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The Middleby Corporation (MIDD)

Q1 2012 Earnings Call· Fri, May 11, 2012

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Transcript

Operator

Operator

Welcome to the Middleby Corporation First Quarter Conference Call. With us today from management are Selim Bassoul, Chairman and CEO; and Tim FitzGerald, Chief Financial Officer. We will start the call with prepared comments from management and then open the call for questions and answers. [Operator Instructions] Now I'd like to turn the call over to Mr. Fitzgerald. Please go ahead.

Timothy FitzGerald

Analyst

Good morning. Thank you for attending today's conference call. I'm Tim FitzGerald, CFO of Middleby Corporation. And joining me today is Selim Bassoul, our Chairman and CEO. The first quarter results reflected the impact of acquisitions completed during fiscal 2011, including the second quarter acquisitions of Beech and Lincat; the third quarter acquisitions of Auto-Bake, Danfotech and Maurer-Atmos; and the fourth quarter acquisitions of Drake and Armor Inox. During the first quarter of 2012, we also completed the acquisition of Turkington U.S.A.. The Turkington acquisition was completed on March 13 and therefore was only partially reflected in the results of the quarter from the date of acquisition. Net sales in the 2012 first quarter of $228.8 million increased 25.3% from $182.6 million in the first quarter of 2011. Sales growth from acquisitions accounted for $36.5 million or 20% of this increase in the quarter. Excluding the impact of acquisitions, sales increased 5.4% over the prior-year quarter. This increase reflects a 6.2% increase in our sales at our commercial foodservice group and a 1.3% increase in sales at our food processing group. At commercial foodservice group, we continued to realize growth in chain sales resulting from the adoption of new products and technologies with numerous restaurant chain customers, while international sales growth amounted to 2.2% in the first quarter, reflecting the timing of large projects in the first half of last year and slow sales in Europe. While we expect to see variability in sales in the emerging markets, we anticipate that we will see continued momentum in the emerging markets during the year as restaurant chain customers continue to expand globally and through increased sales penetration as a result of continuing investments made in our international selling organization, although we anticipate we may see continued softness in sales to European…

Operator

Operator

[Operator Instructions] All right, our first question comes in from Tony Brenner from Roth Capital.

Anton Brenner

Analyst

2 questions. First, I think you -- Tim, I think you implied that international sales comparisons, organic international sales comparison, should improve as we go forward. But given the fact that, typically in the foodservice sector, those comparisons were nominally up in the first quarter, unless you're assuming some improvement in the European economy, I wonder what gives you that confidence.

Timothy FitzGerald

Analyst

Well, Tony, I guess I was -- we think that we're going to continue to grow in emerging markets. I mean, last year we grew double digits throughout the year. Clearly, there's some softness in Europe and that detracted from our growth in the first quarter, I think. I think that will -- we'll probably likely see some continuing softness there during the year, but in the kind of the rest of the world, Latin America, Asia, Middle East, we're still seeing strength there. It was a little bit softer in the first quarter just due to comparisons, but we -- we expect that those markets will grow a robust rate for the -- during the 4 quarters of this year.

Anton Brenner

Analyst

Okay. And second question. Again looking at organic comparisons, gross margins in both divisions appear to be kind of flat. And given the fact that your steel costs, I think, are down year-over-year, I'm wondering why there wasn't at least some improvement in gross margin.

Timothy FitzGerald

Analyst

Well, the gross margin in first quarter was primarily affected by the mix between the commercial foodservice group and the food processing group, so that...

Anton Brenner

Analyst

Yes, but generally, the gross margins just in the foodservice area were flat and so were gross margins in the food processing area...

Timothy FitzGerald

Analyst

Yes, well, the food processing group is affected by these -- I mean, we did 6 acquisitions in the food processing sector in the last year. And those businesses, when we break them -- as historically has happened, are -- tend to be at lower margins, and then as we integrating them head up. But there was some contraction in the gross margin on the food processing business when you think of the acquisitions that we've just completed. And we'll spend a fair amount of that to secure integrating those businesses. And as we...

Anton Brenner

Analyst

I think you broke out gross margins excluding the acquisitions, and those were flat. Were they not?

Timothy FitzGerald

Analyst

No, that includes the acquisitions. So the gross margins were slightly down because of the acquisition. And in food processing -- on the commercial side, the margins were flattish at 40%, and that is -- that mix can change from quarter to quarter. So that wasn't necessarily the contraction in the margins, but it was really just the natural quarter-to-quarter impact of product mix.

Selim Bassoul

Analyst

Tony, I would like to step in also to tell everybody that the cost [indiscernible] -- our raw material costs were not down as we expected it to be. We expected to have a much more reduction in steel prices than we expected, but ultimately it did not work. So our reductions in the first quarter were not as drastic as we expected them to be. And the surcharge on steel continues to be challenging for us, and I think some of the other raw materials that we've done, we've seen this is not abatement as we expected it to be in raw material cyclings.

Anton Brenner

Analyst

Okay, that's true. And Tim, lastly, are -- is your effective tax rate going to be a point or two higher for the balance of the year than in the first quarter?

Timothy FitzGerald

Analyst

Yes, I would generally anticipate that kind of the -- that the normal run rate of tax rate would be higher. The first quarter did benefit from some reserve adjustments. And our effective rate continues to move down over time, but we did get some onetime benefits.

Operator

Operator

[Operator Instructions] And our next question comes in from Peter Lisnic from Robert W. Baird.

Peter Lisnic

Analyst

I guess the first question, if we can just talk about Turkington for a little bit. Can -- Tim, can you give us the kind of what's the revenue base for the businesses? And then Selim, if you could talk about strategically how that fits into the portfolio and kind of what the leverage is from that business, that would be very helpful.

Timothy FitzGerald

Analyst

Yes, Pete, historically, that's been a $20 million to $30 million revenue business. It'll probably be a little bit lower as we kind of -- it was an asset acquisition, so we'll be rebuilding a backlog and portfolio kind of as a new business, but that's historically a $20 million to $30 million revenue business.

Selim Bassoul

Analyst

Peter, what is the interest of that platform for us: with the acquisition of Auto-Bake and now of Turkington, we become a real player in the baked goods business, which includes -- which becomes -- puts us in most probably a #2 or #3 position globally in that business. What I like about this platform is the fact that baked goods is a trend not only in the United States but mostly in emerging markets where, literally, people are going from locally -- local bakeries with heavy labor to processed -- factories where they process baked goods at much lower price and better quality. So as I look around that platform, I see that platform being a great introduction in growth in emerging markets. And I like the fact that this platform is being consolidated. And today, if you're a small player in that platform, it's hard for you to be able to go globally. So I like the fact that we now continue to consolidate that platform and come up to become a #2 or #3 player in that platform. I like the growth span and the growth future of it. I like the fact that it's a international platform. I like the fact that people tend to invest in baked goods. It's not going away. We, as human nature, like our sweets and we like baked goods. So whether it's taking them to school or taking them for casual dining restaurants or quick serve, there are a lot of potential in that market.

Peter Lisnic

Analyst

Okay, and is there -- can you give us a feel as to what the potential market opportunity there is for you, how significant size the market might be?

Selim Bassoul

Analyst

I think that market could easily be, for us, literally a $100 million to $200 million market, just with the companies we have today. So we could go from being a $40 million to $50 million player to almost tripling our revenue within the next 4 to 5 years in that business. It's a nice business for us. It's -- again, the issue with that business, similar to food processing, is the fact that the purchase equipment is pretty large. So you're talking about multimillion-dollar purchase. But I see us looking at places like Saudi Arabia, Thailand, China, India where we're seeing a lot of activity in baked goods.

Peter Lisnic

Analyst

Okay, all right. And then, Tim, if we could just switch back over to the commercial business. Can you give us a sense as to what the pricing trends there look like? Anything of meaningful change in terms of pricing and your ability to get price in that market?

Timothy FitzGerald

Analyst

There -- yes, we had -- our prices increase generally at the start of the year. That was in the 3% to 5% range, and generally we believe that, that's -- we're getting that across the market.

Peter Lisnic

Analyst

And it's safe to say that you're getting it across both domestic and international, is that fair to say?

Timothy FitzGerald

Analyst

Yes, that's fair to say.

Peter Lisnic

Analyst

Okay, all right. And then the last question, if I could. The -- I think the dry powder on the buyback is basically gone at this point. Any thoughts about a new authorization, share repurchase authorization?

Timothy FitzGerald

Analyst

Are you talking about from the credit facility, or just the amount of shares that's...

Peter Lisnic

Analyst

No, I -- a share buyback. If my math is right, you're getting pretty close to having that fully exhausted. So I'm just wondering if there's new plans for a new share authorization plan.

Timothy FitzGerald

Analyst

Yes, I think that, that would be something when that's exhausted, that, likely, we would discuss at the board, and that would -- we'd likely reinstitute some ability to do that on a go-forward basis.

Operator

Operator

Your next question is from Jason Rodgers at Great Lakes Review.

Jason A. Rodgers

Analyst

I wonder if you could talk about the current acquisition pipeline, if the focus is still mainly on the food processing side or if you're seeing some opportunities now on the commercial side.

Selim Bassoul

Analyst

I would like to address that, Jason. I think we continue to see activities in both. I think we're starting to see the acquisition pipeline to be active on both sides. The key is to make sure that it's something that fits us. We have been able to walk away from a couple of acquisitions because either the fit was not perfect when we did the due diligence or the pricing did not fit to be accretive for us. So I think the acquisition pipeline is very active. And we'll start to see activity also on the commercial side of the business. And I think, in 2012 we will most probably see activity both domestically and internationally both on the commercial side and on the food processing side.

Jason A. Rodgers

Analyst

Okay. And Tim, do you have an estimate for CapEx and D&A for 2012?

Timothy FitzGerald

Analyst

Well, CapEx has historically been 1% to 2% of sales, so we anticipate that, that will be roughly at 2% or less of sales going forward. So that's pretty consistent where we've been historically. I don't have -- I -- we don't give a forecast on depreciation and amortization. And I think that -- in particular, that's affected by the amortization of acquisitions, which we still have numerous recent acquisitions and that can still move somewhat from quarter to quarter. But generally, and the first quarter we laid it out, it was $7 million of amortization and depreciation. I would -- we don't -- that did not include amortization from Turkington, which at this point -- we just completed that acquisition, so that's why -- we don't have a forecast for that as we complete the valuation for that. But the $7 million that's there for prior acquisitions and existing companies would likely trend down over time as we fully amortize certain intangible classes.

Jason A. Rodgers

Analyst

Okay, that's fine. And then finally, Selim, if you could talk about SPINFRESH, how the testing is going with customers and then any other new products that were especially noteworthy in the quarter.

Selim Bassoul

Analyst

Yes, I think that SPINFRESH is -- continues to get a lot of attraction. This is the first quarter that it's gone into production. The first quarter was the first -- I mean, in January, February, it was ready for -- literally to be sold. It's now being able to be mass produced. We just came back from the National Restaurant Show this week and it was the hot topic at the show. It was -- people were standing around it. Everybody is looking at calorie reduction and the fact that it can decrease oil consumption. So we've got a lot of interesting concepts. We've sold a few units right now as we speak. And we have a couple of tests in existence right now, and we're monitoring it very carefully. I think that this product seems to have a lot of interest right now, especially at the show. We had people looking at it, testing it, wanting to put the testers in their store concept. In addition, we came up with a countertop unit, which just comes at the heels of what we produced, which allows people to basically take a countertop -- a lot cheaper mode of the valued production. So if you just bought fryers from us and you don't want to buy a new SpinFry, that we produce a countertop unit that was also patented and also well received at the show. So the biggest question we had is, as we grew our fryer business over the last 5 years, a lot of customers come back and say, "Wait a minute. I just bought -- retrofitted all my fryers from Pitco in my chain. Now you introduce this. What can I do? I don't want to throw away those fryers and end up buying a SpinFry."…

Operator

Operator

[Operator Instructions] Our next question is from Jamie Sullivan at RBC Capital Markets.

Sid Panda

Analyst

This is Sid, standing in for Jamie. My question was on the commercial food segment. The operating margin in the first quarter of 2012, it was down 100 basis points versus last year. What were the major drivers there?

Timothy FitzGerald

Analyst

Well, we would have had higher intangible amortization expense related to acquisitions. So that would have been one of the primary drivers.

Sid Panda

Analyst

Okay. And any updates on the casual dining rollout, the kitchen line efforts? Any change to the current rates of rollouts of any new projects?

Selim Bassoul

Analyst

At this moment, we continue to rolling out our Kitchen of the Future, which I call -- we call it the Kitchen of the Future, with Brinker, and done around 150 stores right now. And we continue rolling out this new equipment package which automates the kitchen of the casual dining segment. And we continue to work, spend a lot of time with Brinker. And as we dedicate all our resources for Brinker, we're seeing a lot of interest from other casual dining chains. But I've been very, very focused on making sure that the Brinker staff works well. They are our #1 partner right now, and we're committed to making sure that, as we roll out more than the 150 we've rolled out in the second quarter and in the second half of the year. We're spending a lot of energy on making sure that, that goes very well.

Sid Panda

Analyst

Okay. Coming to the food processing segment, can you provide orders for the quarter or a book to bill metric for food processing?

Timothy FitzGerald

Analyst

I'm sorry. Could you repeat the question?

Sid Panda

Analyst

For the food processing segment, can you provide what sort of orders did you see during the quarter on a book-to-bill ratio for the quarter for food processing segment?

Timothy FitzGerald

Analyst

Okay. Well, we don't disclose our exact orders, but we did see double-digit order growth in the food processing segment. So it continued to have pretty strong rate from the fourth quarter into the first. And we saw it continue to build in the backlog.

Operator

Operator

Okay, that was our final question. I'll turn it back to Mr. Bassoul and Mr. FitzGerald for closing remarks.

Selim Bassoul

Analyst

I would like to give you a little bit of a flare of what's going on in the industry as we came back from the National Restaurant Show, which was one of the best shows I've seen since the pre-recession. I think we've seen the biggest number of customers and operators coming to the show. We were mobbed -- I -- literally, a lot of people were looking at our kitchen innovation or a lot of people are looking at energy. They are looking at waterless appliances. They are looking at ventless application. The interesting part that I've seen is, I've seen some 5-star or niche-line star chefs looking at introducing concepts that are value proposition. So we saw a lot of interesting people. For the first time in years, actually, people are looking at opening up new concepts. And it was very, very exciting and optimistic. Then I would tell you that what I've seen in general now, most probably starting in -- since the summer of 2011: For the first time, I am very optimistic about seeing unit growth across many concepts accelerating. While we don't expect to go back any time soon to the pre-2008 overgrowth, we are seeing growth in 2012 through -- across the board. So I'm seeing every concept now going back in the U.S. and starting to open stores. Part of that is the fact that franchisees bank funding is widely available and inexpensive. Lenders are actively -- despite the tight lending environment, lenders are actively looking to lend money to franchisees. We are back to seeing interest rates in the mid-4% to 5% range to many franchisees of Dunkin' Donuts, of Chick-fil-A, of McDonald's, of Burger King, of Papa John's. And this is very encouraging for those people to start opening up…

Timothy FitzGerald

Analyst

Okay, thanks, everybody, for attending today's call. We look forward to speaking to everybody at the end of the next quarter.

Operator

Operator

Thank you for joining. That concludes today's conference call.