The Middleby Corporation (MIDD) Q1 2015 Earnings Report, Transcript and Summary

Hello and thank you for joining us for the Middleby Corporation's First Quarter Conference Call. With us today from management are Chairman and CEO, Selim Bassoul and CFO, Tim Fitzgerald, who will begin the call with an overview from Management and then open up the lines for questions from participants. Instructions on how to queue will be given at that time. Now I would like to turn the call over to Mr. Fitzgerald for opening remarks. Please go ahead sir.

Okay. Thank you. Good morning, everybody and thanks for attending today's conference call. I will go through some initial comments about the company's 2015 first quarter results and then will open the call to Q&A. Net sales in the 2015 first quarter of $406.6 million increased 9.2% from $372.5 million in the first quarter of 2014. The first quarter sales include the impact of acquisitions not fully reflected in the prior year comparative results and accounted for $29.1 million or 7.8% of the sales growth in the quarter. Excluding the impact of these acquisitions, sales increased 1.3% over the prior year quarter. This increase reflects an organic sales growth of 7.9% at our commercial Foodservice group, a decline of 13.2% at our food processing group and a 5.7% decrease in sales at our residential kitchen equipment segment. Sales in the quarter were impacted by the strengthening of the U.S. dollar against a number of foreign currencies and this fluctuation resulted in lower reported international sales when converted to U.S. dollars in the quarter. This impact amounted to $12.7 million or 3.4% in lesser sales reported. Excluding foreign exchange impact, organic sales growth would have been 10% for the commercial food service equipment group, a 5% reduction in food processing equipment sales and a 4.9% reduction in residential kitchen equipment sales. The sales at the commercial food service group amounted to $262.2 and sales growth reflects continued demand from restaurant change looking to upgrade equipment and adopt new technologies to improve efficiency of store operations. Organic sales growth of 1% in international markets was largely offset by currency impact, but on a constant currency basis, grew approximately 9% in the quarter with solid growth realized in Asia, Europe and Middle East. Sales at Food Processing Group amounted to $69.8 million in…

[Operator Instructions] Our first question comes from Tony Brenner of Roth Capital Partners. Your line is now open.

Thank you. Good morning.

Good morning.

Good morning.

I have two questions. One is regarding the pickup in food processing orders going forward. I wonder if you could just characterize those a little bit. Are they primarily international or are they largely developing markets, are they food safety related, i.e., China or are they something else?

Well, about half of our business in food processing is international and I would say it’s pretty strong in markets such as Asia and Latin America. So, they are developing markets. Some of the larger orders that we’re seeing as of late are in those markets. So, they tend to be in those markets and there are a number of our new processing plants that are going out. So, it's just kind of the demand for precooked, preprocessed food in those markets. And up in those plants they are looking for equipment that has high capacity and it’s got the safety standards of the U.S. So, that is China driving that.

Okay. And the other is with all the changes going on in Viking and the residential segment. I wonder if you might comment on what -- at the end of the year, where might Viking’s EBITDA margins be as a run rate compared to now.

Well, we’re -- our EBITDA margins for the quarter were just over 18%. So, we’re continuing to climb towards the 20% and I do expect that we’ll get to the 20% or better run rate in the back half of the year.

Well, or better? What is -- do you want to narrow that a little bit Tim?

Well, I think, there still a lot of moving pieces Tony. We just announced again, we’ve had a number of restructuring charges there Viking as we continue to fine tune, we’re working on distribution right now. So a lot of the charges recorded in this quarter related to consolidation of distribution operations.

So, Tony, let me answer the question a little bit more because I’ve been really involved with the distribution and the travel. Thank you, Tim, I didn’t mean to cut you off, but on this one we have introduced so many new products and literary the biggest problem we have is we have to provide displays to all our dealers and those displays are at a significant discount, for example, to put them in all those showrooms. So, literally the number of new products that we’ve initiated is driving a significant order rate for the displays. So, you look at that as not only the cost of the discount of that product, but also we have to go in and co-share, which is the industry standard is to co-share the cost of the fixtures with the dealers. So, the dealer puts some, we put some to make it equivalent to our brand. I don’t want to only put -- throw pieces of equipment out there and they look -- they don’t look good. So, you have to create this vignette as you call it were also you have to do those things. I think what’s driving significantly our inability to basically surpass the 20% as fast as we need to is once we’re done with those displays, I think it will be a much breather. Today, I have most probably close to literally, as we speak, around 800 stores that are being retrofitted right now one way or another with displays. So, this is what’s happening. It’s rather seeing the frustration that why we’re not getting to 20%. So, if you take the display away, we’re about 20%. If you take the display, we are above 20% right now. So, if you take those orders are not displayed and you take the fixtures that we’re spending because we have pay for those fixtures, at least, part of them and of course, it’s Cap and the dealer puts the rest, but still I think between those two there are several million dollars of EBITDA that’s hitting the bottom line.

Fair enough. Thank you, Selim.

Thank you.

Thank you. Our next question comes from Josh Chan of Robert W. Baird. Your line is now open.

Josh?

Josh, please check your mute button.

Can you hear me now?

Yes. Hi, Josh!

Hi!

Hi. Good morning. Sorry about that. I was just wondering if you could give a little bit more color on the commercial foodservice business and in particular how the demand has tended in various international geographies and if you can touch on the U.S. and what you’re seeing there that would be great too.

Well, let me give a macro trend. For a macro trend, we’re seeing some fascinating, what I’d call, shifts in the commercial side, which is benefiting Middleby. So, I continue to talk about what I called a change in the kitchen and if you wanted to call them basically the ability to innovate the menu, the ability to create speed in the kitchen, the ability to address labor and the ability to make sure that they can provide basically a consistent level of service. So, that’s determined differently. Let’s call that the U.S. market is truly versus international market, which is driven by unit growth, it’s really driven by the four R’s. So what are the four R’s? Renovation, Replacements, Rollouts of menu and repair. So, you can’t have a lot of this happening. So, on the other side in a sense where competition in the foodservice industry has continued to heat up, and the National Restaurant Association predicts overall nominal growth of restaurant sales of roughly 3.1% in 2015. So, when you take away, you factor inflation in its most probably not a big growth in terms of same-store sales. However, what’s going to happen? They’re going to have to find restaurants and specifically change and they’re going to find all sorts of ways to differentiate their operation from their competitors. And from that perspective, you’re going to be seeing three areas that will be game changing in terms of where they’re going to spend the money in the next five years. So, you're going to see first a lot of money spent and investment capital expenditure spent on technology, mobilized app making sure that you can order and make reservation on line. Kitchen overall is number two and work flow. One of the thing that has not been…

Thanks Selim and definitely I appreciate the color there. You guys are definitely well positioned to benefits on this need for upgraded equipment. I guess I was wondering also are you seeing any different demand trends in Europe versus Asia for example and I know you have a meaningful business in Australia too, I was just wondering how those geographies are trending recently?

I would say that literally I was worried about Europe a little bit more. Europe is doing quite better. Now the only problem there that we are facing as a company is in fact that the dollar has become very strong. So I think if you take the dollar away and the fact that dollar way, we continue looking at literally close to 20% growth in our emerging markets and our international market and we see that continuing, why because chain continue pushing hard into opening goods in stores all over the place. We see our innovation becoming even more in demand. I can you it will be difficult to go to place where we're going to see our TurboChef oven, our new Pitco Fryer. It's difficult for me to go any country now where TurboChef is not becoming a main stream or when I look at our Pitco Fryer or when I look at literally we've seen a huge explosion of our Combi oven. Now we're still a small player in term, but what I promised you if you remember many quarters ago, that are push on combi oven continues to be a big push for us and we're becoming very effective and solid in the market. I also will tell you that the other interesting part that is taking place for us is literally taking -- continue taking our kitchen of the future, that has been an interesting segment for us because we're starting to see regional chain and I think we're working with a large one right now in an emerging market that has around 700 stores that is testing and we're working very closely with them to implement the kitchen of the future for them. And labor was not an issue in that case because labor…

Great and thank you so much for your time and congrats on the good quarter.

Thank you very much Josh. Thank you.

[Operator Instruction] Our next question comes from Schon Williams of BB&T Capital Markets. Your line is now open.

Hi good morning.

Good morning Schon how are you.

Good, good. I wondered if we could maybe just focus on the refrigeration rollout, I don’t know Tim is there a way for you to maybe quantify how much that hurts you or how much that impacted you in Q1 and then how should I be thinking about kind of the organic volumes in Viking over the next couple of quarters? Can you be -- is down 5% is that kind of as bad as it gets and then we should be turning up from there or there are some reasons I don’t know it gets materially worse in Q2 and there is that snapback in the back half. Just help me think about kind of directionally what you are thing about for Viking over the next couple of quarters.

Schon, I can answer that question. First of all, it's hard to quantify refrigeration because in our case, we're not a refrigeration company. So the problem we have is if you don't have refrigeration, people are not going to buy a Viking cook top or a Viking hood in that case and end up buying a GE or a sub zero refrigerator. People come to Viking for a package. They want a Viking kitchen. So it's very hard for us to quantify. So I know that when we did not have refrigeration, we lost a lot of packages, we lost also builder packages if they want to put all Viking. So and when you don't have that same look and that's what makes Viking unique. So people are not coming back and say okay I want a Viking dish washer, but I am wanting to put a GE refrigerator and maybe I'll put a Viking hood. What makes Viking unique and that's most probably one of the most beloved feature of Viking that nobody has been able to replicate yet. Nobody has the breadth of products that Viking has is this design integrity that Viking provides. So when you look at how do we quantify, it's hard to quantify because I ask our sales people and I ask the Viking Management how and the packages, I don't know how many packages we lost because we didn't have refrigeration okay. So that's number one. Now let's look for -- so now we're starting to ship and we're starting now to put the new refrigeration in this place. So there is a lag between you put it on the showroom and customers are going to see it not just if you look and sell. So that can most probably be a lag.…

All right. That's very helpful color Selim. I appreciate it and then maybe one follow-up just some accounting housekeeping. Tim, maybe if you could just comment on the exchange loss $5 million in the quarter, can you talk about what your expectations are there over the next couple of quarters? We've seen the Euro bounce back a little bit here. I don't know where exchange rate sit today, would we expect I don't know, would we expect to still incur losses or is this kind of the worst stuff at this point. Just some color there around the next couple of quarters what you expect?

Yes obviously the expectations would come and go with where exchange rates move, but assuming that they stabilize here, then we wouldn't have the exchange loss. I do think it is the worse that we would see. The impact of exchange is broken to two pieces. It's kind of the translation effect quarter-over-quarter, which basically cost us $12 million exchange on the top line and reduced our operating income by $1.2 million and now we kind of have the balance sheet movement, which is from the yearend of the first quarter with changes in rates of the number of currencies, which caused the $5 million of losses. So in total that's a little bit over $6 million that hit the P&L from a pretax income standpoint so the impact in sales and operating income we're going to continue to see quarter-over-quarter until we kind of -- we annualize where the exchange rates are but the balance sheet impact, that $5 million loss if exchange rates kind of stay more stable which I would expect they wouldn't be as volatile that would largely go away. It was also a little bit exacerbated in the first quarter because we did do a number of acquisitions that were outside of the U.S. with Desmond in Europe and golf in Australia. So there is a number of kind of funding and putting in initial lawns in place where we had some moving pieces that maybe normally wouldn't have been in the midst of the quarter. So that kind of added on to what would have been a loss already. So I think that that number hopefully will come down quite a bit in the future quarters, that $5 million exchange loss.

Okay. Thanks guys. Look forward to seeing you at the NRA next week.

Thank you, Schon.

Thank you. Our next question comes from Joel Tiss of BMO. Your line is now open.

Hey guys, how is it going?

Good. How are you, Joel?

All right. Yes I just maybe I'll weed my two questions together because they're both kind of structural industry stuff. So in between like the competitive landscape changing I see like basically you're combi oven seem to be gaining a lot of market share from rational and managed is split into two pieces like there is a lot of changes going on under the surface. So I just wonder if you could give us a sense of where you think things are trending from a competitive landscape over like the next three to five years and then I'll ask my other question later sorry.

Okay. So let's talk about the competitive landscape. So I am going to give it to you in a macro stand versus first of all, I will address that. The difference between us and most probably most of our competitors is emotional connection that people have to our innovation. I think that has been the biggest driver for us. Now we don't have the packages that for an ITW package where they could come in a package a nice machine with a refrigerator with a display cases, we don't have that. In the case of ITW that can even do the dish washer. So what made it unique for us versus our competitor and will continue to be is the focus on innovation and not only innovation that addresses energy and addresses okay, ease of use, the biggest thing that we've done in my honest opinion that made us unique is the fact that we have an emotional connection to our customers. So let me talk about this in a very different way. So let's talk about literally the fourth criteria today that influence a grouping selection by restaurant chains. So Joel that's the key. At the end of the day it doesn’t matter, we're all buying for the same kitchen, for the same cooking equipment. Literally chains in the case of chains, they're now talking for the package. They're truly looking to improve the following. The number one concern on a local equipment is can you help me improve the food quality I am serving to my customers, that's number one. Number two is can you help me save labor. I will tell you three years ago, two years ago it was not a number, it was there, if you can help me save labor, but now it because…

No, that's great. And then when you look at sort of the way that your customers model is evolving, it seems that all these smaller, this Del Taco and Habit Burger and Shake Shack like all these sort of niche just like you said fast guys are seem to be talking share from the bigger guys. But my sense is that the smaller companies want to buy more brand name equipment they want to buy from the biggest guys who are more established, can you just talk about like how you're changing your product line or how you product line fits in with the way this trend is going and if that trend is going to continue or you think the big guys have enough of their sleeve to fight back?

Well it's two different market and we'll talk about it because literally the big guys have declined and we’ll talk about how they’re recapturing market share and we’ll talk about that, but let’s talk about what is the biggest thing that’s helping Middleby today. Okay. So let’s talk about the fast casual, let’s talk about those small chains. Those small chains do not have on site corporate lab okay, they might have a small one but they don’t have the lab that a M have or McDonalds or Burger King have. Those people have engineers on staff. They can test my product. They can test menus. So what those people have done, they’ve outsourced all their R&D to us, so basically they come to us and we know I’m going to give you a great example is the fact that some of those fast casual I can illustrate a chain that came to me specifically it’s the chain that 200 store and say to me, Selim we are thinking of introducing this type of menu item. Can you help us implement it? Now this is the strength of Middleby because we really invested in test, that now translate. So in the case of again unlike our competitors, we not translate that means when you work with us, we give you the best expertise. You want a solution for frying, we have a frying solution. You want a baking solution, we will have a baking solution. You want basically to bake bread, we will give you that solution. You want to talk about vent and speed cooking, we have our own. No we duplicate that this overseas in China, in India, in Dubai, in the U.K., in the Philippines and we have also emulated those test kitchens with many of your…

No that’s great, thank you very much.

Thank you, Joel.

Thank you. And our next question comes from Jason Rodgers of Great Lakes Review. Your line is now open.

Hello guys.

Hi Jason.

Just wondering if you can give an update on the food waste area as well as the food proportioning area and how the IMC Waste Machines and Sky Flow are doing?

Okay. They are both in this interesting stages, let’s put it this way, because it’s highly disruptive and as I've always said disruptive technology takes literally at least 24 months to be launched. So in both cases one of them is right now close to most probably I don’t know 12 to 14 months into its full production and the other one Sky Flow is most probably a few months shorter than that. So I think we’re going to see a bigger explosion of those two technology, I would say 24 months from now. What’s happening right now on the waste management, I can address that because I’ve been involved with the management of that company, the thought leaders of that company because it’s a big driver for us. So I see waste management as becoming in the next five years to 10 years a big driver for us. It’s a game changer and we’re starting to get nice recognition, a nice awareness from big player. I give you a perspective, M brought all their people to see that and they were very impressed by it. They understand the payback. They understand what is does for them and I think as we continue pushing it in the United States, it will have significant impact. So I know that our waste management system has become very, very applicable and the payback on that is literally less than a year. Forget the green initiative that it provide less than a year payback on the waste management. So I see this as becoming a big driver within the next five years, but remembers as I've always said it’s going to take 24 months to see a technology that has people are going to say, does it really work? How does it work because so much game changing that people can't believe that it can take your way dump it in that big box and now it turns into compose or biofuel. So they’ve not seen that in the past. They’ve seen compactors, they’ve seen okay I can take my garbage and compact it and it becomes of being let’s say external amount of cubic feet, I will basically shrink it but this we’re not talking shrinking here. We’re talking a complete solution of that waste, way game changing and I thank you for Jason for mentioning that because we’re betting big on that technology in the next few years and we’re investing heavily in it.

Sounds good. Just a follow-up, McDonalds has mentioned a few times and I was wondering if you're involved at all in their restructuring?

Tim do you want to answer that? A – Timothy FitzGerald: Yes we're involved with them. We’ve always been involved internationally. In the past, McDonalds have not had a great synergistic approach on equipment and they’re a great company. There is nothing wrong with us and McDonalds other than I am going to pull it upfront. They were not willing to pay for our innovation. That’s simple. Today I think they are figuring out that our innovation is worth paying for. I think that’s only difference. I think it’s not a difference of integrity or philosophy or whether they are outstanding honest people, it’s just they were not willing in the past in their business model to pay for innovation. So in the past they always felt that volume compensate for innovation. We always felt that we’re not a volume driven company. We want to be paid for the innovation we deliver and I think that’s within and I think now they realize that it with slightly approach payback they would be more interested. I think with us changing our business model also for moving from literally a price and a cost of ownership to payback I think has captioned McDonalds to listen to us a little bit more than just saying, hey we’re going to open a rollout of small family but expects you to give a bit bids at such a price and we’re saying what let's get away from price let's talk about payback.

Thanks Selim for those comments. Just final question Tim many shares repurchased in the quarter?

There was a small amount of shares that were purchased. It had to do with for shares that were invested for employees that kind of came back in the treasury. So it was an open market purchases.

All right, thanks very much and congratulations on the results.

Thank you, thank you very much.

Thanks Jason.

Thank you. And at this time I’m showing no further participants in the queue. I’d like to turn the call back to Management for any closing remarks.

So, I would like to talk about macro a little bit and what is going to be exciting for Middleby over the next and those are basically macro. As we always say, we’re not going to give guidance on a quarter-to-quarter. We never did but it would be interesting to give you a little bit of where I see the business going. So one I’m very excited about something that position us very, very well, which is Generation Z. Generation Z is those 21 years of age or younger and I’m sure many of us on the call have children that fits in the Generation Z. They are quickly emerging as a formidable group of consumers. It makes up 47% of the population and they will be again moving into gradually trickling into the work force over the next ten years. In larger -- there will be larger number than the previous generation of millennial. What is unique about the Generation Z that we love for Middleby specifically is they’re big on ordering food to be delivered. So let’s start on this it’s a big opportunities for Middleby as we are as the equipment solution that speeds up delivery and keeps the food crisp and more while its being delivered. So literally one of the acquisitions that we’ve done in the past has been focused on how do we improve the delivery of that business and it's been amazing for us as this generation comes up. They love two things. They love delivery of food, which works beautifully in our sweet spot because many restaurants we’re not talking Pizza here, we’re talking delivery of any food just start investing in what I call holding and warming where are delivered. The next one to generated in Z love to use they…

Okay, thank you everybody for attending today’s call and we look forward to speaking you in the second quarter.

Thank you. Bye, bye.

Ladies and gentlemen, thank you for your participation on today's conference. This conclude the program. You may now disconnect. Everyone have a great day.