The Middleby Corporation's (MIDD) CEO Selim Bassoul on Q2 2016 Results - Earnings Call Transcript

The Middleby Corporation (NASDAQ:MIDD) Q2 2016 Earnings Conference Call August 11, 2016 11:00 AM ET

Executives

Selim Bassoul - Chairman and CEO

Tim Fitzgerald - CFO

Analysts

Josh Chan - Baird

Tony Brenner - Roth Capital Partners

George Godfrey - CL King

Joel Tiss - BMO Capital Markets

Operator

Good morning and welcome to The Middleby Second Quarter Conference Call. Joining us today from management are Selim Bassoul, Chairman and Chief Executive Officer and Tim Fitzgerald, Chief Financial Officer. We will begin with opening comments from management and open the call for Q&A. [Operator Instructions]

Now, I would like to turn the call over to Mr. FitzGerald for opening remarks. Please go ahead, sir.

Tim Fitzgerald

Good morning and thank you for attending today's conference call. I will have some initial comments about the company's 2016 second quarter and then we'll be opening up the call for questions and answers.

Net sales in the 2016 second quarter of $580.5 million increased 33.1% from $436.3 million in the second quarter of 2015. Second quarter sales include the impact of acquisitions not fully reflected in the prior year comparative results, which accounted for $127.1 million or 29.1% of the sales growth in the quarter. Sales in the quarter continued to be affected by foreign exchange variation in comparison to the prior year.

This fluctuation resulted in lower reported international sales when converted into US dollars, and this impact amounted to $4.9 million or 1.1% in lesser reported sales growth. Excluding the impact of acquisitions and foreign exchange, sales increased by 5.1% as compared to the prior year quarter. This increase reflects organic sales growth of 6.9% at our Commercial Foodservice Group, an increase of 16.3% at our Food Processing Group and a decline of 12.2% at our Residential Kitchen Equipment segment.

Sales at the Commercial Foodservice Group for the quarter amounted to $321 million. Sales reflect continued international -- strong international growth, which remained very strong in the first half of 2016, reflecting improved market conditions and lessened impact from currency volatility. Organic sales growth in the international markets exceeded 20% in the quarter with growth in all regions, while sales domestically were essentially flat with the prior year due to several large rollouts with U.S.-based chains which had occurred in the first half of 2015.

Sales at the Food Processing Group amounted to $83.5 million in the quarter, and organic sales growth of 16.3% reflects revenues associated with a record backlog carried into 2016, along with continued strong incoming orders realized in the first half of 2016. We continue to see demand by our customers looking to upgrade facilities and equipment to more efficient production lines with higher capacities, along with increased demand in emerging markets as food processors develop new operations to support growing market needs.

Sales in the Residential Group amounted to $176 million in the quarter. This included approximately $100.5 million in sales related to acquisitions, including the AGA Group of Companies and Lynx. Excluding the impact of acquisitions, the sales decline in the Residential Kitchen Equipment Group reflects lower sales at U-Line, which had reported particularly strong sales in connection with new product launches in the first half of last year as well as the continuing impact of the prior year product recalls at Viking related to legacy products manufactured prior to Middleby's acquisition of Viking.

Although we continued to realize a decline in sales due to these factors, the decline at Viking has lessened sequentially in the last several quarters as the favorable impact of new product introductions and substantial investments made in training are beginning to offset the impact of the 2015 recall of products that were manufactured prior to Middleby's acquisition of Viking in January 2013.

Gross profit in the second quarter increased to $233.5 million from $172.9 million in the prior year, and the gross margin rate was 40.2% as compared to 39.6% in the prior year quarter. Although we realized an improvement in gross margin rate for the quarter, it was net of lower margins at the recent AGA acquisition. Excluding the impact of AGA, gross margins increased to 41.6% on a comparative basis. As we move into the second half of the year, we will begin to see the impact of increasing steel prices, which likely will impact margins by 0.5% to 1% for the balance of the year.

Gross profit margins during the quarter at the Commercial Foodservice Equipment Group were 43.6% as compared to 41.3% in the prior year quarter. The strong margins reflect the favorable sales mix amongst business divisions and the benefit of increased sales volumes.

Gross margins at the Food Processing Group were 38.4% as compared to 37.4% in the prior year quarter. Gross margins strengthened from the prior year benefit of profitability improvements implemented as we continue to focus on bringing the profit levels at the Food Processing division in line with those at the Commercial Foodservice segment.

The gross margin at the Residential Kitchen Equipment segment decreased to 35.5% from 36.2% in the prior year but improved from 31.1% in the first quarter. The decline in gross margin reflect the lower margins at the recent acquisitions of Lynx and AGA. Excluding the recent acquisitions, Residential margins would have increased to 38.2% on -- and the AGA gross margins were 33.1% in the second quarter and improved in comparison to 28.5% in the first quarter. The gross margin at AGA will continue to have a dilutive impact to the margin rate through the year but are anticipated to continue to improve in the second half as the benefit of cost-reduction initiatives at AGA are fully realized.

Selling and distribution expenses during the quarter increased to $58 million from $45.3 million in the prior year quarter, and the second quarter of 2016 includes $12.5 million in additional selling costs related to acquisitions completed during the past year, accounting for the increase in the quarter; while general and administrative expenses increased to $57.2 million from $42.8 million in the prior year quarter, and general and administrative expenses included $11.9 million in expenses associated with the recently acquired companies not included in the prior year quarter.

The second quarter also included $6.4 million of restructuring expenses associated with continued profit improvement initiatives at AGA, and this compares to $1.5 million in restructuring in the prior year quarter, which related to rationalization and efficiency improvements related to the acquired Viking distribution operations.

Non-operating expenses during the quarter included a $2 million increase in interest expense and higher debt balances related to the funding of the AGA, Lynx and Follett acquisitions, while non-operating income increased to $3.8 million in comparison to $400,000 in the prior year quarter due to favorable impact of foreign exchange gains. The larger exchange gains in the quarter relate to -- primarily to unhedged positions at AGA that in future periods are not expected to occur.

Earnings per share of $1.28 per share in the quarter improved to $0.95 in the prior year quarter. Both the current year and prior year included the impact of restructuring expenses, which reduced net earnings by $0.07 and $0.02 per share respect -- in the respective quarters; while the foreign -- the favorable foreign exchange gains benefited the quarter by approximately $0.04 per share. Excluding these items, earnings per share increased by 35% over the prior year quarter to $1.31 as compared to $0.97 per share in the prior year quarter.

Cash flows generated by operating activities remained strong and amounted to $81.2 million in the quarter as compared to $85 million in the prior year quarter, while for the first 6 months, cash flows generated by operations amounted to $95.7 million as compared to $108.8 million. Operating cash flows for the first half of 2016 include cash obligations paid in connection with funding of pension obligations at AGA of approximately $14 million that was negotiated and agreed upon in connection with that acquisition and $16 million of cash costs related to AGA restructuring activities in the first half of 2016.

Non-cash expenses added back in calculating operating cash flows amounted to $22.2 million for the quarter and $42.4 million for the first six months. For the quarter, this included $9.4 million of intangible amortization, $6.6 million of depreciation and $6.2 million of non-cash stock-based compensation. The company utilized $5.4 million in the quarter to fund capital expenditures, primarily related to investments in manufacturing equipment and enhanced production capabilities.

Total debt at the end of the quarter amounted to $916.3 million as compared to $766.1 million at the end of 2015, and the company's net debt-to-EBITDA leverage ratio at the end of the quarter approximated 1.9 times.

We were also pleased to complete and announce the refinancing of our revolving credit facility. This facility was expanded to $2.5 billion of borrowing availability as compared to our existing -- or prior existing facility of $1.25 billion, which provides for continued funding of strategic investments as we build upon each of our three industry-leading business platforms.

Chanel, that's all for our initial comments. Could you please open the call to questions at this time?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Josh Chan of Baird. Your line is now open.

Josh Chan

Hi, good morning and great job on the quarter. I just wanted to ask about the Commercial Foodservice business. Maybe you can talk about internationally whether that growth is sustainable. And then also domestically, what are you seeing based on the different categories of restaurants? I think one of your competitors mentioned weakness in QSR. Just wanted to see what you're seeing in each of those verticals? Thank you.

Tim Fitzgerald

I think on the international side of the business, Josh, I mean, we had obviously a very strong first half. I mean, I think we see improved conditions internationally and do expect growth, which if you remember last year, international didn't grow much. I think we do expect it to moderate. I mean, I think 20%-plus growth in the first half of the year is very strong. So we're still targeting a double-digit international growth in the back half of the year, but I think that would probably come down into something that was in the low to maybe mid-teens.

Josh Chan

Okay. And then on the domestic side, what are you seeing in each of the different type of concepts?

Selim Bassoul

Well, I can answer that question. On the domestic side, we continue to see the restaurant business doing very well. At least so far, the total restaurant same-store sales were up 2.4% from a year ago, and food away from home is up 2.6% from a year ago. We also believe that QSR and fast casual and casual dining are all in the positive category, and they will continue to be driven by the following, unemployment continues to trend down around 5%, and the most important is underemployment is now below 10%, which is the true measure of truly people who are no longer reported on the labor census is now below 10%.

And then we continue to see gasoline prices trending down. I think that they will remain low for a while and will -- they will continue to give consumers more money in their pockets. So I see that the Commercial Foodservice, while it could be that individual chains here and here could see some disruption, whether it might be in their operation or they might be implementing a online ordering system or changing menu items, but in general, I see the trends in the second half of the year to be -- to remain positive.

Josh Chan

Okay. That's good to hear. And then if I can switch over to the Food Processing side. Obviously, you've gotten good growth from the backlog. Just wondering is orders continuing to be positive or strong, I guess and can you talk about the sustainability of growth rates in that segment?

Tim Fitzgerald

Yes. No, Josh. So we continue to have strong incoming order rates in the first half. We've been able to essentially maintain the backlog while having the strong revenue growth in the first half of the year, so I think we're well positioned as we move into the second half of the year.

Josh Chan

Okay. And on the Residential side, is there a way you can kind of break out the organic revenue in Viking versus U-Line? I know U-Line caused the decline there, too, but just wondering the trajectory of each of those business.

Tim Fitzgerald

Well, I'll just say that the -- if -- I don't think we want to break them out since we reported each of our independent groups, but I think Viking was less than 10% of the sale down. So overall, we were, I think, 12.2% of a decrease. So I mean, we kind of notched down to a single-digit decline at Viking in the quarter. So we still continue to have the headwinds from the recall, but we are seeing the benefits of the new products that are coming out there that are beginning to kind of chip away and offset that quarter-by-quarter as we see those in the market.

Josh Chan

Okay. Great. Thanks for the color and great job.

Operator

Thank you. And our next question comes from the line of Tony Brenner of Roth Capital Partners. Your line is now open.

Tony Brenner

Thank you. I have two questions. First of all, regarding Viking. I'm aware that beginning in the third quarter, your comparisons become much easier, as such a year ago when you begin to see the full brunt of the recall. But while you've increased quality and you've introduced a number of new products, I wonder if that's -- if that means that Viking is now completely fixed or is it still -- is there still work to be done? I know in the release, you mentioned the service part of the business as well, and I know you're still working on that end. So to what extent is this to a work in progress in terms of fixing Viking?

Selim Bassoul

So Tony, I'm going to answer this question. I think from the standpoint of fixing Viking, I think there are some bright notes. So let's start with the bright notes. Our refrigeration business is positive. So when you look at refrigeration, which has been our most Achilles heel, our orders in refrigeration are up in the positive business. So literally we're starting to gain back traction in refrigeration, which has been part of our recall, additional recall. It had a lot of issues when we bought that company. And we finally redesigned every refrigerator we own, and we sell a complete redesign in terms of quality, in terms of testing, in terms of how we do that. So the bright note is our refrigeration business is up.

On the ranges business, I think we've continued to be affected, honestly, with the recall. I think recall continues to be somewhat affecting the older ovens and ranges. Now the new ranges was 700 Series, and the French Doors continue to be very well, but we still have a stigma with the recall that's taking -- lingering a little bit more than we expected. Finally, we have -- we're starting to tackle service and tackling parts availability. Part of the issues, as I mentioned before, is the fact that we had redesigned over 100 products. Almost the entire product line has been redesigned, and we're trying to catch up in training the service agent in the field, in trying to make sure that people are serving the product with the right -- so we have customers who've had ranges in kitchens that are 10 years old, and they need parts. And some of those parts have become caught as we're introducing and producing new product.

So a balancing act that we have to do is make sure that we continue producing the orders that we have in-house on new products and still fulfilling old parts that really the equipment doesn't exist anymore. So we're not going to let down a customer who bought a piece of equipment 7, 8 years ago and they need a part because that product is not existing. So we're still going through this, this year. And I think by 2017, we'll start to deliver a better customer experience, both on service and part, but we’re in the middle of it. And it's affecting our dealers. It's affecting our customers somehow because we've struggled in servicing parts in the last 12 months as we transition to a complete new line of new product, and we have customers who still have all type of ranges. And they might need a burner that we do not have any more or they might need a type of a door that we don't produce anymore.

And now we're going back and saying, well, let's produce this to keep those customers happy and excited. But it's been a juggling act on the servicing parts, and I could tell you it's not done yet. So it's going to take us through the balance of this year, which is the second half to get our act together on that one. But the bright note refrigeration is up. Builder business is up. Our new products, which is the new product introduced, are up. So we're feeling very good about the way we are with Viking. And what I mentioned is the fact that once we have the recall behind us, hopefully, totally, we're going to start to see better year-over-year sales comparison.

Tony Brenner

Okay. My second question. You've made several acquisitions in expanding your beverage platform. Selim, would you, from a big picture standpoint, just talk about what your strategy is in this area, what the addressable market is, who your customers are? Is there potential for this to be an international business? And are there synergies here with your three other areas of operation?

Selim Bassoul

So Tony, the -- as a vision for beverage for me is literally targeting Generation Z. That's followed by who is Generation Z? It's the 13 to 23-year-old customers. It's that population. And I have done a great effort in working, in designing product and helping our customers target that generation because that generation tend to eat out more often than the Millennials and the Baby Boomers. That generation want speed, convenience, low prices and customization, which is all excellent for Middleby. They are not looking for big, elaborate dining spaces. So now our customer can spend more time in the back of the house. They are big on take-out, grab and go. But the other things they are big on, they are big on beverage options and frozen drinks and desserts. For example, they love cold brew coffee is an example of a new product for the Generation Z.

So when I look at where we're going and I look at our customers, which is mostly the chains, I see us helping them target and get to those customers. So beverage becomes a major driver for us to help our customer deliver a great menu offering for Generation Z. So as I look at the trend the next five years, I -- it goes back to most probably what I did in 2000 to 2003. If you recall and you go back to the transcripts of my conference call, I transformed the business, along with my team. I don't think it's -- it's a team effort, which we did when we did the acquisition of Blodgett and Pitco and Magikitch’n at the time, was to transform our company from a literally institutional, fine-dining company to a fast casual company. We targeted the fast casual before anybody else targets the fast casual. We became the dominant supplier to fast casual at the time.

And today, I look at a trend, which is Generation Z, which sits very well among our chain customers, and I see us putting product together and offering equipment that helps our customer target that generation. An example of this company -- of a company that has done very well targeting -- and there are many of them, but I'm going to give one, is Wingstop. They have customized menu items. They launched digital ordering via social media platform. They have basically done a very good job doing a fresher take-out preparation. They've done a great job in customization, customizing the menu offering, whether the wings and the sauces and how they provide take-out and grab and go. And we've been right there with them.

We've been right there, along with them, helping them with the equipment to be able to be faster, fresher at a price point that allows that customization. That's one example of a concept that has targeted Generation Z very efficiently. So that answers a little bit why I see beverage as a critical component for us as we go through targeting Generation Z, and that has been a forefront for us as we marry our technology with our customers' drive to target and attract that type of customers in the next 5 years.

Tony Brenner

Richard, thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of George Godfrey of CL King. Your line is now open.

George Godfrey

I wanted to zero in on the gross margin, which was fantastic. The adjusted 41.6%. And then, Tim, I heard your comments about steel prices maybe up 50 to 100 basis points taken away from that. So is 41% a sustainable target on an adjusted gross margin base, do you think?

Tim Fitzgerald

Well, I think one of the things that's a little bit difficult to predict is just the mix. I mean, we've had a pretty favorable mix in the first half of the year, particularly at the Commercial Foodservice segment. You see a lot of margin expansion across all 3 platforms. Clearly, in Food Processing and Residential, a lot of that has to do with integration initiatives, which are coming through on the Commercial side of the business, which is still our largest segment. That can move from quarter-to-quarter just based on the dynamic of which business units are selling more. We've got strong gross margins across all of our brands, but there are 35 brands, and there are some variability. So I think we've had a very positive mix in the first half of the year as it relates to the Commercial Foodservice. So I would say as we look into the back half, we've got a little bit of headwind with steel, which pricing obviously went up in the first part of the year. We were fairly protected through midyear, so we'll see some of that come through. And then just depending on the mix in the back half of the year, that could may be drift back a little bit because I would say it was the mix was to our benefit.

George Godfrey

Got it. And it's nice to see the Residential Kitchen trending in the right direction. I realize it was minus 12% on an organic basis this quarter, but it was minus 19% in Q1. Do you think as we go Q3, Q4 we'd see a similar improvement 5, 7 percentage points of growth improvement towards getting a breakeven?

Tim Fitzgerald

Yes. It's -- we do expect that will continue to march towards improved sales or at least a lesser decline. We don't have a great visibility in terms of what that impact is, so it's hard to predict what the percentage would be. But I would say that directionally, we'll continue to see something similar.

George Godfrey

Okay. And then I believe you said the organic growth split 20% internationally and flat domestically. Can you just remind me what the organic growth was on a full year basis for last year domestically?

Tim Fitzgerald

I don't have that right in front of me, but I think it was probably in the 8% range.

George Godfrey

8%. Great.

Tim Fitzgerald

Yes. I don't think -- I can double check that number, though, so -- but it's in order of magnitude, it was high-single digits.

Operator

[Operator Instructions] Our next question comes from the line of Joel Tiss of BMO Capital Markets.

Joel Tiss

So I just listened to the conference call before this one about how their big competitor is cutting prices and undercutting the market and trying to buy market share. I just wonder if you could talk a little bit more detail like give us a better sense of exactly in Commercial like what are some of the programs that are having success and what are you hearing from the customers about what the next 6 or 9 months look like in terms of how they're thinking about their business. I know all the restaurants are struggling a little bit, and they've got higher costs and all that. We all know that, but I just wonder a little more granular what you saw in the quarter and what you're hearing from your customers.

Selim Bassoul

Joel, I can answer the fact that, first of all, I would say many of our customers are doing very well. Let's put it this way. First of all, commodity prices are manageable in terms of food prices compared to what it used to be I would say 2, 3 years ago. I would say also the fact that consumer confidence is pretty high in terms vis-à-vis eating out. As I mentioned, I would go back and I say food away from home is up 2.6% from a year ago, so we continue trending out where people are spending more of their budget and their dollar eating out. I think the challenges for our restaurant concept today is to continue to reinvent themselves, and I think that's most probably the biggest issue. How do you reinvent yourself to cater to a changing expectation from a customer or delivering a great guest experience?

So I think that it comes back to 3 things: one, many of them have spent the money in the past 3 to 5 years doing the online apps, ordering, digital, whatever, texting, where you can get that done. They've upgraded their menu boards and their front of the house. I would say what bodes well for us is many of them are starting to go back to remodeling the kitchen, and we're seeing significant, especially in our national account department where we're seeing a lot of restaurant concept coming back to us and saying, Help us work out the rising labor cost. Help us make sure that we are efficient as we introduce more menu items or as we expand the hours. Many of them have extended hours. Let's take the example of the all-day breakfast, which becomes very complicated. Help us get there.

And I think that what we've done, especially at Middleby, I look at the next 3 years, I'm not going to look -- I've never looked at 1 quarter to second. And Joel, you've been with me researching this company for years. I've never been sucked into a guidance or into a quarterly or even a yearly corporate guidance. What we've always looked back is the trend good over the next 3 years, not the next 10 years or next 5 years. I'm talking the next 3 years. If you are investing into Middleby, what is the trend over the next 3 years? And I will tell you that basically, I see our opportunities to be among the best. I think Middleby has never been stronger, and I think the markets are going to be forcing many of our customers to reengineer their kitchen, to drive innovation, to remain competitive.

So I think I'm very bullish on the next 3 years at Middleby and all our customers, and I will give some specific example. I will tell you that I look at customers that are reinventing, so let me give specific example. Dunkin' Donuts is an example that is a company that's reinventing itself. And for example, they are testing curbside delivery and updating their app and updating their menu offering in a very successful way, and they continue looking at ways to reinvent and grow. I look at Domino's as another example of a very mature company. Domino's have been around for a long time, and they've basically reinvented themselves. The same with all the pizza chains, whether it's Papa John's, Pizza Hut, they are all looking at reinvention. And they are finally getting there, and we're very thrilled to be a part of those customers to help them.

Joel Tiss

And then can I guess that by not answering the question about competitive pricing in the market that there is a little bit of share that you guys are sharing that issue with some of the competitors?

Selim Bassoul

Well, I have to tell you we've always faced competitors one way or another, and we've most probably stayed away from doing what they do. We've always been the contrarian. We've always been focused on what we do best, and I go back and say Middleby has always been very driven by its own corporate -- or core competency versus trying to emulate what people want. We really have not been a company that goes by what you think the natural rationale will be. For example, all -- most of our competitors, if not all of them, are really a full turnkey operators. They offer refrigeration. They offer freezers. Some of them offer dishwashers. They offer mixers. We've been very focused on what we do best. And along the space, we've lost customers who want a complete turnkey solution, and we said no. We're going to give you the best of what we offer. If we're not good at it, we're not going to get into it.

And we are also the type of company that will cut SKUs if we're not really innovating in it. So part of our reinvention as part of Middleby has been to say, I don't want to offer something that's [indiscernible] product. And if it's going to cover -- cost us some sales or lose some customers, be it, because we're going to offer what is best. So when you come to Middleby, whether coming into Commercial, and Commercial has been a phenomenal example of that, and we're emulating that into Food Processing because food processing is starting to emulate what we did in Foodservice. Meaning, we want to offer the best solution we can on a very restricted product line. So we talked about beverage. We're not going to be offering all type of beverage equipment. We're going to offer what we do the best. We want to be the leader in innovation in a specific category, and we're not going to be in every category. So between us and our competitors, there is a big fundamental difference. We are very focused on what we do. We're very focused on being the best in class in what we do.

And the day the product is not best in class, we'll cut it off. Even though customer would want it, we'll say go buy it from somebody else because we're not best in class in that product. That's why when we look at speed cooking, we look at our pizza oven, we look at our fryers, we look at our beverage, we are best in class in what we do. And now we're taking that to our Residential because we used not to be best in class. Even when we bought the business, even the first year or 2, we struggled with refrigeration, and now we're starting to become best in class in refrigeration. And that's why our numbers are now in a positive order rate for our refrigeration, competing against a very, very strong competitor in Residential -- in upscale residential refrigeration, and we're starting to start having traction.

So Joel, my concept of this competitor is many of our competitors would claim things that are similar to us. They say we're as good as Middleby on energy or on labor automation on that. Test after test, we prove that since we are very focused, not only we win the business almost every time on those categories. And I told you, there are certain customers that would like to go back and buy a complete turnkey because they are attracted by the discount or that total package that we do not give.

Joel Tiss

All right. Yes, just looking at the numbers, you can pretty much see what the answer is anyway.

Tim Fitzgerald

Yes. Well, Joel, maybe just a short answer to that. I mean, we are not buying market share. In fact, we've been focused on putting in price increases to offset steel costs in the back half of the year. And I think, as you know, as you look across our product lines, our products are generally at a premium to our competitors because of the innovation and features and benefits, so I think that -- so we are not focused on the price reductions or buying market share. It would be the exact opposite.

Operator

And our final question today is a follow-up from George Godfrey of CL King.

George Godfrey

So in the enthusiasm for the business and the company, it resonates as I you listen to you speak on this call. And I'm just wondering about the credit facility that was recently doubled to $2.5 billion. And if I look at the gross debt of $916 million, this is a substantially large number. So I'm wondering if we can interpret that as a continuation of the enthusiasm we just spoke about.

Selim Bassoul

Yes, George. I think it's a continuation of the enthusiasm. I think also that the fact that the acquisition pipeline continues to be out there strong, I think what is the best thing that I've seen in the next -- in the past 3 to 5 years is the number of people that have come to us to say I want to be part of Middleby. Now of course, some of them fit, some of them don't, some of the maybe the evaluation -- we don't get to evaluation that we agree upon, but there has been a concerted effort by many players wanting to be part of Middleby. And I have to say the biggest example has been Follett, and I can say very proudly that Steve Follett did not need to sell. He had a great company, a great business. He was striving, and his name is on the door of this company. And it's his several-generation company, and he decided to come to Middleby and be part of Middleby. Because it is an attraction to go in global. It is an attraction to the way our DNA and our culture allows them and its people to continue operating in a way that makes him proud to say, I still run the company.

I am still in control. I'm not part of a bureaucratic organization. And I continue looking at all the acquisition we've made, and I think part of the credit facility is we're having significant interest from people to say I want to join Middleby and part of it you want to be ready, which I think that we'll see significant opportunities ahead in acquiring some companies that fit us that may might not have been ready in the past to be sold or be merged into a Middleby culture. And I think we're very excited about that. And I think when I look at the acquisition of Follett or Cozzini or Concordia as small as this or Desmon or AGA or Lynx, U-Line, those people made a decision to join Middleby because they have a say. They could have said no, I don't need to. They were all doing well. They didn't to be acquired, but they felt that synergies and the culture and the DNA of Middleby may give some advantage and allows them to continue to run their business autonomously. And it's been very good, so that's why we went on the credit facility. There is a purpose to it. It did not happen that suddenly.

And the markets -- I'll be honest with you, the interest rate in the markets are very favorable for us to go get a credit facility without diluting our equity base and our shareholders. So it's a most efficient cost of capital at this moment, and we're really -- I want to go back to our bankers and our banks who believed in us to give us such a facility. It's my -- hats off to our people in the treasury department, but most important -- and Tim, but most important is to our bankers who believe in us. They want back to their credit committees and said, Hey, let's -- we believe in Middleby. We believe in what they are doing. We believe in the next 5 years of those people, what they are doing. And many of them have been a part of this company for now almost 20 years, 25 years in lending us money. And it's been gratifying to see when we went back to them, they were there for us.

Tim Fitzgerald

Yes. And George, I mean, I just kind of point out. I mean, if you look at the history of Middleby, I think we started with $100 million facility back in 2001. So we've constantly doubled it. We've got a -- it's a 5-year facility. So we're looking it as a long-term facility, which, obviously, we've continued to grow the debt, but that's along with a much larger company and earnings base is supported. So the facility was put in place with a view for growth over the next 5-year period.

Operator

And that concludes our Q&A for today. At this time, I'd like to turn the call back over to management for closing remarks.

Selim Bassoul

So I would like to wrap up this conference call by saying that Middleby has never been stronger. Our innovation is at its highest level. Our brands are among the best. Our global presence is increasing fast. However, we still need to adapt to prepare for the next 5 years where slow growth across the world is the new norm. We have to relentlessly pursue additional action to drive our competitiveness. I think we're going to see some tough economic factors in terms of GDP across the world, including United States, and we need to respond. Those additional actions include the integration of our newly acquired residential brands to conduct consolidation [ph] of our industrial bakery group, so turnaround of Viking range and the launching and expansion of our new beverage food service division.

Three opportunities exist for us, which we have to execute well on them. One is to rationalize our channels of distribution and to introduce a digital experience in Foodservice and in our Residential platform. The second is to manage our supply chain to be more cost efficient. As we acquired more company, we became bigger. I think there is a lot of room to improve our supply chain. And third is to increase our service revenues and become a better service company in delivering a better guest experience, and we talked about that early on in the call when I mentioned our Residential platform. And we need to finally figure out our cost engineering and standardization of components as we become a bigger company. There is a lot of opportunities is cost engineering and standardization of parts without compromising quality.

In the short term, we must help the decline in our Residential revenue. This is a #1 objective. In the long term, we intend to concentrate on leading the automation in food service and in becoming the most connected smart appliance in the kitchen. We have the most cost-effective innovation that will disrupt categories. On the Food Processing, we do not see -- really see a turn in the cycle here. We are still in an unprecedented position as we look at our order backlog. We expect to keep that backlog going for longer than in the previous cycle. I will argue that today Middleby is healthier and stronger than it has ever been. In our Residential Group, we are reinventing the luxury experience for the next generation.

For the past 3 years, we have been set to deliver on the product excellence peaks [ph], so we've been working on the product quality by introducing key technologies from the Commercial side. So we took a lot of innovation we had we use in the restaurant business, and we introduced it, integrate it in our Residential, like our burners, like our zero preheat, like our ability to basically speed cook like our TurboChef oven now introduced in the home. We recognize that the product piece was only the first step in the road map to our future luxury consumers. We are committed to delivering an elevated client experience in line with their rising expectations, and that's why I mentioned our parts availability and service. We have invested in delivering a warm, a human and personalized experience before, during and after the sale.

That's why when Tony Brenner asked me today on this call about where we are in service, I think what we're trying to invest is to become the best in delivering that warm, personalized, customized experience before, during and after the sale. From the website to the ordering, all the way to servicing the product, we are now incorporating artistic features, our culinary performance, our best of in class of what we delivered to our chefs in restaurants and specific design from vintage and classic to urban. On the other side, I look at our cooling, which is now not a commodity cooling but very innovative cooling from beverage to refrigeration to blast chilling, and we're very excited about all of that. So I go back and I look at the drivers. So we start with the QSR and the chains. We look at fast casual and casual dining, and we look at literally how we are penetrating new and hub chain concepts versus our competitors.

To showcase that, I'm going to talk about a company called Hopdoddy. Hopdoddy in Texas, it's an Austin Texas-based burger and brew fast casual concept using hormone-free beef. We have been the supplier for most of their equipment from day 1. They use our equipment, NU-VU and Doyon for baking the buns on premise. They use our Pitco fryers. They use our Magikitch’n grills to do their burgers. In 2013, they had 4 stores. Today, they have 14, and their sales have increased 1,842% in 5 years. In just last year alone, their sales year-over-year grew 70%. So our penetration of what I call emerging hot chains is unprecedented, and we continue monitoring that, and we're very proud of being close to those type of customers as they grow.

In addition, I'm very proud to say that when I talk about our existing customers, as we build our relationship with them, in the Foodservice and in the Residential, we'll continue to work with them on delivering an experience and a solution that allows them to grow with us. So from that, I look at another great driver for us, which is convenient stores. Food and beverage now represent 21% of the total in-store revenues of all convenient stores. So if you look at this total sales, 21% of their total store revenues come from food and beverage. But much most impressive that 34% of their profit contribution come from food and beverage, and now it's bigger than tobacco and packaged beverage. So we see that driver also growing pretty fast for us is the convenience stores where we become very close to them and working closely with them.

Thank you for listening to us. Thank you for being with us on this call, and that concludes my comments. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.