Timothy Fitzgerald - VP and CFO Selim A. Bassoul - Chairman and CEO.

Timothy Wojs - Baird & Co. Lawrence De Maria - William Blair & Company James Clement - Macquarie Securities Group James Picariello - Keybanc Capital Markets Jason Rodgers - Great Lakes Review.

Welcome to The Middleby Corporation First Quarter Conference Call. With us today from management is Selim Bassoul, Chairman and CEO, and Tim Fitzgerald, CFO. We will begin the call with commentary from management and then open the lines for your questions. Instructions on how to get in the queue will be given at that time.

[Operator Instructions] Now, I'd like to turn the call over to Mr. Fitzgerald..

Thank you, Andrew. Thank you to everybody for attending today's conference call. I'm Tim Fitzgerald, CFO of Middleby. I've got some initial prepared commentary and then we will open the call for questions. Net sales in the 2017 first quarter of $530.3 million increased 2.7% from $516.4 million in the first quarter of 2016.

The first quarter sales include the impact of acquisition activity, not reflected in the prior year comparative results, which accounted for $44.6 million or 8.6% of the sales growth in the quarter. Sales in the quarter continued to be affected by foreign exchange variation in comparison to prior year.

This fluctuation resulted in lower reported international sales when converted to U.S. dollars in the quarter. And this impact amounted to $13.3 million or 2.6% in last year reported sales growth, and reflects the significant impact from the strengthening of the U.S.

dollar versus the British pound which impacted the reported sales at AGA and other business operations in the U.K. This impact is likely to continue for the upcoming second quarter, although we expect it to be lessened in the second half if currencies remain stable at the current levels.

Excluding the effect of acquisition activity and foreign exchange, sales during the quarter decreased by 3.4% as compared to the prior year quarter. This reflects an organic sales decline of 2.6% in our Commercial Foodservice Group, a decrease of 0.9% in our Food Processing Group, and a decrease of 5.9% in our Residential Kitchen Equipment segment.

Sales at the Commercial Foodservice Group for the quarter amounted to $312.2 million and the lower sales [indiscernible] prior year amounted to 2.6%. Although sales in the general market increased, this was more than offset by reduced purchases from major restaurant chain customers in comparison to the prior year.

The prior year included the benefit of several chain [indiscernible] the current year period did not include any significant chain rollout activity.

We continue to have significant testing and approval activity across a number of our brands and with a number of our major existing chain account customers, which we are confident will translate to sales in future periods later in the year.

Sales internationally at the Commercial Foodservice Group were flat in comparison to strong sales in the prior year. This reflects lower sales in Europe related to a prior year chain rollout, whereas we had sales growth both in Latin America and we're up double-digit in the Asian markets.

Sales at the Food Processing Group amounted to $77.3 million in the quarter. The organic sales decline of 0.9% in the quarter reflects a strong prior year comparison and normal quarter-over-quarter fluctuations driven by timing of larger projects in this segment.

We see continued strong demand by our customers looking to develop operations in international markets to support growing market needs and are developing new growth opportunities in other segments.

However, we expect revenues in the upcoming quarter will continue to be relatively kind of similar to first half of 2016 due to timing of larger projects that we expect to occur in the later part of the year. Sales in the Residential Group amounted to $140.8 million in the quarter.

Foreign exchange translation adversely impacted revenues at this segment by $8.5 million, primarily due to the strengthening of the dollars, as I mentioned before. Excluding this impact from foreign exchange, organic sales declined by 5.9% in the quarter.

The organic sales decline reflects reduced sales at Viking of approximately 4%, while the AGA Group of Companies declined by approximately 7%.

The revenues at AGA reflect the impact of product rationalization as we trend low-margin and non-profitable products from the product line, and as well as efforts to reduce price discounting as we continue to focus on profit improvement at this business.

Sales at Viking reflect the continuing impact of the Viking recall and legacy issues prior to Middleby' ownership.

However, we are pleased with the positive response we are receiving on new products, product quality and the significant improvements in customer service and technical service, and we continue our efforts to convert this into positive sales momentum.

Our gross profit for the quarter increased to $209.5 million from $196.8 million in the prior year, and the gross margin rate was 39.5% as compared to 38.1% in the prior year.

Gross profit margins during the quarter at the Commercial Foodservice Group were 41.3% as compared to 41.5% in the prior year quarter, and margins reflect lower sales volumes, mix impact and increased steel prices, offset by favorable efficiency gains and the benefit of material cost savings initiatives.

Gross margins at the Food Processing Group were 39.4% as compared to 40% in the prior year quarter, and the gross margin as compared to the prior year also reflects the impact of sales mix and steel pricing. Gross margin at the Residential Kitchen Equipment segment increased to 36.9%, from 31.1% in the prior year quarter.

The gross margin rate reflects the impact of benefits from integration initiatives implemented at AGA and across the residential platform as we further our efforts to leverage synergies across the entire business segment.

Selling and distribution expenses or selling and general expenses during the quarter decreased from $109.8 million to $106.6 million in the current year quarter. The first quarter of 2017 included $8.4 million of additional selling cost related to businesses acquired during the past year.

This increase was offset by $3 million of lesser reported expenses due to currency translation, $2.9 million in lower amortization expense, and $1.5 million in lower stock compensation, as well as $4.2 million in other net reduced cost associated with restructuring and integration initiatives.

Our earnings per share of $1.24 for the quarter improved from $0.88 in the prior year quarter, and the first quarter reflected favorable tax benefits of $7.9 million associated with the adoption of new accounting standards related to tax deductions for stock compensation.

Additionally, the Company recorded restructuring expenses of $1.7 million during the quarter related to ongoing initiatives related to the integration of AGA. Excluding impact of these items on an adjusted basis, EPS increased approximately 17% to $1.12 per share.

Cash flows generated by operating activities remained strong in the first quarter and amounted to $46.8 million as compared to $14.5 million in the prior year quarter.

The quarterly cash flow reflect increased earnings along with the absence of nonrecurring cash payments related to pension funding for AGA of approximately $12 million in the prior year and lower cash costs related to restructuring efforts. Non-cash expenses added back in calculating operating cash flows amounted to $17.2 million for the quarter.

For the quarter, this included $6.8 million of intangible amortization, $6.9 million of depreciation and $3.5 million of non-cash stock based compensation. And the Company utilized $8.3 million in the quarter to fund capital expenditures, primarily related to investments in manufacturing equipment and enhanced production capabilities.

And net debt at the end of the quarter amounted to $652 million as compared to $663.6 million at the end of the prior year, and then the debt-to-EBITDA leverage ratio was approximately 1.3x at the end of the quarter. So, Andrew, that's all for our initial comments. So if you could open up the call now to questions that would be great..

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

I guess maybe just the first question I have is maybe if you could talk a little bit about how the Commercial business maybe developed through the quarter relative to your expectations? And then, just as you look into the back half of the year, could you give us a little bit of I guess flavor in terms of what you guys are seeing, what gives you the confidence that we'll be able to see from a project perspective some of the customers converting activity into orders in the second half of this year?.

I can answer that question because as I spoke in my last conference call, we have huge visibility on testing since our business is mostly chains and chains basically test and do a lot of rollouts, and our testing continues to be very, very strong.

So, we are testing with many, many concepts and we are seeing execution and rollouts happening in the second half of this year. So, as I mentioned, what happened in this quarter is a timing issue. That's it.

We continue to see – our visibility is literally people coming in [restaurant chains] [ph] and operators coming into our test kitchen, our labs seeking solutions.

And the amount of Company working with us right now to develop a new solution or new menu items to speed up its flexibility to address labor or address delivery or takeout is the highest we have ever seen.

So from that perspective, I'm very confident that the second half and the next three years – as I've always said, our business has not been quarter to quarter, it has always been longer than that and we are very confident..

Okay. And then maybe just if you could comment a little bit on what the M&A pipeline may look like? I know you did a smaller deal in the industrial baking segment.

Maybe what types of deals you are seeing in the pipeline, and then any sort of color on sizes or potential areas of focus?.

Tim, as always, we don't comment in any detail of what we are working on. But I mean I would say consistent with the course of many years, the pipeline is full. So I mean I think we are confident that we will continue to add brands to the portfolio and continue to build on all three business segments.

It's been a little bit slower recently, but I mean it ebbs and flows over a period of time and I don't think that's a reflection of the opportunities that are out there.

So, we did do the nice acquisition of Burford during the quarter, which it's a smaller company but strategically it's a really great fit for our baking platform, really extends the line, and it's a big brand in baking. So we are very excited to add that to the portfolio..

Okay, so it's really, the timing really is more reflective of just timing not necessarily the size of the platform, okay..

Maybe just I should add a little bit more flavor to this, because literally when I look at what's going on in the macro trends, so let's address the macro trends right now, full service and casual dining continues to lose share.

So we know that and that's an opportunity for us because we are working with many casual dining chains to restructure that business, from delivery to take-out to becoming more nimble in changing menu. So we have two casual dining chains right now working with us and they are large to basically work on automating, again, their kitchen.

The first casual posted a single-digit sales growth for the first time instead of its usual double-digit, and this was driven by greater competition and their inability to deliver the best value proposition associated with fast casual. I think we were the first and [dominant] [ph] player in supplying equipment to fast casual.

And we look at the fast casual today, I think some of them have lost their value proposition, pricing, quality, they have become a little bit stagnant, and literally what I'm seeing now there is greater competition in that segment.

And we are working also with several, many fast casual concepts to deliver a new kitchen layout that allows them now to become more competitive and go back to offering a better value proposition. Overall, the restaurant business, Tim, still a lagging same-store sales, including delivery check averages and reduced basically foot traffic.

Now that's specific because grocery stores have become a challenging concept and making dining out less appealing. So from that perspective, all [casuals] [ph] have to go back to the basic of delivering, pricing and food the way pizza chain have basically reinvented themselves. And I've been meeting with many CEOs.

I was [indiscernible] at the Global Leadership Conference and I met many, many CEOs. I was one of the keynote speakers there. And one of the issues, I spoke to many, is how do you reconfigure your business. And that's going to be boding well for Middleby because almost changed our bake and they are seeing us [indiscernible].

And many of them were not forward thinkers in trying to do what many of the pizza chain have done in delivering a value proposition, and if you look at most of our pizza chains today, they are doing extremely well, and I look at many of the coffee chains, they have also reinvented themselves.

From that perspective, I am looking at Middleby and we are very excited about all such things and the restructuring we are doing with many of our restaurant concept and our customers..

Okay great. That's really helpful color. And then maybe from a margin perspective, you cited steel as a little bit of a headwind in the quarter.

Is there any way to maybe quantify that and then how should we think of price/cost through the year, are you able to push through some pricing in some of the other businesses to offset the higher steel costs and when would you expect that?.

So the impact is probably about 0.5% and we did take price increases going into the year. I think we are looking at taking certain mid-year price increases because we do still see steel going up in the second half for us.

So, I think we are largely able to offset with price increases, maybe not totally and then kind of the rest of the offset comes from other initiatives with material cost savings and efficiency gains. So, I think it's a headwind, it's a manageable one that we've had in the past, and over time we are able to kind of jump ahead of it..

Okay, great. I'll hop back in queue. Good luck on the rest of the year..

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

First, can you just specifically tell us what domestic versus organic growth was for Commercial?.

Larry, I don't have it off the top of my head. I would tell you international sales were flattish. So, we were down a little bit on the domestic side. And maybe to kind of give a little bit more color, if you look at the general market, we would be up slightly, so it really is changed.

That's driving it down, which is our top 40 or 50 customers where as Selim mentioned we have visibility to what they are working on but that becomes a timing issue. Internationally, which I think if you remember, we were up 20% plus kind of consistently every quarter last year. We had some pretty strong comparisons.

If you look at the first quarter this year, we continue to be up pretty strong in Asia. Europe, we were down where we saw some softening, but we did have a major chain rollout there in the first quarter, so some of that is tied to that rollout.

And then in Latin America, we were up but we slowed quite a bit, and I would attribute a lot of that to Mexico where we saw some disruption.

I mean obviously after the election and the weakening of the peso, which I think disrupted some of our business early in the year with that market, which I think we'll probably start seeing recovering as we move through the year..

Okay, thank you. That's good color. And then secondly, actually I think you called the timing in the first quarter of last year as well. So it shouldn't have been that big of an issue on an apples-to-apples basis.

So I guess my question is, what gives you the confidence that the organic declines are not share related or maybe it's just mix, like you said with the fast casual being weaker, and if that's the case, do you have plans maybe to be more aggressive in other segments of the commercial markets?.

So Larry, I will answer that. First of all, I keep on talking about second half of the year. So, most probably as our testing, and if you go back to – I've been at this, I've been doing this, me and Tim for over 20 years. So we are most probably the longest standing executives in this industry doing that.

So I have always said, if you go back to 20 years of me talking on conference calls, or 15 years or 12 years or 5 years, our basically testing with our customer takes usually 18 to 24 months for it to take place. And so, when I say I'm optimistic in fourth quarter, meaning it will generate results in a year to 18 months later.

So part of our business, being so innovative where we get customers to come to us seeking solutions, they test because they are not changing a range to another range. That's not what you are doing. This is not a price play. They don't come to Middleby because they are looking for a discounting.

They come to us because they are looking for an innovative solution, innovative solution meaning it's disruptive in their kitchen. It's disruptive in the way the flow of their labor going in.

So, when I look at why I'm now confident, because we are heavily, and me personally, aware of every chain spending time and energy with us having sent through people and flying people away from their corporate offices in our labs, through many of our divisions spending time evaluating, and we have tests in place that have been put in place in several chains, more than one or two stores, so in some of them we are at 50 stores, in some of them we're at 10 stores, some of them we are at three stores, and I have seen the highest number of testing ever in my tenure at Middleby has been the highest ever seen.

So, from that perspective, I'm very comfortable. People don't [spend] [ph], especially today where every change is lean, they would not be sending people to Middleby if they didn't see something that makes sense.

Otherwise, they would have come in and tested for maybe a month and then they moved on, they maybe moved to our competitors or moved somewhere else. But they are here conducting a solo testing in our lab and in the field. So that's number one.

Number two, why am I confident? Because we have concept that today continues to be growing for us, and those concepts have been literally grocery and convenience stores are becoming a strong driver for us. It's a smaller segment for us but it's growing pretty fast.

I look at Mediterranean concepts, chicken, pizza, coffee chain, and Asian concepts are driving strong growth not only second half of this year, as well in the next year. And those concepts continue to be some of the ones that we are testing with and doing extremely well for us.

The next one where I'm seeing significant change flocking to us is about this labor.

So, labor has become finally an issue that I've been talking about labor, we did Chili's almost four years ago and Chili's was most forward-thinking casual dining chain when they came in and said, I need to attack my labor tissue because it's creating a climate of instability in our stores. Consistently people are churning out.

We have positions in our field and our kitchen, and it's cost us a lot of money. And they saw that prior to the minimum wage issue and now basically broadcast on every media that minimum wage has to go up in the restaurant business. However, many of our other chains were very slow to follow suit. Today, it's not the case.

We have more and more chains coming to us looking at how to resolve labor issue, how do we offset the higher cost of labor through automation. So, automation, grocery store and convenience stores, Mediterranean concept, chicken concept, pizza stores, coffee chains, Asian concept, are all a big driver in second half of this year..

And Larry, just one other added comment in terms of your question on the confidence, a lot of the activity that Selim is referring to, it's not where we're bidding and there's three parties that are competing for business. We are working really exclusively with these customers.

So it's more of a matter of how and when, not a process where it might go to us or it might go to somebody else..

Okay, thank you. I appreciate that. I'll pass it on, but can you just let us know what's the full year tax rate we should use? And thanks very much and good luck this year guys..

I think you asked a question on the tax rate. I'll be honest, I didn't capture that. But just maybe I'll comment on the taxes. So in the first quarter, we did have the one-time – it's not a one-time benefit, it's an accounting change. The Company has got stock compensation.

So, in the past those actual, their cash benefits used to run directly through the equity part of the income statement. They now will go through the P&L and that will benefit our effective tax rate kind of on a continuing basis. That being said, it's tied to discrete vesting of shares in one week, get the actual cash benefit.

So that's not a quarter to quarter benefit. So I think that's what we realized in the first quarter. We would not realize a similar benefit in the second, third or fourth quarter, but we likely would realize discrete benefits at certain points in time as there is vesting of shares of the Company.

So, absent that, we would kind of revert to a normalized effective rate, which right now we forecast to be in the 33% range. So Andrew, I don't know if there is, if you want to bring on the next caller..

Our next question comes from the line of Jamie Clement with Whaley. Your line is now open..

Selim, if I could ask you a follow-up on the conversations that you have had with other CEOs of restaurant chains recently with respect to labor costs, one thing that I'm not sure investors or people like me totally understand is, how can a chain if it doesn't want to go full-on Chili's kitchen of the future, can they effectively take out labor cost by just early replacing a couple of pieces of equipment or they really need to address the entire kitchen and have a bigger expense associated with it?.

That's a good question. So basically, today it is difficult to take labor out by just replacing a piece by another piece. The problem is it requires a complete transformation of the kitchen. So we have two types of customers – well, we have six types of customers.

There are customers that are still thinking that all they have to do is keep on becoming innovative on the front-end, meaning let me more invest in my app, in my electronic ordering and I make it easier for people to order online or texting or whatsoever. And we figure that out.

Those customers would most probably spend millions of dollars putting technology in the ordering process and then they don't see the same store sales go up. And the proof is literally the pizza chain did that.

They were the most innovative and most probably 2005/2006/2007, they were the first to do mobile app, they did texting, you can order your pizza online. Then they realized that's not enough, unless you have a great product.

And when Domino's came out and Papa John's and Pizza Hut came out and said, we have started delivering a better product, a better value proposition, and then they find out that they needed to go to a $10 pizza and they need to figure out how to get a $10 pizza faster in a value proposition.

It required a complete change of what type of equipment they needed to use, and that's how the WOW! became a big one, then the WOW!2 and all that. That's one type of customer. The second type of customers would be customers who are more interested in looking at expanding their menu items, so how do I increase my menu items.

And today – in the past, you say, okay, let me add labor, let me add piece of equipment to the kitchen and add labor to it, or extend buyouts or extend to breakfast. At one point, it's tough to keep on adding labor. First, you can't find it; second, it's become very difficult to expand the kitchen.

You don't have space, you need woods, you need all of that. And there are certain type of customers who have been very, very forward thinkers who would come back and say, I need to become flexible in my – I need to become like a factory.

I want to come in and be able to have less people, be able to be open more hours, be able to offer more menu items, but with a lot less people. And maybe I want to be able to go [indiscernible]. So, definitely you've seen what happened on a one casual dining chain.

So one of the casual dining chains, which we tried to work with and I have dealt with the CEO of that chain many, many times and asked, how come you are not reinvesting in the kitchen? Your kitchen is full of microwave. And the answer was, we're not a – we're interested in the bar, our business is a bar business, we make more money on drinks.

Well, it doesn't preclude you from offering great food. So, the Buffalo Wild Wings figured out how to do that, okay. Now, the problem is that chain, that CEO was fired early this year.

That's my feeling is finally now that chain is having new leadership and they are working with us to figure out a way to get the kitchen and the food better, which for years they have used microwave, mostly microwave, to rethermalize pre-cooked food that they got from their supplies, and that chain kept on, it's a large chain, kept on shrinking..

Thanks a lot for the color, Selim. I appreciate. Tim, just if I could ask you a follow-up, when you were discussing Processing during the quarter, I think you kind of gave a little bit of some commentary on 2Q. I think you were around $83 million last year and perhaps in 2Q, I could be wrong about that, that's a huge number.

Were you implying that, I think what was the number this quarter, around 77 or so, were you saying we should be sequentially roughly flat or were you implying that you should be flat year-over-year in Processing in 2Q?.

I think I was referring to the same quarter last year. So I mean I think we are, as I mentioned, I think as everybody knows, that's a lumpy business and individual orders kind of drive the growth up or down. So I think what we are looking at is a lot of the bigger projects go later in the year.

And I think sequentially, or not sequentially but quarter over quarter, we'd probably be looking to be flattish. And I think as everybody, as I'll point out, we were up double digits every quarter last year. So, last year was a strong year for Food Processing all the way through.

So we are looking at being I think flattish in the first half of the year against some pretty strong comparison..

Yes, absolutely. And was that 2Q was I think really the one that really kind of took off when you started seeing the backlog really come in, so that's why I wanted to ask the question. Thanks very much for your time, guys, as always..

Our next question comes from the line of James Picariello with Keybanc Capital. Your line is now open..

For Food Processing, I mean you made it clear that there is some really nice backlog visibility in the second half.

I'm just wondering given the really strong margin ramp that you had last year, how should we be thinking about margins in the second half with these large projects coming through?.

We still have a number of initiatives to enhance margins really across the segment. So I think in particular, we did a consolidation of our baking group to drive some manufacturing efficiencies and we have really also focused on pricing in that segment. So, I think that should give a little bit of tailwind.

That being said, I would say mix is probably going to be the factor depending on how the meat side of the business and baking splits out in the back half of the year, because I do think we are seeing some strong growth in the baking side of the business and that does have lower margins.

So, while we are bringing it up to the average, there's a little bit of plus/minus there where baking margins are coming up, but as compared to the meat side of the business, there still is – they are lagging. So, I would say that's kind of the dynamic that will play out in the second half of the year..

Okay, that's great color. And then just on the Residential side, how are things trending? I mean, I think you guys provided some really nice context around AGA and the SKU reduction and less price discounting initiatives that are hitting the top line a bit.

But for Viking, how should we be thinking about the rest of the year? Are dealers, the anecdotes seem to be more positive, but is there any more visibility beyond that in terms of a recovery for Viking?.

I'm going to say that literally we continue to be affected by the recall. We've stated that, and it's most probably a broken record now because you keep on – we keep on addressing the recall, but so they had to recall, it's 60,000 ranges that [indiscernible]. So let's talk to what's happening next. So let's take Viking.

The 7-Series product line on the cooking side continues to be growing extremely fast, and this is a line that we have introduced under Middleby which has all the Middleby technology, the burners that are non-clog burners, the no pre-heat ovens.

Now we are introducing the 7-Series refrigerator, which will be our brand-new refrigeration delivered under Middleby this quarter, and we're [missing] [ph] that refrigerator. So we were still living off – the refrigerator off that was designed under the old management and it took us time to get there.

So we had to meet energy, we needed to do it so that it's worldwide globally accepted. So, we took time to get our new line of refrigerators to accept the refrigerant that used in Europe, the refrigerant used in Middle East, in Asia and in the U.S.

So we worked very hard to make this product line globally accepted, which was not the case in the former refrigerator. Today, I can't sell my [indiscernible] refrigerator without a transformer if I want to sell it to Europe or to the Middle East. So now we are introducing the new 7-Series refrigerator.

So if I expect that to grow, that will be most probably doing exactly what the 7-Series [indiscernible] did. We are also, we were missing basically a contemporary or what I call an urban product line. So, New York City, Chicago, Miami, LA, high-rises, so we did not have this line. It's not only in looks but it's size.

So it fits in a different type of kitchen and we are launching that later this year, a complete line called Virtuoso. So, from that perspective, what we have been waiting for is the flow of the product line we needed, and we are starting to see.

So we go back to 7-Series ranges doing extremely well, our French-Door Oven is doing well, and then our 7-Series refrigeration and we are getting Virtuoso launched at the end of this year. Now service and parts, we've basically talked about service and parts and we've gotten our service and parts basically in line.

We have reached our service organization throughout the U.S. and now it's reflected in our warranty rates that have gone way down. The other thing that speaks, I think if you go online now, the online reviews on Viking have become extremely positive.

So, we are outpacing our competitors, including every high end, every one, we have outpaced every high end manufacturer of ranges and refrigerator in the high end luxury appliance and we are now beating them on online reviews by almost double the stars and the rating. So that was something that validates that we are still on the right track.

Now, to answer your question when do we start seeing results coming soon? I think if you take away the fact of basically the recall on the 5-series, which is still our largest product line, and you still look at all the products that were introduced by Middleby, the Middleby products introduced have been growing very fast.

Our legacy products continue to be facing the recall, I call the recall stigma. And now we'll most probably start, once we introduce 7-Series refrigeration and it obsoletes the 5-Series, and we start obsoleting the legacy products, I think we're going to start seeing a significant improvement in top line at Viking.

Now the timing is most probably, I would say again, like everything else, we launch a product, by the time we put it in the dealer displays, I'm looking at most probably towards starting to see that happening towards the end of this year..

Thank you for that.

Just one thing, one last thing on Residential, how would you assess the pricing competitiveness dynamic in this space right now?.

I would say we are very competitive in the price point. We are right in line. I think on certain pricing where we have a strong following, which is 7-Series, is priced higher than everybody else on the 7-Series ranges and it's selling. So I think it's not a price sensitive segment. Honestly, it is not a surprise since that people buy with emotion.

If you are going to buy a range that cost anywhere between $8,000 or $10,000, you are not going to be stopped because it's a couple of thousand dollars more. Either you're going to afford to put a high-end luxury kitchen or you are not. So, you start with appliance, then you end up with cabinets.

Nobody is changing appliance without changing cabinets in general. Why? Because you are not putting all laminate cabinets since putting a range that expensive. So literally, when you're looking at renovating your kitchen, you are not stopping at $1,000. Either you can afford to go for the best or you don't. So, from a price sensitivity, there is none.

Now, going Viking versus our competitors, we are usually either same price or priced higher..

Makes sense. Thank you..

Our next question comes from the line of Jason Rodgers with Great Lakes Review. Your line is now open..

I just wanted to follow up on the Residential questions.

Would you be able to say what percent of your Viking sales are legacy products versus the new ones you have introduced?.

We have not given that number but I can tell you, [indiscernible] it will be introduced, the Virtuoso and on SKUs – let's talk SKUs, [indiscernible] SKUs, today legacy product today remains a higher number than our newly designed Middleby product because refrigeration is a large number of SKUs.

So until we introduce the 7-Series which includes 7-Series ranges, bottom out and columns, once you introduce that and we introduce the Virtuoso, then by the end of this year from an SKU standpoint the newly designed product will outdate the legacy product from an SKU standpoint.

So by 2018, the new product designed by Middleby, 7-Series ranges, French-Door induction cooktops and 7-series refrigeration, Virtuoso will outpace SKUs of the legacy product from a number of products in the catalog.

If you go online on catalog or on the Web-site, it will become much, much less, and at that point, somewhere in 2018 we can start phasing out some of our legacy products very quickly.

But you can't do it today because I don't have sizes, I don't have the duration, [indiscernible] I don't have a 7-series refrigerator, I am still selling a legacy 5-Series refrigerator..

Jason, just one thing I'll add is, even though there is legacy products that Middleby has gone back from a quality standpoint and made engineering design changes, which have basically put our quality standards even on the product that we would consider legacy products..

So let me clarify this. We have redesigned every product in terms of quality. So, the difference between the Middleby designed product that came from scratch, which is 7-Series induction, French-Door, Virtuoso, they have Middleby technology in them. The legacy products, we did not put Middleby technology in them.

They have great quality, they have a Middleby quality in them but they do not have the non-clog burners, they do not have the zero pre-heat, they do not have our chrome griddles, just to name a few, they don't have the [indiscernible] fan.

So, the question is, at one point once I get the refrigeration, [indiscernible] product, even though we spent a lot of money redesigning them in terms of quality and basically durability, and we have added a few features like soft [indiscernible] on some and we have added some now, but we are phasing them out, and we'll be 100% somewhere toward the later part of 2018 would be 100% Middleby.

Every product you are buying from Viking has Middleby technology in it..

That's helpful. Also the gross margin performance was strong in the Residential Kitchen segment. Just wondering where to think about that as far as directionally? It's approaching the margin of the other segments and I don't know if it can get there or what the target is for the gross margins..

I would say it's still a work in process, right. I mean the Residential segment is still relatively segment AGA which is by far the biggest junk of it we've only had in the Middleby portfolio for about a year and a half. So I mean, we've had substantial improvements and I think we expected to continue on that path.

So, I think our objective is to get that north of 40%. So, I think we are well on our way to achieve that goal..

All right.

And then just finally, in the Food Processing segment, understanding it's a lumpy business, but what's the risk that some of these projects could stretch out for a longer period similar to what you have experienced back in 2015 or do you think the conditions are different that would preclude that?.

Jason, there is a risk. This is a cyclical business, we love that business by the way, but it's a risk. It's part of food processing business. It's not relative to Middleby as part of it, but I can tell what is unique about that business is the fact that the margins are phenomenal on that business.

The fact that literally it's a business where we love that business, we continue investing in that business, continue acquiring companies in that business, and we just finished investing multi-million dollars on a bakery test center. So, from our perspective, despite the cyclicality of the business, the margins continue to improve.

So from that perspective, it has – I would tell you, I think that today even in Foodservice there is cyclicality. When you think about it, the chains, when you look at the way we continue being closer to chain – now you don't want cyclicality, go sell, go back to all day long gel market.

The reason that you've seen, maybe it's not as long as, cyclicality in Foodservice not as long as Food Processing when it happens, but literally when you think about chain business, there are 18 to 24 months of testing and rolling, and people have stuck with us.

I've always said that we are not a recurring revenue business where it is a razor and blade. But the margins of that business are phenomenal. So, when we look at, I am willing to take cyclicality versus consistency and lower margins. I give an example people. I change my TV all day long but the prices keep on dropping. I would end that business.

You want consistency, I can tell you that in my house we keep on changing TVs every time and they keep on going down in price, and that's the reason we change them, because my children say, papa, I like, can we go buy a curved TV, yes, I go there, it's $200. It used to be $2,000 two years ago.

So our business is all about margin and solution-driven, but it takes time. It just takes some time in Foodservice and in [indiscernible]..

It's a very good point. Thanks very much, guys..

That is all the time we have for questions today. So with that said, I would like to turn the call back over to management for closing remarks..

Thank you for everybody being with us and I want to reinforce literally the macro trends, so that even though some of them are repetitive, again, in the midst of the macro trend and what's going on in Commercial Foodservice in terms of some of our customers losing share and having less traffic, we're seeing major opportunities for Middleby, because it's forcing our customers to reinvent, to shift and switch the way they do business.

And in the middle of chaos, opportunities are happening for us. So, in the middle of a fast casual slowing down, we are working with many of them to deliver a better value proposition in terms of quality and pricing.

In terms of basically the restaurant business, seeing grocery stores and grocery prices take business away from them, we are working with several chains to figure out equipment that provides delivery and takeout for them to become more appealing and be able to come back the grocery stores' threat.

If you look at basically labor and minimum wages increasing across the country and labor pool widening, substantially started happening in 2016 and 2017 in light of unemployment of 4.5%, restaurant operators are faced with a challenge of finding ways to offset higher costs without driving customers away.

And that's going to be tough because literally they have to roll down menu prices and the only way they have to do it is by reducing their labor, not only in the front of the house but in the back of the house. So, looking at that, we are seeing innovation being driving our customers in the middle of the chaos, and it's creating opportunity for us.

So automation is not just about robotics, it's about [indiscernible], it's about labor reducing equipment solution, it's about speeding up the cooking, it's about reducing the space in the kitchen, the layout space, and it's becoming a major driver where many of them are testing new equipment lot.

That is growing fast as non-traditional outlets are growing. Grocery stores and convenience stores is becoming a strong driver for us. It's a new segment for us, it's an emerging segment for us, and we are doing well in that segment. Again, I talked about chicken, Mediterranean, pizza, coffee chain, Asian concept, bakery.

We'll be driving strong growth in the second half of this year as well as the next three years. On the Food Processing side, I'm very excited about our baking business. I'm excited about our becoming a major player in pet food. I'm excited about our bacon. Bacon is a $4 billion market in the United States. It's growing at 10% a year.

And we are becoming a dominant player in bacon. We are becoming a major player in [sweet] [ph], a major solution to reduce cost for restaurants. So our Inox division has become the leader in [sweet] [ph]. Our Thurne division is the leader in bacon. Our Cozzini is a leader in pet food.

Our Stewart Systems and Baker and Auto-Bake has become a leader in bakery. And additional acquisition we are making in Food Processing position us very well to continue expanding beyond protein into pet food and [sweet] [ph] and it's very exciting.

On the Residential side, our legacy products today will be dwarfed by our new products that are Middleby driven. 7-Series refrigeration is coming on.

Virtuoso, which is our urban and contemporary line, our French-Door ovens, and we continue expanding into outdoor with links and center counter between U-Line and Marvel, and we continue looking at La Cornue growing in the U.S., as well as AGA and Rangemaster doing extremely well in U.K.

Our service bots and our service organization have become best in class. It's reflective [indiscernible] but it is reflected in our online reviews live. You can go on live and you can see how better we are doing.

So, the question that was asked on that conference call, when would we have basically Viking become more, growing faster? It will happen the day our Middleby product basically overcome and we basically eliminate our legacy product and that will happen toward the end of this year and we'll start seeing major impact in 2018.

And we are very excited about the Residential business given the margin. So, going back and looking at the quarter, while the top line was not what we expected, however it's just a matter of timing. In our press release we talked about the fact that we have not lost customers. Our testing is the highest we've ever had.

We also are proud to say that this quarter we have basically started working with new customers, customer chains that are large and very innovative forward thinkers that have not been Middleby customers in the past, and now have joined the ranks of leading customers to become potential customers in the future for us, and we are very excited about that.

So from that perspective, it's not losing share, it's just a matter of timing and a matter of pushing our customers to create innovative solution that takes a lot more time to test, because they are very disruptive and game changing. Thank you for all of you to be with us on this conference call and we thank you very much. Have a good summer..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day..