The Middleby Corporation (MIDD) Q4 2014 Earnings Report, Transcript and Summary

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 the growth reflects continued strong sales to restaurant chains looking to upgrade equipment and adopt new technologies to improve the efficiencies to store operations. Sales in international markets grew 12% in the quarter with solid growth realized in Asia, Europe and the Middle East. Sales at the Food Processing Group amounted to $82 million in the quarter and as mentioned sales increased 4.6% on a constant currency basis, but given the large proportion of international business for this segment, the foreign currency fluctuation had a greater impact of sales with sales reported in U.S. dollars at the 1.1%. We anticipate the first quarter will reflect similar growth in exchange impact, but are encouraged by order rates early in 2015 and the pipeline of potential projects particularly in international markets. Sales in the residential group amounted to $72.5 million in the quarter and this includes approximately $11 million in sales related to the U-line acquisition. Sales at Viking were slightly impacted due to the transition to the new line of refrigeration that is now being introduced. The new line of refrigeration started into production late in the first quarter of 2015 and we anticipate that all models will be in production by the second quarter. As a result of this transition to new products, the impact of the refrigeration sales is expected to have a greater effect in the first quarter of 2015 due to the lack of product availability and we anticipate sales at Viking will be lower in the 2015 first quarter than in the prior year, but should revert in future quarters as all models become fully available. Gross profit for the quarter increased to $169.1 million from $150.7 million in the prior year quarter. While the gross margin rate declined from 39.9% to 38.9%. Gross profit margins during the quarter were 40.6% at the Commercial Foodservice Equipment Group and 40.5% at the food processing equipment group and 32.3% at the Residential Kitchen Equipment Group. Gross margins at the Commercial Foodservice Group and the Food Processing Group remain strong with continued improvement, particularly in the Food Processing Equipment Group which increased to 40.5% from 36.5% in the prior, year reflecting acquisition integration initiatives related to businesses that have been acquired over the past several years. The gross margin rate at Viking declined in the fourth quarter which resulted in the overall margin decline for Middleby in the quarter and the margins were impacted by several items including; the unfavorable production variances caused by the lower manufacturing volumes of the refrigeration while the changeover to the new models occur. This impact, as I mentioned, is expected to continue in the first quarter until all the models of refrigeration are in production in the second quarter of 2015. Gross margins were also impacted by higher warranty costs largely related to pre-acquisition manufactured product prior to 2013 which have continued at a higher than expected rate, but should lessen as we move into 2015 as these products continue to fall out of warranty. Additionally the Viking margin reflects increased discounts related to the new products that are sold for display at Dera locations as we continue to fully seat the new products into the new market. Selling and distribution expenses during the quarter increased from $39.1 million to $45.5 million and this increase includes $4.1 million in selling costs associated with the acquisitions completed in 2013 and 2014, as well as increased commissions on higher sales volumes. General and administrative expenses increased from $37.2 million to $41.6 million and this increase is primarily attributed to $3.7 million of incremental expenses also associated with the newly acquired businesses. The fourth quarter expenses also included $3 million of non-recurring expense related to the restructuring costs at Viking which included the facility closure costs. Other expenses during the quarter increased to $2 million as compared to $800,000 in the prior year quarter. This increase of $1.2 million reflects exchange losses during the quarter that were larger than normal due to the currency fluctuations that occurred late in the year. Diluted earnings per share for the quarter was $0.91 as compared to $0.89 in the prior year quarter. Current year quarter included the $0.04 impact related to non-recurring charges from Viking, restructuring actions and $0.01 related to increased foreign exchange losses. Also compared to the prior year, there is a $0.06 per share comparable difference due to increased effective tax rate to 32.6% as compared to 28.2% in the fourth quarter of the prior year and the prior year included certain favorable tax adjustments. Cash flows generated by operating activities amounted to $69.5 million in the quarter and $233.9 million for the full year. Comparing favorably to $146.2 million in the prior year. The 2014 growth in cash flows reflects strong net earnings over the course of the year, as well as favorable impact of tax benefits and timing of payments. Non-cash expenses added back and calculating operating cash flows amounted to $14.1 million for the quarter, including $4.8 million of intangible amortization, $4.2 million of depreciation and $5.1 million of non-cash stock based compensation. The company utilized $3 million to fund capital expenditures in the quarter and $13.1 million for the full year primarily related to investments in manufacturing equipment and capabilities and investments in acquisitions amounted to $142 million in the fourth quarter and $219.9 million for the full year. Total debt at the end of the quarter amounted to $598.2 million, as compared to $515.4 million at the end of the third quarter and $571.6 million at the end of the fiscal 2013 and the company's net debt to EBITDA leverage ratio at the end of the year was approximately 1.6 times declining from 1.9 times at the beginning of the year. Jonathan that is all for our opening comments if you could open up the call to questions that would be great.

[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 is intact, we're getting a lot of momentum and we're still signing the momentum coming in orders. So we're coming back and sitting now looking into the first quarter our momentum in orders has started picking up. We're going to start seeing that and in the second quarter and definitely in the third and fourth quarter we're seeing significant momentum because we have many builders signed up into Viking. Total project, exclusively Viking that we're starting to see happening for us. Large project coming through but they are basically we're just we won the order. The installation and the shipment is going to occur towards the second half of the year. So basically from your question, we're going to start seeing momentum occurring starting in the second quarter. We're going to start seeing improvement coming through, but it will continue being impacted again by the displays that we're putting out there that is impacting a little bit the picture of Viking. But it's very great for us because I can tell you two years ago, a lot of dealers were willing to partner with us but they were willing to put five pieces on the floor. Today, our partners are willing to put 20 to 30 pieces on the floor. A huge commitment that has not happened in years. Well it didn't happen during the recession for sure, so now we're seeing that impact and we're going to be riding the wave of all that luxury high end market that continues to grow right now and we're just seeing a lot of builders coming into it.

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 asking us to come through back to us. So I have not spoken much about food processing before because literally as we continued to consolidate this fragmented industry, there was something that happened that differentiated us with most of our competitors. We're now one of the leading company in food processing be able to customize machine to meet specific food safety design requirement for each customer coupled with the ability to boost their bottom line through either throughput or more efficient processing. So we’ve done what we've done in foodservice now for the first half the ability to generate the least waste and we can measure the waste and provide payback. So it allows us now to have a huge opportunity within that segment as we've consolidated and now we're enable to provide a complete range of products. While most companies focus on producing machines, I'm talking about my competitor, that perform one specific task for a wide variety of food product such as slices or mixers, so you get a company doing slicing or mixing and they could do it, extra slicing ham, sausage, bacon. We're offering a complete suite of equipment covering every state of processing for a specific product. So now we have expertise and solution for beef. We have expertise and solution for chicken, for sausage, for ham and the acquisition we've done including the one we just did with Certain Marel which is this slicing company allows us now to do what we've done in foodservice where now we can go to a pizza business and give them a complete automated solution or we go to a fast casual and give them a complete automated solution. That's the solution we weren't able to give in commercial that now for the first time it differentiates us to talk about it at food processing. This is why you're going to see me focusing a little bit more, giving a little bit more flare on food processing that I've never done, because first not only now we're getting the solution allowing us to get the margin, we're providing the true payback and boosting the bottom lines of our customers per segment.

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 the testing is taking a little bit longer mostly driven by menu, not whether it validates this issues. The second issue is we're finding out that chains are interested in developing that concept nationwide across their stores and we're finding out that they are starting out with their corporate stores and trying to then get the franchisees excited, so they can fork the money versus them forking the money. The difference between Chili's and most of the customer we've seen after this, including those 330 kitchens, the 330 kitchens were all paid by the individual store or the franchisee versus Chili's which paid for everybody. So the question has been making sure that chain A outfits their corporate stores with their own concepts and then ask the franchisee to do pilgrimage to their corporate store to validate that they should embrace that technology at their own cost. That's delaying a little bit to concept, slightly. But however, the story is intact to test our grade and we're going to continue landing. I would tell you that I'm very excited about it because we continue every day installing a Kitchen of the Future, but it's not a one single chain that all the analysts have been expecting. So again, 330 stores, kitchen beyond Chili's in the U.S. have been installed in the last 18 months.

[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, they miss a burner grade that they don't need to call a service agent, they don't need to call us. It eliminates a lot of the phone calls because what they can do on the system now, they can go in, put in knob on a Southbend Range or a Blodgett Oven. It will give them all the knobs that have existed for the last 25 years on those ranges and knobs and they can compare it to the other knob and say well this is the knob I want. They can order it and track their order. This has been done in line with our server. We're not trying to compete with our service agent, but they have welcomed that e-commerce even though it takes away some of their sales away from them and gives us some of the margin to us. But they were overwhelmed anyway by what they call much harder service calls which requires them to be there and make their money on that. So it's been a great partnership and we just launched the system on December, beginning of December. It was highly received at NAFEM. It's highly received by our chains and it's been very, very well played. It has been my dream to establish this for many, many years and we got it done and it's easy and it's fool proof and any of you on the phone can go on it, it's MiddlebyAdvantage.com and see how easy it is.

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 to be able to provide a better flexible menu or they are going to have to automate and they will have to automate. The payback is there. So from that perspective I'm very optimistic about what's going on for Middleby because we're in the heart of automation. We automated the pizza business, we automated the burger business, we automated the beverage business. So all we have all of the pieces to come back and say let's do it so today our automation, the biggest automation is offered in pizza. The pizza business today which accounts roughly for, I would say of all restaurant business, the pizza business is roughly 17% of all restaurant nation that's automated. You add on a little bit of the burger chains, Burger King has automated their broilers. You look at Carl's Jr., they have automated, Dairy Queen have automated. And I look back and I look at some more automation like Chili's so that numbers could end up being close to 25%. So only a quarter of the industry automated, 75% is not. A huge growth for us but I see that happening. I would say if I'm going to give you a somewhat of a total diagnostic because I don't have any magic crystal ball I would say that within the next five years the 25% will end up being close to 50% automated. If it works it's working in pizza, it's working in Chili's, it's working in many fast food chains, so it's no longer wow. It's something unusual and we can't say it's too expensive because the pay back is right there.

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 for a share of the consumers stomach. Today, restaurants compete for a share of their wallet which drives me to say that this change is a sweet spot for Middleby because the people are winning. The share of the wallet of the consumer tend to be mostly where Middleby has focused on which is breakfast, Dunkin' Donuts, Starbucks, pizza chains because they've been able to introduce a $10 pizza and been very successful at that, fast casual. They have been all those segments where we play very dominantly have been winning that share of the wallet. So fast casual continues to add space to total industry. This is where Middleby is best positioned. Today everyone wants to be the [indiscernible] the Five Guys or the Pot Bellies, even star chefs like David Chang, Roy Choi's, Danny Meyers are joining the fray by opening fast casual. A friend of mine and one of the most respected chefs in Chicago, Paul Kahan has also started opening fast casual stores. Those concepts have capital to grow; they can open a lot of stores. In addition to value, speed and convenience was in the customer's seeking a restaurant a dining out experience will be a main driver of consumer eating out. We drive our demand for our new fire oven 90 second pizza is very promising. With labor wages going up, automation which is considered too expensive is now in demand and offers a strong ROI, so it used to be considered expensive a few years back and now the ROI is not an issue. As I mentioned to you today, we have over 1500 kitchens in the U.S. in the past, 24 months that have automated. We're the leader in kitchen cooking automation. 68% of all restaurant operators continues to push for energy efficient equipment willing to pay more for it so 68% today would rather buy an energy efficient or Energy Star equipment versus a non-Energy Star equipment and willing to pay a little bit more for it. I'm just got to give you some numbers. Middleby has the most rated ovens than anybody else in the Energy Star industry so we'll benefit from this. The final trend in restaurant is waste Management. It is now at the forefront of most restaurant operators. Legislation in Massachusetts, in California and ultimately in New York is driving the implementation of food and solid waste solution and we enter that market through our RMC division in Europe which are ahead of us in waste management and we have a very unique, patented, totally green solution for our restaurant at a very affordable cost. The payback is almost less than a year in that solution. Now going back to addressing basically what I talked about, I look at something interesting. When I look at the casual dining and I look at the customers that have been succeeding in the last two years is casual dining. I talk about Buffalo Wild Wings, Cheesecake Factory, Darden, Bloomin brands which is Outback, Carrabba's and Bonefish, Brinker with Chili's, they offering this on it well with their customers which is value, speed, nimble menus that keep on changing and they all have something in common, they are big users of Middleby equipment. Now it's bringing me to the food processing. The food processing segment is experiencing greater confidence certainty than previous years. That is the feedback from the food processing 14th annual manufacturing trend survey which also is indicating that CapEx was in that segment will be at least 5% higher than it was in 2014. Automation is one of them in other most important issues among food processors in emerging markets given the China issues that happen. In the U.S. the most important issue is increased throughput. Global sales of food processing machinery will grow around 7% according to Freedonia Group within the next 18 months. Asia will be the largest sale growth and Middleby is well positioned in that continent within our food processing. We've been able to gain a lot of customers in that segment of being a dominant player there. So I addressed during the Q&A this new legislation that was signed into law by President Obama which is called the Food Safety Modernization Act FSMA. This was signed in January 2011; it aims to insure the food supply is safe by shifting the focus of the food processing factory from responding to contamination to preventing it. How does it affect us as Middleby supplying the equipment? While most major food companies have been in compliance with FSMA, like standard for years, they are upgrading equipment as quickly as they can, even though it's not cheap to buy new equipment, it's usually in the millions of dollars but it's a lot less expensive than ruining the reputation of major brand with the food safety issue or incurring federal penalties. Now in the food processing at Middleby we're different than most of our competitors that we're customizing machines to meet specific food safety design requirements for each customers coupled with the ability to boost their bottom line through either throughput or more efficient processing. We try to generate the least waste and in the last three years we've been able to generate a payback for each customer on how we can deliver yield, better yield and better throughput and less waste. We'll outpace the industry growth similar to the commercial foodservice this year and the years coming. A huge opportunity within that segment for Middleby is how fragmented this industry is. The seven largest companies have a combined market is share of less than 15%. Middleby is today one of the largest manufacturers offering close to a complete range of product and there is a big opportunity to continue consolidating that industry. And as Tim just mentioned in the Q&A, the pipeline is heavy and strong. As I mentioned before unlike most of our competitors focusing on producing equipment that performed one specific task, we offer a complete suite of equipment covering every stage of processing for a specific segment such as beef, chicken, sausage, ham and we can keep ongoing. I want to address finally two things. I would like to address the residential market. According to a New York Times article issued on February 24, 2015 the $1 million price point has become a new sweet spot for attracting buyers. In expensive cities like New York, San Francisco, LA, $1 million homes and apartment are hardly a rarity. Now they are spreading more widely across the country and builders are eager to please the growing number of baby boomers who have risen to high salary level and managed to accumulate substantial savings. Those people are buying a lot of over $1 million homes in retiring in places whether in Florida, in California, in Idaho, Sand Valley. Just to validate that even Toll Brothers sold 585 homes in 2014 across the nation priced at $1 million or more according to MetroStudy. This is nearly three times the number it sold just two years previously. Viking is very well positioned with builders. Toll Brothers is one of those customers of ours so I can name others recently that had basically become a customer of Viking. DR Horton, Pulte, Learner have seen similar patterns where they are starting to build homes over $750,000 and they have all been placing orders with Viking recently for higher end kitchens. I want to go back and name something that I don't want to forget. This is what brought us to the party. The pizza industry has been very strong partner of Middleby for many, many years. So I'm going to give you a glance of where it's going in 2015. If Americans would choose to eat only one food for the remainder of their lives, I will assure you it has to be pizza. Americans eat an average 100 acres of pizza daily or 350 slice per second and this is happening now and all over the world in China, in India. Just to give you a perspective, pizza is a $40 billion industry in the U.S. and it makes up approximately 17% of all restaurants in the nation. The reason I'm talking about pizza because the pizza industry is reinventing itself and we're in the middle of this reinvention. What's happening is today, the pizza business and the segment has been the first to innovate in social media, to place order online, document that there's many articles on Dominos, Papa John's, Pizza Hut what they've done and even Little Caesars. They have been very, very strong in outdoing their marketing strategies for website and e-commerce. In addition, they were the first to be able to deliver especially I remember in 2009 when Pizza Hut launched a deal which allowed customers to choose any set of toppings and crust for $10 per pizza. Since then those trends have proliferated across the pizza industry, reviving the industry after its declined during the recession. We're working hand in hand with many of those customers with those four pizza chains to deliver for them the quick service pizza concept and the ability to continue improving their offering for speed and consistency, less straining, less labor and faster. We feel very strongly about our partnership with our customers and I'm basically going back to Tony Brenner who asked about Viking and when is the momentum going. The story is intact today and we've worked hard to get it done. We're still having legacies of problems that we've inherited in terms of problems. However, we're trying to turn the previous customer dissatisfaction into winning back customers by innovation, by working with dealers, by reducing the number of SKUs we had from 6000 to less than a 1000 exiting the bad business lines that small appliances cooking schools. We have whittled down the dealer network to only strong dealers that offer prime placement and service so we've gone down from 1,500 dealers to now less than a 1,000. We put in place a three year warranty and a no equipment warranty that has been in existence at Middleby since 1999. If you reach out today to our dealers which we had to win over again, they will tell you that they are very excited about what we've done. You will hear comments that I'm now again confident selling this brand. In the last two years since Middleby took over we've had low service call that have really turned things around. I will tell you a comment that one of the dealers I just visited in the New York area that had basically abandoned Viking. He said Selim, pardon my French, but you are really kicking ass with the 7-series. It's the best range on the market. Keep on doing what you're doing. Thank you for following up with the French door oven and I can't wait to see your new refrigeration. This is the type of comments we're getting and I want to see the momentum growing and I want to thank you for staying with me and Tim on this conference call. This ends my comments, thank you.

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