The Middleby Corporation (MIDD) Q3 2014 Earnings Report, Transcript and Summary

Thank you for joining us this morning for the Middleby Corporation Third Quarter Conference Call. With us today from management are CEO, Selim Bassoul and CFO, Tim FitzGerald. The format of today’s call will be opening remarks by management followed by Q&A. Instructions on how to get in the queue will be given at that time. For now, I'd like to turn the call over to Mr. FitzGerald for opening comments. Please go ahead, sir.

Thank you, Candace. Good morning and thank you, everybody, for attending today's conference call. I'm Tim FitzGerald, CFO at Middleby and I'll make some comments about the Company's third quarter and then we'll open the call for questions-and-answers. Net sales in the 2014 third quarter up $404.3 million increased 12.3% from $360 million in the third quarter of 2014. The third quarter sales reflect the impact of acquisitions of Celfrost and Wunder-Bar completed in the fourth quarter of 2013 and Market Forge and Processing Equipment Solutions and Concordia completed during 2014. These acquisitions were not fully reflected in the prior year comparative results and accounted for 4.9% of the sales growth in the quarter. Excluding the impact of these acquisitions sales increased $26.5 million or 7.4% over the prior year quarter. This increase reflects an organic sales growth of 7.5% at our Commercial Foodservice Group an increase of 1.5% at our Food Processing Group and a 14.3% increase in our Residential Kitchen Equipment segment. At the Commercial Foodservice Group sales amounted to $262.8 million. We continued to realize growth driven by increased sales to restaurant chains looking to upgrade equipment and adopt new technologies to improve the efficiency of store operations. Sales in the international markets grew 15% in the quarter with double-digit growth realized in all regions. Sales growth in China continued to be strong following disruption in the prior year related to food supply issues at one of our major customers in that market. Sales at the Food Processing Group amounted to $75.2 million in the quarter. As we expected, sales slowed in the third quarter due to timing of several larger projects, which have shifted to future quarters. We anticipate that we will realize a similar level of growth in the fourth quarter of 2014 and return to higher levels of growth in 2015. Overall, the demand in the project pipeline for this business remains strong and we are realizing benefits at the expanded platform of complementary brands and continue to see increased opportunities in emerging markets, which are adopting newer technologies to improve operating efficiencies and address food safety concerns. Sales of Viking increased 14.3% to $66.3 million for the third quarter and includes the increased sales markup associated with distributor operations added during the year. Sales were somewhat lower in comparison to the second quarter, which included the seasonal benefit of outdoor cooking equipment business, which is strongest in that quarter. We have completed our efforts with the integration of the acquired distribution operations and are heavily focused on the promotion of our new lineup of products, including investments made to display these products in dealer showrooms and seed this equipment in international markets. We anticipate that these efforts will be ongoing through the remainder of 2014 and early 2015 and we will be well-positioned to realize the benefit of these investments as we move into next year. Gross profit for the quarter increased to $162.4 million from $141.4 million in the prior year and the gross margin rate was 40.2% as compared to 39.3% in the prior year quarter. Gross profit margins during the quarter were 42.3% at the Commercial Foodservice Equipment Group, 38.6% at the Food Processing Equipment Group and 33.6% at the Residential Kitchen Equipment group. Gross margins at the Commercial Foodservice Equipment group remain strong and slightly improved from the prior year as a result of increased volumes and favorable sales mix. Food Processing Equipment margins improved significantly from 31.5% in the prior-year quarter resulting from acquisition integration initiatives related to businesses acquired over the past several years. The gross margin at Viking increased slightly from the second quarter rate of 33%. The margins reflect investments in new product displays at dealer showrooms, which will continue in the fourth quarter and margins also continue to be affected by inventory acquired in conjunction with the distributor acquisitions, although this impact has lessened from the prior two quarters. We anticipate margins will benefit favorably in 2015 as these items become less of an impact moving into next year. Selling and distribution expenses during the quarter increased from $41.8 million to $42 million. This increase includes $4.8 million in the selling costs associated with the Viking distribution operations acquired in 2013 and first quarter of 2014 and also includes $1.3 million in the increased selling cost associated with the acquisitions of Celfrost, Wunder-Bar, Market Forge and Processing Equipment Solutions and Concordia. Excluding the impact of these acquisitions, selling costs declined due to reduced promotional activities and reduced commission expenses. General and administrative expenses increased from $32.2 million to $40.4 million. This increase is primarily attributed to $3.1 million of incremental costs associated with acquisitions. And as compared to the prior year quarter expenses also increased due to $1.9 million of additional non-cash share-based compensation and $1.1 million of increased non-cash intangible amortization expenses. Operating expenses for the quarter also included a $6.5 million one-time gain related to the settlement of a patent dispute. The provision for income taxes amounted to $21.9 million and an effective rate of 26.8% for the quarter and 30.6% for the full year. The quarterly tax provision reflects adjustments made to estimates for US tax credits and incentives and reduced foreign tax rates related to increased credits related to the international business. The fourth-quarter effective rate is expected to range in the 35% to 34% rate and largely is dependent upon the mix of domestic versus foreign earnings. Cash flows for the quarter generated by operating activities amounted to $102.7 million and for the full nine months was a $164.4 million. The third quarter cash flows reflects strong net earnings and the favorable impact related to the timing of tax payments as advanced federal tax payments made in the first quarter were utilized in the second and third quarters. And we anticipate continued strong cash flow generation for the remainder of the year. Non-cash expenses added back in calculating operating cash flows amounted to $15.2 million for the quarter including $6.5 million of intangible amortization $3.8 million of depreciation and $4.9 million of non-cash stock-based compensation. During the quarter the company utilized $3.1 million to fund capital expenditures and $12.5 million to fund acquisition related activities. And total debt at the end of the third quarter was $515.4 million as compared to $592.7 million at the end of the third quarter. And company's debt-to-EBITDA leverage ratio at the end of the quarter approximated 1.5 times. Candace, that's all for the financial overview and prepared commentary. Can you open up the call to questions at this time?

Absolutely. (Operator Instructions) And our first question comes from the line of Tim Wojs of Baird. Your line is now open. Timothy Wojs – Robert W. Baird & Co., Inc.: Thanks. Just a couple questions on my end, I guess starting with commercial. Good solid growth organically in that segment, but there was a little bit of a slowdown sequentially I guess in the growth rate. I'm just wondering if there's any moving parts under there domestically that you'd like to call out?

Well, yes, I mean the quarter was strong in growth in most quarter-to-quarter. Last year in the third quarter, we did have a rollout with waterless steamers in the third quarter, so we had a little bit of a tough comparison related to that. But overall we saw continued strong growth really across the business. Timothy Wojs – Robert W. Baird & Co., Inc.: Okay, okay, that's good. I guess just as we think about 2015 in the overall business, are there any puts or takes we should think about just related to the current run rate of growth in margins? Any big swing factors to kind of keep in mind?

Yes, Tim, I'm going to answer that question. It's Selim. Good morning. I would say that literally our customers are under literally a lot of pressure. I think the restaurant industry in general continues to face the following most probably challenges. One is the fact that we continue to see a culture of value pricing. We continue seeing intense buying focus on healthy eating in the face of rising obesity levels. So you have customers trying to see what they want to do and the impact of social media. So a lot of our customers are investing in apps and online texting and ordering and Open Table and whatever. So I would say that what's going to happen, we're going to have two impacts with us. It's going to be positive for us because ultimately in order to invest in technology to connect with their customers, they are going to try to find cost savings everywhere they can, which brings us into the equation. However, at the same time, the ability to implement all those initiatives at the same time is impossible. So there are going to be some timing issues as we look at it from quarter-to-quarter. I think we're going to continue seeing next year and the next three years a significant most probably growth in our orders in the commercial side. However, it's going to be competing with other technologies that’s forcing our customers to decide what to prioritize first. So I would say instead of looking at a one-year scenario, I'd like our investors, our shareholders, our analysts to look at three year because we are competing against – they've got to implement everything. They have to implement online ordering and social media. Okay. They have to implement cost-cutting in the kitchen. Labor is – wages and legislation is forcing our customers to look at automation. So I would like to look more than at 2015. So in answering the question is 2015 going to be a good year, definitely, but is it going to fall exactly the way 2014 fell? I don't know. I would say I would like to look at a three-year plan where we look at Middleby beyond just a two or three quarter or four quarters. That would be my answer. Timothy Wojs – Robert W. Baird & Co., Inc.: That's really helpful. I appreciate the color there. And then I guess just on the acquisition U-Line, how should we think about the growth in the margin profile of that business and I guess what are the other areas in residential that you're interested in growing over the next few years?

Well, as it relates to U-Line, U-Line is roughly a $60 million business. It is already highly profitable. It's in line with kind of our expectations for that business already being around a 20% EBITDA. So that's kind of the starting point with U-Line. Timothy Wojs – Robert W. Baird & Co., Inc.: Perfect. And then any areas just within residential that you're more interested in getting into over the next couple of years?

We continue investing in beverage. I think our beverage platform is an interesting platform for us as we continue investing in it. The acquisition of Concordia puts us in automated coffee machine where they are one of the leading innovators of taking labor out of coffee shops by putting machines that are fully automated and they work and they deliver superior quality coffee than the previous automated machine that you've seen. It's taking literally coffee to a very, very high level and we're very excited about our beverage platform now. And I think the acquisition of Wunder-Bar and I would like to talk about what we're doing there. I think that we've innovated, we have a system called Spire that is being introduced by one of the largest beverage companies in the world, a soda company in the world and it's been very, very successful. It's a highly innovative product that allows the customer to interface with the machine. And not only it saves a lot of labor; it also minimizes space and it provides significant opportunities for the chains to have innovation, a soda machine, in dispensing that has not occurred in a long time. So we're very excited about this innovation that's rolled out already. So we have over 2000 installations that's taking place in the specific technology called Spire. Timothy Wojs – Robert W. Baird & Co., Inc.: Great. Well, thanks for taking my questions. I appreciate the color.

Thank you.

Thanks Tim.

Thank you. And our next question comes from the line of Tony Brenner of- ROTH Capital Partners. Your line is now open. Tony Brenner – ROTH Capital Markets: Thank you, good morning.

Hi, Tony. Tony Brenner – ROTH Capital Markets: Hi, Tim. Tim the $6.5 million gain from litigation, is that a pretax number or a net number?

Yes, that’s a pretax number. Tony Brenner – ROTH Capital Markets: Okay. A couple of questions regarding Viking regarding your international investment. What market or markets do you expect to enter in 2015 internationally?

We've made actually quite a bit of investments this year. I think the most significant in terms of dollars where we've invested in a test kitchen and built some – added in salespeople and so forth has been Latin America, as well as Canada. And we're starting to see the benefits of that already. I would say we're making some good progress in Latin America, but we are also making investments in Europe, Middle East, UK and Asia as well. So I mean that's really an area of opportunity that we see long-term, but it's going to take some time to – we're going to make the investments upfront. It takes a little bit of time to realize the benefits of that. So that's going to be a cost that we're incurring right now on the front end this year as we're opening up those operations. Tony Brenner – ROTH Capital Markets: So everywhere in other words?

Yes, everywhere. I would say Latin America and Canada were further ahead than the others. There, we've really got a lot of sales activities going on. The other ones are in the earlier stages. Tony Brenner – ROTH Capital Markets: Will you be able to use the Viking name in Canada?

We can use it everywhere in the world except Canada. So Canada, we're marketing the name Brigade. So the same products and we're linking it to the strength of Viking, but we've been launching a Brigade line of products. It's the same line of products though. Tony Brenner – ROTH Capital Markets: Okay. You've previously projected that Viking's EBITDA margins would reach 20% next year and I'm just wondering, as you begin to make acquisitions, I know U-Line you mentioned has a high margin, but typically your acquisitions don't initially have high margins. And if we assume that you're going to be aggressive in expanding this product line via acquisitions, wouldn't that be a headwind at least short-term in reaching that margin objective?

Yes, I mean the comments we've made have specifically been to Viking till now. So if we do other acquisitions in the residential platform, I mean that is possible. As it has been with Food Processing and Commercial typically, the companies we're buying are operating at lower margins, often single-digit and that ends up being two steps forward and one step back. So it's hard to look forward to too much to exactly what that impact would be and it would obviously be dependent on the acquisition, the size of the acquisition relative to the platform. But, yes, that's a possibility. Tony Brenner – ROTH Capital Markets: But for now, you're tracking that 20% objective for the year next year?

Yes. And again, that was a Viking projection. I don't think – U-Line doesn't change that for the platform because I think they're really already – they are in line with where we would like the overall platform to be and I would say we continue to make progress. I mean our U.S. business at Viking really is at 20% right now. We were in the 16% range for EBITDA margins in the quarter overall, but that was really made up of ##% in the U.S. and kind of offset by some of these international investments that we’ve had. And we also have some ongoing investment related to seeding in the new products. So both of those items are a little bit of a headwind right now, but lessen as we go into next year. Tony Brenner – ROTH Capital Markets: Perfect. Thank you.

Thank you. And our next question comes from the line of Schon Williams of BB&T Capital Markets. Your line is now open. C. Schon Williams – BB&T Capital Markets: Hi, good morning gentlemen.

Good morning.

Hi, Schon. C. Schon Williams – BB&T Capital Markets: I just want to follow up on the last call there. So Viking at 16% EBITDA margins coming out of Q3, I mean the target was really 20% as we exited 2014, so is 20% still a reasonable target for Viking as we exit Q4?

Yes, I mean that is still our target. C. Schon Williams – BB&T Capital Markets: Okay, but I mean…

The US is essentially there already. So I think we've made significant progress there. And we have some of these ongoing investments, but I think we still feel like we're on track with that. C. Schon Williams – BB&T Capital Markets: Okay, but is it plausible that the investments overseas could be a bit of a headwind versus that 20% target, so it's plausible that the unit as a whole actually comes in below 20% as we exit Q4 because of the investment?

The protection is really the run rate that we want to be going into next year. That's been the objective and that's still what we're marching towards. And I think some of the investments that we've made in international markets; we've tried to be a little bit more aggressive there because we see good opportunities. So that's adding a little bit of headwind to where we're at right now. But we think those are going to pay off moving into next year. C. Schon Williams – BB&T Capital Markets: Okay, that's helpful. And then can we just talk about Food Processing? It sounded like you were expecting some headwinds; I guess some lumpiness going into Q3. There was some commentary last quarter about maybe some pushouts into Q4. Now it sounds like maybe even further pushouts into 2015. I just want to make sure I understand kind of is there anything that's getting kind of weaker from a fundamental standpoint at Food Processing or is this just kind of the natural lumpiness of the business?

I think we're seeing a natural lumpiness of the business. We feel really good about the pipeline of projects. We're seeing a lot going on really across the world, but particularly with the international markets, the timing of those projects is a little bit harder to predict because you've got markets that the education rampup sometimes takes a little bit longer, you're dealing with credit issues in other parts of the world. So it takes a little bit longer for some of these projects to come in and maybe the visibility is a little bit harder for us there. But we feel pretty confident about the projects that are out there. We're being involved with more brands in more projects, but I think, as you mentioned, it is a lumpy business. Some of the things that we thought might come in the fourth quarter might be later in the quarter or even perhaps early in the first, but we feel good about the overall activity that's going on in that business right now. So it's really more of a timing on when those orders come in. C. Schon Williams – BB&T Capital Markets: Okay. And then the last question, I don't want to spoil the surprise, but any kind of commentary about maybe what we could expect out of the Analyst Day down in Mississippi in a couple weeks, just any kind of general thoughts on what the focus will be?

The focus is going to be mostly on innovation. You're going to see some unique products; you're going to see some fantastic technology. You're going to also have a chance to see some of the software that we have implemented with respect to service. It's going to be an exciting Analyst Day because we have a lot of innovation not only in building and creating solutions, but in the way we deliver that total package of hardware and software to our customers. You will have to feel, also see some interesting investment [indiscernible]. And we continue to do in our manufacturing down there. Middleby has already invested millions and millions of dollars in Viking and you will continue seeing what we've done. It's fascinating to see how we've taken that. You'll also see some latest foodservice technologies and innovation that are being rolled out to our customers. It's going to be a great meeting I think. I will urge every analyst, and thank you for bringing that question to be there. It's fun, it's a good way to do it and the reason we did it in Greenwood, Mississippi is for you to touch and feel what we’ve done down there and the changes that have occurred. Remember, we've taken the business that was not growing, that was literally breakeven, in two years to 20% EBITDA to growing again and to back – basically dominating the space, even internationally and that's what Tim has alluded to in terms of investment that we've made the last two years. Viking specifically in Latin America, in the Middle East, in Canada has been tremendous. It will be a great – it's going to be a take-home value for you to come down. I would not bring you down to just show you a factory. I'm bringing you down to see really fantastic new innovation and disruption. C. Schon Williams – BB&T Capital Markets: All right, thanks, guys. Looking forward to it.

Hey, Schon, just to mention also that we have information on the Investor Day on the website too. So if people want to look up the details and see further information on that.

Thank you. (Operator Instructions) And our next question comes from the line of Jason Rodgers of Great Lakes Review. Your line is now open. Jason A. Rodgers – Great Lakes Review: Good morning.

Hi, Jason. Jason A. Rodgers – Great Lakes Review: I just wanted to get an update on the Kitchen of the Future progress, especially as it pertains to the large restaurant chain testing.

Jason, we have so far, which is fantastic, we've had this year 300 stores installed and they have been installed not at one chain, but at several chains. So total right now, we've gone from 24 chains to 25 chains testing that system representing around roughly 10,000 stores and we have tests going. We've had 300 stores installed this year and we continue feeling very good about that. As I mentioned to you, it's not a matter everybody loves that Kitchen of the Future concept; it's a matter of timing because it's changing their business. It's – people have to make a commitment. The biggest thing about the kitchen of the future is that you cannot go in and implement it in 10% of your stores and not implement it across the whole system because it requires changing the way your supplier delivers, it requires the way you deliver your food, it requires training, it requires a total disruption. So what's happening right now is literally we're feeling very, very good about the Kitchen of the Future. So I know this has been a big question since we finished the Chili's implementation and everybody has continued asking me when we will have another big implementation and I think we’re feeling very, very good now to those 25 chains that we will end up landing a couple, two of them in 2015. Jason A. Rodgers – Great Lakes Review: Sounds good. And then just looking internationally, the 15% growth was that all organic or were there some acquisition contributions in there?

No, that's an organic growth number. Jason A. Rodgers – Great Lakes Review: And what's driving that strength?

We've got broad-based growth, so, as I mentioned, it was double-digit in Latin America, Europe, Middle East and Asia. So I mean we are seeing good growth really in all markets. A lot of it is restaurant chains, both global and local chains opening in those markets and adoption of kind of our technologies in those stores. Jason A. Rodgers – Great Lakes Review: I think you mentioned China as being strong. Could you expand a little on what…?

Well, I just highlighted that because that had been a market that was a headwind last year and really even the early part of this year because some of the food safety issues, but I mean we've seen that rebound. So that's one of the things that's adding to the growth rather than detracting kind of in the back half of the year here. Jason A. Rodgers – Great Lakes Review: All right.

Well, Jason, I would like to step into this because I would like to give credit to our team and credit to the investors who stuck with us for so long. I think that we invested in emerging markets and a global infrastructure that pales – nobody compares to us. All our competitors pale to us in terms of what we've done. It started in the mid-1990s to the late 1990s where we opened up our Philippine plant and we went into China and India when nobody was even considering – when the Company was tiny. We were almost $100 million in sales when we started doing those investments. I think we started doing investment, major investment I remember that when I opened China, then it almost took almost 50% of our EBITDA in that year and many people questioned the logic of taking 50% of your – basically of your cash and EBITDA and invest in China at the time. We invested in India we invested in emerging markets in Latin America significantly. We have an infrastructure that is not only in selling and service that's very difficult to duplicate today. We've been at it longer than anybody else. . We've invested in people; we’ve also been on the ground almost from the start with many of our customers. So we've been basically battle scarred from day one. So when our customers opened in China, we were there almost when they opened up their first 100 stores. In Latin America and Mexico, we have been there with our chain customers almost from day one. Many of them most probably had less than 10 stores when we opened up Mexico and Latin America. So we feel very, very comfortable about the growth internationally and it's an infrastructure that we've built. It's a unique infrastructure, it's a huge investment not only in dollars, but in training, in management, understanding our customer base and being with them from ground zero. Jason A. Rodgers – Great Lakes Review: Thank you very much and look forward to seeing you both at the Analyst Day.

Thank you.

Thank you, very much.

Thank you. And our next question comes from the line of Joel Tiss with BMO Capital Markets. Your line is now open. Richard Carlson – BMO Capital Markets: Hey, good morning, guys. This is actually Richard Carlson in for Joel Tiss.

Good morning. Richard Carlson – BMO Capital Markets: Actually I just want to go back to the value pricing that you mentioned. Is that specifically your customers on their own menus?

I think value pricing has come up basically in terms of two things. You are seeing it mostly in the QSR, which is happening with – literally they keep on doing what I call introducing special menu items that are cheap or they are having couponing where you can go and get a coupon. And literally I don't see this stopping this stopping. I don't see it. I see this continuing to be an issue in our industry at the restaurant level. However, in addition, they have to still deliver quality food. So it's not like I have to discount and offer lousy food. So the question is they are going to have to be forced to look at ways, at meaningful ways of finding every penny off the table and that's a conversation I'm having no longer with just the VP of Operations. We're having those conversations at the CFO level, at the CEO level of our customers. They are looking at it saying, okay, I understand that I have to provide value. People are still under pressure and literally our customers out there are still feeling the heat. When they go out, they want to be able to get a value meal and they are now looking and they have never looked a lot, so I basically look at the Chili's example. Chili's originally when they started with us, it was basically to improve their food, to deliver the food faster, but one of the byproducts of the Kitchen of the Future was our ability to take people out of the kitchen and meaningfully take people out of the kitchen. It was a permanent reduction of one or two people out of the kitchen. And this is the type of thing that we're going to see in the next three years that Middleby is so well-positioned to help those chains figure out. We've been at automation longer than anybody else. We’ve been doing we automated the pizza business 25 years ago. We basically automated the burger business almost 15 years ago and now we are taking the casual dining and we're taking the coffee business and we're automating as much as we can where we're taking labor at the same time improving the quality of the food. We're not doing that at the expense of a lousy customer experience. And I think that's what makes Middleby unique and when we started originally in the pizza business, I remember people said to me, Selim, I don't want to compromise the quality of my pizza by using a conveyor oven. I understand I automate and I have less labor, but the quality will suffer. Today I can tell you that our automated conveyor ovens deliver as good of a pizza as our Beech oven, which is our wood-burning, which we own. So I'm not attack with the competition; I'm not trying to smudge anybody. I'm talking about today we are introducing a WOW!2 oven that will almost deliver as good a pizza as coming from the white wood-fired oven from our Beech oven. And you don't have the labor, you don't have the installation, you don't have all that complication and I think we're proud to say that our WOW!2 oven, which will be released basically in January, will almost come very close to an artisanal pizza coming from a conveyor oven. Richard Carlson – BMO Capital Markets: Very good. Thank you for that color. That was great. But for the companies out there that do not have the level of innovation you have, are you seeing more competition on price, that the guys are going to the restaurants and strictly trying to compete based on a cheaper product?

Well, the problem today is restaurant industries are slow to disrupt their process. So unfortunately our industry is not the first to innovate. They are not basically adopting innovation and change fast. So what's happening is if you are in the fast casual segment. So let’s talk about our segment. Let me define our segment. If you are in the fast casual, they seem to be the most innovative segment in the industry and where we are very, very entrenched with it. So starting year 2000 this fast casual concept has been the most adaptive to innovation. Then you look at the other two – you’ve got the QSR fast food with their big, big stores. They tend to be slower than fast casual, but they are coming around. They are starting to look at ways to innovate. And then you look at casual dining, which has been most probably the most reluctant to change and the experience of Chili's and now with the other 25 chains that are coming from casual dining looking at the Kitchen of the future. We are seeing that changing. So who's going to suffer? I'll tell you who's going to suffer. Mom-and-pop because they don't have the ability, they don't have the capital to innovate, they don't have the funds. Number two, institutional, which means cafeterias, healthcare, all of those have not innovated. They've been very labor-intensive, they have been very – using technology that's most probably 1960s, 1970s and those, I don't know if they will ever innovate and we're not in that segment much. Our segment is mostly chain. So when you look at Middleby, we are – 60% of our business comes from chains. We are almost 80% of the fast casual segment is basically equipped by Middleby, so we tend to see the leakage from the fast casual now coming into casual dining and into quick serve. And that's where Middleby is starting to expand beyond fast casual into the quick serve and the casual dining with our innovation, which has been fantastically adopted for the last I would say 10 years by the fast casual operator. Richard Carlson – BMO Capital Markets: Great. Thank you. See you guys in a few weeks. Best of luck.

Thank you.

Thank you. (Operator Instructions). And I am showing no further questions in the queue at this time. I'd like to turn the call back over to management for any closing remarks.

So I would like to finish with the following things. I look at literally going forward the next five years or less, I look at three factors that will impact our customers and will impact Middleby. One, I look at sustainability, will have one of the biggest impacts on foodservice over the next three years. Sustainability will be defined by two elements, energy and water savings, which mean utility savings; second, food waste reduction. The next one, which will affect our customer, is the rising cost of labor, which is the second biggest trend and the third thing is food security. So as we look at the drive for sustainability is being propelled by consumer demand who want a feel-good factor and by legislation. The UK is the first country to require restaurants now to require restaurants now to manage food waste. Here in the US, the state of Massachusetts just is following the same legislation and I think we're going to see that within the next three to five years to see every state enact legislation for reducing food waste. So basically let's talk about food waste for one thing. The restaurant industry generates 80% of the food waste in the world. 50% of this food waste ends up in landfills every year. So each year, 50% of the food waste is ending up in a landfill. In addition to just ending up in a landfill, each ton of food waste creates 4 tons CO2 emissions. The reason the barrier for restaurants not having managed their food waste in the past has been cost. So we are now working on a machine, which you will see at our Investor Day, on a waste management system that converts waste to compost or biofuel. We expect that system to reduce waste disposal charges and to have a payback of less than three years. So we started implementing that waste management system in the UK. We've had many installations in Toronto right now, in the Middle East and we have a few installations in the U.S. We expect that waste management system to be a big driver of our sales in the next few years. The next part of sustainability has to do with water. Now a few years ago, we introduced energy-saving appliances having to do with gas, energy and electricity and today, almost 70% of all commercial cooking equipment is now energy – is required to be energy-efficient. So most of our customers are asking for energy efficient. So now the next challenge is for them to start reducing their water usage. So every restaurant is going to have to reduce the water footprint of menus by creating dishes that require less-intensive farming processes and less water to produce. We have been at the forefront of water-saving equipment. So our waterless steamer, our induction dry well are just two examples of saving millions of gallons of waters annually. So between waste management, water saving, we see those are being two major drivers for us in the next five years. The next one is the fact that rising costs of labor will continue to happen significantly in the next three years due to two factors. The minimum wage increase, the entire restaurant industry shall face a significant rise in wages due to higher wage legislation and number two, the shortage of skilled workers. Today, in our industry, we have 4 million people working in restaurant kitchens. I'm not talking our waiters and waitresses; I'm just talking about people working in the kitchen, cooking, prepping, cleaning. By 2017, we will need another 200 more workers just in the U.S. working in our kitchen. It's going to be very hard to find people as the economy gets better to find people willing to work at $10 an hour in our customers' kitchens. So the outlook for people coming into the restaurant industry has never been so bleak. In order to deliver the high levels of food quality that consumers expect when they eat out, restaurants have to improve talent management and to introduce automation. I believe that by 2020, which is five years from now, 50% of the kitchen jobs will be replaced by automation and Middleby is the clear winner and leader in this field. We have automated broilers, we have automated ovens, we have automated coffee machines. We have automated ventilation. We have a lot of automation that we've created over the past 25 years and we are going to see a major breakthrough in the next five years. So when I look at that basically the last one is food security. Food safety is a must to win consumer trust. There is no chain that can afford to have food safety issues within their system, especially in emerging countries and emerging markets where they are investing heavily in opening new stores. So what's happening there is we're going to continue to see the implementation of our Food Processing systems, where we're going to see that their suppliers are going to be required to invest in Food Processing equipment that will create a significant food safety and reduce food risk. So I'm very excited and I look forward to seeing you at the Investor Day. Thank you for listening to us and have a great day. That concludes my comments.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day, everyone.