Good morning and welcome to The Middleby Second Quarter Conference Call. Joining us today from management are Selim Bassoul, Chairman and Chief Executive Officer and Tim Fitzgerald, Chief Financial Officer. We will begin with opening comments from management and open the call for Q&A. [Operator Instructions] Now, I would like to turn the call over to Mr. FitzGerald for opening remarks. Please go ahead, sir.

Good morning and thank you for attending today's conference call. I will have some initial comments about the company's 2016 second quarter and then we'll be opening up the call for questions and answers. Net sales in the 2016 second quarter of $580.5 million increased 33.1% from $436.3 million in the second quarter of 2015. Second quarter sales include the impact of acquisitions not fully reflected in the prior year comparative results, which accounted for $127.1 million or 29.1% of the sales growth in the quarter. Sales in the quarter continued to be affected by foreign exchange variation in comparison to the prior year. This fluctuation resulted in lower reported international sales when converted into US dollars, and this impact amounted to $4.9 million or 1.1% in lesser reported sales growth. Excluding the impact of acquisitions and foreign exchange, sales increased by 5.1% as compared to the prior year quarter. This increase reflects organic sales growth of 6.9% at our Commercial Foodservice Group, an increase of 16.3% at our Food Processing Group and a decline of 12.2% at our Residential Kitchen Equipment segment. Sales at the Commercial Foodservice Group for the quarter amounted to $321 million. Sales reflect continued international -- strong international growth, which remained very strong in the first half of 2016, reflecting improved market conditions and lessened impact from currency volatility. Organic sales growth in the international markets exceeded 20% in the quarter with growth in all regions, while sales domestically were essentially flat with the prior year due to several large rollouts with U.S.-based chains which had occurred in the first half of 2015. Sales at the Food Processing Group amounted to $83.5 million in the quarter, and organic sales growth of 16.3% reflects revenues associated with a record backlog carried into 2016, along with continued…

[Operator Instructions] And our first question comes from the line of Josh Chan of Baird. Your line is now open.

Hi, good morning and great job on the quarter. I just wanted to ask about the Commercial Foodservice business. Maybe you can talk about internationally whether that growth is sustainable. And then also domestically, what are you seeing based on the different categories of restaurants? I think one of your competitors mentioned weakness in QSR. Just wanted to see what you're seeing in each of those verticals? Thank you.

I think on the international side of the business, Josh, I mean, we had obviously a very strong first half. I mean, I think we see improved conditions internationally and do expect growth, which if you remember last year, international didn't grow much. I think we do expect it to moderate. I mean, I think 20%-plus growth in the first half of the year is very strong. So we're still targeting a double-digit international growth in the back half of the year, but I think that would probably come down into something that was in the low to maybe mid-teens.

Okay. And then on the domestic side, what are you seeing in each of the different type of concepts?

Well, I can answer that question. On the domestic side, we continue to see the restaurant business doing very well. At least so far, the total restaurant same-store sales were up 2.4% from a year ago, and food away from home is up 2.6% from a year ago. We also believe that QSR and fast casual and casual dining are all in the positive category, and they will continue to be driven by the following, unemployment continues to trend down around 5%, and the most important is underemployment is now below 10%, which is the true measure of truly people who are no longer reported on the labor census is now below 10%. And then we continue to see gasoline prices trending down. I think that they will remain low for a while and will -- they will continue to give consumers more money in their pockets. So I see that the Commercial Foodservice, while it could be that individual chains here and here could see some disruption, whether it might be in their operation or they might be implementing a online ordering system or changing menu items, but in general, I see the trends in the second half of the year to be -- to remain positive.

Okay. That's good to hear. And then if I can switch over to the Food Processing side. Obviously, you've gotten good growth from the backlog. Just wondering is orders continuing to be positive or strong, I guess and can you talk about the sustainability of growth rates in that segment?

Yes. No, Josh. So we continue to have strong incoming order rates in the first half. We've been able to essentially maintain the backlog while having the strong revenue growth in the first half of the year, so I think we're well positioned as we move into the second half of the year.

Okay. And on the Residential side, is there a way you can kind of break out the organic revenue in Viking versus U-Line? I know U-Line caused the decline there, too, but just wondering the trajectory of each of those business.

Well, I'll just say that the -- if -- I don't think we want to break them out since we reported each of our independent groups, but I think Viking was less than 10% of the sale down. So overall, we were, I think, 12.2% of a decrease. So I mean, we kind of notched down to a single-digit decline at Viking in the quarter. So we still continue to have the headwinds from the recall, but we are seeing the benefits of the new products that are coming out there that are beginning to kind of chip away and offset that quarter-by-quarter as we see those in the market.

Okay. Great. Thanks for the color and great job.

Thank you. And our next question comes from the line of Tony Brenner of Roth Capital Partners. Your line is now open.

Thank you. I have two questions. First of all, regarding Viking. I'm aware that beginning in the third quarter, your comparisons become much easier, as such a year ago when you begin to see the full brunt of the recall. But while you've increased quality and you've introduced a number of new products, I wonder if that's -- if that means that Viking is now completely fixed or is it still -- is there still work to be done? I know in the release, you mentioned the service part of the business as well, and I know you're still working on that end. So to what extent is this to a work in progress in terms of fixing Viking?

So Tony, I'm going to answer this question. I think from the standpoint of fixing Viking, I think there are some bright notes. So let's start with the bright notes. Our refrigeration business is positive. So when you look at refrigeration, which has been our most Achilles heel, our orders in refrigeration are up in the positive business. So literally we're starting to gain back traction in refrigeration, which has been part of our recall, additional recall. It had a lot of issues when we bought that company. And we finally redesigned every refrigerator we own, and we sell a complete redesign in terms of quality, in terms of testing, in terms of how we do that. So the bright note is our refrigeration business is up. On the ranges business, I think we've continued to be affected, honestly, with the recall. I think recall continues to be somewhat affecting the older ovens and ranges. Now the new ranges was 700 Series, and the French Doors continue to be very well, but we still have a stigma with the recall that's taking -- lingering a little bit more than we expected. Finally, we have -- we're starting to tackle service and tackling parts availability. Part of the issues, as I mentioned before, is the fact that we had redesigned over 100 products. Almost the entire product line has been redesigned, and we're trying to catch up in training the service agent in the field, in trying to make sure that people are serving the product with the right -- so we have customers who've had ranges in kitchens that are 10 years old, and they need parts. And some of those parts have become caught as we're introducing and producing new product. So a balancing act that we have to…

Okay. My second question. You've made several acquisitions in expanding your beverage platform. Selim, would you, from a big picture standpoint, just talk about what your strategy is in this area, what the addressable market is, who your customers are? Is there potential for this to be an international business? And are there synergies here with your three other areas of operation?

So Tony, the -- as a vision for beverage for me is literally targeting Generation Z. That's followed by who is Generation Z? It's the 13 to 23-year-old customers. It's that population. And I have done a great effort in working, in designing product and helping our customers target that generation because that generation tend to eat out more often than the Millennials and the Baby Boomers. That generation want speed, convenience, low prices and customization, which is all excellent for Middleby. They are not looking for big, elaborate dining spaces. So now our customer can spend more time in the back of the house. They are big on take-out, grab and go. But the other things they are big on, they are big on beverage options and frozen drinks and desserts. For example, they love cold brew coffee is an example of a new product for the Generation Z. So when I look at where we're going and I look at our customers, which is mostly the chains, I see us helping them target and get to those customers. So beverage becomes a major driver for us to help our customer deliver a great menu offering for Generation Z. So as I look at the trend the next five years, I -- it goes back to most probably what I did in 2000 to 2003. If you recall and you go back to the transcripts of my conference call, I transformed the business, along with my team. I don't think it's -- it's a team effort, which we did when we did the acquisition of Blodgett and Pitco and Magikitch’n at the time, was to transform our company from a literally institutional, fine-dining company to a fast casual company. We targeted the fast casual before anybody else targets the…

Richard, thank you.

Thank you. [Operator Instructions] Our next question comes from the line of George Godfrey of CL King. Your line is now open.

I wanted to zero in on the gross margin, which was fantastic. The adjusted 41.6%. And then, Tim, I heard your comments about steel prices maybe up 50 to 100 basis points taken away from that. So is 41% a sustainable target on an adjusted gross margin base, do you think?

Well, I think one of the things that's a little bit difficult to predict is just the mix. I mean, we've had a pretty favorable mix in the first half of the year, particularly at the Commercial Foodservice segment. You see a lot of margin expansion across all 3 platforms. Clearly, in Food Processing and Residential, a lot of that has to do with integration initiatives, which are coming through on the Commercial side of the business, which is still our largest segment. That can move from quarter-to-quarter just based on the dynamic of which business units are selling more. We've got strong gross margins across all of our brands, but there are 35 brands, and there are some variability. So I think we've had a very positive mix in the first half of the year as it relates to the Commercial Foodservice. So I would say as we look into the back half, we've got a little bit of headwind with steel, which pricing obviously went up in the first part of the year. We were fairly protected through midyear, so we'll see some of that come through. And then just depending on the mix in the back half of the year, that could may be drift back a little bit because I would say it was the mix was to our benefit.

Got it. And it's nice to see the Residential Kitchen trending in the right direction. I realize it was minus 12% on an organic basis this quarter, but it was minus 19% in Q1. Do you think as we go Q3, Q4 we'd see a similar improvement 5, 7 percentage points of growth improvement towards getting a breakeven?

Yes. It's -- we do expect that will continue to march towards improved sales or at least a lesser decline. We don't have a great visibility in terms of what that impact is, so it's hard to predict what the percentage would be. But I would say that directionally, we'll continue to see something similar.

Okay. And then I believe you said the organic growth split 20% internationally and flat domestically. Can you just remind me what the organic growth was on a full year basis for last year domestically?

I don't have that right in front of me, but I think it was probably in the 8% range.

8%. Great.

Yes. I don't think -- I can double check that number, though, so -- but it's in order of magnitude, it was high-single digits.

[Operator Instructions] Our next question comes from the line of Joel Tiss of BMO Capital Markets.

So I just listened to the conference call before this one about how their big competitor is cutting prices and undercutting the market and trying to buy market share. I just wonder if you could talk a little bit more detail like give us a better sense of exactly in Commercial like what are some of the programs that are having success and what are you hearing from the customers about what the next 6 or 9 months look like in terms of how they're thinking about their business. I know all the restaurants are struggling a little bit, and they've got higher costs and all that. We all know that, but I just wonder a little more granular what you saw in the quarter and what you're hearing from your customers.

Joel, I can answer the fact that, first of all, I would say many of our customers are doing very well. Let's put it this way. First of all, commodity prices are manageable in terms of food prices compared to what it used to be I would say 2, 3 years ago. I would say also the fact that consumer confidence is pretty high in terms vis-à-vis eating out. As I mentioned, I would go back and I say food away from home is up 2.6% from a year ago, so we continue trending out where people are spending more of their budget and their dollar eating out. I think the challenges for our restaurant concept today is to continue to reinvent themselves, and I think that's most probably the biggest issue. How do you reinvent yourself to cater to a changing expectation from a customer or delivering a great guest experience? So I think that it comes back to 3 things: one, many of them have spent the money in the past 3 to 5 years doing the online apps, ordering, digital, whatever, texting, where you can get that done. They've upgraded their menu boards and their front of the house. I would say what bodes well for us is many of them are starting to go back to remodeling the kitchen, and we're seeing significant, especially in our national account department where we're seeing a lot of restaurant concept coming back to us and saying, Help us work out the rising labor cost. Help us make sure that we are efficient as we introduce more menu items or as we expand the hours. Many of them have extended hours. Let's take the example of the all-day breakfast, which becomes very complicated. Help us get there. And I think…

And then can I guess that by not answering the question about competitive pricing in the market that there is a little bit of share that you guys are sharing that issue with some of the competitors?

Well, I have to tell you we've always faced competitors one way or another, and we've most probably stayed away from doing what they do. We've always been the contrarian. We've always been focused on what we do best, and I go back and say Middleby has always been very driven by its own corporate -- or core competency versus trying to emulate what people want. We really have not been a company that goes by what you think the natural rationale will be. For example, all -- most of our competitors, if not all of them, are really a full turnkey operators. They offer refrigeration. They offer freezers. Some of them offer dishwashers. They offer mixers. We've been very focused on what we do best. And along the space, we've lost customers who want a complete turnkey solution, and we said no. We're going to give you the best of what we offer. If we're not good at it, we're not going to get into it. And we are also the type of company that will cut SKUs if we're not really innovating in it. So part of our reinvention as part of Middleby has been to say, I don't want to offer something that's [indiscernible] product. And if it's going to cover -- cost us some sales or lose some customers, be it, because we're going to offer what is best. So when you come to Middleby, whether coming into Commercial, and Commercial has been a phenomenal example of that, and we're emulating that into Food Processing because food processing is starting to emulate what we did in Foodservice. Meaning, we want to offer the best solution we can on a very restricted product line. So we talked about beverage. We're not going to be offering all type…

All right. Yes, just looking at the numbers, you can pretty much see what the answer is anyway.

Yes. Well, Joel, maybe just a short answer to that. I mean, we are not buying market share. In fact, we've been focused on putting in price increases to offset steel costs in the back half of the year. And I think, as you know, as you look across our product lines, our products are generally at a premium to our competitors because of the innovation and features and benefits, so I think that -- so we are not focused on the price reductions or buying market share. It would be the exact opposite.

And our final question today is a follow-up from George Godfrey of CL King.

So in the enthusiasm for the business and the company, it resonates as I you listen to you speak on this call. And I'm just wondering about the credit facility that was recently doubled to $2.5 billion. And if I look at the gross debt of $916 million, this is a substantially large number. So I'm wondering if we can interpret that as a continuation of the enthusiasm we just spoke about.

Yes, George. I think it's a continuation of the enthusiasm. I think also that the fact that the acquisition pipeline continues to be out there strong, I think what is the best thing that I've seen in the next -- in the past 3 to 5 years is the number of people that have come to us to say I want to be part of Middleby. Now of course, some of them fit, some of them don't, some of the maybe the evaluation -- we don't get to evaluation that we agree upon, but there has been a concerted effort by many players wanting to be part of Middleby. And I have to say the biggest example has been Follett, and I can say very proudly that Steve Follett did not need to sell. He had a great company, a great business. He was striving, and his name is on the door of this company. And it's his several-generation company, and he decided to come to Middleby and be part of Middleby. Because it is an attraction to go in global. It is an attraction to the way our DNA and our culture allows them and its people to continue operating in a way that makes him proud to say, I still run the company. I am still in control. I'm not part of a bureaucratic organization. And I continue looking at all the acquisition we've made, and I think part of the credit facility is we're having significant interest from people to say I want to join Middleby and part of it you want to be ready, which I think that we'll see significant opportunities ahead in acquiring some companies that fit us that may might not have been ready in the past to be sold or be merged…

Yes. And George, I mean, I just kind of point out. I mean, if you look at the history of Middleby, I think we started with $100 million facility back in 2001. So we've constantly doubled it. We've got a -- it's a 5-year facility. So we're looking it as a long-term facility, which, obviously, we've continued to grow the debt, but that's along with a much larger company and earnings base is supported. So the facility was put in place with a view for growth over the next 5-year period.

And that concludes our Q&A for today. At this time, I'd like to turn the call back over to management for closing remarks.

So I would like to wrap up this conference call by saying that Middleby has never been stronger. Our innovation is at its highest level. Our brands are among the best. Our global presence is increasing fast. However, we still need to adapt to prepare for the next 5 years where slow growth across the world is the new norm. We have to relentlessly pursue additional action to drive our competitiveness. I think we're going to see some tough economic factors in terms of GDP across the world, including United States, and we need to respond. Those additional actions include the integration of our newly acquired residential brands to conduct consolidation [ph] of our industrial bakery group, so turnaround of Viking range and the launching and expansion of our new beverage food service division. Three opportunities exist for us, which we have to execute well on them. One is to rationalize our channels of distribution and to introduce a digital experience in Foodservice and in our Residential platform. The second is to manage our supply chain to be more cost efficient. As we acquired more company, we became bigger. I think there is a lot of room to improve our supply chain. And third is to increase our service revenues and become a better service company in delivering a better guest experience, and we talked about that early on in the call when I mentioned our Residential platform. And we need to finally figure out our cost engineering and standardization of components as we become a bigger company. There is a lot of opportunities is cost engineering and standardization of parts without compromising quality. In the short term, we must help the decline in our Residential revenue. This is a #1 objective. In the long term, we intend to concentrate…

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.