The Middleby Corporation (MIDD) Q2 2013 Earnings Report, Transcript and Summary

Welcome to the Middleby Corp. Second Quarter Earnings Conference Call. My name is Hilda, and I will be your operator. [Operator Instructions] Please note that this session is being recorded. I will now turn the call over to Mr. Tim FitzGerald. You may begin.

Okay. Good morning and thank you for attending today's conference call. I'm Tim FitzGerald, CFO of the Middleby Corp. And joining me today is Selim Bassoul, our Chairman and CEO. I have some initial comments about the company's 2013 second quarter results and then we'll open up the conference call for questions. Net sales in the 2013 second quarter of $363.8 million increased 40% from $260 million in the second quarter of 2012. Second quarter sales reflect the impact of acquisitions completed in the past 12 months, including Viking, Nieco and Stewart Systems. These acquisitions are not fully reflected in the prior year comparative results and accounted for $76.1 million in sales or 29.3% of the sales growth in the quarter. Excluding the impact of these acquisitions, sales increased 10.7% for the prior year quarter. This increase reflects an organic sales growth of 11% at our Commercial Foodservice Group and a 9.4% growth at our Food Processing Group. At Commercial Foodservice Group, we continue to realize growth driven by increased sales to restaurant chains looking to upgrade equipment and adopt new technologies to improve efficiency at store operations. Sales in emerging markets remain strong, with overall growth in excess of 10%. Sales in Latin America, Middle East and Europe all grew at double-digit rates, while Asia slowed in the quarter, impacted by a temporary slowdown in store openings with a major restaurant chair customer in China. While we expect continued growth in the second half of the year, the growth rate will likely moderate from the second quarter, due to completion of a major chain rollout in the first half of 2014 -- or 2013. However, we have continued strong demand across our broad portfolio of restaurant chain customers and expect growth to continue to at mid to high single-digit rates for the balance of the year. At the Food Processing Group, we continued also to realize strong growth, reflecting demand by Food Processing customers looking to modernize existing production operations, and new customers developing operations in international markets. While we anticipate continued strength in demand in orders at this segment, we anticipate sales growth will moderate during the second half of 2013. The 2012 comparative period realized particularly strong revenues related to a large customer project late in the year. Sales at Viking amounted to $58.8 million during the second quarter, reflecting a general improvement in industry conditions. Included in these revenues are $1.9 million related to non-core business operations which were divested in the second quarter. Additionally, sales in the quarter reflected a positive impact of distributor acquisitions, which added to revenues in the quarter of approximately $4 million. Included in these revenues are certain non-Viking products that will be discontinued in future periods. We expect to be in the $55 million to $60 million range for the third quarter and anticipate continuing initiatives related to disposition of non-core revenue streams, the discontinuance of low volume and low-margin products and the temporary disruption in distribution channels may affect the sales in the third quarter. Gross profit in the second quarter increased to $136.6 million from $101.8 million in the prior year, and the gross margin rate was 37.5% as compared to 39.2% in the prior-year quarter. The gross margin rate reflects the impact of lower margins at the recent acquisitions, including Viking, and a greater mix of Food Processing sales with lower gross margin. Excluding the impact of recent acquisitions completed during the past 12 months, the gross margin rate would have increased to 39.4%. Viking had the greatest dilutive impact to the gross margin in the quarter, impacting the gross margin rate by 1.4%. At Viking, we reported a gross margin rate of 30.7% for the quarter. This was an improvement of 2.2% from 28.5% in the first quarter. The lower margin of this business will continue to dilute the overall margin for the balance of the year by 1% to 2%. However, we anticipate the gross margin will show continued improvement in the second half of the year, reflecting the benefit of purchasing savings, SKU simplification actions, gains in production efficiencies and other ongoing initiatives. Selling and distribution expenses during the quarter increased $10.4 million to $38.6 million. The increase in selling expenses was entirely attributable to the additional expense from recent acquisitions not included in the prior year. Excluding the incremental expense from acquisitions, selling costs would've remained constant with the prior year. General and administrative expenses increased by $9.4 million to $37.6 million. The increase in G&A expenses for the quarter was primarily attributable to $7.9 million of incremental cost from acquisitions. This includes $3.5 million of noncash intangible amortization costs associated with the recent acquisitions. There were minimal nonrecurring costs in the second quarter associated with Viking and we do not anticipate significant further restructuring charges in the second half. The provision for income taxes amounted to $18.7 million, at a 33.5% effective rate. This compared to the prior year provision of $12.7 million at a 29% effective rate. The prior year second quarter tax provision reflected favorable reserve adjustments for reduced state tax exposures and, as a result, the second quarter provision increased in comparison. We estimate that the effective tax rate will continue in a range of 33% to 35% for the remainder of the year. Cash flows used for operating activities amounted to $24 million in the quarter. It's -- or, for the year, as compared to $54.3 million in the prior year period. Cash flow in the first half 2013 reflects increased investments in working capital associated with increased sales, in particular, related to the residential business and certain large Food Processing projects. Noncash expenses added back in calculating operating cash flows amounted to $14.4 million for the quarter, including $7.3 million of intangible amortization, $4.2 million of depreciation and $2.9 million of noncash stock-based compensation. During the second quarter, the company utilized $11.7 million to fund investing activities, included -- including $14.9 million associated with the acquisitions of Viking Distributors and $4.1 million in capital expenditures net of $7 million in proceeds related to the sale of non-operating assets. Total debt at the end of the quarter amounted to $618 million, as compared to $638.4 million at the end of the first quarter, reflecting repayment from operating cash flows. The company's borrowings are supported by its 5-year $1 billion revolving credit facility which matures in 2017. As it relates to the Viking acquisition, we're pleased with the continued progress made during the quarter to reduce operating costs, improve product quality and customer service and realize synergistic opportunities with our Commercial Foodservice business. We anticipate that the EBITDA margins, which improved from 12% in the first quarter to 15% in the second quarter, will continue to progress in the second half of the year. And we remain confident in our initially stated expectation that we will achieve EBITDA margins in excess of 20% for this business and are targeting to reach this run rate by the end of 2014, ahead of our initially stated expectations. That's all for the prepared commentary. Hilda, could you please open the call now to questions?

[Operator Instructions] We have a question from Tony Brenner from Roth Capital Partners. The next question comes from Peter Lisnic from Robert W. Baird.

Hilda, there must be some problem with the call.

Can we reestablish if people can call in, please? There must be some issues in people calling in, they're not asking questions.

Line is open, let me go ahead and move to the next party, one moment. [Operator Instructions] The next question comes from Schon Williams from BB&T Capital Markets.

Hilda, do you have that other -- is Robert helping you with the other calls on the other line? Can he hear the people?

Yes, one moment.

Please, for the other people who are on the phone, let me most probably talk a little bit about some of the initiatives we've done at Viking. Since we owned Viking to be almost -- basically, we're finishing up 7 months of owning Viking. And the 5 things we've done at Viking is literally: one, making sure that we are listening to customers to understand what they want. And to that extent, in fact, we have worked with -- introducing a -- the D3 line and we, basically, also made many changes to some of our cooking products, as well as our dishwashers and our refrigeration. So number one, we have spent a lot of time listening to our customers to understand what they want as we double up a slew of new products coming up in the fourth quarter of this year. The second thing we have been doing, in line with our salespeople and our service organization and our distributor, is we are testing ideas in advance. We launched our No Quibble Warranty in Southern California, and it has been a resounding success. And as we listened to feedback from our customers and our dealers, we will continue implementing those ideas as we take them nationally. Number three, we have been focusing on our core customers. Viking has the largest installed base of any other luxury appliance company due to the fact that it was the brand that started it all. It has a strong allegiance among baby boomers and retirees. We have to make sure we do not alienate them with edgy designs and features. We love our traditional customer base, and they have been loyal to us and we would like to remain loyal to them. Number four, we love the Viking brand. The brand is fabulous. As I talk to people who have owned a Viking Range for over 10 years, they won't buy anything else. They love it, they have a great connection to it and, in many cases, they go back and buy it again and again and again. I am one of them. My family bought our range in 2000 and it still looks beautiful and it works, and we are a family that cooks at home. As we are working with our dealers to tweak all what we've done in, basically, selling, designing and marketing and gently reshaping the Viking brand who want to connect back with our core customers. Number five, Middleby and Viking is a great match. Our culture of taking care of our customers, the culture of innovation, the culture of taking care of service to our end-users are just the few beginning items that are in common between us. I will tell you that the employees at both companies have a passion to win and to basically build great products. I love the morale at Viking as we have taken over and they have embraced Middleby very fast and very quickly. What makes Middleby and Viking unique is they have a culture of executing thoughtfully, they do not adhere to the old saying "If you build it, they will come." I can tell you that Viking learned from their experience in refrigeration. It was a clunker. They did not build great refrigeration products in the past. Today, they have gone back to every service call they've had and learned from it. They redesigned, retooled and worked with their supplier to get it right. We are launching a new line of refrigerators that will be very high-quality, that is synonymous to what Viking has stood for. So I'm very excited as we reshape the company and look at what we're doing as we launch in the fourth quarter of this year a complete new line of cooking, refrigeration, outdoor and dishwashers that connect us back to our core customers. Those products have been designed with the help of our dealers, of designers and our core customers, people who have owned Viking forever. I don't know now if we can -- we'll open up to asking question and the lines are open again.

Yes. Hilda, please try to open the line to questions. Hilda, can you hear us?

Can you hear me?

Yes, I can hear you, sir. Mark, is that you?

I think anybody heard -- did anybody hear my comments?

Yes, they can hear us. I'm exchanging emails with investors, and they're trying to un-mute them right now.

Should we ask people to call back in 5 minutes and we fix that up, Tim? If that's...

Oh, Tim and Selim, can you hear me? This is Greg Halter.

Greg, I can hear you now. Greg, could I ask, given this glitch, did you hear my comments about Viking?

Yes, I did. Your 5 things you've done in the 7 months owned.

Yes. Thank you, Greg.

Thank you for being patient while they kept the line straightened up.

Thank you.

All right. First question I had, and both are related to the cash flow statement, there's 2 line items there in the investing activities, one is the sale of assets and the other is a purchase of tradename. The first one is for $7 million and $5 million. I just wondered what those 2 items were.

Yes, so the first one, the sale of assets, I kind of referred to non-core assets. So Viking had a plane -- it was a corporate jet, which we sold in the second quarter. The second one was a -- it was an acquisition, actually, that we announced, Spooner Vicars, which -- that was a purchase of a tradename, that was kind of the key asset related to that acquisition. That's a leading manufacturer of baking ovens and products for the Food Processing Group, so that we did earlier in the year.

Okay. And any comment on the direction or what happened with steel costs in the quarter and what you expect the direction going forward?

Steel's been fairly stable this year. So it hasn't had a significant impact one-way or the other and I don't think we expect any major change in that.

Okay. And relative to the distributors, you mentioned 4 have been acquired, are there plans out there to purchase some of the others that remain?

Yes. So we continue to evolve our distribution strategy, and we're -- we are kind of finding out -- finalizing all that through the second half of the year. And that may include the addition of some additional distributors in the back half of the year. So we actually completed one shortly after the quarter 2. So there's been a total of 5 added through the year. And as in the press release, that represents about 40% of the revenues of Viking today that we're now handling direct through our own distribution.

So 40% is through those 5?

Correct.

Okay. And one last one, relative to what you're doing on the acquisition side. Obviously, Viking is a larger transaction, just wondered what your thoughts are, going forward, in looking at potential other opportunities.

Well, as with the other 2 platforms, the -- we do view that there's some other brands out there that are complementary to residential, so that is a pipeline that we're developing on the residential side.

And on the Commercial Food and then Food Processing side, as well, I presume you're still looking for things there also?

Yes, absolutely. I mean, the pipeline is strong, clearly, in those 2 segments as well. So we would anticipate, similar to the last 5, 10 years, that we will continue to add on to those platforms with strategic acquisitions. So again, focused on brands and leading technologies and innovations.

All right. And I had one other one that just popped up here. On your cash flow from operations, I think you said "used" in your comments, I thought -- I think you mean provided by, correct?

Yes, if I said "used" that was an error. Yes, we generated it, it was positive cash flow in both the first and second quarter.

Okay. And I know it was positive, but it was still down about $30 million year-over-year from last year's number. Any comment there on how the rest of the year looks and the working capital changes that caused that?

Well, we would expect cash flows to be pretty strong in the back half of the year. Typically, it is stronger in the latter half than the first part. We did have increased working capital needs in the first half, some of that related to residential and some related to some March food processing orders. Also we -- just the timing of tax payments were a little bit ahead of schedule this year relative to last year, so we've got some prepaid taxes that will probably help us -- be more of a benefit to cash flow in the second half of the year.

The next question comes from Schon Williams from BB&T Capital Markets. Aaron M. Reeves - BB&T Capital Markets, Research Division: This is Aaron Reeves, sitting in for Schon. I just wanted to follow-up a bit on the Viking product rollout. I know you mentioned that a number of products are slated to the market in the second half. Could you just again remind me what the range of those product offerings are? And maybe do you expect most of them to be released maybe in the third quarter or are we looking more in the fourth quarter?

We are -- I think we're starting to release some. We released some in July. We released some in September. So it's not coming all at one shot. So we're going to start seeing -- due to the length of the release of the new product, there are a lot of them, they are coming up as we speak and there will be most probably -- the bulk of them will be completed by, I would say, October, November. So you're going to start seeing some coming -- as they come online. So we started with the redesign of the D3 that came online in July. We will basically introduce a new line of cooking equipment, which should come up in -- sometime in September, and then we'll continue with coal-fired [ph] which is coming up in -- starting coming up also starting in October. And then we'll start going through to the end of the year. So I think you're going to see, most probably, perhaps the bulk of those products will most probably happen, I would say, towards the end of the third quarter and the November 1. I think, from an impact of sales, we'll most probably start seeing the sales impact, most probably, in the first and second quarter of 2014. Aaron M. Reeves - BB&T Capital Markets, Research Division: Okay. Great. Had one follow-up as well on the margins. Good job on getting EBITDA margins to 15% on Viking, that was a bit more than we've had modeled. I guess my question is what are some of the levers that you've already pulled to get to 15% EBITDA margins? And then what's left to take us to 20% by the end of next year?

Well, I'm going to put some flavor to it. I think one of them has been literally doing some headcount reduction. We basically became a lot more -- we did some restructuring that we're more in line of what we wanted to do as we also reduced SKU. So part of it has been an efficiency play. The other thing is as we reduced SKUs at Viking, we also were able to eliminate some people. The other thing we've done also is to do some CapEx that allowed us to take away some labors in the way we were doing some fabrication there. The other part has been the purchasing improvement because of the leverage with Middleby. Using Middleby's purchasing power where it came on to us, whether it's on steel buying or motors or control. And the other improvement have been, literally, some quality improvement, project that drove down costs and increased reliability. Sorts of things that we looked at their range versus the way we built our ranges. Remember, we build a lot of ranges. So for us, especially when you look at cooking, we have a lot of expertise. We have many, many divisions that today are involved with burners technology, involved with the way we do our motors on convection ovens. So we've taken some of that technology and taken it back to Viking in terms of improving quality. And I think, if you look at all those 3: headcount reduction; purchasing leverage from Middleby; SKU reduction; and improvement in terms of the way they build their range, whether it's making sure we use different motors or we use a different way of conducting the wiring or perhaps, basically, increased the margin. In addition, I will have to say that the engineers at Viking have done a superb job. And I have to give them a kudos for all of them stepping in, as we've reduced the SKUs and there was a lot more focus on our core product. They've all stepped in because there were a lot of additional product -- project they were -- they had on the line. They were also supporting commercial. They were also doing a lot of other things. Today, the engineering at Viking, which is the same people they've had in the past, have stepped up in terms of focusing on core technology instead of being basically spread all over the place. Tim, if you want to add something else also? I think the distribution might have played a little bit of a role too.

Yes, I'll just kind of add that, from a timing perspective, a lot of the headcount savings and the scrutiny on just -- on operating expenses, that's kind of what's gotten us reflected in the 15%. But getting to the 20%, which is kind of second part of your question is, some of the other items that would favorably impact margin, that Selim mentioned like the purchasing savings, as well as new product design which might be higher margin or reduced warranty cost -- that's -- a lot of that still has yet roll through as we introduce new products or we roll in new prices from suppliers, or engineering changes are run through the factories. So those things kind of are additive or rolling quarter-after-quarter.

Our next question comes from Peter Lisnic from Robert W. Baird. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: So just, Tim, a quick one, going back to the purchase of the distributors. Just as you look forward, I assume that the cost to acquire any remaining distributors would be modest or nominal, nothing of significance, is that a fair way to think about it?

Yes, and I can't comment on specific numbers but you can see we spent $14.7 million in the first half of the year. It could be more or less but it's not going to be $100 million, for example. I mean, so it's a manageable number. And a lot of those -- the costs, a lot of the costs associated with the acquisition is actually buying inventory that's in the channel, so it's really almost an investment in working capital. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: Got it. Okay. And then the -- I guess the big question for me is just the acceleration in the organic growth at Commercial Foodservice. I mean if I look at the first quarter, you had Europe being a bit of a weight on that piece of the business, to the tune, I think, of 100 basis points or something. So I would guess, a, that perhaps subsided a bit. So if you could, a, first comment on Europe and what you're seeing demand-wise there. But, b, maybe Selim can chime in as well, just as you look to the second half of the year, it seems like the organic growth here really picked up in the second quarter. And maybe talk about what you're seeing in terms of customer inquiries or being able to replace a larger customer that might be rolling off. And just how that growth rate -- I know, Tim, you mentioned a little bit of deceleration here in the back half of the year. But just some color around back half of the year and really 2014 on organic growth at the Commercial Foodservice business would help.

Tim, you want to go ahead and answer the international or do you want me to do so?

I'll just comment on -- you start off with Europe. So Europe we did see a return to growth in the second quarter. That was primarily driven by the U.K. So we actually did have double-digit growth in Europe. That -- it kind of flipped with Asia this quarter, just because one of our customers had a slowdown in store openings, so I mentioned that. I think Europe still continues to be a bit challenging. Continental Europe we've kind of overlapping some reduced numbers, so we expect that Europe is kind of stabilizing from this point moving forward. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just, Selim, go ahead, if you could on the second half and just what you're hearing from customers. That would be great.

I think what we're hearing from customers is they continue to do steady capital spending on commercial appliances and capital equipment. So if you look at the number of remodeling and expansion, it is most probably in line with what you've seen in the first half. So I don't think there is a slow down. And I'm going to give some example to give a little bit more clarity. You look at -- today, Wendy's, which has had strong lift at its remodeled units, following the example of what Chili's has done at Brinker. And you look at Bloomin' Brands, which is Bonefish, Outback, Carrabba's and Fleming, which is owned by -- which is under the Bloomin' Brands umbrella. They are all remodeling their kitchens and they're all doing extremely well. So I think everybody got to the perception that remodeling is the new way to basically generate cash flow. The payback, especially if you're using some of our equipment, whether it's Kitchen of the Future, whether Wendy's using some of our cooking equipment, you're seeing a lot of remodels continues to take place. So I think restaurant operators will increase their plans for capital spending in the second half and in 2014, I don't see this stopping. In fact, I look at, despite the fact that sometime sales and traffic at restaurants were maybe a little bit challenging in June and July, I would say that the spending on capital with a payback of less than 24 months is no-brainer, and we're seeing it across the territory, whether it's in casual dining or fast casual or breakfast menus. So we continue seeing that becoming a big driver -- continue to be a big driver for us. The only problem, Peter, is that we're going to face, and I mentioned that on the last call, is there going to be a lag between finishing a rollout with one of our customer, which is Brinker. Now everybody knows about that, it's Chili's. It's ending up -- it ended basically in the second quarter. So I always say there's going to be somewhat of a lag of one quarter by the time we offset that. So I see somewhat of a lag occurring in the third quarter as we finish Brinker and we picked up some other initiatives that will fill, and I'm positive, it will fill the Brinker initiative. They might not be all in one customer but there are going to be many, many rollouts that's taking place that will basically fill the gap between the finishing -- the end of rollout of Brinker and the start of all those new rollouts. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: Okay. All right. That's helpful there. And then just last question, is [indiscernible] activities that the restaurants are taking. If I look at your gross margin numbers, at least in Commercial Foodservice, and try to adjust for acquisitions, it looks like the mix has gotten a bit richer. So as we continue to see strong demand, should we think about the Commercial Foodservice business as being stronger gross margins than what we've seen historically? And I don't know if you could put any color around that or quantify to any degree, but just any comment on how the margins look as you get sort of this buildout or replacement cycle occurring with the restaurant customers would be helpful.

Peter, I'm going to answer that. As we've integrated many of those acquisitions, we're starting to see us becoming a large player in the Food Processing. I think if you define Food Processing, I look at protein versus bakery. So from a protein standpoint, our margins have hit what we expect them to hit. They've done a great job. I think the leaders of all those divisions have done a great job getting us to what Middleby expected those margins to be. I think our introduction in the bakery side, in the bakery processing segment, where we've now made 3 acquisitions, I think those margins continues to be much lower than what we expect Middleby to be. And I think within the next 18 months, we'll see the bakery side of the business to become equivalent to the protein side of the business, which is the ham, sausage, bacon and chicken. So my feeling is that the next move in margin is going to be through our bakery division. They have the orders, it's just a matter of being able to get the efficiencies among those companies that we've acquired, I think, 1.5 years ago or less. And I see that business to be up, most probably, from 10% by 18 to 24 months to almost 18%, 20% margins. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: Okay. And that was Food Processing. I'm also wondering about Commercial Foodservice though. Is it -- is there opportunities to drive margins? Outside of acquisitions, is there opportunities to drive margins higher in that core business?

I think there might be some there. I think we're more interested right now to make sure that we're getting our customers the payback they need. I don't think we're as much focused on margin in Foodservice, I think we're very pleased with the margin at Foodservice. The key is, today, we'll most probably spend a little bit more margin dollars on innovations. I think we'll continue testing some new products, having to do with water consumption. I think the biggest interest for us is, literally, if I look at one initiative, let's take one initiative that's of interest to us, which is a high margin initiative, similar in line of it is the combi oven business. You have a market that's almost $1 billion market, dominated by one large player and other 42 other players around the world. So you have almost 43 players, we're one of them. And we have put a lot of energy in going after the combi oven business. And that -- to that extent, we see us gaining -- starting to gain market share in that business as we've invested in the selling organization. We've expanded the selling organization. We've also invested in features and benefits that makes our combi oven much more expensive to produce because it saves water, it has unique controls for us to attack that market and become a player. So today, basically, we are an insignificant player in that business. And we believe, within the next 5 years we will become a large player in that business, of $1 billion at the high margin. Today it should affect how our sales have come about with the technology, that innovation, we've put in into our combi oven. And the combi oven, just to explain to everybody, it's a combination, steamer-convection oven, and it's used in most the institutions and some fast casual and some chains. And it's $1 billion market and we see it -- we see us introducing significant energies. So going back to your question, are we interested in literarily expanding margin or taking market share? I look at the combi market and say we would like to continue to infuse it with the right elements, whether it's adding chefs, adding salespeople, adding technology to become a player in that business, which today we are not. We are insignificant today in that business. But given the numbers that I am looking at right now, since the beginning of this year, our business in that business is up hugely, because of what we've done. So to answer your question, we are not going to basically sacrifice growing organically at the expense of -- to go on and increase our margin in Foodservice. We would like to basically work with our customers to develop products that gives them the payback and the features that they need, even if it's at the expense of some margin in that case.

Our next question comes from Tony Brenner from Roth Capital Partners.

A couple of questions. First of all, regarding Viking and the roll up of distributors. What are the gross margins and EBITDA margins of those distributors? And I'm wondering how that -- those acquisitions will affect your -- the timing of your goal in achieving a 20% EBITDA margins?

So Tony, the numbers vary significantly across the distributor base, but the gross margins tend to be in the 15% range, and the businesses are -- tend to be a little bit better than breakeven. So we think we can improve on that as we drive efficiencies through the structure -- at least on the bottom line side. And it -- but the -- it will help our gross margins now there's costs associated with it that we'll be taking on related to logistics distribution. They were carrying some of the service and marketing costs so we'll be handling that. We're managing our own distribution.

Okay. Well, if it's 15% -- okay. Then -- so then the EBITDA margin, I guess, is higher than your current Viking EBITDA margin, is that right?

No, no, no. That's the gross margin, and I'm saying the EBITDA is a little bit better than breakeven.

Okay. Second, Selim, with the Chili's kitchen renovation completed, I know you've been -- I know there are a handful of casual dining chains that are in various stages of cash for similar types of programs. Have any of these chains committed to proceed with that renovation? If so, what kind of a timeline might you provide?

Well, I can give you some color to this. Thank you, Tony. We have, right now, 9 chains that are in field tests. So we're looking at 9 chains and they have, basically -- every chain has more than 1 -- basically 1 to some of them have almost 20 stores in test. So we go from -- some of them have 2 stores in test, some of them have 20 stores in test. So I believe that more than one will come through because the results have been -- so they've moved from a -- let's look at it in the lab, we like it, they've taken it to their management. So we have 9 chains right now that are in tests. And those chains represent approximately total number of stores around -- over 4,000 stores. So when you look at that, I would say that we are very hopeful from the field test that the Kitchen of the Future that we've done at Brinker is -- now it might not be exactly the Brinker model, in fact a lot of them have completely different menu items than Brinker, so they are not competitor -- competing with Brinkers. But what I call a similar -- let's say a variation from the Kitchen of the Future of Brinker. Today we have 9 chains, and I'm comfortable that in 2014, we'll most probably close 1 or 2 chains in 2014, given the number of tests that are now in field testing. The only question, Tony, that you might ask, "Is there going to be a lag?" So my feeling is as we finish Brinker in the second quarter, I think, most probably, 1 or 2 will most probably sign up for us sometime in the fourth quarter. And I think we'll accelerate the rollout in, most probably, the first or second half of 2014. Again, I'm going to summarize your question. Yes, the Kitchen of the Future is successful for us. We have basically 9 chains with over -- which consists of over 4,000 stores, of which are now in field tests going forward. And behind that, we have, basically, 8 chains that are in lab testing, behind those others. So a total of 17 chains are in the pipeline of the Kitchen of the Future as we speak.

Okay. One other item. You've talked about bakery product margins increasing over the next several quarters, possibly doubling. And previously you've talked about disruptive design changes in that segment that you've developed. I wonder if you could elaborate a little on what exactly it is that you're doing that's going to produce that margin improvement?

Well, from a design and patent, you're both right. We have significant technology in the bakery product pipeline. I think from Auto-Bake's patent technology in automation, to Stewart Systems, to Baker, we have some phenomenal product. And it's affecting the orders we're having and the connection with the customers. The problem we have is having 3 companies that have capacity in production that are, most probably, they won't be fulfilled. Every one of those companies have more capacity than they can need. So one of them we need to think of consolidation. We need to think about also SKU reduction because some of them tend to overlap. When we bought them 1.5 years ago, they were -- not competitor, but maybe extensions of what they did, and maybe 2 of them were slight competitors. We need to basically integrate their operations, have them talk to each a little bit better. Pretty similar to what we've done with Alkar, RapidPak, Cozzini and Drake. We've done a fantastic job -- they've done a great job working on the food processing on the ham, the bacon, the hotdog, the chicken. We've worked very well together. And we're trying to do the same thing into the bakery product. And when you look at what we've done in the Food Processing side, not the bakery side, we used to be 5% margin, 5% EBITDA margin. And today, they are close to 20% -- 18% to 20% margin. And I think we're going to do the same with the bakery. We have exact same footprint, the same journey to make there. So -- and I think we're starting to do that. So again pushing saving, consolidation of some the operations and interchange of trying to see where the SKU would be better placed today. When we bought them they were totally independent companies and now we're trying to integrate them. In addition, we are doing -- just to let you know in the bakery system, our customers have consolidated. So they expect us to consolidate and work with them as a one-stop the way we did in the Food Processing. Today when you get somebody, a large food processor, they look at us as one entity. They end up buying RapidPak, Alkar, Cozzini, Drake, Armor Inox from one customer. And we're now trying to do the same thing in the bakery business.

Our next question comes from Jamie Clement from Sidoti & Company. James Clement - Sidoti & Company, LLC: A couple questions, and obviously most have been asked and answered, but just some questions of clarification. In your Food Processing segment right now, Tim or Selim, what is the rough percentage breakdown between protein and bakery from a revenue perspective?

It's probably 20% to 25% bakery. James Clement - Sidoti & Company, LLC: Okay. And with the...

Yes, and most of those companies -- I mean -- we've talked a lot about bakery, most of those -- those are our most recent acquisitions. So... James Clement - Sidoti & Company, LLC: And that was what I was going to get to is do you think that, like -- the disparity in margins between the 2 categories under processing, is a lot of it just simply a question of you've just been in the protein business longer than you did in the bakery business?

Yes. That's exactly right. Yes, I mean, if you look at the last 3 acquisitions we did in Food Processing, it was Baker Thermal Solutions, Stewart Systems and Spooner Vicar, and those were all completed in the last year. So we're still in the early stages of the integration of those companies and we have seen margin improvement. So things are headed in the right direction there and it's really just really -- it's more of a function of timing and we're still on the same path that we are -- that we've seen with the overall Food Processing business. Now if you were to back out those recent acquisitions, our gross margin in that -- in the kind of upside of let's say the companies we bought in the last 12 to 18 months is north of 35%. It's -- I think I mentioned it was about 36% in the quarter and we saw expansion in that, and we have EBITDA margins that are in the low to mid-20s. So let's say, 22%, 23%. So that's -- we're in bringing up the most recent acquisitions and the recent acquisitions always have a drag on the margin, whether they're in Food Processing or on the Commercial side. So that's just what we're experiencing here and we've got integration plans and we're executing to those. James Clement - Sidoti & Company, LLC: Okay. So there's nothing inherent about the bakery side of the processing business versus the protein side that would inherently make it lower margin? Is there?

Correct. James Clement - Sidoti & Company, LLC: Okay. Changing gears, 2 more and I think they're brief. With respect to a customer that you mentioned in Asia slowing down some store openings, is that related to some things we've seen in the news regarding concerns about a certain type of product on the protein side? Is that -- am I on the right track?

Yes, there were some food safety issues in China. And we expected that to work itself kind of through the system in the next quarter or 2. James Clement - Sidoti & Company, LLC: Okay. I just wanted to make sure that I understood what you were talking about there.

Yes, yes. And we view that as a temporary disruption. James Clement - Sidoti & Company, LLC: It's been well discussed. I just wanted to make sure that we -- that I was interpreting your comments correctly. And then, Selim, finally, maybe this question is -- maybe this should go to you. As you look at Viking and you look at what their sales were before the recession -- and what then -- where they are now, could you -- do you all have the information with respect to the age of the installed base of Viking ranges that are out there in the market? And an approximate sort of -- any research that says, well, they typically stay in a home for 8 years or 10 years or what-have-you. And basically, what I'm just sort of getting at is, is there a replacement cycle play that you'll start to see at some point in the -- on the residential side?

Yes, I could give a big flare on this one because if you think of the market in the U.S. of the high-end luxury market, you're looking at $1 billion, $1.1 billion. And when you think about the [indiscernible] point, Viking used to be 40% of that business, and today, they were -- they are 20% of that business. They stand at 20% versus 40%. So part of that has been, in the last few years, the building, the housing market and the new home construction has gone down and affected them, but they were very strong in what I call the new home replacement. And as the new construction went down, they have been affected. However one of the things that Viking has done very, very well and I have to give them credit that even before the acquisition of Middleby is they've gone back and started replacing that business and targeting renovation and remodeling. And I would say today, as the economy got better and people are willing to spend a little bit more on renovating their kitchen and staying home because they don't want to sell their home or they cannot sell their home because they are so much underwater, people say, "Well, I'm not going to go, let me go and renovate make kitchen." And what's happening is, literally, the new products that Viking has done is to go back after renovation. And I'm going to give you an example about that. One is sizes. Sizes. They have introduced sizes that allow them to come back and renovate, not only in places such as homes, but in high-rises, where they were able to redesign product to get it there. I think also they've done a very good job in getting after what I call international. One of the things that makes Viking pretty interesting is their international foray. And that was something that we did not expect to be as strong. So as I visited dealers overseas -- and we look at places like Brazil, we look at places in the Middle East and Asia, we're seeing significant interest in the brand. The brand is alive and kicking, and the distributor needed specific product geared to the international market that Viking had basically had not supported over the years. And that's starting to come through as they've redesigned special ranges that fits those markets overseas. Because some of them are driven by propane versus natural gas, and electrical requirement that they did not have. So we're very excited about what's happening from an engineering standpoint. We talk about new product, but in all fairness, in the last 7 months that I have not given kudos to what Viking has done, is literarily come up to standard specification to be able to sell in Europe, to be able to sell in the Middle East. As an example I met with distributor, I came back with wishes -- wish lists. And not having to do with features and new product, but, "Selim, can I get this for my market? Because I have a market where the electricity goes up and down. It's very volatile. We have a lot of shortage of electricity but I need this to be built into it." And almost every request that I came back with, the Viking engineering and production team had delivered from it. And that's going to give a significant boost from those distributors who have suffered, who have lost and not been able to sell those products because they did not have the ability to get there whether it's in refrigeration or in cooking. James Clement - Sidoti & Company, LLC: Okay. And then regarding your comment about wish lists, some of your big customers and -- have done a terrific, terrific job on the beverage side. And I'm not talking about sodas, I'm talking about coffee and I'm talking about blended drinks too, smoothies, that sort of thing. You are in the coffee business to a certain extent through Bloomfield. I don't believe you are through any of your other business lines. One of the things that I hear from restaurants, and again it seems like a lot of these restaurants now are offering these smoothies and it's -- they've done very, very well with it. They have great margins that kind of things. But I have heard, as a complaint, that within the kitchen, delivering those to the counter in the quick serve model is not so efficient. So is that a market where you actually think of something that might be viable for you going forward? I mean, I'm not suggesting you're just going to get into the soda dispensing market or anything like that, but where there's more labor involved, where the system is a little bit more complicated, for example, in smoothies, that kind of thing, is that an area of the market you think you might want to play in?

Jamie, I can tell you our customers ask us all the time. Because you're right, so far, today, I get asked because everybody is spending more money on beverages, in general. And they asked us, they say, "We wish you were in that business." But so far, we haven't been. We don't play. We've been very focused on cooking, alone. But I can see an opportunity there, whether it's Middleby will fill it or somebody else, but it's an opportunity that I see from our customers. I would tell you, Jamie, where I see Middleby going. I would tell you my #1 objective from a food service standpoint and then I'll talk about food processing, because you gave me a way to address that issue, thank you. I'm going to tell you one. When you look at Foodservice, and I spoke about the combi business. Combi business is basically a billion-plus dollar business, dominated by literally one company, they dominate most probably 60% of that business. And we are -- it's literally our core business. And we have 2 companies today that play in that business. And we are not even a player. We've never put the resource on it, we haven't been focused on that. We've been more focusing on working on the Kitchen of the Future, we've been working with speed of cooking, we've been working on ventless, we've been working on friers that produce less oil. We've been on that. But on the combi front, it's been our first -- literally, first push this year. So I see that as saying it's exciting for us. We have $1 billion market, high margin and there is really no reason for not us be the #2 player in that business. James Clement - Sidoti & Company, LLC: Yes. The combi oven market certainly seems like a very -- a rational place to be focusing.

Exactly. And the way, Jamie, we just put it in. I've seen the numbers. The numbers -- I'm looking at the numbers right now. While it's still at -- the number's aggregate dollars are small because we're a small player in this. You look at this -- we are a 2% player in that business, okay? James Clement - Sidoti & Company, LLC: You're talking -- and you're talking globally, right?

Globally. Yes. We are a 2% business in that -- 2% player in that business. There is no reason for us not to become a 10% player very quickly in that business. None. And once we focused on it and we put the features and the technology, we've seen the numbers. I'm looking at them. They are significant result there. The other thing is we continue spending a lot of time on your energy-saving. So our energy-saving, whether it's water saving and we're talking about our waterless steamer that just got launched. And I talked about our waterless steam table that also got launched with 2 major chains. And it's rolling out as we speak. I talked about our ability to work with, literally, Wendy's, Buffalo Wild Wings, Bloomin' Brands, just to name a few, while we're helping them remodel the kitchen. You look at Starbucks expanding into food by levering La Boulange platform. And Starbucks also in its early stage of international expansion. I look at our pizza chains, they are all benefiting from the shift to online, mobile ordering and I look at those as they expand internationally. So from that perspective -- so I look back and I say, "Okay, where does Middleby stand? Okay. Do I really need to expand into beverage?" I will tell you I am not desperate. I have so much runway still in sharing with you between Kitchen of the Future, waterless steamer, combi oven, the new pizza oven. And then I'm going to look at Foodservice, alone, I have 10 new products in Foodservice launching in 2013. 10 new -- and they're all disruptive. Some of them aimed at breakfast menu that will most probably disrupt the breakfast menu offering, some of them are done for what I call waterless base product, some of them having to do with automation. Then on the Food Processing part, I'm introducing 9 new products in 2013. So when you look at Foodservice and Food Processing, in 2013 we're introducing 19 new products. 19. So we're not stopping, and I'm not talking -- again they are totally disruptive. And then I look at the Viking on top of that, and what we're doing with Viking, revamping it. And then I look at what you've done with our distribution at Viking. We looked at penetrating the markets, continuing our penetration in India, continuing our penetration in Brazil, and I look at our investment in China. And then you take the Middle East, which is being a big penetration for us as we continue expanding our sales force there. I am very optimistic as I look at our business, I am not in desperate need to go and say, "Wow, what's happened next?" Middleby is , literally, still has a lot of runway. So I look at all the customers looking at us and saying, "Help me remodel my products -- my store." And I look at them and I have a list of them that's humongous as I look at them looking at us. So...

Our next question comes from Jamie Sullivan from RBC Capital Markets.

Two quick questions. The first one, Tim, you mentioned selling costs flat excluding acquisitions, yet double digit organic growth. Just wondering if you could explain how you're able to hold the selling costs flat in that environment.

We're -- we had some initiatives around efficiencies. There was also some marketing costs that we had in the third quarter last year that were nonrecurring and that kind of offset some of the variable costs associated with the second quarter growth.

Right. Okay. And you mean against the second quarter last year?

That's correct, yes.

Right. Okay. Great. And then one on Viking. Selim, you emphasized the core customers a number of times and you'd also previously mentioned a white space in a lower price point area of the landscape. Are the initial products that you're launching in the second half, are these legacy price point products or are these the initial foray into that white space you had previously mentioned?

Yes, we -- basically we introduced what I call our lower-priced unit that attracts new customers in, to bring people into. And it was launched in July, which I called the D3. So the D3 product line that's priced around, I would say, between $3,000 and $3,500 has been launched in July. But the -- all the new products that we're seeing are all about the legacy customers. We want to make sure we don't abandon our core customers. I want to make sure I don't do the J.C. Penney disaster where we go in and try to bring people into the store that's never -- and we lose our customers. Viking had significant quality among people -- me and my wife love Viking. We don't want to basically -- if we want to buy something else, we'll buy Viking. That's one of the reason I've been attracted to that brand because we're loyal to it. It served us well. And as I went and visited dealers, as I went and visited customers. In fact, many, many customers called me. Now has the brand had, had service issues? Yes. And I think part of that service issues have been most in refrigeration, and I talked about it. They delivered, they designed, they conquered. They did not work. They had huge issues with it as they launched it, I think, 10 years ago or less. I don't know if it's even 10 years ago. However, one of the reason that we're buying the distributor today has been the connectivity to our customers. The business model of Viking has been let's go buy -- let's basically sell to 10 customer and that's what they did. They had 10 or 11 customers they sell to in the United States and that's who they did to -- all their business was 10 to 11, those people took title to business and those people ultimately connected to the customer. So if the dealer sold a Viking product and an end-user had an issue, the dealer would say, "Let me put you in touch with the distributor." If the customer called Viking, Viking had no -- they didn't have a record of the sale. They didn't understand what happened. One of the reason we want to own the distributor is to own the connectivity to that end user. I want to be able to own the experience the way we've done it in the United States with Foodservice. Today -- us and our dealers are connected: number one, as our national account and our chains are one. If there is a constant issue with my Blodgett convection oven, I will know about it. I don't take that responsibility and say, "Sorry, it was my distributor." Today, at Viking, they had no way to basically understand what was going on. Until a customer is so upset and that customer is willing to raise, basically, stakes by calling Viking and being very upset or yelling and screaming, Viking did not understand what was happening because all the concentration of the sale and the service was happening at the distributor and the dealer level. By owning the distributor, it's a strategic decision for us to own the customer relationship, period. It is owning the customer relationship. So going back to your question about the legacy product, we want to go back and reconnect with our legacy customers. I am not trying to go back and own new customers. I want to make sure -- and that has been always the story of Middleby. If you look at Middleby, when we started it, if you look at me as the CEO in 20 -- and there must be a transfer somewhere in 2000 -- or 2001 when I became the CEO. I told people -- everybody said, "Selim, how are you going to grow market share? How are you going to go and acquire new customers?" I said, "No." Our philosophy is to go and become more connected with our existing customers. If you look at today's relationship between our customers, if you look back, it's only recently that new customers come to us. But if you look at why, 90% of the time our core customer base has never left us. At Middleby, we have almost 100% customer loyalty when it comes to us because we take care of our customers. We don't take them for granted. We don't go back and say, "You know what, you took me to the dance, and now thank you. Now I'm going to look for somebody else." What we've done, and it's been part of our culture at Middleby, I would rather forgo a new customer if I cannot support my core existing customer. And I want to do the same thing at Viking. And I want to make sure and I think they support me on this. I don't think that was the case with distributor. Distributor did not have -- the distributor is about volume because they had very low margin and they had to most probably go and grow the volume. I want to go back and say, "I want to take care of the customer of mine." I'm not trying to go after other people's customer. I want to make sure that if you bought a Viking, you're going to buy another Viking again. And I think there are plenty of them because we have the largest installed base. We've created that category. So that's where I'm coming from. That's my philosophy.

We have no further questions at this time. I would like to turn the call back over to Mr. Tim FitzGerald for closing remarks.

Okay. Thank you, Hilda, and thank you, everybody, today for being patient on the call as we worked through some of the technical issues, and we look forward to speaking with you next quarter. Bye.

Thank you, everybody. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. We thank you for participating. You may now disconnect.