Middelby 1Q15 Earnings Call Notes

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Chains have to reinvent their kitchens to meet consumer tastes

So most chains will have to invent their kitchen with significant shifts and I can give more color to that. The fact casual will continue to push fresh meat to order menu items. I will give an example. Let’s talk about the burger chain. Let’s talk about Five Guys as one example. Five Guys Burgers and Fries, which is a Number 8 burger chain will only — offers only fresh beef with customers able to order in so many different ways their burger….You have to have very sophisticated equipment, which Five Guys buys from us because we have a unique patented technology that’s designed for them that allows them to deliver that customized burger pretty fast, pretty quickly, warm and tasty to their customer across over 1,000 stores that they have now.

I was worried about Europe, but Europe is doing better

I would say that literally I was worried about Europe a little bit more. Europe is doing quite better. Now the only problem there that we are facing as a company is in fact that the dollar has become very strong.

Overseas, restaurants use more microwaves

one of the biggest things that’s helping us in implementing the kitchen of future overseas versus the United States is amount of usage of microwave.
So if you go around and I’ve been visiting many, many chains around the world, you see even though they have very good equipment in their kitchen they could have decent chop board or decent griddle, decent convection oven and in some cases combi, they cannot stay away because their staff is not trained enough and there is a big turnover in those countries to recruit is that they end up relying on the microwave as crutches.

its possible to create an emotional connection even in kitchen supplies

The difference between us and most probably most of our competitors is emotional connection that people have to our innovation.
I think that has been the biggest driver for us. Now we don’t have the packages that for an ITW package where they could come in a package a nice machine with a refrigerator with a display cases, we don’t have that. In the case of ITW that can even do the dish washer.
So what made it unique for us versus our competitor and will continue to be is the focus on innovation and not only innovation that addresses energy and addresses okay, ease of use, the biggest thing that we’ve done in my honest opinion that made us unique is the fact that we have an emotional connection to our customers.

Food quality is the number one concern, then labor, then speed, then energy efficiency

They’re truly looking to improve the following. The number one concern on a local equipment is can you help me improve the food quality I am serving to my customers, that’s number one.
Number two is can you help me save labor. I will tell you three years ago, two years ago it was not a number, it was there, if you can help me save labor, but now it because number two. It went from being maybe a number six item to number two.
The third one is speed. Speed continue — now speed at one point used to be number one. Now speed is number three. So food quality improvement, if you can get me a touch to improve my food, you give me some labor saving, I love you. If you give me speed on top of that, I adore you and if you give me on top of that energy efficiency in auto saving all together, I worship you.

Small chains don’t have food laboratories like MCD or Burger King

Okay. So let’s talk about the fast casual, let’s talk about those small chains. Those small chains do not have on site corporate lab okay, they might have a small one but they don’t have the lab that a M have or McDonalds or Burger King have. Those people have engineers on staff. They can test my product. They can test menus.
So what those people have done, they’ve outsourced all their R&D to us, so basically they come to us and we know I’m going to give you a great example is the fact that some of those fast casual I can illustrate a chain that came to me specifically it’s the chain that 200 store and say to me, Selim we are thinking of introducing this type of menu item. Can you help us implement it?

Moving to all day breakfast adds a lot of complexity to a kitchen

So they turn to lunch and what happens today is they’re all trying to differentiate themselves by taking breakfast as a competitive advantage and extending it almost through the whole day. A huge, a huge complexity in the kitchen which works in our favor because we have the equipment, we are a very leader in breakfast equipment between start, we have significant ability to provide breakfast offering versus our competitor.
So they turn to lunch and what happens today is they’re all trying to differentiate themselves by taking breakfast as a competitive advantage and extending it almost through the whole day. A huge, a huge complexity in the kitchen which works in our favor because we have the equipment, we are a very leader in breakfast equipment between start, we have significant ability to provide breakfast offering versus our competitor.

Generation Z likes to order in

So one I’m very excited about something that position us very, very well, which is Generation Z. Generation Z is those 21 years of age or younger and I’m sure many of us on the call have children that fits in the Generation Z. They are quickly emerging as a formidable group of consumers. It makes up 47% of the population and they will be again moving into gradually trickling into the work force over the next ten years.
In larger — there will be larger number than the previous generation of millennial. What is unique about the Generation Z that we love for Middleby specifically is they’re big on ordering food to be delivered.

More people are going out for lunch

The next one, the next interesting thought according to Technomic, three in five consumers today purchase lunch away from home, which represents 58% at least once a week eat away from home that means go out to lunch, 58% of them.
They predict that this group will grew considerably higher and lunch will have a major, major growth in the next few years. Again that stimulates cooking equipment so from a macro trend Technomic thing, lunch is going away. In fact lunch where people are cooking and ordering a lot of stuff is going to drop.

There’s a backlog of cooking equipment from the recession

So over the years as the recession took place and people didn’t want to replace as the economy slowed down so now we’re sitting at over 150,000 Middleby Marshal oven that are over 15 years old, big opportunity from a replacement business for us.