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

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

Okay. Thank you. Good morning, everybody and thanks for attending today's conference call. I will go through some initial comments about the company's 2015 first quarter results and then will open the call to Q&A. Net sales in the 2015 first quarter of $406.6 million increased 9.2% from $372.5 million in the first quarter of 2014. The first quarter sales include the impact of acquisitions not fully reflected in the prior year comparative results and accounted for $29.1 million or 7.8% of the sales growth in the quarter. Excluding the impact of these acquisitions, sales increased 1.3% over the prior year quarter. This increase reflects an organic sales growth of 7.9% at our commercial Foodservice group, a decline of 13.2% at our food processing group and a 5.7% decrease in sales at our residential kitchen equipment segment. Sales in the quarter were impacted by the strengthening of the U.S. dollar against a number of foreign currencies and this fluctuation resulted in lower reported international sales when converted to U.S. dollars in the quarter. This impact amounted to $12.7 million or 3.4% in lesser sales reported. Excluding foreign exchange impact, organic sales growth would have been 10% for the commercial food service equipment group, a 5% reduction in food processing equipment sales and a 4.9% reduction in residential kitchen equipment sales. The sales at the commercial food service group amounted to $262.2 and sales growth reflects continued demand from restaurant change looking to upgrade equipment and adopt new technologies to improve efficiency of store operations. Organic sales growth of 1% in international markets was largely offset by currency impact, but on a constant currency basis, grew approximately 9% in the quarter with solid growth realized in Asia, Europe and Middle East. Sales at Food Processing Group amounted to $69.8 million in the quarter. Foreign exchange had a more significant impact on this segment, given the greater proportion of foreign sales and reduced reported sales by 8.2% in the quarter. On a constant currency basis, sales were down 5%, reflecting the impact of order timing. although second quarter sales will continue to reflect this similar impact from currency and order timing, we've seen a growth in the year-to-date order rate and growth has been in excess of 10% over the prior year and we expect that, that will reflect in the second half results and remain encouraged by the pipeline of potential projects, particularly in international markets. Sales in the residential group amounted to $74.6 million in the quarter. This included approximately $15.4 million in sales related to the U-line acquisition. Excluding the impact of acquisition, sales at Viking were impacted due to non-core products that were discontinued in connection with acquisition integration initiatives and the transition to the new line of refrigeration. As a result of this transition to the new products, refrigeration sales were affected during the quarter due to lack of product availability. 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 end of the second quarter. We anticipate the impact of the new product launch will be lesser in the second quarter and should fully revert in the second half as all models will be fully available. Gross profit for the quarter increased to $157.6 million from $143 million in the prior year and the gross margin rate increased from 38.4% to 38.8% with improved margins in food processing and the residential kitchen equipment segments. Gross profit margins during the quarter were 40.1% at the Commercial Foodservice Group as compared to 40.5% in the prior year first quarter and the slight decline in gross margins reflects the impact of the newly acquired companies during Q4 and Q1. Gross margins at the Food Processing Group were 37.4% as compared to 34.8% in the prior year quarter and continue to show improvement reflecting the impact of acquisition integration initiatives. The gross margin at Residential Kitchen Equipment segment increased to 37% from 34.1% in the prior year quarter. The improvement reflects the benefit of integration initiatives and although the quarter reflected certain production inefficiencies as we began manufacturing the new line of refrigeration, this impact lessened from the fourth quarter of last year. Selling and distribution expenses during the quarter remain relatively constant from $47 million to $47.1 million. The first quarter of 2015 includes $4.2 million of additional selling cost related to acquisitions completed during the past year, Offset by cost reductions from acquisition, integration initiatives and other cost reductions as we continue to further leverage the sales infrastructure at each of our three business segments. Selling expenses also includes a $1.3 million favorable impact due to foreign currency translation in the quarter. General and administrative expenses increased from $40.1 million to $43.9 million. This increase is attributed to $3.2 million of incremental expenses associated with newly acquired businesses. The first quarter expenses also include $4.6 million of non-recurring expense related to the restructuring cost at Viking, which increased $2 million as compared to $2.6 million of restructuring cost recorded in the prior year quarter. Other expenses during the quarter increased to $4.6 million and included $5 million of foreign exchange losses during the quarter that were larger than normal. These exchange losses are largely related to currency fluctuations on intercompany payables and loans of foreign subsidiaries that are repayable in U.S. dollars. Earnings per share in the first quarter amounted to $0.67 as compared to $0.59 in the prior year quarter and the current year quarter included a $0.05 impact related to non-recurring charges from Viking restructuring actions and an $0.08 impact related to translation and foreign-exchange losses during the quarter. Excluding these items, earnings per share amounted to approximately $0.80 per share. Cash flows generated by operating activities amounted to $23.8 million in the quarter comparing favorably to $13.6 million of cash used in the prior year quarter. Non-cash expenses added back in calculating operating cash flows amounted to $13 million for the quarter including $6.6 million of intangible amortization, $4.4 million of depreciation and $2 million of non-cash stock-based compensation. The company utilized $6.1 million to fund capital expenditures during the quarter related to investments in manufacturing equipment and capabilities and investments in acquisition during the first quarter amounted to $46.5 million and included the acquisitions of Desmon, Goldstein and Marsal. And total debt at the end of the quarter amounted to $639 million as compared to $598.2 million at the end of the year and company's net debt-to-EBITDA ratio at the end of the quarter approximated 1.7 times. Tarija, that is all for our initial remarks. So, if you could open the call to Q&A that would be great.

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

Thank you. Good morning.

Good morning.

Good morning.

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

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

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

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

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

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

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

Fair enough. Thank you, Selim.

Thank you.

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

Josh?

Josh, please check your mute button.

Can you hear me now?

Yes. Hi, Josh!

Hi!

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

Well, let me give a macro trend. For a macro trend, we’re seeing some fascinating, what I’d call, shifts in the commercial side, which is benefiting Middleby. So, I continue to talk about what I called a change in the kitchen and if you wanted to call them basically the ability to innovate the menu, the ability to create speed in the kitchen, the ability to address labor and the ability to make sure that they can provide basically a consistent level of service. So, that’s determined differently. Let’s call that the U.S. market is truly versus international market, which is driven by unit growth, it’s really driven by the four R’s. So what are the four R’s? Renovation, Replacements, Rollouts of menu and repair. So, you can’t have a lot of this happening. So, on the other side in a sense where competition in the foodservice industry has continued to heat up, and the National Restaurant Association predicts overall nominal growth of restaurant sales of roughly 3.1% in 2015. So, when you take away, you factor inflation in its most probably not a big growth in terms of same-store sales. However, what’s going to happen? They’re going to have to find restaurants and specifically change and they’re going to find all sorts of ways to differentiate their operation from their competitors. And from that perspective, you’re going to be seeing three areas that will be game changing in terms of where they’re going to spend the money in the next five years. So, you're going to see first a lot of money spent and investment capital expenditure spent on technology, mobilized app making sure that you can order and make reservation on line. Kitchen overall is number two and work flow. One of the thing that has not been part of all what you're seeing in the last 10 years have not been about work flow. So you're going to see what I call time studies in the kitchen as well as between the kitchen and the front of the house and that’s going to involve more automation, more equipment that’s going to make the floor a lot better between the back and front of the house. So just to summarize, all of this what does it mean from a Middleby perspective to you. Small tweaks will not work. Let's make clear. Today small tweaks will not work to be able to win the game. So most chains will have to invent their kitchen with significant shifts and I can give more color to that. The fact casual will continue to push fresh meat to order menu items. I will give an example. Let's talk about the burger chain. Let's talk about Five Guys as one example. Five Guys Burgers and Fries, which is a Number 8 burger chain will only -- offers only fresh beef with customers able to order in so many different ways their burger. So this is a trend that we're seeing in fast casual. Now to do that you're talking about upgrading the equipment. You can do it on a normal griddle and chop, let's put that way. You can do it simple warming and holding equipment. You have to have very sophisticated equipment, which Five Guys buys from us because we have a unique patented technology that's designed for them that allows them to deliver that customized burger pretty fast, pretty quickly, warm and tasty to their customer across over 1,000 stores that they have now. Let's talk about fast food now to catch up they're going to have to fight back but where it goes fast that's the motivation otherwise their market share is being squeezed and they have to respond by renovating both their physical operation and their menus. So in many ways you're going to see a significant amount and you start seeing that at McDonald. They just announced that they're going to start moving a little bit more to being -- giving the customer a choice to customize likely their menu. Now they're not a fast casual, they are not Five Guys or Hub Daddy or Smash Burger or Shick Shack, but they're going to try go this way. Now if you look finally on the casual dining, in that category you're going to see this segment completing its kitchen by adding combi ovens for fat convenience cooking of menu items and replacing equipment induction cooking for smaller footprints and utility savings. In addition, this is a segment now that is doing the kitchen of the future. So I can report on that, because I am sure I am going to a question on this. We have so far seven of the top 10 chain causal dinning chain have kitchen of the future in field test. Finally seven out of ten in field test kitchen of the future. We also talked about what happened beyond Chili's. So now we have over 500 stores installed outside the Chili system. So basically you're seeing the causal dinning now really coming into what I call the automation and the kitchen of the future to remain competitive. This gives you a little bit what the segments. I talked about fast causal which continuing pushing for fresh made to order menu item. Customers are responding by literally renovating their physical operations and menus and finally the causal dinning trying to upgrade their kitchen to kitchen of the futures, combi ovens for induction and again affecting what I call the kitchen renovation and the major shift again tweaks are not going to work.

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

I would say that literally I was worried about Europe a little bit more. Europe is doing quite better. Now the only problem there that we are facing as a company is in fact that the dollar has become very strong. So I think if you take the dollar away and the fact that dollar way, we continue looking at literally close to 20% growth in our emerging markets and our international market and we see that continuing, why because chain continue pushing hard into opening goods in stores all over the place. We see our innovation becoming even more in demand. I can you it will be difficult to go to place where we're going to see our TurboChef oven, our new Pitco Fryer. It's difficult for me to go any country now where TurboChef is not becoming a main stream or when I look at our Pitco Fryer or when I look at literally we've seen a huge explosion of our Combi oven. Now we're still a small player in term, but what I promised you if you remember many quarters ago, that are push on combi oven continues to be a big push for us and we're becoming very effective and solid in the market. I also will tell you that the other interesting part that is taking place for us is literally taking -- continue taking our kitchen of the future, that has been an interesting segment for us because we're starting to see regional chain and I think we're working with a large one right now in an emerging market that has around 700 stores that is testing and we're working very closely with them to implement the kitchen of the future for them. And labor was not an issue in that case because labor rates are cheap. It is mostly speed and consistency and to make sure that they get the consistency across all their systems. So one of the biggest things that's helping us in implementing the kitchen of future overseas versus the United States is amount of usage of microwave. So if you go around and I've been visiting many, many chains around the world, you see even though they have very good equipment in their kitchen they could have decent chop board or decent griddle, decent convection oven and in some cases combi, they cannot stay away because their staff is not trained enough and there is a big turnover in those countries to recruit is that they end up relying on the microwave as crutches. So they cannot -- they've not been to say, hey I’m going to take all those microwaves away from the kitchen. So what's happened they have only one option. They are basically moving to our kitchen of the future, which forces automation into that kitchen and elimination of both the microwaves and the traditional equipment and this is the interest of that chain. That’s specifically why they ask us to come and basically figure out a solution for their business and kitchen of the future is the solution that they liked.

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

Thank you very much Josh. Thank you.

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

Hi good morning.

Good morning Schon how are you.

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

Schon, I can answer that question. First of all, it's hard to quantify refrigeration because in our case, we're not a refrigeration company. So the problem we have is if you don't have refrigeration, people are not going to buy a Viking cook top or a Viking hood in that case and end up buying a GE or a sub zero refrigerator. People come to Viking for a package. They want a Viking kitchen. So it's very hard for us to quantify. So I know that when we did not have refrigeration, we lost a lot of packages, we lost also builder packages if they want to put all Viking. So and when you don't have that same look and that's what makes Viking unique. So people are not coming back and say okay I want a Viking dish washer, but I am wanting to put a GE refrigerator and maybe I'll put a Viking hood. What makes Viking unique and that's most probably one of the most beloved feature of Viking that nobody has been able to replicate yet. Nobody has the breadth of products that Viking has is this design integrity that Viking provides. So when you look at how do we quantify, it's hard to quantify because I ask our sales people and I ask the Viking Management how and the packages, I don't know how many packages we lost because we didn't have refrigeration okay. So that's number one. Now let's look for -- so now we're starting to ship and we're starting now to put the new refrigeration in this place. So there is a lag between you put it on the showroom and customers are going to see it not just if you look and sell. So that can most probably be a lag. Now most probably second quarter will be most probably a reflection of what you're seeing in the first quarter roughly. So in the second half, we're actually looking at two things. Now I have refrigeration up and running basically 100%. So we're up and running in all the models. Everyone is in the second half. The displays of what I talked 800 stores, I am expecting at least 50% of those displayed to be finished completing -- completed. Number three, that we haven't talked about is all those new products have been trained. So we're spending a significant amount of training where we're training all those people and I have to tell you I am so excited about the commitment that the dealer ownership and the dealer management have provided to give us the amount and the commitment to training. So I am going to give you a new one literally the lots of dealer in basically the New York region committed to giving us access to all sales people. I am not talking five, ten, fifteen minutes. It took some hours to field of the floor and force them to come and have long hours of training and we're seeing that happening in many, many dealership. So as we do the training also, we're going to see impact in the second half to be good. So this place will be 50% all our display done. Refrigeration will be finally completed and customers can touch it and we'll have the training basically completed and that should help us in the second half. Now it's tough for me to tell you what the organic growth will be because literally we've been in that transformational phase, which has been switching from all legacy products literally was problem. I am not going to hide to you, we are going to have problems with the legacy product and switching to our new products, which happen to innovative technology driven to try now to take some into the field and make them happen. So the products are done. So a year ago, I was telling you we're making sure the products are getting there. Now they are there. It's how fast we can install and get those displays up and running. So where do I look at it, I think we're all behind the curve right now in terms of the implementation. We're almost at the of the implementation phase. We're at the final stage of putting those products in display at showroom and the training is done. So we're not talking a year from now. We're talking literally I am saying that between now and most probably the end of this quarter we'll have the big displays of 700 refrigeration, the new look and the French store will be almost complete. We're launching the next one which is anticipated is basically installing the TurboChef shelf oven, which will be next phase because now it's ready to go into production and it's going to be installed this year and will be three completed almost toward the second half of the year. So by then, we'll have completed all the new products in installation of showrooms and training.

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

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

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

Thank you, Schon.

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

Hey guys, how is it going?

Good. How are you, Joel?

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

Okay. So let's talk about the competitive landscape. So I am going to give it to you in a macro stand versus first of all, I will address that. The difference between us and most probably most of our competitors is emotional connection that people have to our innovation. I think that has been the biggest driver for us. Now we don't have the packages that for an ITW package where they could come in a package a nice machine with a refrigerator with a display cases, we don't have that. In the case of ITW that can even do the dish washer. So what made it unique for us versus our competitor and will continue to be is the focus on innovation and not only innovation that addresses energy and addresses okay, ease of use, the biggest thing that we've done in my honest opinion that made us unique is the fact that we have an emotional connection to our customers. So let me talk about this in a very different way. So let's talk about literally the fourth criteria today that influence a grouping selection by restaurant chains. So Joel that's the key. At the end of the day it doesn’t matter, we're all buying for the same kitchen, for the same cooking equipment. Literally chains in the case of chains, they're now talking for the package. They're truly looking to improve the following. The number one concern on a local equipment is can you help me improve the food quality I am serving to my customers, that's number one. Number two is can you help me save labor. I will tell you three years ago, two years ago it was not a number, it was there, if you can help me save labor, but now it because number two. It went from being maybe a number six item to number two. The third one is speed. Speed continue -- now speed at one point used to be number one. Now speed is number three. So food quality improvement, if you can get me a touch to improve my food, you give me some labor saving, I love you. If you give me speed on top of that, I adore you and if you give me on top of that energy efficiency in auto saving all together, I worship you. So today, I am going from where will this position, we kick every one of that boxes as being the most advanced in preserving and improving the quality of the food and we've seen it time after time because we've been back tested before anybody else in creating and working in part with the fast causal. We also were the first to introduce a kitchen of the future that not only improve the consistency and the quality of the food that it can go back to Chilly's. Chilly openly on many of their quarterly reports talks about the impact of literally on their operations, it improves their labor saving. It definitely improves their speed and we're basically the biggest generator of innovation and speed. And finally energy efficiency we were the first to start energy efficiency and year 2000 and I always tell that that story. We were the first us and Toyota when we introduced this, we were the only two companies talking about energy saving in year 2000. By now 15 years later, we still remain the most energy start ovens that we have. We have more energy saving devices than any of our competitor in the space that we also buy and now we're number one leader in water saving. So just I am proud to announce that in 2014 we saved through our customers 1.2 billion gallon of water. So again Joel your question is what does it make me competitor? I don't play in the same business model as my competitor. I play addressing solutions that really affects those four, which is food quality, labor saving speed and energy efficiency and water saving. I don't know if I've answered your question.

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

Well it's two different market and we'll talk about it because literally the big guys have declined and we’ll talk about how they’re recapturing market share and we’ll talk about that, but let’s talk about what is the biggest thing that’s helping Middleby today. Okay. So let’s talk about the fast casual, let’s talk about those small chains. Those small chains do not have on site corporate lab okay, they might have a small one but they don’t have the lab that a M have or McDonalds or Burger King have. Those people have engineers on staff. They can test my product. They can test menus. So what those people have done, they’ve outsourced all their R&D to us, so basically they come to us and we know I’m going to give you a great example is the fact that some of those fast casual I can illustrate a chain that came to me specifically it’s the chain that 200 store and say to me, Selim we are thinking of introducing this type of menu item. Can you help us implement it? Now this is the strength of Middleby because we really invested in test, that now translate. So in the case of again unlike our competitors, we not translate that means when you work with us, we give you the best expertise. You want a solution for frying, we have a frying solution. You want a baking solution, we will have a baking solution. You want basically to bake bread, we will give you that solution. You want to talk about vent and speed cooking, we have our own. No we duplicate that this overseas in China, in India, in Dubai, in the U.K., in the Philippines and we have also emulated those test kitchens with many of your chains have they gone overseas have used our test kitchen, so the differentiation between the two is first from testing of menu and equipment, the fast casual will basically work through the manufacturers. The big guys, the basically even in the case of Darden and in the case of M and Burger King, when these will have their own testing centers. So only that’s a differentiation. The other differentiation that I see between how those customers are fighting each other, literally is a fact that for example one of the things that the QSR have done which is a fast food by fighting back is they have done something that fast casual has not been able to do effectively which is breakfast. So let’s talk about breakfast. So when you took out people places like Taco Bell, Taco Bell is literally becoming a leader and taking huge market share in breakfast. They’ve done a great job and for them, breakfast has become a big driver for them and what they’ve done is they keep on pushing equipment to take breakfast and now many chains are thinking of taking breakfast basically whole day. That means now you can get breakfast anytime of the day versus from X time I get all breakfast. So they’re going to expand the breakfast menu all the way to many, many hours which creates very complicated work flow and equipment design and much so ever, slightly haven’t done it before. So you went in let’s say to a McDonalds, I think McDonalds by 10 or 11 they won’t offer you anymore breakfast it’s done. So they turn to lunch and what happens today is they’re all trying to differentiate themselves by taking breakfast as a competitive advantage and extending it almost through the whole day. A huge, a huge complexity in the kitchen which works in our favor because we have the equipment, we are a very leader in breakfast equipment between start, we have significant ability to provide breakfast offering versus our competitor. So this is a little bit where I see the differentiation happening and the biggest thing to all that happening, I think the market is going to expand as people’s income go back to better as the generation Z which is those 21 years of age or younger come into the marketplace and the workplace in the next five years is going to grow significantly restaurant business and I will address that in just a minute. Joel any other questions?

No that’s great, thank you very much.

Thank you, Joel.

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

Hello guys.

Hi Jason.

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

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

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

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

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

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

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

Thank you, thank you very much.

Thanks Jason.

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

So, I would like to talk about macro a little bit and what is going to be exciting for Middleby over the next and those are basically macro. As we always say, we’re not going to give guidance on a quarter-to-quarter. We never did but it would be interesting to give you a little bit of where I see the business going. So one I’m very excited about something that position us very, very well, which is Generation Z. Generation Z is those 21 years of age or younger and I’m sure many of us on the call have children that fits in the Generation Z. They are quickly emerging as a formidable group of consumers. It makes up 47% of the population and they will be again moving into gradually trickling into the work force over the next ten years. In larger -- there will be larger number than the previous generation of millennial. What is unique about the Generation Z that we love for Middleby specifically is they’re big on ordering food to be delivered. So let’s start on this it’s a big opportunities for Middleby as we are as the equipment solution that speeds up delivery and keeps the food crisp and more while its being delivered. So literally one of the acquisitions that we’ve done in the past has been focused on how do we improve the delivery of that business and it's been amazing for us as this generation comes up. They love two things. They love delivery of food, which works beautifully in our sweet spot because many restaurants we’re not talking Pizza here, we’re talking delivery of any food just start investing in what I call holding and warming where are delivered. The next one to generated in Z love to use they put a high poverty than any other generational group whether its baby boomers or the Y generation or the millennial on speed of service. So between speed of service and delivery is another great sweet spot for Middleby. So when I look at the next five to ten years, Middleby is so well positioned with that generation. So that’s one. The next one, the next interesting thought according to Technomic, three in five consumers today purchase lunch away from home, which represents 58% at least once a week eat away from home that means go out to lunch, 58% of them. They predict that this group will grew considerably higher and lunch will have a major, major growth in the next few years. Again that stimulates cooking equipment so from a macro trend Technomic thing, lunch is going away. In fact lunch where people are cooking and ordering a lot of stuff is going to drop. I talked about breakfast. Breakfast continues to be a bit driver for many fast-food chains such as Wendy’s, Taco Bell, McDonalds, Burger King and one of the stretches to offering all day breakfast menu, which since they well was up. We are one of the leader of offering equipment that serve breakfast and as they go for a full day at extend hours, it puts a lot of pressure on how they going to work workflow as they introduce the lunch menu or the dinner menu and that’s creates complexity that Middleby is a big solution driver for this. The next big driver over the next 10 years which will be good for our industry in general is the Hispanic population, which will grow 20% and according to Inavision by 2025 there will be an addition of six million Hispanics between the age of 18 through 29 added to the population and those are income that means they have the disposable income to spend. Hispanic consumers tend to eat at chain restaurant more than independent. So they’re predominantly eating at chain restaurants and over three quarter of Hispanic find restaurant a good place to spend quality time with family, friends and kids and I’m talking mostly in chains, which is our business. So 65% today of Middleby’s business is chain driven and that will continue to grow as the Hispanics grow. The chain business will grow and our equipment will grow with them. Then I would like to talk about basically we talked about the fourth criteria today that interest equipment selection of food quality improvement, labor saving speed and energy efficiency I want to say all four sweet spots for Middleby. So I would like to bring something else which is fascinating to us so let’s go back to the pizza business. So in the pizza business today we’ve over 150,000 Middleby Marshal ovens that are still in existence working that are over 15 years old. So if you look at this we expect in the next five to 10 years that it will be a huge replacement in the pizza oven business to go back and say we will be happy to Middleby. Middleby oven has been very good for them. They survive 15 to 20 years. So I expect that almost 90% of those consumers of those operators to go back to Middleby and start replacing equipment. So we have a huge replacement opportunity in the pizza business. Forget the earnings growth just from that number. So over the years as the recession took place and people didn’t want to replace as the economy slowed down so now we’re sitting at over 150,000 Middleby Marshal oven that are over 15 years old, big opportunity from a replacement business for us. On the food processing side, we continue to see interesting changes there. The changes continue to be in emerging markets and on food safety. So we talked -- I talked about it specifically if you go to the transcript of the last quarter, I spoke about safety and I spoke about emerging market. But I’m going to speak about something interesting today, which is a chicken consumption where we have made several acquisitions in the chicken equipment processing and I see this segment continue significantly increasing in the next five years. For tourism there is a belief among consumers both going to restaurants or eating at home that chicken is healthier than beef. So there’s a perception that chicken is healthier than beef. There is also the fact that rising beef prices continue to put pressure for people to switch to chicken, which is another sweet spot for us. On the Viking side all our innovation will continue driving and our connectivity with the emotional connectivity that has been very successful for Middleby on the food service is now being translated and making an emotional connectivity to the builders, designers and end user in the residential space. This basically concludes all my prepared comments.

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

Thank you. Bye, bye.

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