The Middleby Corporation (MIDD) Q4 2017 Earnings Report, Transcript and Summary

Welcome to the Middleby Corporation Fourth Quarter Conference Call. With us today from management are Chairman and CEO, Selim Bassoul; CFO, Tim Fitzgerald; and COO of Commercial Foodservice, David Brewer. Management will start the call with opening comments on the quarter, and then we will open the lines for Q&A. Instructions on how to get in the queue 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, Jimmy. And thank you everybody for joining us today at our conference call. I’ll do a brief review of the quarter and then as Jimmy said we’ll open for questions-and-answers. Net sales in the 2017 fourth quarter of $632.9 million increase 6% from $596.8 million in the fourth of 2016. The fourth quarter sales include the impact of acquisitions not fully reflected in the prior-year comparative results which accounted for $59.5 million or 10% of the sales growth in the quarter. The impact of foreign exchange in the quarter added $10.7 million or 1.8%. Excluding the impact of acquisition activity and foreign exchange, the sales during the quarter declined by 5.7%. This reflects an organic sales decrease of 2% at our Commercial Foodservice Group, a decrease of 14.4% at our Food Processing Group, and a decrease of 8.2% at our Residential Kitchen Equipment segment. The sales at the Commercial Foodservice Group for the quarter amounted to $381.3 million. Sales were impacted by strategic initiatives to consolidate our independent selling organization which resulted in a disruption during the quarter. This initiative is expected to be completed during the first quarter with benefits expected to be realized as we progress through 2018. Additionally sales for our major restaurant chain customers continue to be slow as those customers finalize new product testing and decisions on equipment purchases. During the quarter we continue to make progress with a number of major restaurant chain customers including finalization of several rollup programs expected to start in the second quarter. In 2017, the international market was challenging following a particularly strong 2016 which grow organically more than 20% in each quarter and during the fourth quarter of 2017 international sales decreased by 5.5% due to challenging market conditions in Latin America driven by the hurricanes and earthquakes that occurred in that region late in 2017. Sales at the Food Processing Group amounted to $96.9 million in the quarter. The organic sales decline in the quarter reflects fluctuations driven by timing of larger projects. Orders had been slow in the second half of 2017 which is reflected in the revenues in the quarter and that will continue to impact revenues in the first quarter of 2018. However we have a strong pipeline of projects entering in 2018, and we've seen order rates improve early in the year with several larger projects being finalized. Sales in the Residential Group amounted to $155.4 million in the quarter and organic sales declined by $8.1 million in the quarter. The revenue decline includes the impact of restructuring initiatives including product rationalization and restructuring of non-core businesses at AGA with approximately half of this $8.1 million decline coming from the non-core furniture and retail businesses of AGA. Although sales at Viking continued to be lower, we have seen positive momentum with our dealer partners. We've added over 70 new product displays late in 2018 along with a number of new dealer partners and had seen positive order trends early in 2018. Gross profit for the quarter increased to $240.2 million from $239.2 million in the prior-year. The gross margin rate was 37.9% as compared to 40.1% in the prior-year. The gross margin rate was impacted by the acquisitions and excluding the impact of acquisitions gross margin would have amounted to 39.8% reflecting the impact of lower sales volumes and a less favorable mix which was offset by cost savings initiatives. Gross profit margins during the quarter at Commercial Foodservice Equipment Group were 38.4% as compared to 41.2% the prior year quarter - I'm sorry, gross margin at the Food Processing Group were 40.4% as compared to 42.7% in the prior year quarter and this is primarily reflective of the impact of mix with increased sales of our bakery business which carries lower margin. Additionally margins were impacted by lower sales for the Group. The gross margin at the Residential Kitchen Equipment segment was 36% and consistent with the prior year quarter. The margins reflect cost improvement initiatives offsetting the impact of lower volumes. Additionally we incurred costs with distribution changes in the quarter as we transitioned the number of our domestic brands including [Middleby] Lynx and La Cornue to be distributed by our company on Middleby residential distribution platform. While this transition has some negative impact in the fourth quarter, it should result in improved profitability in 2018. Selling distribution and general, administrative expenses during the quarter increased to $110.8 million from $110.3 million in the prior year quarter. The fourth quarter of 2017 included $14.4 million in expenses related to recent acquisitions. These increases were offset by savings from cost of - in connection with the restructuring and acquisition integration initiatives along with reduced compensation costs. During the quarter we recognized an impairment of intangible assets that amount to $58 million related to the Viking tradename. This impairment resulted from the continued declines in revenue in 2017, attributable to the product recall announced in 2015 and products manufactured prior to the acquisition of Viking. The provision for income taxes in the fourth quarter amounted to - with a benefit of $14 million and effective rate of 22.8% as compared to $36.9 million at a 31.3% effective rate in the prior year quarter. And the fourth quarter tax provision reflects the impact of the Tax Cuts and Job Act of 2017, and included a tax benefit for re-evaluating U.S. deferred taxes at the lower corporate income tax, partially offset by transition taxes to move to a Territorial Tax System. Excluding this impact the normalized effective rate was proximately 32% for the fourth quarter and also for the full year. Moving into 2018, the company will benefit from the impact of the new tax [axe] which will reduce the effective rate which we estimate on a preliminary basis will decline to approximately 25% to 26%. The earnings per share for the quarter of $1.35 was compared to $1.41 in the prior year quarter, but excluding the impact of the fourth quarter non-recurring charges in tax benefit EPS would have amounted to a $1.48 per share. Briefly touching at cash flows, cash flows generated by our operating activities continue to be strong for the year and amounted to $99.6 million in the quarter and $304.5 million for the full year. Non-cash expenses added back in calculating operating cash flows amounted to $21 million for the quarter. For the quarter, this included $12.1 million of intangible amortization and $8 million of depreciation. And company utilized $12.1 million in the quarter to fund capital expenditures primarily related to investments in manufacturing equipment, enhanced production capabilities and tooling for new product launches. Our net debt at the end of the quarter amounted to $939.2 million as compared to $869 million at the end of the third quarter, and $663.6 million at the end of 2016. Company's net debt to EBITDA leverage ratio at the end of the quarter approximated 1.9 times and the increase in the debt during the quarter includes a $140 million for acquisition activities including Globe and Scanico. And for the entire year the company made investments of approximately $300 million to fund [seven] acquisitions completed during the year, as well as funding stock repurchases of $239.8 million. Jimmy, that's all for the initial prepared commentary. So if you could open up the call now to questions, that'd be great.

[Operator Instructions] Our first question comes from Tim Wojs with William Baird. Your line is now open.

Maybe just to start on Commercial Foodservice and maybe kind of some color on what you're seeing in terms of order activity and confidence around spending by your chain. I know, you've been kind of talking about a pipeline and some testing activities in the business in the course of 2017. How confident or how visible is some of that revenue potentially coming through in 2018, any help there would be - any color there would be helpful?

Tim, growth definitely in 2017 was not as much as expected. And I will elaborate on that a little bit later. As I speak about why we have not seen growth in 2017 specifically in the chain business, but we're seeing - in Q1 of this year we're starting to see positive trends in both sales and also operator sentiment. So we're starting to see that change now. So our orders are in the positive territory right now and we're very confident about that. Now if you look at overall industry research, they are still given what happened in 2017 everybody is coy about research, they are afraid, so now everybody's reporting 1% to 2% industry growth. I think that my prediction is looking at a lot more than that in 2018.

So Tim just maybe last year looking back, we actually - we have some growth in the general market. As we talked about during the year we were substantially impacted by the chains which historically that's been the reason we’ve outpaced the growth of the industry. So, we've talked about that that's been a strong pipeline, but it's been a long lead time and we’ve kind of talked about it starting to come into place in the fourth quarter in the first quarter when we're starting to see some of that initially come through. Just touching on internationally, I mean it was 2016 we grew I think 22% or 24% organically. So we were coming off a pretty strong comp then we had some disruptions out there in certain markets, Latin America in particularly which had been a growth market. So I think going into the 2018, we've got a better backdrop right, we're coming off of weaker comparisons and some of the things that were maybe instabilities in certain markets looking forward hopefully we've get a better landscape moving into the year.

So I mean maybe to put a finer point on it, 2018 you guys have confidence in visibility that you'll be able to grow organically in Commercial Foodservice?

Yes.

Any number you want to give us or will you - I know you don't give a lot of guidance?

No, I don't give any guidance. I don't want to go there. But I would tell you that through outpace the industry and outpacing our competitors.

And then on the margin side, I mean, mix has been a headwind on the gross margin side of some of the acquisitions. What's the right way to think about gross margins and operating margins as you look in - from 2017, 2018, I mean, can margins be up on a year-over-year basis, despite some raw materials?

I am going to answer that and then I'll turn it over to David Brewer, but if you remember, it’s the only guidance I've ever given. In my tenure as CEO, I've never given any guidance. The only guidance I gave was, I think a year ago when I spoke about moving from 23% to 27% on EBITDA sales ratio. And I said it will happen within three years, correct. Now I think 2017 we ended up 25.7% and now that's taking away the new acquisitions that you've done. So at this moment, I would say that to reach our target of 27% faster than - probably will be reached sometime this year. So ahead by two years and I'm now giving another guidance, is now I am upping my guidance on EBITDA sales ratio, it has been always a driver of our company to say by 2020 will be 30%, end of 2020 we'll be 30% EBITDA to sales ratio. Taking away newly acquired company, I'm talking organically we’ll see a 30% EBITDA to sales ratio by the end of 2020.

Our next question comes from Larry De Maria with William Blair. Your line is now open.

Just two quick questions start on the quarter. How much was pricing up or down in fourth quarter especially in CFS? And how much we add back to get to that kind of adjusted $1.48 in a stock units and what did that look like to the rest of the year because obviously we're calling it out this quarter? Thank you.

Larry, can you break down your question a little bit? That's a lot of questions at the same time. So can you repeat that one by one?

Larry, before you repeat I'll answer your last one first, because I'm not sure obviously how much the detail. The $1.48 that I had essentially backing up the Viking impairment, the restructuring which was roughly 2 million in the quarter and then kind of putting a normalized effective tax rate out there of 32.5%. So, I mean obviously that's a very unusual or somewhat nonsensical tax provision with kind of all the adjustments for the tax rate changes. But effectively that gets you to the $1.48 so it's not a - so that…

Right, so the start base comp I guess was the question about how much we added back to get in that number to go from 1.35 to 1.48 and what is it look like the rest of the year with the tailwind/headwind?

When you say added back, I mean the stock based comp is just whatever it was in the quarter there is no adjustment for that to like get to that pro forma 1.48 for the quarter. Now stock-based comp was less in the fourth quarter because as I mentioned, expenses in the quarter were down 14.4 million. When you back out acquisition so on a like-for-like basis our expenses were running substantially lower lot of that has to do with cost reduction initiatives that we implemented and we saw the number of our restructuring charges go through the second half of the year. But in addition to that just because we have incentive based compensation across the company that was lower for the quarter and that includes the stock-based compensation.

Okay I'll take offline. Maybe just confused about that. Then just maybe just the pricing in fourth quarter and then just had one final question? Thank you.

So I can address pricing. We basically had - I think a price increase that went in on some of our divisions in the first quarter but in general our pricing was in line. We have not gone back in discount or rebated or whatever so we’ve been in line. So, no unusual pricing changes in the first quarter.

Yes, I mean I’ll just - we had price increases which typically will start to take them late in the year we had some divisions taken late in the year, we had a number of other divisions that took them during the first quarter but in terms of discounting nothing changed on that front.

And then just final thing, obviously in last quarter you talked a lot about the QualServ and how discussed with your dealers and distributors and sort the things out. Are we confident that that’s not going to be an issue, it is to be more through 2018 and the headwind to organic growth at all and do we have 100% confidence in that is sort out I guess is the question?

Larry I would say it is sorted out, I mean I think we spent a lot of time connecting with our dealer partners as we're committed that channel so they understood what QualServ was which is heavily focused on fabrication and I think Dave will talk a little bit about that, but I think that stabilize of course, there may still be a little bit of disruption but I mean I think that would be really more on the edges and minimal now. I think it’s really for us it was really making sure that we educated our partners to what QualServ was and what our intent was with QualServ moving forward. And maybe Dave you can touch on.

Sure, we’ve had - like we referenced maybe four or five, six months ago around QualServ. What we’ve done with our partners our dealers partners and our channel is we’ve established very clean communication, it's actually allowed to rekindle some tremendous relationships. And now it is behind us a couple months ago as far as having a working relationship. We have rules of engagement and frankly there is tremendous value in QualServ that I think our channel partners are going to take advantage of. And so I think it’s empowered our relationship, it’s made us better company, better partner to the channel. And I think we’re both - frankly I think we’re both going to win big time because we’ve gotten very specific about the value of QualServ to our channel as a manufacturer.

And our next question comes from John Joyner from BMO. Your line is now open.

So just following up on the commercial side in your commentary about consistently outgrowing industry growth rates, kind of despite what’s occurring across the overall market. I mean if I looked at 2018 there is really three factors that should be a tailwind which are one easy comp or the easiest comp about seven years. You have a large pipeline of potential orders and you have 10% plus of acquired growth. So my question is beyond kind of your comments about changes, is there anything about the current competitive landscape that is different today versus when Middleby was able to meaningfully outgrow year in and year out?

I would John one I don’t know the competitive landscape I can’t address it one or another I think that in light of what happened in the first quarter or the third quarter I think we’ve seen some discounting that took place and we seen that on one specific QSR that happened. At the end we’ve responded by saying that we will not discount and we have not discounted and the question has been is other than that specific chain we have not lost a single account where I can go back and name any significant account that we’ve lost. So from that perspective we did not lose and market share. 2018 continues to be interesting for us from three perspective, and perspective number one is there some and I’m going to put some right there laser of very clearly. Is there are some macro factors that which continue to affect restaurant business in general. One of them is the fact that the gap between restaurant prices and retail grocery is the largest it's been in years. From one perspective, you’re seeing the competition from retail stores, from what I call grocery stores going after restaurant business and diners. And that’s putting a huge pressure on restaurant traffic. So that’s one thing that has to be resolved. Number two, we’re seeing somewhat of restaurant saturation too many places to buy food right now. So somehow somewhere restaurant should focus on being the most convenient place to get food. And to figure out their cost income between what’s going to cost them on menu price growth which is now far exceeding grocery prices. So when you go back and get prepared food from retail stores or grocery stores so from that perspective they have challenges. On the other hand we have some opportunities for us as company so they have another challenge which is labor. And only labor has become very difficult staff boost cost and turnover increased and we’ll continue to do so in 2018. So with turnover being high it's really, really hard to retain good people. So just to give you numbers and basically what I call front of the house and back of the house labor in 2017 the turnover, average turnover in chain Weston was 154%. In management of whether a franchisee management or store operators management it was between 40% and 50%. From that perspective opportunities for us is to go to automation and labor saving equipment. And we’re seeing many off the chains turning to us to talk about automation and labor saving devices. On the other end we’re looking at interesting outliers out there. We have been the first to get close to fast casual. I will tell you in our pipeline today we have many, many accounts that I call micro chains. They use to be independent or very tiny chains that are now seeing significant growth and they are expanding and graduating to chain status. We are patterning what I call - we call them emerging chain and our growth in that category while it small because they don’t have the store unit, but the growth in that category for us has been amazing. We have learnt a lot of things from working with those chains because they do not have and R&D they do not have what I call the big chains have testing labs. So we have become their R&D department and we realize what made those - emerging chains very successful. So from that perspective I look at labor, I look at the micro chains, I look at the fact that menu prices at restaurants are outpacing retail prices and is one thing that we can help restaurants figure out a cost structure to help them reengineer their kitchen, reengineer and menu offering and be more efficient and compete more effectively against delivery, and against grocery stores. From that perspective, I’m going to turn it a little bit Dave to talk a little bit about our expertise in our grocery stores and how we’ve been very successful in that category too.

We continue as Selim pointed out specially leveraging our ability to effectively change that manufacturing process in the kitchen. My background is from that side of the business and restaurant operations. We have the inherent ability to address the fundamental concerns of every restaurant operator out there, every general manager, every team member and that is food cost, speed of service, menu flexibility and energy usage. We’ve got proven success stories and every one of those thanks to partnership with the large chain and we’re just embedding those kind of efficiency and these emerging chains and upcoming start-ups and they value that. We can go in an effectively in a matter of weeks to dynamically change their energy usage, their speed of service, their menus and allow them to bring out limited time offers very quickly or new product launches and these emerging chains are young, aggressive. Our management team as we’ve restructured it last year is a diverse group of experienced people and leadership to young aggressive people. We mirror the image of our customer and management style and capability and the emerging chains are latching on to us for that because we deliver real value very quickly.

And our next question comes from Robert Barry with Susquehanna. Your line is now open.

So in addition to QualServ you mentioned this headwind from consolidating the independent selling organization. Do you have some rough sense of how much that might have cost you in the quarter?

Honestly it is difficult to say I mean we just know that that there was a change over because we were bringing on a new selling organization changes were ongoing, training efforts were in processes with some of the sales call that would be made or the connectivity that we would have with our customers just kind of disrupted during the period so it’s tough to say - put a number on that though. But certainly we know it was a headwind.

I’m going to step in and say I'm surprised, pleasantly surprised by our numbers in the first quarter I would tell you why. 2017 was a transformation year for us it was a transformation year for two out of three reasons one on the commercial food service side we basically changed two-third of rep organization they had contractual agreement with us and we basically had to tell them early on that we’ll not renewing those contracts with them in order to consolidated and go from over 158 reps to 50 reps. So we cut two-third of them. The problem is, once you cut those people and tell them we’re not going to renew the contract they are not pushing our products anymore and what happens is they were going out and soliciting to represent other lines. Number two the QualServ situation which occurred in June and July when he bought the company rattled our channels of distribution. People were concerned that we were going to have a dealer to compete against them which was not the case, but it took six months to get those people back in line. In the meantime, we were having a good momentum with the channels of distribution and they started basically slowing up orders till they understood our strategy with QualServ. When I look at those management, and we look at the general market we were up with the general market that’s number one. Number two, having a complete selling organization not selling our product which is that what you get in commercial food service having a complete channel of distribution basically wondering whether we’re going to be competitive or not and that took almost six months. Having changed also being now told by the reps they are no longer the reps they were – basically being dis-aligned or fired from being representing Middleby we created a significant disruption in the marketplace. And for us to be in the first quarter down the way we’ve been down 2% I would have said the sustainability and the power of the brands I would have expected us to be down a lot more. We have a sales force total sales force that’s disrupted we have complete channel of distribution that basically questioning if you become a competitor and we’re still up in general market. So from that perspective I look back at Middleby and I'm very proud of what our team has done. I think they had a significant challenges that were self inflicted those were not required. They were not constrained people didn’t abandon us we made two structure decision one to buy QualServ for its fabrication and middle work, second, to change our complete rep organization within less than a year, retaining people, signing up new contract, honoring contract because we didn’t want - we were honorable in certain cases, we basically work with our existing sales reps who have been with us for a long time. And despite all of that, I am very pleased with where we’ve been there. So as I look at 2018, it should be a breather for Middleby. Dave would like anything to add?

Sure Selim, Selim answered I think it was question one or two about his confidence in our and basically what I call middle of P&L. Frankly the work has been done - last year we did three tactical things that turned out to be tremendous strategic impacts. We restructured our organization not only with the sales team in the field but the management team and we’ve created an organization that is much more efficient. We changed our manufacturing process in a number of our locations and more importantly we made a step function change in supply chain management that’s now done and embedded. And so using engineering elements and artificial intelligence software on supply chain, we have fundamentally given us a tremendous advantage over anybody else in the industry with literally the same number of people in our organizations and that is been applied to residential and commercial effectively already being used. So I can easily say at the end of the year, I told Selim at the end of the year I am positive of the budget.

I think that sort of I was going it seem like if you strip out some of these self inflected headwinds that you actually put up you know some decent growth in the foodservice business especially in the last couple quarters. But maybe just a shift focus over to residential and Viking I was a little surprised to see the impairment just getting it seems like indications have been that business is inflecting. So can you just talk a little bit about kind of what underpins that impairment and what the actual trends are that you see there. Do you think we could see some growth at Viking anytime soon?

So let me answer the final question I’ll let Tim talk about the impairment. So what I have always told you and I want to thank everyone one of you our shareholders, our analysts that are stuck with me to say at one point I’ve kept on talking about past tense it will happen or whatever we’re still not there. Today I can tell you Viking is fixed so from that perspective you can expect positive growth for Viking moving forward starting in the first quarter of 2018. So the problems are behind us and I am very, very happy that finally some of you may thought it took a little bit longer and that’s why I turn it over to Tim to talk about impairment but Viking is fixed.

So I mean just from an accounting standpoint - although as Selim said we’re positive on Viking all the heavy lifting that was done and the momentum that we're starting to see kind of going into the year, but as you kind of look at impairment you look at it relative to the forecast that we’ve had and no surprise over the last five years. We've been talking about all the challenges with Viking from the quality and the recall which is impacted to the topline. So relative to where we expected the last few years to be in terms of revenues we’re clearly below those right so 2017 we were down with Viking again I mean really that’s the kind of the jump-off point is with the inflection point came longer because the challenge was frankly bigger and the investments that we had to make were deeper and the lifting was heavier. But we’re at this point now but that - from an accounting standpoint, I mean that puts us behind where any of our initial expectations when we bought the company we’re in that - and that's how valuation was at. So I think looking - we analyzed the impairment once a year that happens in the fourth quarter. I think when we looked at the recall the impact of that and getting on the other side of that took longer. So I think that was a big factor in re-evaluating kind of the valuation.

But just last one from me, you mentioned potential positive impact from the tactual change. I was just curious A; if you actually saw any headwinds in the quarter from maybe some customers delaying purchases to kind of a wait for the new depreciation rules? And then B; have you actually heard from customers or seen any evidence that the new rules will actually be an incentive for buying things?

I think anecdotally yes, it’s I think it's a positive a backdrop and our customers are certainly aware of that and we've talked about it with them. I don't think it really held up anything in 2017. But I think it's another factor that's kind of a positive backdrop as we've moved into 2018.

Our next question comes from Jeff Hammond with KeyBanc Capital Markets. Your line is now open.

So food processing, I think you mentioned some larger projects slowing, and can you just expand on what's going on there and how that maybe shapes the first half of the year in that business? Thanks.

Yes, I think we've always talked about food processing it's a lumpy business and these big projects tend to cause us to jump up and have accelerated growth or drop back. So I mean I think we're in one of those low periods where we didn't have any big projects coming through in the back half of the year. We saw some things either get deferred or not materialize. And that is - so we’re obviously we’re down in the fourth quarter. I think that's going to carry into the first quarter, just given where the backlog was coming into the year. We do have some positive order momentum going into the year and starting to rebuild that pipeline. But I think it's going to be a year where we're going to start soft and then we're optimistic though about the back half of the year, kind of given some of the projects that either were - we think were close to or in some cases actually just took on board.

And then so just back to the comment you made earlier about commercial food servicing and growth in ’18, is that - I think you're referencing kind of people thinking about 1% to 2% industry growth. Is your view that, that is too pessimistic based on what you see or were you commenting on kind of your confidence in your business relative to industry growth rates? Thanks.

I think really I think the industry will have a hard time growing until they fix some major issues. They're going to have to fix their marketing problem. I think the 1% or 2% industry growth is realistic. I think it's you know there are a lot of issues, competition has increased and many of them are still looking at technology implementation. I'm talking about specifically Middleby, I think Middleby you will outpace significantly that number for many reasons. One, we are working with new chain customers that are new to us, we are working with current chain customers in redefining their labor situation. And working with them on creating a better real food, what I call real food menu. We have some - now orders coming through, we're no longer in testing so in - if you remember, we started talking about many of those chains that would come through. And I said they will come through, start coming through in the fourth quarter of 2017. And at this moment, I'm looking at them coming through big in 2018 and even bigger in 2019. I want to turn it to Dave to be a little bit more specific on this.

Yes, that's a great point Selim. Frankly we've moved to a past tense. So you know we've talked for a number of quarters now about the pipeline of chains. We got probably more than a dozen chains. And I would say that, over half of those doesn't change and there's many more as we talked about them in pipeline. But you know that we've gone through the field ready process. Field ready process took a longer time, but we did market testing and we've proven our products. And I'm proud to say that we’re not talking about the future anymore. We've actually started shipping more than a half a dozen significant programs products. Now, I came from that world, it's a slow ramp, it doesn't ramp up next day, but we are through the testing process now. We are getting orders against proven products. And I think that, if you look at this year in total that's just developed and I think that's what creates some of synonyms confidence in the business beyond our channel partner and our dealer networks. And don't forget, we are very strong internationally. So when I talk about chains I am just talking about U.S. chains, there are tremendously strong chains both in China, Southeast Asia, in the Europe - Eastern and Western Europe that have buyed into our concept both emerging chains and large chains.

Dave, that's great. That's a great point. I have not brought up in the conference call today. So in 2017, amount of disruption we talked about was disrupting international. We doubled down on our investment in international. So we revamped many of our organization. We've increased our service level. We spend more money on service. We spent more money on recruiting new people. So we've doubled down on our investment in internationally in people, and in test kitchen, and prototyping, and the ability to basically have chefs based, vocally Chef based programs. So from that perspective, 2017 continues every time I turn around it's another initiative that was disruptive because we basically went back and hired new people, had them retrain, send them back to our factories to be trained and they were off the field. And so, everything is lined up for us, forget the industry, for us to start the next three years to be very positive. We reinvented our company. I think we were great. We've always been great. I have nothing, I think there's no blemish on little that for the last 20 years. So I'm not going to start telling the 2017 was not blemish year, it was a reinvention year. It was a rebirth for staying on to make sure that the next three to five years become very, very strong again to what we've done. We've become bigger, more complex, the growth becomes a lot more complex to come through. And the only way to recapture what Middleby has done is to reinvent ourselves and it cost us in terms of topline and maybe some bottomline in 2017. But that was a cost to do to reinvent ourselves and go forward.

And our last question comes from Saree Boroditsky from DB. Your line is now open.

I just want to focus a little bit more on Viking, given your quanta for improved order and if you're looking at this every year. What was really the underlying cause that really changed your forecast versus last year?

About Viking?

Yes.

Simply, I could tell you, I can give you the history of Viking from the beginning. It's something we need to talk about. So number one, when we need both Viking we were surprised by the quality problem we faced. But most important, I think we’ve got sucked back by the recall that occurred on 60,000 rangers. So as we were started to build the brand and we were ready to go and we had some documentation to say we were starting to pick up orders. We became aware of something that’s happened prior to us buying the company. Again, something happened prior to us buying the company, so we were not aware of it, just not a - enter Middleby, so suddenly we became aware that there was an issue that occurred prior to us purchasing Viking. And it affected 60,000 rangers. So suddenly, while we were building confidence of our dealers and our customers, our designer and architects and builders now we had to issue a note telling them, sorry, go back to every one of your customers having Viking Range and tell them that there is a recall and that set us back. In the meantime, while this was something that we could not control, we turned around and kept on innovating, being refusing into Viking all the commercial technology from no pre heating our ovens to basically our volcano burners to our way that our convection oven worked, to our griddle that we used at Five Guys, and Culver's and [indiscernible]. So we started including all the commercial technology to the push-ups technology infused into Viking. In the meantime, we started getting service behind us. So I would like to urge all of you to go to a website called consumers affairs. I don't know its dot.org or.net - dot.net. This is like a catch all. It's like yelp for basically people venting about their appliances. And if you look at that, if you look back two years ago we were a red one star. So if you look now, I would like you look at us versus every one of our competitors, you can go and put [indiscernible] you can put Samsung and put LG, you can put [indiscernible], Bosch, Miele and you see where we are and where we stand. That's something that will tell you, this is not me validating how good we've come. So I can tell you, that if you look at that specific website we used to be red, not even a green one star, it was a red one star that means stay away from Viking. Today we've gone back, I think close to 3.5 or 4 stars and you can compare us against our competitors. I urge you to go there and you can see the progress we've done in the Middleby to build the brand back. So we've invested heavily in the brand. We've invested in service, in parts. We've recommitted to our partners and the product and innovation speaks for itself and the quality problems are behind us. So now, we're starting to see customers reflected in that website, reflected in our orders. From that perspective, this is what happened at Viking. So now I'm very comfortable so before that I wanted to make sure that the products were tested and released. And in this place in our dealers and they are out. Now in 2017 we released 50 new product on top of 52 that were released in 2015, 2016 at Viking and we have a few more products, the final one coming up in the second quarter of 2018 and we're ready to go, exciting products.

Let me add a couple of things. Kevin Brown the President there Viking is just a phenomenal leader and he's invented to back it up what's going insane, that's really driven - he's really driven the business here. The manufacturing process, the quality control, the supply chain again is set in place is embedded and it's up and running. So whatever we're top whatever Selim referencing on that growth potential we’re set on quality, durability and reliability from manufacturing and supply chain presents.

Dave, thank you for kudos, Kevin Brown and kudos at Viking, I think the transition and transformation of this company is something we've acquired many acquisitions over the years the transformation of Viking has been unique. A lot of efforts, a lot of hard work and a lot of innovation took place so kudos to my team. Kudos to all dealers who stuck with us and didn't abandon us and kept believing in ourselves get it done. And many of our designer and builders who always believe in the brand and never give up on us. So from that perspective. Thank you Dave for reminding me to thank everybody because this is an amazing transformation.

I just want to, Selim referenced that website, its consumersaffairs.com.

Its consumeraffairs.com. I urge you to do there do research, its objective, its unbiased. It can take you through how we compare and how we're doing.

And then just one follow up I believe someone kind of mentioned this earlier on the call, but could you just provide a little bit more color on the price cost dynamic in the quarter? And just expectations for 2018, I think in the press release you talked about higher gross margin? Just wanted to follow up on that?

So I'm not sure where to start to do that. So pricing during the quarter as we said you know was really I would say kind of not more of a neutral thing. We lost volume which was an impact on the margins, but our cost structure is lower in the fourth quarter and we'll have that going into next year. We had some built in margin momentum because of the cost savings initiatives, some of that with the newly acquired businesses which we typically go through and integration to drive the margins and then a lot of the initiatives that Dave and Selim talked about to supply the organization and drives supply chain initiatives. So I mean I just - probably we've got some momentum on the bottom line. Selim talked about the targets that we've got out there for driving EBITDA margins. So I think in 2017 we did have a margin percentage growth when you back out the new acquisitions which are always almost by definition dilutive to Middleby when we when we first buy them. So I think we've got momentum there.

Just to clarify, I mean are you saying that cost savings can offset higher sales costs because I think historically you talked about pricing potentially lagging real price by about a quarter?

Yes, so we - there was - we had some nominal steel price increases in the back half of the year in the quarter. So I don't think it was it was kind of neutral. So I don't think that was much of an impact. We had some price increases going into the first part of next year, but our pricing price increases that we have should offset the material cost increases that we're seeing come through.

Thank you. And that's all the time we have for questions, I'd like to turn the call back over to management for any final comments.

So I would like to recap where we've been and where we're going. So again, 2017 was the year of transformation for us. But I remain very pleased with our EBITDA to sales ratio, despite all the changes we made internally. We are now - if you take away the newly acquired company organically 25.7% very close to our target of 27% that I guided upon. And we are almost a year and a half or a year ahead of that target. And I continue now looking upping now for the next three years our running rate to be at 30% of EBITDA to sales ratio. When I look at our topline and 2018, as David mentioned we are - our chain business remain very solid. We're starting to ship. So we believe in 2018 and 2019 we will ship on those millions of dollars that I mentioned before and we'll continue growing. So 2018 should be a growth year for Middleby. Then we look at basically the challenges of our customers is to make sure that they overcome labor and that's where we're doing a lot of work there. It's simplifying their menu item. A lot of opportunities within emerging chains and CSRs for us. I look at also some food service trends. I look at chicken program where we are very strong in the chicken program with equipment taking place. I look at another trend that's happening which is interesting for us, we've gone from a three meal period to a six week period. Breakfast, lunch, dinner, snack, happy hour and delivery. So this extents the use of a kitchen and that's where we're very excited. The limited time offers bring, drive traffic to our customer, but it also drives complexity. So they need versatile equipment. Convenience and speed in food service is unbelievable. Every customer's who come here are talking about our motto. Our mantra at Middleby have been seconds and inches. If you come to Middleby its because we can cut back, inches off your kitchen, give you more space to open extend your bar or extend your dining room. But most important it's about speed. Speed is number one, is one of the number one reason people have competed. Chains have competing against each other on serving people in and out faster and fresher. So speak for us is not just using a microwave, but creating an amazing food experience with cutting seconds and sometimes minutes. And we are technology driven. That's what we do. We are more innovative when it comes to speed, delivery, convenience, automation. Then I continue looking into what's happening in energy. I will remind you I have told that and being saying that for now years. We are the first to create in 2000 when nobody spoke about energy-saving. In 2000 we were the first to create energy-saving equipment and practices across our platform. We started with the pizza oven, then we took to the fryers, then we took to the convection oven, then we took to the combi oven. And what happened today energy start rated kitchen equipment are very popular and we are very, very involved with them. We are the leader in this. If you look at it, there is a lot of opportunities I give you a perspective. Today when you serve the all restaurant chains only 22% today of all restaurant chains are using energy rated fryers. So the opportunity to switch those people from a non-energy rated fryer just as an example to one that energy rated at very little cost to them is a huge opportunity for us. I look at ovens, today 25% of all chains use energy rated ovens. I think we can bring those transformation a lot faster within that segment. Now what is even more interesting is that utility companies have created energy rebates from California to North Carolina to Florida and today only 16% of restaurant operators that have been surveyed took advantage of those energy rebates. So today I give you a perspective that our energy rebates in certain states that go up to a $1000 all you have to do is show that you have purchased an energy star appliance. By doing so it simple, you get up to a $1,000 rebate so you buy an energy star rate of fryers that might cost two grand, you get a $1000 right, within days from submitting that invoice as long as its energy star rated. So from that perspective I’m very excited and bullish about where we’re going to go irrespective where the industry going to go. Our technology will tell us that we’re going to basically switch people from increase or double the usage of energy rated fryers or energy rated ovens or energy rated simmers. Now the second one is water saving innovation. So when we look at water saving innovation, we have been one of the leader. We were the first to introduce a waterless steamer. We are the first to introduce [indiscernible] which eliminates steam table with a lot of water usage. We saved our customers in 2017 and 2016 over 1 billion gallons of water. We are so advanced on that technology and water today is another big challenges for many of our customers. Finally, I look at waste management. We have been a leader in waste management. So today food waste is an emerging area for action in almost every restaurant. And we are the leader in that and we are seeing significant growth in our waste management not only in the U.S. but overseas and we've been right now we’ve invested heavily in technology that allowed us to become the leader in waste management system for restaurant specifically. On the residential side, I would say that finally all the work that had been invested in innovation, in service, in parts, in recapturing our dealer system have paid off. We're seeing a positive order trend that has been ongoing for the last four months now you can say four months is short, I agree but it has been in a negative decline prior to that year-after-year. So finally it’s not - we don't have two years behind us or positive growth but we have at least four months that has been consistently positive for Viking. Now I am excited of our residential platform because it affords two things one, our EBITDA ratio on that platform has been the fastest, faster than food processing, faster than commercial. When you think about it, we started that platform five years ago with the acquisition of Viking, three years ago with the acquisition of AGA, today we are in a 20% EBITDA to sales ratio in that platform. We are going to basically move fast into 25% and 30% to be aligned with food service a lot faster than food processing. It took us 10 years in food processing to get to 25% I think we’ll most probably get a lot faster on residential. On the food processing platform we remain very, very bullish. It’s where we are a dominant player. We are number one and number two in most of the market we serve both in protein and bakery. The margin they are exceptional. Our customers are very much aligned with us. However, the only negative about that platform is cyclicality, it's lumpy. However, when it goes it goes well and we go sometimes through period of lumpiness but over 10 years that platform has been a fantastic value creation for Middleby over the years. From that perspective, I remain very excited about the reinvention of our company at all levels. Internationally, our doubling down internationally is something that has been fantastic. When we take basically a group that has done 20% to 24% and we say we are reinvention, I look at what we’ve done is bold. We’re not broken, the company was not broken. The company was not distressed. At the height of our performance in 2016, we sat down as a management team and said, we need to reinvent and it cost us significant setback in 2017. However, we're willing to take that step back to create a new company. I am very excited because there is not a lot of companies who reinvent when they are at the top of their game. From that perspective, I can talk about two companies, two restaurant companies that use our product of which I'm very proud. One of them is called Noma in Denmark. Rated one of the best restaurants in the world three years in a row. At the top of that game, their owner, founder and chef decided to reinvent the restaurant. He closed it down. Alinea here in Chicago is another restaurant concept that basically was in top of the game they had won James Beard award, they've won Michelin Stars, it takes months to get a reservation. And their two partners that run that concept also closed it down to reinvent. They were not in trouble, they were not distressed, but they believed that to make the future and to remain relevant, they need to disrupt themselves. I talked with those models and that's what happened in 2017. And it was painful because it took a lot of changes from people who have been with us for a long time in terms of reps from basically refocusing our energy with our channel dealers, where going direct in our distribution on residential and revamping our total international organization. However, we are now prepared to move forward and continue the greatness of this company over the last 20 years that will continue in the next five years. I thank everybody for listening to us and I hope to talk to you next quarter. Thank you. Bye, bye.

Ladies and gentlemen this does conclude your program. And you may all disconnect. Everyone have a great day.