Welcome to the Middleby Corp. Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your hosts for today's program, Selim Bassoul, Chairman and Chief Executive Officer and Tim Fitzgerald, Chief Financial Officer. Mr. Fitzgerald please go ahead.

Okay thank you and good morning. Thank you everybody for attending today's conference call. As usual I have some initial comments about the company's fourth quarter results and then we'll open the call for questions and answers. Net sales in the 2014 fourth quarter amounted to $435 million and increased 15.3% from $377.4 million in the fourth quarter of 2014. The fourth quarter sales included the impact of the acquisitions of Celfrost and WunderBar completed in the fourth quarter of 2013 and Market Forge processing equipment solutions Concordia and U-Line completed in 2014. These acquisitions were not fully reflected in the prior year comparative results and accounted for 7.9% of the sales growth in the quarter. Excluding the impact of these acquisitions sales increased 7.4% over the prior year quarter. This increase reflects an organic sales growth of 9% at our commercial Foodservice group, an increase of 1.1% at our food processing equipment group and a 9.2% increase in our residential kitchen equipment segment. Sales during the quarter were impacted by strengthening of the U.S. dollar against a number of foreign currencies. This fluctuation resulted in lower reported international sales when converted to the U.S. dollar and impacted the organic growth rate by 1.5% in the quarter. Excluding foreign exchange impact, organic sales growth would have been 8.9% on an organic basis. The foreign exchange fluctuation impacted the commercial Foodservice group by 1%, Food Processing Group sales by 3.5% and the residential sales by 0.6%. Accordingly on a local currency basis organic sales growth for the 3 segments amounted to 10% for commercial Foodservice, 4.6% for food processing and 9.8% for residential. We anticipate this exchange impact may continue in future quarters if rates remain consistent with current levels. At the commercial Foodservice group, sales amounted to $280.5 million and…

[Operator Instructions]. Our first question comes from the line of Tim Wojs from Baird. Your question please.

I guess just maybe a little bit of color as we look into 2015. I know you had NAFM a couple weeks ago. I'm curious how comfortable are you with the trajectory of growth in commercial, I know you saw some acceleration from Q3 to Q4. I'm just curious what's your thoughts on how we think about growth in 2015 specifically in the commercial segment?

I'm going to answer that because we just came back from a show and I think we were represented there, you were there and you saw that basically the mood, the mood for the commercial foodservice is very strong. In fact restaurant sales especially in certain categories which are the sweet spot for Middleby continues to do well. Casual pizza chains are doing very, very well so I think that we will continue seeing foodservice doing extremely well. I can tell you, give you some numbers. I think that we will see roughly restaurant sales will increase by 3.5% to 4% according to Technomic which is roughly 1.5 in REIT terms which is a 0.5% better than 2014. From a macroeconomic factors, I think we will see the foodservice operators that means our customers doing very, very well. And they will be expected to increase their budget for equipment into renovating their kitchens. And I will say that there will be at least 31% of all foodservice operators according to F&S report and research are expecting to increase their budget for equipment by renovating their kitchen which is roughly in line with what we've seen in 2014. So in general, the commercial foodservice will be very, very strong.

Tim, just on some of the margin headwinds that we saw in Viking in Q4, is there a way to quantify maybe just the impact from some of the under-absorption and the warranty in the quarter? It sounds like the absorption will kind of last into Q1 a little bit. And then do the integration costs that you called out the $3 million does that continue into the first half of the year?

No, the $3 million was, was really non-recurring one-time charges. We did shutdown one of the Viking head four manufacturing facilities so we closed one. So it really was specifically related to that that plant closure. The margins were in the high 30s in the fourth quarter last year so you saw the decline to 32%. So I mean it really, it related to those three items I called out. We expect the warranty impact would lessen in the quarter. I think the other two items, part of being display, the cost of display is putting the new products out there, that's likely to continue at least in the first part of the year and the absorption also will continue at least through the first part of the first quarter. We started, we kind of had a gap of time where we were not manufacturing the old refrigeration line and the new line wasn't being produced. That is coming online now so really in March we've got a number of the models being produced and all of them should be online in the second quarter. But that lack of production is causing kind of inefficiencies and now, but that will continue in the first quarter. We expect that we'll be through that whole process in the second quarter.

Okay and could you give us the EBIT margins by segment for the quarter?

Well the EBITDA margins was kind of, what I'll mention here on what we track. We were about 28% both in commercial foodservice and food processing so food processing had a very strong fourth quarter. So we're really encouraged with EBITDA margins for food processing for the whole year and the whole year completed at 23%. So we've been marching towards that objective to get into the mid-20s. I think the fourth quarter is probably, we don't expect it to maintain at that rate but had very strong margins for food processing. At the residential segment we were at 17% EBITDA margins in the fourth quarter.

And just on FX, how should we think that the impact that you saw this quarter on the revenue line, is that the magnitude we should expect in 2015 if everything, if all of the currencies stay the same? What was the impact to the bottom line? Was there any transaction impacts that we should be aware of just in terms of the currencies?

Yes, I called out kind of the exchange losses toward $2 million in the quarter, again higher than normal. That is really kind of more of a balance sheet impact of transactions when we ship dollars overseas and then we bring it back there's if we're capturing less. Kind of the margin impact is probably not as significant, but it's also harder to capture what that amount. So there may be a little bit of slippage there as well but we don't expect that, that's as material as a number.

So if everything stays the same that $2 million loss shouldn't repeat right?

Yes so the $2 million, right, if it stays the same because that's driven by the change in currency. So currencies stay the same we'll have continuing impact on the sales growth numbers like we did in the fourth quarter which was at 1.5% overall, maybe a little bit of margin deterioration, but not enough to really move the needle substantially and the kind of that one-time exchange loss goes away.

Thank you. Our next question comes from the line of Tony Brenner from ROTH Capital Partners.

I have two questions. One is regarding residential segment and Viking. Looking at your margins going forward, it seems to me there are two cross currents. One is that during 2014 you acquired all of your distributors which is a lower margin business than the manufacturing part. On the other hand you've introduced essentially a whole new line of, a complete new line of products at higher prices and I presume higher margins. When you put those two things together, will you wind up with higher operating margins for residential than you had previously or the same or lower?

They should be higher. We're still moving through kind of all the transition we've consolidated the distributors which was a big undertaking in 2014, now we're really still getting through the product transition, but ultimately when all is said and done they should be higher.

And when will all be said and done? By mid-year or--?

I'll let Selim chime in a little bit here, but we expect to have still a little bit of bumps in the road here as we get the new line of refrigeration out early in the year. As I mentioned, we're still seeding the new products and that's kind of an investment that we're making. But I think once we get through that period which is really first, second quarter then we should see the margins improve pretty substantially.

Tony let me jump into Viking because I've been personally involved in that intimately. I've been not only we just came back from the kitchen and bath show which you came through. But the most important that I will say about what happened as I visit dealers, we're getting to change the perception of Viking from the quality issues they've had which were bigger than we expected. We need to be honest with everybody, we did not expect the quality issues to be as big as we saw, even though we did the due diligence, I don't think we expected the quality issues to be pervasive as much as it's been on almost every product line, So we've turned the corner by introducing all those new products. We're basically starting to win over dealers, to come back to Viking and we've started to win builders. I'll talk about this in just a minute. But most important, as we get dealers to go back and accept Viking, we're getting those dealers to start displaying Viking the way it should be displayed versus just putting them in a corner, we're asking our partners as we reduce the number of dealers to say I need a display that is commensurate with the size of the brand. The brand is big, we want the display to be big and as we're getting the dealers committing to minimum 20, 30 pieces on the floor, the displays are common in the industries to not be sold at the high margin. In fact it's almost we don't make any money on the displays. So as we start getting all those dealers to get the displays, where we're almost half way through putting the displays with all those dealers, but it's impacting our bottom line. However the story…

One other question regarding your food processing business. I understand how lumpy that business can be on a quarter by quarter basis. But one of the things I had expected to happen and I think you've talked a little bit about in the past Selim was how much the food debacle in China or the tainted food incidents in China might help your food processing business as restaurant chains demanded that preparation be automated and with that low single digit organic growth increase in the quarter doesn't really look like that's having much traction. I wonder if you could just address that?

I have to say that I'm just telling you exactly what I just told you at Viking. Our orders have picked up significantly. However, it's a matter of shipping and I have to say that we're benefiting from - in the emerging market, we're benefiting from the issue of safety and automation which is the most important issues among all emerging market food processor driven by the restaurant chains, driven by supermarkets. And in the U.S., the most important issue is increased throughput and food safety laws. So the FSMA which is a Food Safety Modernization Act which was signed into laws by President Obama in January 2011 which aims to ensure the food supply is safe by shifting the focus from responding to contamination to preventing it is affecting a lot of our equipment sales. So Tony, many of our food companies today have been on compliance with FSMA like standards even before the legislation been enacted for years; however, they are operating equipment as quickly as they can because now they cannot only abide with standards now the legislation that costs them a lot of money. So what's happening is very expensive now of course to buy new equipment is multi million dollars. We know that segment is up. But a lot less expensive than ruining the reputation of major brand with a food safety issue or being penalized by the Federal Government now with major fines if that happened. So somehow somewhere, we're seeing two major factors driving our food processing business we have not seen before. Number one, emerging markets after the China incidents everybody basically panicking about that to get automation. Number two, the FSMA which is the Food Safety Modernization Act, is now getting into effect where we're starting to see U.S. food processor…

Thank you. Our next question comes from the line of John Dunn from BB&T. Your question please.

Tim, I think you gave us the gross and EBITDA margins for each segment. Did I hear correctly you guys are not providing the operating margins right now? Just want to double check.

Yes, we tend to focus on EBITDA margins as the driver for our business and given the number of acquisitions we have which has causes kind of sometimes unusual numbers with the amortization from quarter to quarter that tends to be less meaningful in terms of looking at trends.

You guys had recently talked about expanding into the grocery and hotel space. Just kind of wondering what you guys are doing specifically to penetrate that market. Is it through additional salesmen, new products, any color there would be helpful.

We created, well we just came from the NAFEM show which is North American Food Manufacturing show which is the biggest show in our segment. It happens every other year. There we created the first-fall a division that caters to Sedacky it's a national account division that goes across all our brands to cater for hotels/motels. Not only that we also created solutions for the hotel/motels whether it's for breakfast or was it banquet catering that we provided. Similar to what I just talked about just a minute ago was food processing and now we going to hotel/motel with a solution the way we do with fast casual with pizza, with casual dining. We're doing it for hotel/motels. We're pleased to announce that we got our first hotel chains at the show that signed up with us given that solution that we provided. It's too early to tell. We just picked up a large hotel chain. It's embryonic and they gave us a very decent order and it should be repeated with many other hotel chains because we're present in that segment and as being almost non-existent. So for us anything we get is incremental to our business and given our solution, we're very pleased to be validated by that chain that basically aligned with us and partnered with us for the solution that we provided at the show. I wish I could give you more flare, but it's just brand new so we created a division, we created a set of products specifically targeted for that market and we just picked up our first chain on a national basis, hotel chain. Hopefully, I can report more as the next 18 to 24 months unveil and we'll see how many more chains we get. But we're very optimistic for that because this is totally incremental and the hotel chain seems to be wanting our solutions and it was highly receptive at the show.

And maybe just one more. Any news on the Kitchen of the Future front? I don't think I saw anything about that in the press release. If you could just add any color on recent developments there that would certainly be helpful.

So the Kitchen of the Future we continue testing as many as I said, so I'm pleased to announce that I can give you numbers now. Other than Chili's, we just did fully completed 330 kitchens outside Chili's that have Kitchen of the Futures. Today the number is, if I'm correct, it's over 1500 - between 1500 to 1800 kitchens that have Kitchen of the Future here in the U.S.. While it's not one chain that consisted by 330, we've had many of the chains as they move forward we've been able to capture. It's moving, it's a nice chunk, so basically since Chili's, we most probably captured another third of what Chili's remaining chains. We continue to testing very well with the chains but it's a slow process and now I understand why it's slow because I'm also as eager as you are to see why we don't plan faster in other Chili's and others. The payback is there, it's validated, it's documented and nobody's questioned us on this. The two things that continues to be an issue is the time. It's not whether they want to implement the Kitchen of the Future. It has been the fact that to test the menu from the old way to the Kitchen of the Future takes a lot of time. You have to make sure that the testing taste, the ingredients; the suppliers are not affected by Kitchen of the Future. We're also realizing something else as the throughput increases, while we're in test with those chains they are dumping on us a complete new menu and they are coming to us saying, well while we're at it, I would like to see if the Kitchen of the Future can adapt to those menus without increasing labor. So we're finding that…

[Operator Instructions]. Our next question comes from the line of Jason Rodgers from Great Lakes Review. Your question please.

Could you discuss the e-commerce parts ordering what type of early results you're seeing with that initiative?

Well I will answer that because this has been a dream of mine to be able to make our business easy on the service side. So let's talk about service. We have great partners on the service side. They are independent service agents here in the United States and overseas we tend to service mostly by our own equipment in most of the major emerging markets. But in the U.S., our partners have witnessed a difficulty of retaining service technicians just because the intensity of the job, the hours on the job, a lot of the driving where you're servicing restaurants on weekends, you're away from your family. So what happened is the turnover among our authorized service agents is high and what happened, the training becomes difficult. So my dream has been in partnership with my service providers is to create an ability for our, for their service technician to make it easy for them as we innovate also and we introduce especially Middleby introduces a lot of new product, they can service it on the spot by going to that App which is MiddlebyAdvantage and they can basically immediately diagnose what's wrong, download equipment, download through troubleshooting. But most importantly, more important than that, it tells them it will explode the view of every product we do and you're welcome to go on it MiddlebyAdvantage.com and it will immediately tell you what is the part number and what's going on there. More important that I've always wanted this, another thing to happen. I wanted to make it easy for our chains which is 60% or to 65% of our business worldwide to be able to order simple parts without having to deal with service Provider or us on the internet. Give you an example, they miss a knob,…

Also just looking at the number of new product opportunities and technologies that you have out there which of those would you say provide the most potential in 2015 or which ones are you most excited about?

Depending on where we go to. I'm very excited about all the new refrigeration and zero pre-heat on all our ovens now. We will be the only company in residential to do - in the world to do zero pre heat. We're patent on that. Now we announced that at the kitchen and bath show. I'm pleased to announce to you so when you get a Viking convection oven in the wall or in your range, you don't have to pre heat your food, highly disruptive. So this is a new technology that we're introducing. I'm very pleased with what we're introducing in our refrigeration at Viking all brand new, very disruptive, very unique. I'm excited about what we're doing on commercial foodservice like Sapphire oven which can cook pizza ventlessly, no hood in 90 seconds; this has a lot of potential. I'm very excited about all our new equipment that we've created for the fast casual from the start. Design start companies doing extremely well, they have a lot of products and they are winning a lot of rollouts right now in warming and holding. I look at Carter-Hoffman changing the way fast food, not fast casual but fast food are becoming much more efficient in their kitchen. Millions of dollars saved among our customers through Carter-Hoffman. I'm excited about our fryers, our new fryers which is a reduced oil volume Fryers which has been very successful. I continue to be excited by the new launch of our Blast Chillers combined with our Combi and we've just launched a campaign which you will see if you come to Chicago to the National Restaurant Show called Let's Dance. We'll be one of the only manufactures in the world that can combine chilling and Combi oven which have targeted this as a big market for us. It's over $1 billion market and we're a distant player of that. So we have huge room to grow. A lot of exciting things. On the food processing I talk about the solution we're providing in boosting the bottom line and attacking safety as a total solution. So a lot of exciting product at Middleby. I can't name all of them. I'm excited about our beverage business. What you've done with Concordia right now, what we've done with WunderBar. I'm excited about our Royal 2 oven which is being basically now tested at one of our pizza chains and expect a rollout this year. It's a big rollout for us. So we continue innovating in mature businesses. Our pizza business has been now 30 years old and now we're reinventing it, totally inventing it again. We did it in 2005 and 10 years later we're reinventing it with Royal 2 so we're very excited.

Tim just a few quick one's for you. Would it be possible to flush out what the warranty costs were for the quarter and then if you have an estimate for CapEx and tax rate for 2015? Thank you.

Okay I'll kind of go backwards over here. The CapEx I think we've typically spent between 1% and 2%. We're a little bit actually less than 1% in CapEx this year and as a percentage of sales. That's typically what we target to that. We see that not being any different going into 2015. On the tax rate, we would anticipate being in the 33% to 35% rate. A lot of that depends on the mix of international versus domestic earnings so just kind of depending on how the businesses do, that's generally the range there. On the warranty side as I mentioned, we probably saw the margin deterioration at Viking was about 5%. So that might be in the order of $3 million and of that maybe half of that or a little bit less related to kind of warranty issues at Viking.

Thank you. Our next question comes from the line of Joel Tiss from BMO Capital Markets. Your question please.

This is actually Richard in for Joel. Selim, you talked about the labor inflation and over the years being a long term driver to equipment and just with that being in the news now with some of the major chains having to raise rates to attract employees, does that create more of a near term risk to some of the equipment sales? Can you just update us on how you think about that over the next three to five years? [Technical Difficulty] Yes, this is Richard in for Joel.

Richard, I got your message, let me repeat what you asked me.

Okay. Thank you.

So automation will be a driver not in the first in the next three to five years, it will be in the next 12 to 24 months. I just came back from the show we just were there and automation was a big thing for people. Why? Because restaurants are going to be having to increase their labor rate, especially in the kitchen. So you're going to have a big trend. One, as labor becomes more difficult to get with employment getting bigger, people are getting employed, they are going to have a hard time finding people. The other big thing everybody talks about legislation and I think there is a bigger thing than legislation. There is a big issue between people in the kitchen and people in the front of the house. People in the kitchen are spending a lot of time working longer hours, sweating doing a lot of things, menu items changing, speed of the kitchen, having to learn new trades. The people out front are getting tips. So the difference between a sous chef and a bartender is humongous in income. This is going to have to close. If they want to get people happy in their kitchen, restaurants have to address that issue. Now what's going to happen? Unfortunately they can't afford to pay everybody a lot of money. When you're offering a pizza at $10 a pizza, well those people are automated but let's take fast food, fast casual and casual dining trying to compete against fast food and let's take casual dining specifically. They have to offer convenience and value. In order to offer that, they are going to have to basically make their employee pay them more which they can't afford, so they are going to have to put more of them…

One of your key competitors going through a pretty major business restructure. I was wondering how is that impacting the M&A market? Are there guys out there that maybe have been hoping for another couple bidders and some of these conversations you've been having for several years that they are maybe a little more interested and come to the table now?

Well I can tell you we don't discuss merger and acquisitions. We've not at this moment we've really not engaged seriously with anybody. We've been literally focusing on our business and no comments on this one. I don't know what's going to evolve. I'm reading what you're reading in the press and I wish them well. They have great brands they have a good company, but I wish them well, so for me--.

I would say that our pipeline is pretty consistent. We did a fair bit of acquisitions obviously in 2014 and we see kind of a consistent pipeline going into '15.

And Tim, you mentioned the 1.6 net debt leverage ratio. Can you just remind us what your comfortability is, what range?

We probably have a wide range of comfort. As a company we obviously generate a lot of free cash flow, it’s part of the machine here at Middleby's. We're able to acquire the companies integrating quickly and pay down the debt quickly. So we will, we've levered up I think at Viking we're a little bit over 3 times debt to EBITDA. So within our senior credit facility we can go up to 3.5 types. We're very comfortable within that debt range because as you can see, we delever pretty quickly. And for the right acquisitions, we have the ability to raise capital beyond senior debt which we've done in our past history as well. I think, so it just depends on the transaction what the right structure is. But we've got plenty of capacity and we feel good about that, so and balance sheet is strong.

Thank you. This does conclude the question and answer session of today's program. I would like to hand the program back to management for any further remarks.

Thank you. I'm going to start doing my prepared comments. I'm going to start to say that 2015 will be, on the foodservice on the restaurant side, 2015 will be a better year than 2014. From a macroeconomic side despite the impact of the harsh winter this year, we're seeing a more stable and employment figure, lower oil prices, stable food cost which basically allows restaurant sales to increase according to Technomic by 3.5% to 4%, roughly 1.5% in REIT terms is a 0.5% better than 2014. Again as I mentioned earlier, 31% of all foodservice operator expect to increase their budget for equipment and renovating their kitchen. We as primarily cooking will receive 18% of all the spending which is the largest spend of all product categories by almost double. One macroeconomic area trending in a positive direction is the national employment. This U.S. economy has added more than 200,000 jobs per month for the past eight months. The longest streak since the mid-90s according to many published reports. Employment levels helped drive foodservice sales as consumers get busier and the amount of cash they have on hand increases making it easier for them to patronize restaurants as they crave the convenience the industry provides. However, there's some negative that we'll see is that the consumer disposable personal income remains relatively flat. Despite the fact that the income was boosted temporarily by lower fuel prices and utility bills, the cost of other goods like child care and education are going up and it puts pressure on the consumer to be extremely judicious in terms of how they spend their dollars. I remember having been in the industry for a long time it used to be that operators competed for a share of the consumer's stomach so our customers competed…

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.