Middleby Corp (MIDD) 2017 Q4 法說會逐字稿

Welcome to The Middleby Corporation fourth quarter conference. With us today from management: our Chairman and CEO, Selim Bassoul; CFO, Tim FitzGerald; and COO of Commercial Foodservice, David Brewer. Management will start the call with opening comments on the quarter and then we will open the lines for Q&A. (Operator Instructions)

Now I'd like to turn the call over to Mr. FitzGerald for opening remarks. Please go ahead, sir.

Thank you, Jimmy and thank you, everybody, for joining us today on our conference call. I'll do a brief review of the quarter. And then as Jimmy said we'll open it up for questions and answers.

Net sales in the 2017 fourth quarter of $632.9 million, increased 6% from $596.8 million in the fourth quarter of 2016. The fourth quarter sales included the impact of acquisitions not fully reflected in the prior year comparative results, which accounted for $59.5 million or 10% of the sales growth in the quarter. The impact of foreign exchange in the quarter added $10.7 million or 1.8%.

Excluding the impact of acquisition activity and foreign exchange, the sales during the quarter declined by 5.7%. This reflects an organic sales decrease of 2% at our Commercial Foodservice Group, a decrease of 14.4% at our Food Processing Group and a decrease of 8.2% at our Residential Kitchen Equipment segment. Sales at the Commercial Foodservice Group for the quarter amounted to $381.3 million. Sales were impacted by strategic initiatives to consolidate our independent selling organization, which resulted in a disruption during the quarter. This initiative is expected to be completed during the first quarter with benefits expected to be realized as we progress through 2018.

Additionally, sales for our major restaurant chain customers continue be slow as those customers finalize new product testing and decisions on equipment purchases. During the quarter, we continued to make progress with a number of major restaurant chain customers, including finalization of several roll-out programs expected to start in the second quarter.

In 2017, the international market was challenging following a particularly strong 2016, which grew organically more than 20% in each quarter and during the fourth quarter of 2017, international sales decreased by 5.5% due to challenging market conditions in Latin America driven by the hurricanes and earthquakes that occurred in that region late in 2017.

Sales of the Food Processing Group amounted to $96.9 million in the quarter. The organic sales decline in the quarter reflects fluctuations driven by timing of larger projects. Orders had been slow in the second half 2017, which are reflected in the revenues in the quarter and that will continue to impact revenues in the first quarter of 2018. However, we have a strong pipeline of projects entering into 2018 and we have seen order rates improve early in the year with several larger projects being finalized.

Sales in the residential group amounted to $155.4 million in the quarter and organic sales declined by $8.1 million in the quarter. The revenue decline includes the impact of restructuring initiatives, including product rationalization and restructuring of noncore businesses at AGA with approximately half of this $8.1 million decline coming from the noncore furniture and retail businesses of AGA.

Although sales at Viking continue to be lower, we have seen positive momentum with our dealer partners. We've added over 70 new product displays late in 2018, along with a number of new dealer partners and have seen positive order trends early in 2018.

Gross profit for the quarter increased to $240.2 million from $239.2 million in the prior year. The gross margin rate was 37.9% as compared to 40.1% in the prior year. The gross margin rate was impacted by the acquisitions, and excluding the impact of acquisitions gross margin would have amounted to 39.8%, reflecting the impact of lower sales volumes and a lesser favorable mix, which was offset by cost savings initiatives.

Gross profit margins during the quarter at the Commercial Foodservice Equipment Group were at 38.4% as compared to 41.2% in the prior year quarter, and -- I'm sorry, gross margins at the Food Processing Group were 40.4% as compared to 42.7% in the prior year quarter. And this is primarily reflective of the impact of mix with increased sales of our bakery business, which carries a lower margin. Additionally, margins were impacted by a lower sales for the group.

The gross margin at the Residential Kitchen Equipment segment was 36% and consistent with the prior year quarter. The margins reflect cost improvement initiatives offsetting the impact of lower volumes. Additionally, we incurred cost with distribution changes in the quarters, we transitioned a number of our domestic brands, including Marvel, Lynx and La Cornue to be distributed by our company-owned Middleby residential distribution platform. While this transition had some negative impact in the fourth quarter, it should result in improved profitability in 2018.

Selling distribution and general administrative expenses during the quarter increased to $110.8 million from $110.3 million in the prior year quarter. The fourth quarter of 2017 included $14.4 million in expenses related to recent acquisitions. These increases were offset by savings from cost in connection with restructuring and acquisition, integration initiatives along with reduced compensation cost.

During the quarter we recognized an impairment of intangible assets that amounted to $58 million related to the Viking tradename. This impairment resulted from the continued declines in revenue in 2017 attributable to product recall announced in 2015 and products manufactured prior to the acquisition of Viking. The provision for income taxes in the fourth quarter amounted to -- was a benefit of $14 million and effective rate of 22.8% as compared to $36.9 million at a 31.3% effective rate in the prior year quarter.

And the fourth quarter tax provision reflects the impacts of the Tax Cuts and Job Act of 2017 and included a tax benefit for revaluating U.S. deferred taxes at the lower corporate income tax, partially offset by a transition tax to move to a territorial tax system. Excluding this impact the normalized effective rate was approximately 32% for the fourth quarter and also for the full year.

Moving into 2018, the company will benefit from the impacts of the new tax acts, which will reduce the effective rate, which we estimate on a preliminary basis will decline to approximately 25% to 26%. The earnings per share for the quarter of $1.35 was compared to $1.41 in the prior year quarter, but excluding the impact of the fourth quarter nonrecurring charges and tax benefit, EPS would have amounted to $1.48 per share.

Briefly touching on cash flows. Cash flows generated by our operating activities continued to be strong for the year and amounted to $99.6 million in the quarter and $304.5 million for the full year.

Noncash expenses added back in calculating operating cash flows amounted to $20.1 million for the quarter. For the quarter this included $12.1 million of intangible amortization and $8 million of depreciation. And the company utilized $12.1 million in the quarter to fund capital expenditures, primarily related to investments in manufacturing equipment, enhanced production capabilities and tooling for new product launches.

Net debt at the end of the quarter amounted to $939.2 million as compared to $869 million at the end of the third quarter and $663.6 million at the end of 2016. Company's net debt-to-EBITDA leverage ratio at the end of the quarter approximated 1.9x and the increase in the debt during the quarter includes $140 million for acquisition activities including Globe and Scanico. And for the entire year, the company made investments of approximately $300 million to fund 7 acquisitions completed during the year as well as funding stock repurchases of $239.8 million.

Jimmy, that's all for the initial prepared commentary. So if you could open up the call now to questions that will be great.

(Operator Instructions) Our first question comes from Tim Wojs with William Baird (sic) [Robert W. Baird].

Maybe just to start on Commercial Foodservice and maybe kind of some color on what you're seeing in terms of order activity and confidence around spending [by your] chains. I know you've been kind of talking about a pipeline and some testing activities in the business through the course of '17. I mean, how confident or how visible is some of that revenue potentially coming through in 2018? Any help there would be -- any color there would be helpful.

Tim, growth definitely in 2017 was not as much as expected and I will elaborate on that a little bit later as I speak about why we have not seen growth in 2017, specifically in the chain business. But we're seeing -- in Q1 we're starting to see -- in Q1 of this year, we're starting to see positive trends in both sales and also operator sentiment. So we're starting to see that change now. So our orders are in the positive territory right now. And we're very confident about the -- if you look at overall industry research, they are still -- given what happened in 2017, everybody is coy about resurge of trade. So now everybody's reporting 1% to 2% industry growth. I think that my prediction is looking at a lot more than that in 2018.

So Tim, it's maybe -- last year looking back, we actually -- we had some growth in the general market. As we talked about during the year, we were substantially impacted by the change, which historically that's been the reason we've outpaced the growth for the industry. So we've talked about that's been a strong pipeline, but it's been a long lead time and we're -- and we kind of talked about it starting to come into place in the fourth quarter, in the first quarter when we're starting to see kind of some of that initially come through. Just touching on internationally, I mean, it was -- 2016, we grew I think 22% or 24% organically, so we were coming off a pretty strong comp and we had some disruptions out there in certain markets, Latin American particularly, which had been a growth market. So I think going into '18, it's -- we've got a better backdrop, right? We're coming off of weaker comparisons and some of the things that were maybe instabilities in certain markets, looking forward, hopefully we've got a better landscape moving into the year.

Okay. So, I mean, maybe to put a finer point on it, I mean, 2018 you guys have confidence and visibility that you'll be able to grow organically in Commercial Foodservice.

Yes.

Okay. Any number you want to give us, or would you -- I know you don't give a lot of guidance.

No, I don't give any guidance. I don't want to go there, but I would tell you that we're outpacing the industry and I'll be outpacing our competitors.

Okay. And then on the margin side, I mean, mix has been a headwind on the gross margin side and some of the acquisitions. What's the right way to think about gross margins and operating margins as you look in -- from '17, '18, I mean, can margins be up on a year-over-year basis despite some -- maybe some raw materials?

I'm going to answer and then I'll turn it over to Dave Brewer. But if you remember, it's the only guidance I've ever given. In my tenure as CEO, I've never given any guidance. The only guidance I gave was I think a year ago when I spoke about moving from 23% to 27% on the EBITDA to sales ratio and I said it will happen within 3 years. Right now I think 2017 we ended up 25.7% and now that's taking away the new acquisition that we've done. So at this moment, I would say that to reach our target of 27% faster than -- will most probably will be released sometime this year. So ahead by 2 years, and I know I'm giving you another guidance is now I'm upping my guidance on EBITDA to sales, which has been always a driver of our company to say by 2020 we'll be 30%. End of 2020, we'll be 30% EBITDA to sales ratio. Taking away newly acquired company, I'm talking organically we'll see a 30% EBITDA to sales ratio by the end of 2020. Do we have another question?

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

Just two quick questions to start on the quarter. How much was pricing up or down in fourth quarter especially in CFS. And how much do we add back to get to that kind of adjusted $1.48 in the stock units? And what was -- did that look like for the rest of the year because obviously you were calling it out this quarter?

Larry, can you break down your question a little bit, that's a lot of questions at the same time? So can you repeat one by one?

I mean, Larry, I'll maybe -- before you repeat it, I'll answer last one first, because I'm not sure how much detail you've -- but the $1.48 that I had, it's essentially backing out the Viking impairment, the restructuring, which was roughly $2 million a quarter and then kind of putting a normalized effective tax rate out there of 32.5%. So I mean, obviously, that's very unusual or somewhat nonsensical tax provision with kind of all the adjustments for the tax rate changes, but effectively that gets you to the $1.48. So that's not a -- so that...

Right. So the stock-based comp, I guess, was the question about how much we've added that back to get that number to go from $1.35 to $1.48. And what does it look like for the rest of the year? Was it tailwind, headwind?

When you say added back, I mean, the stock-based comp was -- is just whatever it was in the quarter. There was no adjustment for that to like get to that pro forma $1.48 for the quarter. Now stock-based comp was less in the fourth quarter because as I mentioned, I mean our expenses in the quarter were down $14.4 million. When you back out acquisitions so on a like-for-like basis, our expenses were running substantially lower, a lot of that has to do with cost reduction initiatives that we implemented and you saw the number of restructuring charges go through the second half of the year, but in addition to that just because we're -- we have heavy incentive-based compensation across the company. That was lower for the quarter and that included stock-based compensation.

Okay, I'll take it off-line. Maybe just confused about the [ASU]. Then just -- maybe just the pricing in fourth quarter? And then I just have one final question.

So I can address pricing. We did not -- we basically had I think a price increase that went in on some of our divisions in the fourth quarter, but in general, our pricing was in line. We have not gone back and discounted or rebated or whatever. So we've been in line. So no unusual pricing changes in the fourth quarter.

Yes, I would just kind of agree on that. We had price increases, which typically we'll start to take them late in the year, we had some divisions to take them late in the year, we had a number of other divisions that took them during the first quarter, but in terms of discounting, nothing changed on that front.

Okay, and then just final thing, obviously in the last quarter you talked a lot about the QualServ and how you discuss with your dealers and distributors and sorted things out, are we confident that, that's not going to be an issue as we move through 2018 and headwind to organic growth at all? And do we have 100% confidence that, that is sorted out, I guess is the question?

Yes, Larry, I would say it is sorted out. I mean, I think we spent a lot of time connecting with our dealer partners as we're committed to that channel so they understood what QualServ was, which is heavily focused on fabrication and I think David will talk a little bit about that, but I think that stabilized, of course, there may still be a little bit of disruption, but I mean, I think that would be really more on the edges and minimal amount. I mean, I think it was -- really for us, it was really making sure that we educated our partners to what QualServ was and what our intent was with QualServ moving forward. And Dave, you can touch on.

Sure. We've had -- like we referenced maybe 4, 5, 6 months ago around QualServ, what we've done with our partners or dealer partners and our channel is we've established very clean communication, it's actually allowed us to rekindle some tremendous relationships and now it is behind us. It was behind us a couple of months ago as part of having a working relationship. We have rules of engagement and frankly, there's tremendous value in QualServ that I think our channel partners are going to take advantage of and so I think it's empowered our relationship, it's made us a better company, a better partner to the channel and I think we're both -- frankly, I think we're both going to win big time, because we've gotten very specific about the value of QualServ to our channel, as a manufacturer.

Our next question comes from John Joyner from BMO.

So just following up on the commercial side and your commentary about consistently outgrowing industry growth rates kind of despite what's occurring across the overall market. I mean, if I looked at 2018, there's really 3 factors that should be a tailwind, which are: one in the easy comp or the easiest comp in about 7 years, you have a large pipeline of potential orders and then you have 10% plus of acquired growth. So my question is beyond kind of your comments about change. Is there anything about the current competitive landscape that is different today versus when Middleby was able to meaningfully outgrow year in and year out?

I would say, John, one, I don't know the competitive landscape, I can't address it one way or another, I think that in light of what happened in the fourth quarter or the third quarter, I think, we've seen some discounting that took place and we've seen that on one specific QSR that happened. And at the end we've responded by saying that we will not discount and we have not discounted. And the question has been, is other than that specific chain we have not lost a single account, where I can go back and name any significant account that we've lost. So from that perspective, we did not lose any market share. 2018 is -- continues to be interesting for us from 3 perspective. And perspective number one, is there are some -- and I'm going to put some right there, lay them out very clearly, is there are some macro factors that will continue to affect restaurant business in general. One of them is the fact that the gap between restaurant prices and retail grocery is the largest it's been in years. So from one perspective, you're seeing the competition from retail stores, from what I call grocery stores going after restaurant business and diners. And that's putting a huge pressure on restaurant traffic, so that's one thing that has to be resolved. Number two, we're seeing somewhat of restaurant saturation. Too many places to buy food right now. So somehow, somewhere, restaurants should focus on being the most convenient place to get food and to figure out their costing between what's going to cost them on menu price growth, which is now far exceeding grocery prices, or when you go back and get prepared food from retail stores or grocery stores. So from that perspective, they have challenges. On the other hand, we have some opportunities for us as a company. So they have another challenge, which is labor. Not only labor has become very difficult. Staff, both cost and turnover increased and will continue to do so in 2018. So with turnover being high, it's really, really hard to retain good people. So just to give you numbers in basically what I call front-of-the-house and back-of-the-house labor. In 2017, the turnover -- average turnover in chain restaurant was 154%. In management, of -- whether franchising management or store operators management, it was between 40% and 50%. From that perspective, opportunities for us is to go to automation and labor-saving equipment and we're seeing many of the chains turning to us to talk about automation and labor-saving devices. On the other hand, we're looking at interesting outliers out there. We have been the first to get close to fast casual. I will tell you, in our pipeline today, we have many, many accounts that I call micro chains. They used to be independent or very tiny chains that are now seeing significant growth and they are expanding and graduating to chain status. We are partnering with what I call -- we call them emerging chains and our growth in that category, while it's small, because they don't have the store unit, but the growth in that category for us has been amazing. We have learned a lot of things from working with those chains, because they do not have an R&D, they do not have what I call the big chains have, testing labs. So we have become their R&D department and we've realized what made those chains -- those emerging chains very successful. So from that perspective, I look at labor, I look at the micro chains, I look at the fact that menu prices at restaurants are outpacing retail prices and there's one thing that we can help restaurant figure out a cost structure to help them reengineer their kitchen, reengineer their menu offering and be more efficient and compete more effectively against delivery and against grocery stores. From that perspective, I'm going to turn it a little bit to Dave to talk a little bit about our expertise and our grocery stores and how we've been very successful in that category too.

Yes, thanks, Selim. We continue, as Selim pointed out, especially leveraging our ability to effectively change that manufacturing process in the kitchen, that's the -- my background is from that side of the business in restaurant operations. We are -- we have the inherent ability to address the fundamental concerns of every restaurant operator out there, every General Manager, every team member and that is food cost, fee-to-service, menu flexibility and energy usage. We've got proven success stories and every one of those, thanks to our partnership with the large chains. And we're just embedding those kind of efficiencies in these emerging chains and upcoming startups and they value that. We can go in and effectively in a matter of weeks, dynamically change their energy usage, their speed of service, their menus and allow them to bring out limited time offers very quickly or new product launches and these emerging chains are young, aggressive. Our management team as we've restructured it last year is a diverse group of experienced people in leadership to young, aggressive people. We mirror the image of our customer and management style and capability. And the emerging chains are latching onto us for that because we deliver real value very quickly.

And our next question comes from Robert Barry with Susquehanna.

So in addition to QualServ, you mentioned this headwind from consolidating the independent selling organization. Do you have some rough sense of how much that might have cost you in the quarter?

Honestly, it's difficult to say. I mean, we just know that there was a changeover, because we were bringing on a new selling organization. Changes were ongoing, training efforts were in process, some of the sales calls that would be made or the connectivity that we would have with our customers is kind of disrupted during the period. So it's tough to say -- put a number on that though. But certainly we know it was a headwind.

I would say -- I'm going to step in and say I'm surprised, pleasantly surprised by our numbers in the fourth quarter. I would tell you why. 2017 was a transformation year for us. It was a transformation year for 2 -- 3 reasons. One, on the Commercial Foodservice side, we basically changed 2/3 of our rep organization. They had contractual agreement with us and we basically had to tell them early on that we will not renew on those contracts with them in order to consolidate and go from over 158 reps to 50 reps. So we've got 2/3 of them. The problem is, once you kept those people and tell them we're not going to renew the contract, they are not pushing your products anymore. And what happens is they were going out and soliciting to represent other lines. Number two, the QualServ situation, which occurred in June -- in July, when we bought the company rattled our channels of distribution. People were concerned that we were going to become a dealer to compete against them, which was not the case, but it took 6 months to get those people back in line. In the meantime, they -- we were having a good momentum with the channels of distribution and they started basically slowing up orders till they understood our strategy with QualServ. When I look at those management and we look at the general market we were up with the general market, that's number one. Number two, having a complete selling organization not selling your product, which is -- that's what we did in Commercial Foodservice. Having a complete channel of distribution basically wondering whether we're going to be a competitor or not and that took almost 6 months. Having chains also being now told by the reps they are no longer the rep, they were being -- basically being disaligned or fired from being representing Middleby, created a significant disruption in the marketplace. And for us, to be in the fourth quarter down the way we've down 2%. I would have said the sustainability and the power of the brands I would've expected us to be down a lot more. We have the sales force, total sales force that's disrupted, you have a complete channel of distribution that's basically questioning if you have become a competitor. And we're still up in general market. So from that perspective, I look back at Middleby and I'm very proud of what our team has done. I think they had a significant challenges that were self-inflicted. Those were not required, they were not constrained, people didn't abandon us. We made 2 strategic decisions, one, to buy QualServ for its fabrication millwork. Second, to change our complete rep organization within less than a year, retaining people, signing up new contracts, honoring contracts, because once we were honorable in certain cases. We basically work with our exiting sales reps who've been with us for a long time and despite all of that, I am very pleased with where we've been today. So as I look at 2018, it should be a breather for Middleby. Dave, would you like anything to add?

Sure, Selim. Selim answered, I think it was question 1 or 2 about his confidence in our margin and basically what I call the middle of the P&L. Frankly the work had been done. We -- the last year, we did 3 tactical things that turned out to be tremendous strategic impacts. We restructured our organization not only with the sales team in the field, but the management team and we've created an organization that is much more efficient. We changed our manufacturing process in a number of our locations. And more importantly, we made a step function change in supply chain management that's now done and embedded. And so using engineering elements and artificial intelligence software on supply chain we have fundamentally given us a tremendous advantage over anybody else in the industry with literally the same number of people in all our organizations, and that has been applied to residential and commercial effectively already being used. So I can easily say, at the end of the year, I told Selim, at the end of the year, I'm positive with the budget.

Yes, that's where I was going. It seems like if you strip out some of these self-inflected -- inflected headwinds that you actually put up some decent growth in the food service business, especially in the last couple of quarters. But maybe just to shift focus over to Residential and Viking. I was a little surprised to see the impairment just given, it seems like indications have been that business is inflecting. So can you just talk a little bit about kind of what underpinned that impairment? And what the actual trends are that you see there? Do you think we can see some growth at Viking any time soon?

Yes. So let me answer the final question and I'll let Tim talk about the impairment. So what I've always told you, and I want to thank every one of you, our shareholders, our analysts, that have stuck with me, to say, at one point I kept on talking about past tense. It will happen or whatever we're still not there, today I can tell you, Viking is fixed. So from that perspective, you can expect positive growth for Viking, moving forward, starting in the first quarter of 2018. So the problems are behind us and I am very, very happy that finally, some of you saw that it took a little bit longer. And that's why I turn it over to Tim to talk about impairment, but Viking is fixed.

Yes, so, I mean, just from an accounting standpoint, I mean, although, as Selim said, we're positive on Viking, all the heavy lifting that was done and the momentum that we're starting to see kind of going into the year, but as you kind of look at impairment, you look at it relative to the forecast that we've had and no surprise over the last 5 years. We've been talking about all the challenges with Viking from the quality and the recall, which has impacted the top line. So relative to where we expected the last few years to be in terms of revenues, we're clearly below those, right? So '17 we were down with Viking again. So I mean really that's the kind of a jump-off point is, with the inflection point came longer, because the challenge was frankly bigger and the investments that we had to make were deeper and the lifting was heavier, but we're at this point now, but that -- that -- from an accounting standpoint. I mean, that puts us behind where any of our initial expectations when we bought the company were and that's how valuation was at. So I think, looking -- we analyze the impairment once a year, that happens in the fourth quarter. I think when we looked at the recall, the impact of that and getting on the other side of that took longer. So I don't think that was a big factor in reevaluating kind of the valuation.

Yes, got it, got it. Just last one for me, you mentioned potential impact, positive impact from the tax rules change. Was just curious, a, if you actually saw any headwinds in the quarter for maybe some customers delaying purchases to kind of wait for the new depreciation rules and then b, have you actually heard from customers or seen any evidence that the new rules will actually be an incentive for buying?

I think, so anecdotally, yes, I think it's a positive in the backdrop, and our customers are certainly aware of it. We -- we've talked about it with them. I don't think it really held up anything in 2017, but I think it's another factor that's kind of a positive backdrop as we move into '18.

Our next question comes from Jeff Hammond with KeyBanc Capital Markets.

So food processing, I think, you mentioned some larger project slowing. And can you just expand on what's going on there? And how that maybe shapes the first half and the year in that business?

Yes, I think, as we've always talked about food pricing, it's a lumpy business and these big projects tend to -- cause us to jump up and have accelerated growth or drop back. So I mean, I think we're in one of those lull periods where we didn't have any big projects coming through in the back half of the year. We saw some things either deferred or not materialize and that is, so we're -- obviously we're down in the fourth quarter. I think that's going to carry into the first quarter, just given where the backlog was coming into the year. We do have some positive order momentum going into the year and are starting to rebuild the pipeline, but I think it's going to be a year where it's going to start soft and then -- we're optimistic though about the back half of the year kind of given some of the projects that either were -- we think we're close to and or in some cases it actually just took on board.

Okay, great. And then Selim, just back to the comment you made earlier about Commercial Foodservice and growth in '18, is that -- and I think you're referencing's kind of people thinking about 1% to 2% industry growth. Is your view that, that is too pessimistic based on what you see? Or were you commenting on kind of your confidence in your business relative to industry growth rates?

I think, originally, I will think the industry will have hard time growing until they fix some major issues. They're going to have to fix their marketing problem, I think the 1% or 2% industry growth is realistic. I think it's -- there are a lot of issues, competition has increased, and they are -- many of them are still looking at technology implementation. I am talking about specifically Middleby. I think Middleby will outpace significantly that number for many reasons. One, we are working with new chain customers that are new to us, we are working with current chain customers in redefining their labor situation and working with them on creating a better real food, what I call real food menu. We have some -- now orders coming through. We're no longer in testing. So -- in any -- if you remember, we started talking about many of those chains that will come through. And I've said they will come through -- start coming through in the fourth quarter of 2017 and at this moment, I am looking at them coming through big in 2018 and even bigger in 2019. I want to turn it to Dave to be a little bit more specific on this.

Yes, that's a great point, Selim. Frankly, as we've moved to a past tense. So we've talked for a number of quarters now about this pipeline of chains. We've got probably more than a dozen chains. And I would say that over half of those, over half of those dozen chains and there's many more. As we've talked about in pipeline, but that we've gone through the field ready process. The field-ready process took a longer time, but we did market testing and we have proven our products, and I'm proud to say that we're not talking about the future anymore. We've actually started shipping more than half a dozen significant programs -- products. Now, it's a -- I came from that world, it's a slow ramp. It doesn't ramp up the next day, but we're through the testing process now. We are getting orders against proven products and I think that if you look at this year in total, that's just a [belt], and I think that's what creates some of Selim's confidence in the business beyond the -- our channel partner and our dealer networks. And don't forget, we're very strong internationally. So when I talk about chains, I'm just not talking about U.S. chains. There are tremendously strong chains both in China, Southeast Asia, in the Europe -- Eastern and Western Europe that are -- have bought into our concept, both emerging chains and large chains.

Dave, by the way that's great, that's a great point that I have not brought up in the conference call today. So in 2017, amount of disruption we talked about was disrupting international. We doubled down on our investment in international. So we've revamped many of our organization, we've increased our service level. We spent more money on service. We spent more money on recruiting new people. So we have doubled down on our investment in international in people, and testing kits, in test kitchen, in prototyping, in the ability to basically have chef-based, locally chef-based programs. So from that perspective, 2017 continues, every time I turn around it's another initiative that was disrupted, because we basically went back and hired new people, had them retrained, sent them back to our factories to be trained and they were off the field. So everything is lined up for us, forget the industry, for us to start the next 3 years to be very positive. We've reinvented our company. I think we were great, we have always been great. I have nothing -- there is no blemish on Middleby's record for the last 20 years. So I'm not going to start telling you 2017 was not a blemish year. It was a reinvention year. It was a rebirth for staying on to make sure that the next 3 to 5 years become very, very strong again to what we've done. We've become bigger, more complex, the growth becomes a lot more complex, come through, and the only way to recapture what Middleby has done is to reinvent ourselves and it cost us in terms of top line and maybe some bottom line in 2017, but that was the cost to do, to reinvent ourselves and go forward.

And our last question comes from Saree Boroditsky from DB.

I just want to focus a little bit more on outlook for Viking. Just given your commentary for the improved order book, and if you're looking at this every year, just what was really the underlying cause that really changed your forecast versus last year?

About Viking?

Yes.

So simply, I can tell you, I can give you the history of Viking from the beginning. Because it's something when you talk about it. So number 1, when we bought Viking, we were surprised by the quality problem we faced, but most important, I think we got set back by the recall that occurred on 60,000 ranges. So as we were starting to build the brand, and we were ready to go, and we had some documentation to say we're starting to pick up orders, we became aware of something that happened prior to us buying the company. Again, something happened prior to us buying the company. So we were not aware of it. This is not an end for Middleby. So suddenly we became aware that there was an issue that occurred prior to us purchasing Viking and it affected 60,000 ranges. Suddenly, while we were building confidence of our dealers and our customers, our designers and architects and builders, now we had to issue a note telling them, sorry, go back to every one of your customers who have a Viking range and tell them that there is a recall. And that set us back. In the meantime, while this was something that we could not control, we turned around and kept on innovating, bringing the -- infusing into Viking all the commercial technology from no pre-heat in our ovens to basically our Volcano burner to our way that our convection oven worked. To our griddle that we use at Five Guys and Culver's and the chrome griddle. So we started including all the commercial technology to the TurboChef technology, infused into Viking. In the meantime, we started getting service behind us. So I would like to urge all of you to go to a website called consumer's affairs (sic) [ConsumerAffairs]. I don't know if it is dot org or dot net -- dot net. This is like a catch-all, it's like your Yelp for -- basically people venting about their appliances. And if you look at that, if you look back 2 years ago, we were a red 1 star. So if you look now, I would like you to look at us versus every one of our competitor. You can go and put Sub-Zero Wolf (sic) [Sub-Zero and Wolf], you can go put Miele, you can put Samsung, you can put LG, you can put Jenn-Air, Bosch, Miele and you can see where we are and where we stand. That's something that will tell you. This is not me validating how good we've come. So I can tell you, that if you look at that specific website, we used to be a red, not even a green 1 star, it was a red 1 star, that means stay away from Viking. Today we've gone back. It's, I think, close to 3.5 or 4 stars and you can compare us against our competitors. I urge you to go there and you can see the progress we've done under Middleby to build the brand back. So we've invested heavily in the brand, we've invested in service, in parts. We've reconnected to our partners, and the product and the innovation speaks for itself and quality problems are behind us. So now we're starting to see customers reflected in that website, reflected in our orders. So from that perspective, this is what happened at Viking. So now I'm very comfortable, but before then, I wanted to make sure that the products were tested and released and displayed in our dealers and they are out. Now in 2017, we released 50 new products on top of 52 that were released in 2015, 2016 at Viking and we have a few more products, the final one coming up in the second quarter of 2018 and we're ready to go. Exciting products.

This is Dave, let me add a couple of things here. Kevin Brown, the President there at Viking is just a phenomenal leader. And he has embedded backup, what Selim is saying, that's really driven, Selim has really driven the business here, the manufacturing process, the quality control, the supply chain, again it's set in place. It's embedded and it's up and running. So whenever we talk, whatever Selim is referencing on our growth potential, we're set on quality, durability and reliability from manufacturing and supply chain.

Dave, thank you for kudos-ing Kevin Brown and kudos everybody at Viking. I think the transition and transformation of this company is something -- while we've acquired many, many acquisitions over the year, the transformation of Viking has been unique. A lot of efforts, a lot of hard work and a lot of innovation took place. So kudos to my team. Kudos to our dealers who stuck with us and didn't abandon us and kept believing in us that we'll get it done, and many of our designers and builders who always believed in the brand and never gave up on us. So from that perspective, thank you, Dave for reminding me to thank everybody, because this is an amazing transformation.

I just wanted to -- Selim referenced that website it's actually -- it's consumeraffairs.com.

It's consumeraffairs.com, I urge you to go there, do research, it's objective, it's unbiased, it can take you through how we compare and how we're doing.

Great, and then just one follow-up, I believe someone kind of mentioned this earlier on the call, but could you just provide a little bit more color on the price-cost dynamic in the quarter and just expectations for 2018. I think, in the press release you talked about higher gross margins, but just wanted to follow-up on that?

So not sure where to start with it at. So -- pricing during the quarter, as we said, you know was really, I would say, kind of not more of a neutral thing. We lost volume, which was an impact on the margins, but our cost structure is lower in the fourth quarter, and we'll have that going into the next year. We have some built-in margin momentum, because of the cost savings initiatives. Some of that's with the newly-acquired businesses, which we typically go through in integration to drive the margins and then a lot of the initiatives that Dave and Selim talked about to simplify the organization and drive supply chain initiatives. So I mean I just -- broadly, we've got some momentum on the bottom line. Selim talked about the targets that we've got out there for driving EBITDA margin. So I think in 2017, we did have a margin percentage growth when you back out the new acquisitions, which are always, almost by definition dilutive to Middleby when we first buy them. So I mean, I think, we've got momentum there.

Okay, so just to clarify, are you saying that cost savings can offset higher steel costs, because I think, historically, you've talked about pricing and potentially lagging steel costs by about a quarter?

Okay, sorry, yes, so. Yes, so -- we -- there was -- we had some nominal steel price increases in the back half of the year in the quarter. So I don't think it too -- it was kind of neutral. So I don't think that was much of an impact. We have some price increases going into the first part of next year, but our price increases that we have should offset the material cost increases that we're seeing come through.

And that's all the time we have for questions. I would like to turn the call back over to management for any final comments.

So I would like to recap where we've been and where we're going. So again, 2017 was a year of transformation for us, but I remain very pleased with our EBITDA sales ratio despite all the changes we made internally. We are now, if you take away the newly-acquired company, organically at 25.7%. Very close to our target of 27% that I guided upon. And we are almost 1.5-year, or 1 year ahead of that target. And I continue now looking at upping now for the next 3 years our running rate to be at 30% of EBITDA to sales ratio. When I look at our top line, and at 2018, as David mentioned, we are, our chain business has remained very solid. We are starting to ship. So we believe, in 2018 and 2019, we will ship on those millions of dollars that I mentioned before. And we'll continue growing. So 2018 should be a growth year for Middleby.

Then we look at basically, the challenge for our customers is to make sure that they overcome labor and that's where we're doing a lot of work there, it's simplifying their menu items. A lot of opportunities, which are in emerging chains and QSRs for us. I look at also some food-service trends. I look at chicken program, where we are very strong in the chicken program with equipment taking place.

I look at another trend that's happening, which is interesting for us, it's we've gone from a 3-meal period to a 6-meal period. Breakfast, lunch, dinner, snack, happy hour and delivery. So this extends the use of our kitchen and that's where we're very excited. The limited time offers bring -- drive traffic for our customers, but it also drives complexity, so they need versatile equipment. Convenience and speed in food service is unbelievable. Every customer who comes here are talking at what has been our motto. Our mantra at Middleby has been seconds and inches. If you come to Middleby, it's because we can cut back inches of your kitchen, give you more space to open, extend your bar or extend your dining room, but most important, it's about speed. Speed is #1 -- is one of the #1 reason people have competed, chains have competed each other on serving people in and out faster and fresher. So speed for us is not just using your microwave, but creating an amazing food experience with cutting seconds and sometimes minutes and we are technology driven. That's what we do. We are the most innovative when it comes to speed, delivery, convenience, automation.

Then I continue looking into what's happening in energy. I will remind you, I've told that, we've been saying that for now years. We are the first to create in 2000, when nobody spoke about energy-saving. In 2000 we were the first to create energy-saving equipment and practices across our platform. We started as a pizza oven, then we took it to the fryers, then we took it to the convection oven, then we took it to the combi oven. And what happened, today, Energy Star rated kitchen equipment are very popular and we are very, very involved with that. We are the leader in this. You look at it, there is a lot of opportunities. I give you a perspective. Today, when you serve in all restaurant chains, only 22% today of all restaurant chains are using energy rated fryers. So the opportunity to switch those people from a nonenergy rated fryer, just as an example to the one that is energy rated, at very little cost to them is a huge opportunity for us. I look at ovens, today, 25% of all chains use energy rated ovens. I think we can bring those transformation a lot faster within that segment. Now what is even more interesting that utility companies have created energy rebates from California to North Carolina to Florida. And today, only 16% of restaurant operators that have been surveyed took advantage of those energy rebates. So today I give you a perspective. There are energy rebates in certain states that go up to $1,000. All you have to do is show that you have purchased an Energy Star appliance. By doing so, it's simple, you get up to a $1,000 rebate. So you buy Energy Star rated fryers that might cost $2,000. You get $1,000, right? Within days from submitting that invoice as long as it's Energy Star rated. So from that perspective, I'm very excited and bullish about where we're going to go, irrespective of where the industry is going to go. Our technology will tell us that we're going to basically switch people from increase or double the usage of energy-rated fryers or energy-rated ovens or energy-rated steamers.

Now the second one is water-saving innovation. So when we look at water-saving innovation, we have been one of the leaders. We were the first to introduce a waterless steamer. We were the first to introduce Incognito which eliminates steam table with a lot of water usage. We saved our customers in 2017 and 2016 over 1 billion gallons of water. We are so advanced on that technology. And water today is another big challenges for many of our customers.

Finally, I look at waste management. We have been a leader in waste management. So today, food waste is an emerging area for action in almost every restaurant, and we are the leader in that, and we're seeing significant growth in our waste management not only in the U.S., but overseas and we've been at it now, we've invested heavily in technology that allowed us to become the leader in waste management systems for restaurants specifically.

On the Residential side, I would say that finally, all the work that has been invested in innovation, in service, in parts, in recapturing our dealer system had paid off. We are seeing a positive order trend that has been ongoing for the last 4 months, now we can say 4 months is short, I agree, but it has been in a negative decline prior to that year after year. So finally, we're -- it's not -- we don't have 2 years behind us on positive growth, but we have at least 4 months that has been consistently positive for Viking. Now I am excited about our Residential platform, because it affords two things. One, our EBITDA ratio on the platform has been the fastest, faster than Food Processing, faster than Commercial. When you think about it, we started that platform 5 years ago with the acquisition of Viking, 3 years ago with the acquisition of AGA. Today, we are in a 20% EBITDA to sales ratio in that platform. We are going to basically go -- move fast into 25% and 30% to be aligned with Foodservice, a lot faster than Food Processing. It took us 10 years in Food Processing to get to 25%. I think we'll most probably get a lot faster on Residential.

On the Food Processing platform, we remain very, very bullish. It's where we are a dominant player. We are #1 and #2 in most of the markets we serve, both in protein and bakery. The margins there are exceptional. Our customers are very much aligned with us. However, the only negative about that platform is technicality. It's lumpy. However, when it grows, it grows well, and we go sometimes through period of lumpiness, but over 10 years that platform is -- has been a fantastic value creation for Middleby over the years. From that perspective, I remain very excited about the reinvention of our company at all levels.

Internationally, our doubling down internationally is something that has been fantastic. When we take basically a group that has done 20% to 24% and we say we're on reinvention. I look at what we've done is bold. We're not broken. The company was not broken. The company was not distressed. At the height of our performance in 2016, we sat down as a management team and said we need to reinvent. And it cost us significant setback in 2017. However, we're willing to take that setback to create a new company. I am really excited, because there is not a lot of companies who reinvent when they are at the top of their game. From that perspective, I can talk about 2 companies, 2 restaurant companies that use our products on which I'm very proud. One of them is called Noma in Denmark. Rated one of the best restaurants in the world 3 years in a row. At the top of their game, their owner, founder and chef decided to reinvent the restaurant. They closed it down. Alinea, Alinea here in Chicago is another restaurant concept that basically was on top of the game, they had won James Beard Awards, they won Michelin star. It takes months to get the reservation. And their 2 partners that run that concept also closed it down to reinvent. They were not in trouble, they were not distressed, but they believed that to make the future and to remain relevant they need to disrupt themselves. I copied those 2 new models and that one in happened 2017. And it was painful because it took a lot of changes from people who've been with us for a long time in terms of reps from basically refocusing our energy with our dealer, channel dealers, with going direct in our distribution on Residential and reinventing our total international organization. However, we are now prepared to move forward and continue the greatness of this company over the last 20 years that will continue in the next 5 years.

I thank everybody for listening to us and I hope to talk to you in next quarter. Thank you, bye-bye.

Ladies and gentlemen. This does conclude your program and you may all disconnect. Everyone, have a great day.