Thank you for joining us for The Middleby Corporation Second Quarter Conference Call. With us today from management are Selim Bassoul, Chairman and Chief Executive Officer and Mr. Tim Fitzgerald, Chief Financial Officer. We will begin the call with comments from management and then open it up for question and answer. Instructions will be given at that time. Now I'd like to turn the call over to Mr. Fitzgerald for opening remarks. Please go ahead, sir.

Thank you and good morning, everybody. Thanks for attending today's second quarter conference call. Net sales in the 2015 second quarter of $436.3 million increased 2.7% from $424.8 million in the second quarter of 2014. The second quarter sales include the impact of acquisitions not fully reflected in the prior-year comparative results, which accounted for $32.1 million or 7.6% of the sales growth in the quarter. Sales in the quarter also continued to be affected by the strengthening of the U.S. dollar against a number of foreign currencies in comparison to the prior year. This fluctuation resulted in lower reported international sales when converted to U.S. dollars. This impact amounted to $11.8 million or 2.8% in lesser reported sales growth for the quarter. Excluding the impact of acquisitions and foreign exchange, sales declined by 2.1% over the prior-year quarter. This decline reflects an organic sales increase of 7.9% at our Commercial Foodservice Group, a decrease of 22.5% at our Food Processing Group and a decline of 13.3% at our Residential Kitchen Equipment segment. Sales at the Commercial Foodservice Group amounted to $288.8 million and sales growth reflects continued demand from restaurant chains upgrading equipment and adopting new technologies to improve the efficiency of restaurant operations. Sales at the Food Processing Group amounted to $71.9 million in the quarter. Consistent with the nature of this business, we saw volatility in the second quarter sales in comparison to the prior-year quarter due to the timing of large orders. Additionally, given the large proportion of international business, the impact of the strengthening U.S. dollar had the greatest impact on this segment. Despite the first half sales decline, incoming order rates increased by approximately 20% in the first half and we continue to see positive trends in activity with our customers and we expect…

[Operator Instructions] And our first question comes from the line of Tim Wojs of Baird. Your line is open.

Close enough. Good morning, guys.

Morning.

I guess just to start in Residential, I think your organic growth in that business probably surprised people the most. How did that business trend relative to your expectations during the quarter? And did you see some improvement in the sales trajectory through the quarter and into Q3 so far?

Well, first of all let me go back to my business confidence goals, which I had mentioned that we had done three things at Viking that where I think back in the short-term sales. Number one, we had really basically changed our complete dealer channel by reducing the number of dealers we're selling to. We were changing the dealer programs, which affected basically a lot of the distribution. We basically had to eliminate dealers, and we had to take back inventory and displays, and literally cancel orders that were eminent, and that impacted the first factor. The second factor was the fact that we had the new product that was coming out, and as the new products were coming out, we had to put on displays, and the displays are basically offered to our dealers at a significant discount for them to motivate them to put the displays. So they offer the space, we offer this display at a significant discount. And we've had significant amount of displays going on this year, which while did generate sales, it generated sales at a heavily discounted price. Number three, our biggest issue has been the refrigeration [ph]. As I mentioned to you that we were redesigning our complete refrigeration [ph] to the ENERGY STAR and meet the energy guidelines; second, to introduce the complete slew [ph] of refrigeration [ph] that had better quality than the previous Viking refrigerators that had a lot of legacy problems. So you look at all of those, so literally I had already told everybody that we do not expect Viking sales to come through this quarter, knowing all that. On top of that we had a recall that took place in the quarter that also affected the sales, because we were out there taking out some recalled…

Okay. No, that's very helpful. Thanks, Selim. Should we expect the level of organic growth to improve in the back half of the year? And I guess, Residential, should it – could it be positive?

Well, I would tell you that at this moment orders have picked up, but I am not going to make any guidance in the short term for two reasons. One, I want our number objective, and I want to make it very clear, my number one objective at Viking, when we bought that and we always had a pact between all of us, between us and our shareholders, between us and our board, between us and our employees, between us and our dealers, is to reestablish the brand as a high-end brand. And this was not the case in the past. We've had many recalls. We've had legacy issues on quality. We've had pricing all over the board. We've had people on the Internet basically offering pricing where you could buy a Viking product almost heavily discounted. We stopped all of that, and the results have been twofold. One, the brand is coming up and I will basically in my closing comments talk about all the awards we've gotten since. It was very difficult for us, because it's easier to go and get orders. I can tell you today, I can ship truckloads of orders if I keep the Internet the way it was and managed. If I go out and sell every dealer out there, because Viking is a very strong brand, if I go and allow people to basically discount one product to move our cooktop or our ranges that are very popular, and we stopped all of that. Number two, our pact is to make sure – so we wanted to raise the brand, which has always been something that Middleby is known for. Number two, more important is to make sure that our EBITDA continues to grow. And one of the issues that you've seen in this industry and the essential appliance industry has been the low margins. So if you look at everybody, whether it's GE, whether it's LG, Samsung, Whirlpool, Electrolux – that is the one I can capture, Siemens and [indiscernible] don't share public, and Viking, they were all below a single-digit EBITDA number. And the challenge that everybody asked me when we bought Viking, why would Middleby enter a segment that was traditionally low-margin, specifically when you have big players, a lot bigger than us, that have automation, they have efficiencies, they have supply synergies and supply leverage bigger than us? Well we proved to all of you that – I think, Tim, our margins in, our EBITDA margins were how much in this quarter?

Well for the first half, we were running right at 20%.

Okay. At 20%. And we will continue to pushing to what Middleby is. We would like to hit 30%, which should be a major change. Viking since its existence has never had a 20% EBITDA, from day one they started. Even in the heydays when they were almost a $0.5 billion company, they never had a 20% EBITDA to sales ratio. So this is our number one focus was to get the brand back up, to get the EBITDA. So today, I will continue saying we will not take orders at the expense of the brand and EBITDA. And this is a big change. It's a big cultural change because this was not the case in the industry. So I can give you a perspective. Our number one competitor is out there discounting heavily even though they have a great brand, and they discount. And we refuse to meet and match the prices, and we've lost some projects because people are testing our resolve and we're saying no. And as we continue bringing the new products, the Middleby technology, we hope to do what we've done in Commercial. We are basically – we will grow by being positioned at the highest price but great features, great benefits, in the long run, a great cost of ownership. And that's what we'll do.

Great. No, no. You guys have done a great job. I'm not trying to – I mean, you guys have done a great job. I'm not trying to – you guys have done a very good job with the business over time. So yeah, I'd hate to kind of concentrate on some of the short term. You guys have really done a great job there over the last couple of years. I guess on food processing, is there a way to think about – you said orders were up in the first half by 20%. Is there a way to think about what the base of that order book looks like in terms of what that could translate into revenue in the back half of the year, Tim?

Yeah. I think we're going to see higher single-digit to lower double-digit revenue growth is kind of what we would anticipate for the back half of the year. Some of those orders will go into 2016, but we will start seeing that start coming through in Q3 and Q4 as well.

Okay. And that's just on an organic basis, not accounting for FX?

Correct.

Okay. And then in Commercial Food, is there anything – you guys are very well positioned – is there anything that you're seeing that would kind of change the demand trajectory there? Or is it just kind of status quo, business as usual in Commercial Food?

It's been fairly consistent. As you mentioned, we're seeing continued activity really across our Chain business, which is strong. Some of the international markets have been up and down a little bit. Overall we're still growing well international. But again, given currency change for example, markets like Brazil where you had huge swings, our book is becoming more expensive. So we've seen a few pockets here and there of I would say slowing, but I think that's kind of in the – with the backdrop of still good demand as we see a lot of our customers opening restaurants overseas.

Okay. I appreciate all the color. I'll hop back in queue. Thank you.

Thank you very much.

Thank you. Our next question comes from the line of Tony Brenner from Roth Capital. Your line is open.

Thank you. Good morning.

Good morning, Tony.

Hi, Tony.

I have a question regarding the 20% first half increase in food processing orders. Given the high-ticket nature of that business, I wonder if that backlog or the increase in orders reflects just a couple of high-ticket items that are in the pipeline? Or is it a broader based increase in orders? And if so, what might be driving that?

Tony, you're getting to the heart of our strategy, which I would like to answer that question. We've been in that business now for approximately 10 years. So one of the issues that we've done over the past I would say five years is to try to take the cyclicality and the lumpiness of that business away. We're not there yet. I'm not going to tell you that we've taken that out. But what we want to do in the next 24 months is we will basically start seeing a much more normal, flat business than it's been in the past. And that has been a major effort by us. So let me give you a perspective of what we've done to take away the lumpiness. One, the number of acquisition we've done have been given, gave us a lot more flexibility to basically weather one segment to another. So if beef is down or chicken is up, we're baiting [ph] and playing and smoothing out a little bit more of where we were mostly playing was dominantly playing in sausages, hot dog, bacon. So now there is more integration and technology in the chicken market. We've become a much better player in the chicken especially with the acquisition, our last acquisition we've done this year. I also look at emerging markets. We have in the last two years invested significantly in emerging markets where we see a lot more of this coming through from China, Thailand, Malaysia, Middle East. Number three, we are now in the process of expanding our more expertise into segments that could benefit from what I call high-speed cooking or automation. So our bakery business, now we're going into things that we didn't have before. So we close within our bakery business to attack snacked goods, snacked goods, which we did not have before. We're mostly into what I call baked goods. Now we're going into snack goods, which allows us to get there. We're going into some application we have continues to be interesting in the medical [ph] side. We are interested in looking more at seafood. We're looking into, more into pet food for – we all have pets and we know how much we're spending on pet food. And all that requires the same thing. We're feeding dehydrated fish and salmon and beef and chicken to our pets. So I think that the strategy is working and our number one goal in the next 24 months is to figure out a way to smooth that lumpiness and cyclicality. And we're almost there. If you ask me that question 24 months ago, I would say I don't know how to answer it. So we've put a lot of effort. In the next 24 months it will be significant effort to smooth and start growing the way we grow in Foodservice. So we're very excited about this.

Okay. Thank you.

Thank you. Our next question comes from the line of Schon Williams from BB&T Capital Markets. Your line is open.

Hi. Good morning, gentlemen.

Hi, Schon.

Good morning, Schon.

I wonder if we could talk a little bit about the restructuring that's been going on in Viking? Quite a bit of charges the last couple of quarters. Can you just talk about – is most of the heavy lifting done, kind of first part of the question? And then what, in terms of the benefits, have most of the benefits from that restructuring already been realized? Or is there still more to come and we should start to see it over the next kind of 6 to 12 months?

I would say the heavy lifting is done, Schon. We did a lot of the charges that came through in the first half of this year related to distribution. As you recall, we acquired quite a few distributors over the course of last year. And as we streamlined that operation, we had a number of charges, including as we consolidated warehousing and kind of focused on the logistics end of that business. We still continue to drive efficiencies overall in the business. So I think really a lot of the heavy lifting is done. I think you saw from residential, improved margins in the first half of this year, overall the company we've had lower reported SG&A during the quarters. So we are seeing the benefit of that. It's somewhat offset by the fact that we're still dealing with the buying issues, as Selim talked about. We're kind of moving into the new Viking, but that being said, it's shown up in the EBITDA numbers, and we do think that those will expand as the business grows. I think there still is probably a little bit of improvement that is still yet to come through the numbers, but I think you did see a lot of it here in the second quarter.

Okay. And then just focusing on Viking, I mean if we strip out the discontinued lines, we strip out maybe refrigeration, would organic growth in Viking would still be down because of the changes that you've made in distribution? I'm just trying to think of like...

It's really up. Let me make that clear. If you strip out the distributers' products and refrigeration will be up. So...

Okay. That's helpful.

So it will be up.

Okay. That's very helpful. And last question, if I may, Tim, could you maybe just talk a little bit about we've seen some news recently about some recalls coming through just within the past couple of weeks. Maybe just talk about, is that already built into the warranty reserve? Is there still adjustments that maybe needed to be made to the income statement as we go into the back half of the year? Is there a special charge that needs to happen for those? Can you just help me understand, kind of are there – are we seeing kind of incremental headwinds here or was that already kind of baked into the numbers to some degree?

Oh. We do have a reserve on the books for recall items, and so we're not anticipating additional charges related to that.

All right. That's helpful, guys. I'll get back in the queue.

Thank you, Schon.

Thank you. Our next question comes from the line of Jason Rogers from Great Lakes Review. Your line is open.

Good morning.

Good morning, Jason.

Just to follow-up on the last question, I wonder if you would be able to quantify the costs related to the refrigeration rollout in the quarter? And how should we be thinking about that for the second half of the year?

Well I would say, it would be tough to do that for two reasons. One, we've incurred a lot of R&D costs on the refrigeration just from that perspective. So just to give you – maybe I should give everybody a historical perspective on refrigeration at Viking. So number one, when we acquired the business, refrigeration was – the engineers, R&D of refrigeration was in Iowa, in Des Moines, Iowa. So you had some factory in Greenwood, Mississippi and the engineering and R&D done in Des Moines, Iowa, extremely difficult to basically coordinate what was going on. And what happened, every time they designed a prototype, it had to be shipped down to Greenwood and they had to ship back with the changes, and it was tough. In the meantime, we had a deadline of September 1, 2014 to deliver the energy standards on refrigeration. In July, I decided to close the Iowa R&D, because it was not efficient. So here we are in the middle of trying to catch up on our energy standards, and I decided to close down the Iowa. It was spared [ph] by a couple of things. First of all I think they, the Iowa engineers realized that at one point I did not like the fact that we were disconnected and a couple of them had put their resumes out and left. And then I said, we'll it's time to maintain maybe close the tank [ph] and we closed it. So we took, we had no R&D or engineering in Greenwood, Mississippi and none of the engineers in Iowa were willing to relocate to Greenwood, Mississippi from Des Moines, Iowa. So we had to rebuild our total engineering group and luckily for us, we're not only able to find great engineers in refrigeration [ph],…

Thank you for that detail. Just shifting gears a little bit to the Commercial Foodservice, just wondering what impact the rising minimum wage, the $15 minimum wage, what impact that is having as you sell your Kitchen of the Future?

Well it's having a big impact. I will tell you one thing that people are all nervous about it, and it's driving two things. They are driving – well in fact, they're driving – it's impacting three key areas, which is design, design of the kitchen, the equipment and the workflow. So everybody is now, they know it's reality and everybody's trying to figure out a way of redesigning their kitchen. And we're seeing the impact in the fast casual. We're seeing the impact in emerging chains. As you know, the big chains take a long time. It takes a long time for them to try to change their workflow and process, not because they can't, the problem is you take a chain that has 5,000 stores or 30,000 stores or 10,000 stores, usually they have to go and convince their franchisees to invest in that technology. That's number one. So you have a corporate R&D team that really believes in it, but they might own only 200 stores. So there's no point for them to say, well, we're going to only do it in our own stores. So they need to go and convince the franchisees. And I will tell you what we're facing right now. So we're facing and they are at the end of it. The last year, I've been like you, struggling to understand why the Kitchen of the Future, which is a no-brainer, has not taken off as fast. Because the payback is less than a year, it is extremely fantastic for the over now I think there are, oh I don't know, 3,000, 4,000 restaurants that are using it. They love it. The operation income impact has been superb. So I went and asked many CEOs, and they say, Selim, we'll get to it.…

Thank you for that. Final question, Tim, what should we think about the tax rate for 2015 to be?

Yeah, that's a good question. I think we're still looking at 33%, 34%. I mean, we were a little bit lower than that in the first half of this year due to some kind of favorable items, but I think that 33%, 34% is the range we're looking at.

Thanks very much.

Thank you. Our next question comes from the line of Gary Farber from CL King. Your line is open.

Good morning.

Good morning, Gary.

So a few questions. Just on the Viking business, in the U.S. the dealer network that it's going through now, now that you've made a lot of improvements and changes, what – can you give a sense of what percent is just a large sort of electronics chains? Or just large retailers of the distribution network in the U.S.?

Can you clarify the question please a little bit more?

Yeah. So like a P.C. Richards or something like that like within that end, the chain that's reaching out, that's touching the customer, what percent of the total footprint that you have in the U.S. for distribution for Viking is comprised of those types of chains would you say?

Okay. So we – I would say we have switched significantly to those big chains. Prior to that we – let's start with P.C. Richards. P.C. Richards has always been a Viking dealer, but the relationship was not the best. Why? For one reason is we did not support them in displays. We did not support them in training. And the relationship was literally not the best. So when Middleby bought Viking, it was one of my objectives to target people like P.C. Richards. So I went and met with Craig [ph], and we created a relationship that's based on price. Craig Richards [ph] didn't come to me and say, "Selim, I'm not making money at Viking." His biggest issue was, Selim, I want three things to happen in my store. I want your sales people to support my sales people better. He had a lot of stores, and he said, "Selim, I want your people to be more present in our stores," which had been a big issue for us from a sales standpoint, our direct sales force. So we had to reinvent ourselves with our sales force. Our sales force is superb. It's just a matter that they were too spread out. We had too many dealers, and they were calling on everybody and P.C. Richards didn't feel that they were privileged, because we had I think – we had around 2,000 dealers or – let's say for sure we had 1,600 dealers, which is a lot of dealers to cover. Number two, he wanted to make sure that the display of the new products were upgraded. So what we've done is we worked together to upgrade, and it includes a commitment on both sides. He invests on display, we invest on display, and literally it was a…

Correct.

You can see that right now today. So Middleby installed an electronic parts system where anybody can track their orders. They can track which part they know. So the biggest issue as we changed a lot of, introduced a lot of new product it was tough for everybody including service to recognize which part is what, which know works where. So now you can go and see how easy it is to order parts. So if you have an old Viking range, let's say 10 years old and you don't know your part number or the service technician is new, they can go on their app on their tablet or on their computer or on their phone and go onto middlebyadvantage.com, which was cut released in December, and for Viking it go released in April 1. And now you can basically recognize which knob you need, which thermostat you need, what's wrong with your oven. It's very intuitive and it has gotten rave reviews by both our Foodservice service people and the Viking service organization. So all of those make people, dealers like P.C. Richard, Pack Sales [ph], Ferguson [ph], very much connected to Middleby now. It's not only part of Viking. It's not only the ability to sell, but the ability to tell their customers you're going to have a unique and differentiated experience with Viking now being owned by Middleby. Viking could not have done it. I could tell you that. Our competitors in residential, high-end competitors don't have that system. It's a unique system. In Foodservices it's unique, and it's out, it's open, it's on middlebyadvantage.com.

Okay. Thanks. I would – but just to say – so would you say practically all of the product is now going through P.C. Richards’s type dealers as opposed to being more fragmented than that before?

I wouldn't – it still is a diverse dealer base.

Pretty diverse?

Yeah.

And if you took like the top-five distributers, would they comprise a fair – more than 15% to 20% of the sales? Or is it sort of less than that?

I mean it's not something we really want to disclose. You can assume it's a meaningful number. But there still is hundreds of dealer customers. Selim just went through an example. We've invested heavily in relationships with a number of key partners, which some of those are the larger dealers. But it is – it's a broad base of customers, so not heavily concentrated with one or two.

Okay. All right. Thank you.

Thank you. Our final question comes from the line of Jamie Clement, Macquarie. Your line is open.

Tim, Selim, Darcy if you're back there, good morning.

Good morning, Jamie.

Morning.

All right. A thematic question for you, big picture, most of the basic ones have been asked and answered, but as you look at Commercial Foodservice versus Residential, these are two markets where you've got to deal with price competitors. Now, over the last decade plus in Commercial Foodservice, there's clearly been ongoing pricing pressure, but you all have been able to demonstrate a return on invested capital case to your customer base, and you all haven't had to discount your sales of double or tripped everybody else's. On the Residential side, you're dealing with a potentially less sophisticated buyer. And when they go into a retail location, maybe they see a competitor where it's hey you buy the refrigerator and maybe we'll knock $1,000 off the price of the range. How long does it take upgraded quality at Viking to break that kind of mindset and allow those customers to come to Viking?

So I'm going to answer. Jamie, it is a fabulous question. It's something that I wanted to present, to talk about it a little bit. So let's talk about Viking and then I will go to Foodservice. So on the Viking side, people buy Viking because of its looks. It's very different than Wolf, Subzero. It's very different than Thermador. And one of the things that we continue, and I'm going to share with you some of the awards that we've gotten in 2015 alone, we continue to upgrade. So we beefed up the handles. We beefed up the looks. We kept the integrity, and that's what makes Viking unique. If you get a Viking product in your kitchen, you still looks better than anybody else if you want that commercial looking design. If you want a slick urban look and you want modern transitional, Viking is not your cup of tea. You're going to go to Emele [ph], you're going to go to Agagino [ph]. We're not into that business. Our core customers want that look. And what happens is literally we continue investing in that design integrity that Viking has always had. Now, as the quality gets better, we're going to stay away from people discounting, which is surprising to me that in both Foodservice and in Residential, people, I don't know if it's the upper management or because they do not really man the stores that we do, I see discounting that doesn't need to be. So I give you a great example. A friend of was building a project – is building – not was building, is building a project in the Caribbean. It's a timeshare type of project. He had the first project. It's all Viking and even before we bought Viking, had always bought…

And then some. Thank you all very much for your time.

Thank you very much.

Is there any other? If there's not more questions, I'm going to basically wrap up by talking about some interesting trends that makes Middleby very excitable for the next three years. So I will start to release Technomic just released the top-500 report, and the 500 biggest U.S. chains have something to celebrate in 2014 and in 2015. Their sales, their food sales rose 4% last year up from 3% in 2013. And in 2015 the trend seems to be even slightly higher. The number second biggest event is that it's the first time ever that sales, food sales at bars and restaurants surpassed sales at grocery stores according to the U.S. Department of Commerce. Big, big number for us, meaning people spending money eating out has now surpassed in actual dollars people buying food in grocery stores. The third data shows that reliance on eating out grows with each new generation. And the millennials are considerably heavier users of Foodservice than baby boomers, which spends well for our industry and our segment. Finally, premium fast casual remains hot, hot, hot, where Middleby is extremely well positioned. It grew at 11% in 2014 while overall QSR growth was flat that traction to fast casual stems from the fresh made-to-order menu items and the ability to create innovation in menu and to serve literally items in a fresher environment and more made-to-order. Again, I would say, it's a take share market for most operators these days. To help spur growth, creativity is rapidly becoming the norm. Restaurant and institutions continue to come up with all sorts of ways to differentiate their operations. And it's maybe small tweaks to significant shifts. But I tell you, everybody is trying to elevate the dining experience, whether it's a McDonald's, whether it's a Chipotle, whether…

Ladies and gentlemen, thank you for participation in today's conference. This concludes the program. You may all disconnect.