Middleby 2Q15 Earnings Call Notes

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It’s taken discipline to grow the Viking brand

“We’ve had many recalls. We’ve had legacy issues on quality. We’ve had pricing all over the board. We’ve had people on the Internet basically offering pricing where you could buy a Viking product almost heavily discounted. We stopped all of that, and the results have been twofold. One, the brand is coming up and I will basically in my closing comments talk about all the awards we’ve gotten since. It was very difficult for us, because it’s easier to go and get orders. I can tell you today, I can ship truckloads of orders if I keep the Internet the way it was and managed. If I go out and sell every dealer out there, because Viking is a very strong brand, if I go and allow people to basically discount one product to move our cooktop or our ranges that are very popular, and we stopped all of that.”

We will not discount, we will grow by being the best like we did in commercial

“Our number one competitor is out there discounting heavily even though they have a great brand, and they discount. And we refuse to meet and match the prices, and we’ve lost some projects because people are testing our resolve and we’re saying no. And as we continue bringing the new products, the Middleby technology, we hope to do what we’ve done in Commercial. We are basically – we will grow by being positioned at the highest price but great features, great benefits, in the long run, a great cost of ownership. And that’s what we’ll do.”

Rising minimum wage is having a big impact on the way that people are designing their kitchens

“Well it’s having a big impact. I will tell you one thing that people are all nervous about it, and it’s driving two things. They are driving – well in fact, they’re driving – it’s impacting three key areas, which is design, design of the kitchen, the equipment and the workflow. So everybody is now, they know it’s reality and everybody’s trying to figure out a way of redesigning their kitchen. And we’re seeing the impact in the fast casual. We’re seeing the impact in emerging chains.”

It’s tough for the big chains to move because they have to convince their franchises

“As you know, the big chains take a long time. It takes a long time for them to try to change their workflow and process, not because they can’t, the problem is you take a chain that has 5,000 stores or 30,000 stores or 10,000 stores, usually they have to go and convince their franchisees to invest in that technology. That’s number one. So you have a corporate R&D team that really believes in it, but they might own only 200 stores. So there’s no point for them to say, well, we’re going to only do it in our own stores. So they need to go and convince the franchisees.”

People have been investing in apps front of house and now they’ve done that, they can invest in kitchen

“I went and asked many CEOs, and they say, Selim, we’ll get to it. I promise you this will be our next impact. But we’ve been spending time, money, basically upgrading our technologies so that we can be literally digital leader. We can be able to order our customers order and pay online, to be able to create technology, to be able to create a more enjoyable dining experience. So a lot of money went into technologies.”

We are at the end tail of people investing in apps

“I did my own research, and people were honest and said, Selim, it’s on our docket. We will have to use automation in our kitchen. We need to change the workflow. We need to change the labor cost, and you are the solution and we know it works, but we could not spend the money before becoming technologically advanced.”

“When I can’t be a pizza chain that I can’t have our customers order online or text message and be able to track where their pizza delivery is. And they had to invest in all those technologies. And I think we are at the end tail. Maybe it’s another quarter or two, but I’m looking forward to saying 2016 will be a big one for our Kitchen of the Future.”

A customer we lost in the recession when we wouldn’t discount has now come back to us because they realized that the total cost of ownership was lower

“We lost the domestic business. So a year ago they decided to come back to us. Why? Because over the five, seven years they realize there’s a cost of ownership was a lot bigger, higher than the discount they got up front. And they realized that Middleby in those five, seven years in the domestically they did not benefit from the speed of cooking, from our ability to create a better bake, a better pizza, and ultimately they came back.”

People are now spending more money eating out than at grocery stores

“The number second biggest event is that it’s the first time ever that sales, food sales at bars and restaurants surpassed sales at grocery stores according to the U.S. Department of Commerce. Big, big number for us, meaning people spending money eating out has now surpassed in actual dollars people buying food in grocery stores.”

Reliance on eating out grows with each generation

“The third data shows that reliance on eating out grows with each new generation. And the millennials are considerably heavier users of Foodservice than baby boomers, which spends well for our industry and our segment.”

Premium fast casual remains very hot

“Finally, premium fast casual remains hot, hot, hot, where Middleby is extremely well positioned.”

Everyone is trying to elevate the dining experience

“I tell you, everybody is trying to elevate the dining experience, whether it’s a McDonald’s, whether it’s a Chipotle, whether it’s a nursing home. Some fast casual concepts are now hiring corporate chefs to take their menu to the next culinary level.”

QSRs are fighting back by fast casualizing

“QSRs are fighting back by fast casualizing. Seeing their market share getting squeezed, fast food chains are responding by renovating both their physical operations and their menu items. Taco Bell just introduced several upgraded menu items and they are working with Miami chef, Lorena Garcia, to come up with items that will compete with fast casual rival, Chipotle.”