look at what we've done, I always talked about seconds and inches, about consistency, about service and we talk about the repair rate. Our innovation is focused on quality, consistency and simplification of service execution. I think the example that Dave talked about yesterday -- about yesterday's visit from those titans of the industry reflects why they came to Middleby and why we sealed the deal with them yesterday.

To validate how we are winning, let me share with you some of the 2017 awards that we've got. We have awards in our automated grilling system. Our TruVapor from Southbend, our TurboChef Double Batch. We received awards from our customers, we received the Burger King Engineer of the Year Award for Nieco. We're named Vendor of the Year by Red Lobster. We are named by Starbucks on the Food Advisory Council. We are named by Coca-Cola 2017 Innovative New Design Award for Wunder-Bar. We won the Papa John's Supplier of The Year. We were the Pizza Hut Star Award Winner. The [30-year] exclusive supplier award. Just to name a few. I could go on and on. And this is just in 2017.

Then I turn around and I want to remind everybody that our innovation spans over the last 20 years. We're the first to automate the pizza business. We're the first to automate the burger pizza -- the burger business. We're the first to introduce energy-saving appliances back in 2000. And data exists to validate and prove that. We were the first to introduce complete ventless technology. No hoods. We were the first to link our equipment to our -- to POS system. We were the first introduce steaming without water. We were the first to introduce 90-second pizza cooking. Where do we go from here?

We are -- we have reorganized our company to address the changing consumer preferences, specifically targeting millennials. Millennials are the largest and most diverse and educated generation in history. There are all about choice and convenience. Millennials represent 87 million of the U.S. population. They are today 50% of the workforce. Now let's make it very relevant to us. Most of our chefs and operators in our customers' kitchen are millennials. They want different type of equipment and I will address that shortly what does it mean. Millennials eat out 3 to 4 times per week. They spend over 50% of their food budget out of the home. 74% of them prefer delivery. Millennials spend 11% more on food than Baby Boomers. And 33% more in restaurants than Baby Boomers. So if you look at our industry in general, do you feel good about it? I do. I think the trend is on our tail. When you have a generation of people wanting to eat more and see 3 to 4 times more in restaurants, I feel good. However, there is a seismic shift in food service. Dine-in will go from $70 billion to $220 billion by 2020, just in 3 years. Those are explosive valuations. So restaurant delivery and meal kits will be huge drivers.

And I love the quote by Ken Taylor who is the founder and CEO of Texas Roadhouse. He said, we encourage delivery because we do not serve lukewarm food, meaning that the only thing that has prohibited delivery to take place is the ability to deliver quality food the way Ken mentioned. Most of the food, other than the pizza business, most deliveries have failed in the United States. I'm not talking about China. I'm not talking about the Middle East where we've been a big player there.

However, our delivery systems and our equipment has been very innovative and you could see many of them at the National Restaurant Show earlier this year. We have been forefront, ahead of everybody else in looking at the seismic changes and doing that. So when you look at where we go from here and what happens next, so when you look at those customers that came in yesterday, those titans of the industry and they left knowing one thing. They know that -- and we showed them. Our experience in safety, we have a product today that's highly patented, that takes a product, that takes the product that's fully injected of bacteria, whether it's salmonella or e-coli and we run it through our equipment today that is a highly innovative piece of equipment and it basically kills the bacteria by the time it's out. That is a major technological change on our innovation. I look at our app-enabled equipment. I look at our predictive analytics that takes place whether in our beverages or our ovens or in our pizza ovens or our residential appliances or our food processing, we are leading what I call the best techniques in data analytics. It's not anymore a prototype. It's there and we can sell it. And we continue forging away in what I think is the proximity to our customers without equipment and being connected to us relative to service, diagnostics and to downloading menu application.

From there, we want to remain a world-class supplier, evidenced and validated yesterday by those titans of the industry. They went everywhere and they came back to us. I would like to continue pushing our innovation, not only in terms of equipment. However our structure is different than our competitors. We are a niche player. We focus on what we do best. Our customers are seeking specific application solutions. We are structured around centers of excellence and not full turnkey sales approach.

Now, I value our competitors. They make us better and they are great competitors. I think I like what they are doing. They make the industry better. However, there are 2 types of customers out there. And I'm going to illustrate it in cars. I'm going to make very personal.

My brother, if you go into his garages, it's all about Ford. He has a Ford Explorer, as an SUV, he has a Ford Mustang, that is a sports car and he has a Ford Fusion, as a sedan. He likes that concept. Nothing wrong with them and I love him dearly.

If you look at me, when it comes to me, I am the type of customers that I would like, when I buy a sports car, I want it to be a Porsche. However, when I like to buy an SUV, I like it to be a Suburban or a Tahoe. If I want to buy a sedan, I want it to be a Lexus. So it doesn't mean that really, there's no room for both of us to coexist. However, we are different. And that's what makes it very unique. So I value the customer like my brother who likes to go to one. However, I have built this company to be very different. My brother will never be a customer maybe of ours. But I would like to go to the people who did from us yesterday who were seeking specific solutions. So I go back to ice. We entered ice lately. We are not at all types of ice. We only create the best crushed and nugget ice. That's all what we do. And just to validate. In ice, that acquisition, while it doesn't affect our organic number, it was double-digit growth. Why? Because that's all what Follett does, is ice that people want in crushed and nuggets. So it doesn't serve all customers. But it goes specifically to a specific niche where we are best at what we do. And this is where Middleby has been and will continue to be. And I think all of you who's been with us for all those years and believe in that structure and believe in what we do, that differentiates us and give us that innovative structure in both centers of excellence.

For that, I thank you and I hope you enjoy the rest of your summer. That ends our conference call for today. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.