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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 29, 2005
THE MIDDLEBY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-9973 36-3352497
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
1400 Toastmaster Drive, Elgin, Illinois 60120
(Address of Principal Executive Offices) (Zip Code)
(847) 741-3300
(Registrant's telephone number, including area code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of
the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 2.02 Results of Operations and Financial Condition
On July 29, 2005, The Middleby Corporation held its teleconference discussing
the financial results for the quarter ended July 2, 2005. A copy of the
transcript from the second quarter teleconference is furnished herewith as
Exhibit 99.1.
This information is furnished pursuant to Item 2.02 of Form 8-K and shall not
be deemed filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities
of that section, unless specifically incorporated by reference in a document
filed under the Securities Act of 1933, as amended, or the Exchange Act. By
filing this report on Form 8-K and furnishing this information, The Middleby
Corporation makes no admission as to the materiality of any information in
this report that is required to be disclosed solely by Item 2.02.
Item 9.01 Financial Statements and Exhibits
(c) Exhibits
Exhibit No. Description
- ----------- -----------
Exhibit 99.1 Transcript for conference call held on July 29, 2005
(furnished pursuant to Item 2.02)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
THE MIDDLEBY CORPORATION
----------------------------
(Registrant)
Date: August 4, 2005
By: /s/ Timothy J. FitzGerald
----------------------------
Timothy J. FitzGerald
Vice President, Secretary and
Chief Financial Officer
Exhibit Index
Exhibit No. Description
- ----------- -----------
Exhibit 99.1 Transcript for conference call held on July 29, 2005
(furnished pursuant to Item 2.02)
Exhibit 99.1
THE MIDDLEBY CORPORATION
Moderator: Tim Fitzgerald
July 29, 2005
10:00 am CT
Operator: Good morning. My name is (Aileene) and I will be your
conference facilitator today. At this time I would like
to welcome everyone to the Middleby Corporation's Second
Quarter Earnings conference call. All lines have been
placed on mute to prevent any background noise.
After the speakers' remarks there will be a question and
answer period. If you would like to ask a question
during that time simply press star then the number 1 on
your telephone keypad. If you would like to withdraw
your question press the pound key. Thank you.
Mr. Fitzgerald, you may begin, sir.
Tim Fitzgerald: Thank you, (Aileene). Good morning and thank you for
attending today's conference call. I'm Tim Fitzgerald,
CFO of the Middleby Corporation and joining me to day is
Selim Bassoul, our chairman and CEO. I have some initial
comments about the company's second quarter results and
then we'll open up the conference call for questions and
answers.
We were very pleased with the results of our second
quarter which has historically been our strongest
quarter due to the seasonality of our business. Net
sales in the second quarter increased 15.1% to $83.9
million as compared to $72.9 million the second quarter
of 2004.
Sales from the Nu-Vu acquisition completed in the first
quarter of 2005 amounted to $4.1 million and accounted
for 5.5% of the sales growth for the quarter. Excluding
the impact of the Nu-Vu acquisition organic sales growth
amounted to 9.6%.
The organic sales growth in the quarter reflected an
extremely strong quarter for our international business
which benefited from rollouts with several chain
customers. As we had expected, domestic order rates
slowed during the second quarter as customers bought in
advance of price increases instituted during quarter
one.
We expect that the first quarter pre-buying will
continue to impact the third quarter due to lower order
rates in the second quarter and earlier part of the
third quarter.
The company realized sales increases at all divisions
during the quarter. Sales at our Blodgett division
increased 4.4% reflecting continued momentum of the
Blodgett (convee) oven and the Blodgett steam line of
products launched in the second quarter of 2004.
Sales at our Southbend division increased by 4.5% with
continued success of the heavy-duty range line up.
Middleby's March Sales increased 3.6% with increased
sales of service parts and refurbished ovens.
Net sales at Pitco increased 9.4% during the quarter
reflecting continued success of the Solstice Fryer
Platform. Pitco's strong sales in the quarter also
benefited from a particularly strong backlog carried
into the quarter associated with customer orders placed
in advance of the first quarter pricing increase.
At Middleby worldwide, our international sales and
distribution division, sales increased 26.1% from the
prior year quarter with growth in all international
regions. Strongest growth came from Asia which was
impacted by the bird flu in the prior year comparable
period. Strong second quarter sales at the international
division reflect expansion of U.S. based chains and
increased business with local and regional developing
chain concepts, including several equipment rollouts at
various chain customers. Gross profit increased (sic)
from $28.8 million to $32.8 million on higher sales
volumes. The gross margin rate however declined from
39.5% to 38.8%.
Higher steel costs continued to adversely impact margins
in the second quarter however this was offset in part by
the benefit of higher sales volumes and favorable sales
mix driven by greater international sales which carries
higher gross margins.
The gross margin rate for the quarter was also affected
by lower margins associated with the newly acquired
Nu-Vu product lines, although to a lesser extent than in
Q1.
The company is making progress integrating the Nu-Vu
operations which reported margin improvement in the
second quarter. We expect that margins will continue to
improve at that operation as the integration initiatives
are completed over the remainder of this year.
Selling expenses increased $400,000 to $8.8 million
reflecting higher selling costs on the increased sales
volumes. General and administrative expenses increased
$1.7 million to $7.5 million reflecting an increase from
non-cash equity-based compensation and increased
expenses associated with the acquired Nu-Vu business
operations.
Second quarter general and administrative expenses also
included higher legal costs and other professional fees
driven in part by the second quarter proxy vote and the
recently completed secondary offering.
Operating income increased 11.5% from $14.6 million to
$16.3 million reflecting the benefit of higher sales
volumes.
Interest and deferred financing costs in the second
quarter of 2005 were $1.7 million as compared to
$800,000 in the same period last year. The increase in
interest expense is due to higher debt balances
resulting from the funding of December 2004 stock
repurchase transaction and funding of the $12 million
Nu-Vu acquisition in January of '05.
Other expense was also $140,000 favorable to the prior
year quarter due to foreign exchange gains recorded
during the current year quarter.
Net income from the quarter increased $8.9 million or
$1.11 per share as compared to $8.3 million or 82 cents
per share in the prior year quarter. The increase in
earnings per share reflects the accretive effect of the
December stock repurchase transaction which resulted in
the reduction of the weighted average diluted shares
outstanding which totaled $8 million 50,000 in the
second quarter of 2005 versus $10 million 48,000 in the
prior year quarter.
Now turning to our balance sheet and second quarter cash
flows, accounts receivable, inventories and trade
payables increased from the prior year-end due to
increased sales volumes and the increased working
capital associated with the Nu-Vu acquisition. The
increase in good will from the year-end is also
associated with the acquisition of Nu-Vu.
Prepaid taxes decreased in the first half of the year by
$9.2 million as tax overpayments from 2004 were utilized
in the first half of the year which favorably benefited
our cash flows.
Accrued expenses decreased during the first half due to
payment of severance obligations due to the former
chairman, the payment of year-end rebate and incentive
compensation obligations during the first half of the
year.
Total debt at the end of the quarter amounted to $121.3
million as compared to $123.7 million at the beginning
of the year and $138.5 million at the end of the first
quarter.
The $17.2 million reduction in debt in the second
quarter reflects strong cash flows from operating
activity, includes the benefit from the utilization of
the tax overpayments carried from 2004 which amounted to
$5.4 million during the second quarter and $9.2 million
in the first half.
Capital expenditures amounted to $300,000 during the
quarter and $600,000 for the year primarily associated
with replacement and upgraded manufacturing equipment.
Depreciation amounted to $800,000 during the quarter and
$1.7 million during the first half of the year.
That's all for our prepared commentary. (Aileene), can
you please open the call for questions?
Operator: At this time I would like to remind everyone if you
would like to ask a question please press star then the
number 1 on your telephone keypad. We will pause for
just a moment to compile a Q&A roster.
Operator: Your first question comes from (Andy Kaplowitz) with
Lehman Brothers.
(Andy Kaplowitz): Good morning, guys. Good quarter.
Tim Fitzgerald: Hi, (Andy).
(Andy Kaplowitz): Can you tell us what we should be thinking in terms of
gross margin for the remainder of the year? I know that
you have a new supplier contract, steel contract. What
should we be thinking in terms of the headwind as we go
into the second half? Is it going to kind of be similar
to what we see now, better, worse?
Tim Fitzgerald: We expect the second quarter to be our highest margin
just because of the seasonality of the business so
you'll see third quarter be less than the second
quarters we've had historically.
The gap that we've had in the first half of the year
where margins have been less than the prior year, I
think that gap is closing. And I think we're going to
see the impact of steel lessen in the second half of the
year as steel softens. That impact will be felt more in
the fourth quarter than the third quarter as we'll have
some steel burn through in the third quarter.
We anticipate that at some point in the second half of
the year we'll recover to the margins we had last year
and perhaps begin to exceed them.
(Andy Kaplowitz): Okay, that's great. So shifting gears for a second
you've said in the past that sort of 6% to 8% organic
growth is what you target and obviously you did 10% this
quarter. And so I'm just wondering as again for the
second half of the year what we should be looking at in
terms of organic growth. I mean obviously the food
equipment market is doing quite well and your
international sales are very, very strong. So what does
that all sort compute to for the second half of the
year?
Selim Bassoul: (Andy), first I would like to mention the fact that our
industry has been historically growing 3% to 4% and we
believe we can exceed that rate of growth. I think 6% to
8% is what we see our organic growth to continue
growing.
And the reason definitely that we've seen some great
double-digit growth patterns in the first half of the
year. One, we've had pre-buying prior to the price
increase and specifically in our distribution channels
where we've had some dealers stock up on orders for
schools and for institutions that usually takes place in
the third quarter.
So I think most of the pre-buying occurred where our
dealers' network has stocked in the first quarter for
third quarter. We're seeing a lot of the school orders
in the third quarter being filled from our distribution
channels rather than being ordered newly. That's going
to impact somewhat our third quarter.
Next I think we're seeing also pent-up demand coming out
from the recession, from a lot of our customers have
held up on their capital expenditures and we've seen in
the last, I would say in the last three quarters - the
fourth quarter, the first quarter and the second quarter
of this year we've seen some pent-up demand and my
feeling is we're going to start seeing a more stable
organic growth of between 6% to 8% moving forward.
(Andy Kaplowitz): Okay, that's great. I guess...
Selim Bassoul: Internationally - to address the international
market, I think the international market we're going to
always see a double-digit growth. I think the
double-digit growth is going to be what you'll see
internationally. However I think that what is unusual
about this quarter this year is the fact that last year
as I always mention, the epidemics tend to hurt our
customer purchasing.
When we had the Asian Bird Flu and SARS in the past
we've seen the new store opening and the replacement of
equipment being delayed. I think comparing quarter to
quarter we`ve had in Asia last year at this time the
bird flu hit China, Thailand, Philippines, throughout
all Asia so we had a lot of deferrals of purchases and I
think the comparable figures make it a little bit more
distorted.
I think our Asian business grew up over 50% in the
second quarter and I don't think that's normal however
internationally I think we will commit to growing
double-digit growth moving forward but not in the 26%,
but more in the 10% to 12% growth.
Tim Fitzgerald: (Andy), I'm going to add on to that a little bit. In the
international business that's a long-term growth rate
and that from quarter to quarter you're going to have
some volatility. This year we had favorable comparisons
because of the bird flu in the prior year quarter and
some chain rollouts favorably impacting this quarter,
but you're going to see that swing from, single-digits
to higher growth rates, such as the 26% in the current
quarter - and over time it's going to average out to
that double-digit growth rate.
Moving into the third quarter, we came off of favorable
comparisons with the bird flu, now we're dealing with in
the UK, what's going on there with there bombing
situation which could have some impact - it's a little
bit early to say but it could have some impact for our
third quarter growth rate in the UK which is one of our
major international markets.
(Andy Kaplowitz): What did Europe grow in the second quarter?
Tim Fitzgerald: Europe grew 17% in the second quarter and that was
driven by some chain rollouts that we had and frankly
those were driven in the UK. One of them was with Burger
King.
(Andy Kaplowitz): Gotcha. And then in Latin America just to finish off?
Tim Fitzgerald: Latin America was up 28%.
(Andy Kaplowitz): Okay, great. I guess the other question I have is,
Selim, you've kind of mentioned in the past that you're
more weighted to sort of faster growing areas and so
even though you talk about 3% to 4% growth, you know,
going forward I mean I understand that, if chains are
growing sort of 5% to 7%, is that supportive of sort of
long-term growth?
Selim Bassoul: I would say, (Andy), going back to - can you hear me now?
(Andy Kaplowitz): Yes.
Selim Bassoul: I think going back to what I believe the chain
growth would be, first if you look at the (QSR), they
are growing in the 2% to 3%. If you look at pizza it's
growing at 3% to 4%. I think the segment we're talking
about which is fast/casual and the fast/casual, casual
dining and breakfast casual is growing in double-digit
growth and we are a dominant player in those segments.
However they only account, at this moment they are still
less than 20% of our overall sales.
And as we continue growing with them, they are fast
growing, we see those sales growing faster. I think my
feeling over the chain growth would be over the next
three years we will double, we'll continue doubling our
sales to those chains. So today we are at the 10% to 15%
of the fast/casual, the breakfast casual; we will most
probably over the next three to four years double them
again. As they grow we'll grow with them.
It's not a phenomenon going from quarter to quarter. And
I think that I would like to emphasize a little bit
(Andy), what I see in the marketplace. Let's talk about
the pipeline of our new products.
In general when we introduced a new product, it takes us
eight to nine months to seat that product in the
marketplace. Some of the change might take even longer.
It make take up to 12 months.
So our feeling is as we continue developing this new
product, maybe your question gives me an opening to talk
about new products. In the past three years we
introduced 24 new products -- 24. They were all patented
platform, innovative platform, unique platform.
Today if you look at what we consider a new product, is
any product introduced over three years. After three
years it's no longer a new product. It falls back to our
normal day to day product. But the new product is any
product introduced in the past three years.
Today 25% of our sales are coming from those products.
So keep going back to what I just mentioned a minute
ago. Anything introduced a year ago, we're starting to
see the impact now. It takes nine to 12 months to (see)
the impact, to (see) those new products in the
marketplace.
What is my prediction for our pipeline going forward? I
think that the next three years, three to five years
we'll have as strong a pipeline as we've had in the past
three years.
I am very excited about our pipeline of new product and
they are based on three things. We're starting to see
major rollout that's going to take place in the first
quarter of '06 on energy management saving, on speed of
cooking and on automation.
Those three platforms I think even the next three to
five years will have an additional 24 to 25 new products
that are totally innovative, what I call totally
transformational. They are - they will change some of
the landscape as we continue saving money for our
customers as we continue speeding their cooking to allow
them to maybe deliver in bigger portions or to maybe
offer lunches faster or quicker. So I'm very excited
about the pipeline that we have in the next three
(years).
(Andy Kaplowitz): Okay, that sounds really good. I guess, the only other
question that I have is how much is sort of - I mean you
mentioned sort of new energy product and new energy
efficient products. How much is replacement demand
because your customers want - because of high energy
cost, your customers want new products faster?
Selim Bassoul: Well let's go back about replacement. We - the average
life of the unit for us for the Middleby Corporation
mirrors what the industry is. It's around eight years.
Today we have 400,000 units active in the field. We
believe that with energy management system specifically
starting - started mid last year, the third quarter of
last year we started seeing our customers highly
interested in energy management systems. I think cost of
fuel continued to go up, the utility bills continued to
go up. They are not being able to pass them to their
customers. Finally we're seeing a huge breakthrough from
the replacement cycle starting on energy management
saving, equipment, specifically on our conveyor oven.
We believe that that will continue strongly. In the
first quarter of '06 we're introducing EMS II which is
another platform that will take the saving by another
30% from EMS I. If you have not had any EMS I, it's 60%
savings. So the dollars are substantial in saving. So
we're very excited about the introduction of that
platform that's coming in the first quarter of '06.
(Andy Kaplowitz): Okay that's great. Then thanks very much guys. I'll get
back in the queue.
Tim Fitzgerald: Thanks (Andy).
Operator: Your next question comes from (Richard Rossi) with
Morgan Joseph.
(Richard Rossi): Good morning everybody.
Tim Fitzgerald: Hi (Rich). How are you?
(Richard Rossi): Okay. One thing, currency impact in the quarter with
those international sales, just an idea of what it was?
Tim Fitzgerald: It would not have been material.
(Richard Rossi) Okay, so the sales were all real volume sales, the sale
virtually (off)?
Tim Fitzgerald: Yes, yes.
(Richard Rossi): Now in terms of steel, you had the contract last - give
us an update on where you stand in terms of how you're
buying steel, under contract in spot price, et cetera?
Tim Fitzgerald: Right. Yes, (Rich), we had a steel contract that ran
through June of this year. Usually we lock in for a
one-year period. But this year we sensed that steel
might soften in the second half. So that contract ended
at the end of June. So we're floating right now. We're
evaluating right now whether we're going to lock in for
a three or six month period right now. But right now
we're floating.
(Richard Rossi): Yes, you're in good shape going forward I would suspect.
Tim Fitzgerald: Steel increased for us, roughly 35% in January versus
where we were last year. And then where we see pricing
right now is that we've probably picked between 5% and
maybe 10% of that increase is starting to come back.
It's something north of 5 and less than 10.
(Richard Rossi): Also, in terms of your goals related to debt reduction,
et cetera, could you update us on what your current
thinking is as far as this year and next year?
Tim Fitzgerald: Well obviously we're very focused on debt reduction.
That's going to continue to be the theme. We would
expect that our debt levels would be approaching 100
million toward the end of the year. That would be our
objective. So we'll continue to drive down debt in
absence of other investment opportunities. We'll
continue to look for tuck in acquisitions like the NuVu
opportunity. So absent other acquisitions, we will
continue to just drive down debt.
(Richard Rossi): Okay. And I'm sorry, but I missed Selim's comment when
you were talking about the major roll out near term.
What was - could you go back and - it's my fault but I
missed that. What have we got rolling out for the end of
this year? You talked about three platforms?
Selim Bassoul: (Rich), which rollout you're talking about, our new
product?
(Richard Rossi): Yes, new product going forward right. Yes, this year.
Selim Bassoul: New product going forward this year, I think we have new
convection ovens coming on. So I think we have new
baking oven coming up with a new platform of baking
oven. We have new fryers. So across all the divisions I
think we have - we probably have a new steamer which is
- which has been a good thing for us. We've introduced a
few years ago, a no boiler, boiler-less steamer. Now
we're introducing in a gas unit. So it will be electric
and gas which our customer have been asking us to
introduce.
So we have a bunch of new products going out this year.
Then in the first quarter of next year and the one after
I think we have some fascinating products coming on.
We've been talking about it which is the higher speed
oven and energy management, just the two which would be
in the first quarter of '06. So that gives you a little
bit of background where we're going.
(Richard Rossi): Okay, all right.
Selim Bassoul: Convection oven, more fryers, a unique steamer platform
coming up from us. And I think that's what we have.
(Richard Rossi): All right, obviously you've been very successful with
the pipeline of new products and it's good to hear more
going forward.
Just to help bear in my mind, how do you define a new
product? I mean I can't imagine that all these new
products are designed from scratch? I mean do you take
the base of a product you already have and then add
something, change something so that it - it's function
is improved, it's efficiencies are improved or do you go
to the drawing board and start from scratch? I guess you
do both but...
Selim Bassoul: Hello, (Rich)? I'm going to answer it in three ways. Our
R&D falls into three categories, what I call disruptive
design. The disruptive design is what I call a shakeup.
They shake up conventional product categories and a
(strategic) point in transformation. (Bala), I'm going
to give you an example.
The conveyor oven, when we introduced the conveyor oven
20 plus years ago, everybody used to use a deck oven to
cook a pizza.
(Richard Rossi): Right.
Selim Bassoul: Then we changed that and became a disruptive design. My
belief is disruptive designs happened for Middleby once
every three years. Solstice platform was at the
(softest) design okay? So that's becomes one.
Number two, we do what I call brand extension which we
add - we design terrific features that really win big in
the marketplace, features that make the users feel good.
I'm going to give you an example. (Ala) platinum where
we have a non-clock burner on our ranges and waterproof
control. While they do not save a lot of money directly
to the customer, they are not measurable savings. They
are truly makes - the economics makes the customer feel
good. It's easy features. It's like adding your CD to a
car now or a cassette or radio.
(Richard Rossi): Right.
Selim Bassoul: We have a lot of those. I think our brand extension
makes us unique. We work with our customer, work closely
with them to do a lot of features that really change the
rule. Those features, many of them are innovative and
patented.
The last one which I think Middleby has done a great
thing with is what I call catalyst design, product that
delivers measurable values to the bottom line of our
customers. This is where we've been hitting the energy
savings, the speed of cooking because it allows them now
to do more pizzas or more sandwiches in a faster time.
It allows them now to deliver in a bigger ranges,
delivery ranges.
So going back I would say next year we'll have a
(disruptive) design. We'll have one product will be
(disruptive) design in '06. This year and next year
we'll have plenty of brand extension and catalyst
designs.
So I don't know if that...
(Richard Rossi): No, that helps a lot. That helps a lot. Thank you.
Selim Bassoul: Okay. So if I look at the 24 products that we introduced
in the last three years, I would say two of them, two
platforms were (disruptive) okay, major disruption --
the Solstice platform and the (Excel) oven. We did a lot
of brand extension and catalyst design.
I think if you look in the next three years we'll have -
I would say I'm looking at four disruptive design in the
next three years, four disruptive. I've seen them. You
have not yet. Some of our customers had a chance to see
some of those disruptive designs. They look good. I'm
excited to say the least.
So I think we doubled our product into the disruptive
design area going in the next three years. I think
disruptive design brings a lot of margins. They have
high margins because they change the rules -- totally
changing the rule. And we'll achieve (strategic) market
transformation.
(Richard Rossi): All right. That's very helpful. Thanks very much.
Operator: Again, if you would like to ask a question, please press
star then the number 1 on your telephone keypad. We will
pause for just a moment.
You have a follow-up question from (Andy Kaplowitz) with
Lehman Brothers.
(Andy Kaplowitz): Hey guys again, can you talk about sort of your future
pricing strategy? Obviously you raised prices in early
January and you know effective later in the quarter.
What's sort of the strategy going forward and maybe
through next year?
Selim Bassoul: (Andy) this is Selim again. In the past, our price
increases have been around 1%. If you look at our price
increase, they have really accounted for 1%.
This year because of sales price decrease, we've been
able to pass along a little bit more than that in the
3%. But as steel prices start going back and
stabilizing, our pricing strategy is not to go out and
put price increases. We don't believe in that. I don't
believe in price increases. What I believe on in adding
features and design and (disruption) that allow us to
add significant margin to a new design where it provides
value to the customer.
So we're not going to - you're not going to see us
putting 3% out in the marketplace next year. We'll go
back most probably to the 1%. But we are more interested
in when we introduce a new product where the customer
sees value in it to charge, to provide margin. They make
money, we make money.
So our philosophy in pricing is mostly designed on R&D.
Our engineers understand that they have to develop
patented technology that have applications to our
customer to where we can charge more.
For example, when we introduced the new speed oven it
has significant value to our customer. So it allows
them, - we allow us now to price it a lot more. Plus it
allows them to save on training. It allows them to save
on energy. It allows them to save so we can price more.
But going back to anybody building a business model on
Middleby, our price increases are limited to usually 1%
to 1-1/2% at most unless we have something like steel
that hits us so quickly so fast we have to react to it.
Even though we didn't pass all the steel increase to our
customer we have to go back and do some efficiencies in
our plants to mitigate the margin erosion from steel.
So I don't know if I'm answering that question (Andy)
(unintelligible).
(Andy Kaplowitz): No I think that makes a lot of sense. Can we
talk about the Nu-Vu acquisition a little bit more? In
terms of you mentioned the integration is going well so
how much - I mean maybe you can tell me how much cost
you've been able to take out of the business or you can
tell me can Nu-Vu get to the margins that the overall
company has? Or is there sort of a goal that you have to
get it to?
Tim Fitzgerald: I think it can get to the margins that the overall
company has. That's the objective so I think by the end
of next year, it'll be consistent with other product
lines. We won't be talking about Nu-Vu margins
detracting from, from the overall.
There was improvement in the margins from - in the
second quarter versus the first quarter and there - some
of the operating initiatives that we started with we've
closed an outside plant and we're in process completing
a re-layout of the factory which is going to drive some
manufacturing efficiencies.
So I think we're going to as that process is completed
we're going to - we expect that we're going to pick up
gradually as the year progresses and into next year.
(Andy Kaplowitz): Okay great. You might have mentioned this before so
forgive me but is the underlying growth rate on Nu-Vu
the same as the business or is it higher than the
overall business?
Selim Bassoul: I'm going to answer that (Andy). The growth rate of
Nu-Vu is still basically for us new to us in a sense of
we're introducing a bunch of platform. Remember most of
their business through Subway and what we try to do is
now since the acquisition has taken the non-Subway
business and we've added a lot of features into the
Nu-Vu pipeline to take the expertise they've had in the
baking bread outside.
So we expect our business to grow significantly. I think
the - this year we have not been focused on growing the
pipeline at all at Nu-Vu. What we've been focusing on is
to take the margin from the low 20% and bring it within
a matter of 24 months or less bring it to the margin of
Middleby which we're committed to without an erosional
sale.
But would like to see the sale sort of remain, you know,
the gross to be in the 3% to 4% but would like the
margin to go from 20% to the mid-30's which we are
committed to and my management team is committed to to
take it to that level by the fourth quarter of '06. So
that's a significant margin improvement for us.
(Andy Kaplowitz): Again that makes a lot of sense. Thanks (unintelligible).
Selim Bassoul: Yes.
Operator: Your next question comes from (Robert Frost) with UBS
Financial Services.
(Robert Frost): (unintelligible) good morning Selim and (Tim). The
questions I have relate to R&D since that's seems to be
a focal point of a lot of the questions.
Within the fast food industry Selim there is a lot of
pressure being put on in terms of improving nutritional
value of the foods served. Is there anything in the R&D
area you're doing now that might lend to that?
Selim Bassoul: Yes I think a lot of the research we've seen is really
improving the food (unintelligible). A lot of things
we're seeing is we're seeing a lot of our customers
using our conveyor oven to basically use conveyor oven
to bake stuff that use less oils or less starch. So
we're starting to see this momentum.
It's not in full swing yet. We saw the low carb diets
which increased our sales of our convection oven
griddle. But at the same time United States have - it's
a unique phenomenon. While the low carb diets and the
Atkins and South Beach diet was in full swing the
increase of people buying breads and crescent and muffin
was going at the same time.
So I would say it's very difficult. At the same time our
fryer sales around the world have been going on. I
believe that it is not one phenomenon that seems to be
frankly people like to eat and I think you're going to
have hard time limiting people to eat one day its finger
foods, the next day its chicken wings, while a certain
part of the population is going to say well I want a low
carb diet.
So I think as long as we watch those trends and we
capitalize on them. We saw the low carb diet early on
and we worked with our customer to fill their needs as
they needed griddle or steamers or convection oven with
those customers that wanted to add that type of offering
to their existing menus.
I would say the biggest phenomenon more than the food
health stuff which mostly is being driven by food
processing companies and food suppliers, what affects
our business is something unique, it's called
co-branding. The co-branding is taking one existing
restaurant and putting two concepts under one roof. And
that's driven by one of our major customers called Yum!.
I see this as the major revolution that's going to take
place in the food service industry in my opinion. I've
seen it at work because I've been visiting many of those
sites where Yum! has been able to put the Taco Bell, KFC
and the customers love it. It gives them the choice and
I think the co-branding will do to the restaurant
business what 30 years ago the drive-thru did to the
restaurant business to the fast food.
I think co-branding is a major force, we've been at it
with Yum!, we've learned a lot from co-branding and I
think that we're well positioned as Yum! continues to go
after the co-branding and as other customers of ours
embrace the co-branding the supplier of choice is
Middleby. I think we've done a lot of learning through
that process.
I've put a lot of research to learn how does the
co-branding work, what type of equipment is required,
what type of ventilation, what sits next to what and I
think we've learned a lot. I think Yum! through the
process spent a lot of years breaking the code and I
think they did. I think they just - they've been at it
for the last three to four years trying to break that
code and I believe that is the future of one of the
major items that will affect the restaurant business
worldwide.
I think Middleby is greatly positioned to take advantage
of that because we've been working with Yum! and Dunkin
Donuts as Dunkin Donuts put in the Togo's and Dunkin
Donuts together. They've learned a lot about the
complexity of putting two assembly plants in one kitchen
without breaking too much walls, without doing anything.
That's, I think, the big phenomenon that's we are very
excited about.
(Robert Frost): Selim in the same vein and you've alluded to it
and maybe even advanced into question but I think its
worth raising. We've seen a proliferation of new
products particularly in fast food restaurants, you
know, coming along. How has this impacted your business
and how you stay on top of it? And in fact are you part
of the development of new products in terms of providing
equipment to produce them?
Selim Bassoul: Yes I think (Bob) that's a great question. In fact, we
many times drive some of those changes with our
customers. We work with our customers closely. You look
at Pizza Hut adding Wing Street to them in their stores,
in some of their stores and we've been right there with
working with them in putting the fryers.
Think of Pizza Hut, Pizza Hut had not had fryers before;
they've not had their people trained on oil. You know,
changes and whatever on the fryer or dealing with fried
foods. So we had to develop unique fryers that allows
them to minimize the training required and keep the
safety of their employees to working with them given
their very, very stringent requirements.
We basically developed a unique product that allows them
to introduce Wing Street very quickly in Pizza Hut. That
concept has now been very successful for them and for us
and its now in just - it just got introduced last year
in the first quarter of '04.
There is a lot of menu changes taking place in United
States. People always tinker with menu and I always joke
when things are harder people tinker even more with menu
changes. Because when they are not doing as well they
want to basically do more menu changes. Every menu
change usually requires a piece of equipment to be added
in cooking.
Maybe it doesn't require more of the refrigeration or
food preparation but when it comes to cooking, you know,
you can't if you have a convection oven and you decide
to griddle something you need a griddle or a
charbroiled. So or if you have a fryer and you need
steam you need a steamer. You can't - not a lot of
pieces are as versatile as they are when you make menu
changes.
So menu changes today is a big driver for our business.
(Robert Frost): Great.
Selim Bassoul: We see it not only in the quick serve but we see it also
in casual dining, fast casual.
(Robert Frost): Thanks Selim.
Selim Bassoul: Thank you (Bob).
Operator: Your next question comes from (James Clement) with
(Sidoti).
(James Clement): Morning gentlemen.
Tim Fitzgerald: Hey (Jamie) how are you?
(James Clement): Good, good. My top list of 35 questions has already been
asked and answered so I'll just have one quick one
Selim. In the past you guys have talked a little bit
about restaurant trend drivers domestically that you're
seeing and I know you just mentioned co-branding and
Yum!. When you look outside of the United States I guess
the A part of the question would be, are there any
unique trends outside of North America that you see
developing?
And B, the second question would be with regards to
international, you know, as that becomes an increasingly
larger piece of your business as the decade progresses
from a managerial and, you know, perhaps service
customer service standpoint do you feel you're
adequately staffed at this point for that kind of
growth?
Selim Bassoul: Well let me answer the first question first. The first
question is the trend that I see internationally is
simple; I see a lot of our U.S. chains going
internationally and I always give the example of my
sister in Beirut, Lebanon. She always likes to go to
Chili's. It's easy, it's fun, it's always full. So even
in Beirut, Lebanon there is a Chili's. So even then I
think casual dining is all over the world and its
growing.
As well as the quick serve and I believe the next trend
will be the fast casual. But another phenomenon which is
interesting for us because we have a unique
infrastructure internationally. For the past ten years
we've put a lot of effort in emerging markets and we're
seeing in those markets where there is a growing
population as well as people eating out where the level
of the middle class is rising.
Let's address them. China, India specifically where
we've made huge investments as this company over the
years in training people in resource and selecting the
right element and putting the right officers, the right
labs, the right test kitchen. What we see there is we
see regional chains growing.
We see that in Central America, we see in Asia a chain
called (Jollibee). (Jollibee) is we are a major supplier
to (Jollibee) out of Philippine. (Jollibee) is growing
in China, they are growing in Malaysia with - it's a
burger chain. They have I think 800 stores in Asia. You
look at (Stella) Pizza in Spain, you look at (Palo
Comparo) in Latin America and you start seeing regional
and local chains that need the training.
They don't have the lab testing, they don't have the
power of the Pizza Hut as they franchise in neighboring
countries. Of course they are not looking at dominating
the world but they are looking at going from 50 stores
to 300 stores and they turn to the Middleby Corporation
for those training and those outsourcing of menus and
whatever.
Now let's talk about the infrastructure we have. To date
our international operation is an important part of our
business. It represents approximately 20% of our sales.
Most important it's an important part of our future. We
are truly unique in our international footprint. What
we've done is we've put our own sales and - first of all
we can sell and service in over 100 countries. You know,
that's unique.
We also have our own direct service in countries where
there's not a good third party. Where we went to China
and we have our own sales and service in China. We have
our own sales and service in Mexico. We have our own
sales and service in Korea, India, Taiwan, Spain, U.K.,
Middle East now. Where we see emerging trends where
people are eating out more and more, where dual incomes
is taking place and we're there to service our customer
whether its U.S. chain taking a venture.
We just in the past few years invested in what I call
regional labs, test kitchen where our customers can come
in and train their employees or they can come in and
look at our equipment and or do menu changes. That makes
us unique than everybody else.
Now this year we'll be investing in Eastern Europe.
We're in the process of training our staff to open up
Eastern Europe for us with the same thing, sales and
service. As our customers go overseas we go with them
and when they trench from the market we retrenched.
I remember a few years back most of our customer
retrenched from France because France went to that 35
hour week and they couldn't make money. They could not.
It killed them. And when they left France we left with
them. So we're very adaptable and we took those people
(unintelligible) and dispersed them somewhere else.
So we have a great infrastructure and we continue
training our people in the U.K. We have when we bought
Blodgett we inherited a great distribution channel in
the U.K. and been very good for us. And so I feel very
good about infrastructure and we continue adding to it.
I think our investment internationally is going to be
very good. I believe within the next five years that our
international operation will be a third a more of our
business.
Selim Bassoul: Thanks (Jamie).
Operator: Your next question comes from (Tony Brenner) with (Roth
Capital Partners).
(Tony Brenner): Thank you. My question regards new products also. My
impression is that unlike in some previous years where
many of your new product introductions were in expansion
into new market segments or new product segments, more
recently a large proportion of those new product
introductions involved new features such as energy
saving, waterproof controls, and so on, which in effect
makes at least a large portion of these sales
replacement sales. And therefore they're sort of
discretionary. The buyer decides that the cost savings
is compelling from an economic standpoint.
And this change is occurring. The change in mix of new
products at a point in time, it seems to me, where
restaurant companies are becoming cautious with respect
to their sales outlook, consumers are being squeezed
from a macroeconomic perspective. And I'm wondering what
kind of pushback you're getting in that buying decision
from your large customers.
Selim Bassoul: (Tony) I would say - at this moment our customers are
looking for speed of cooking, they are looking for more
ways to save money. I think there is a lot of many ways.
I am very comfortable that the 24, or 25 products that
are going to be introduced in the next 3, 3-1/2 years,
will have as many disruptive - as I mentioned there
would be four disruptive, totally disruptive designs.
I think as we continue brand expansion - give you an
example. The product we're introducing in September
which is a gas steamer, while it has no boiler, our
customers say, "We've always had an electrical steamer."
They say well, "Can you introduce us a gas steamer in
the same concept where there's no boiler in it but it's
gas."
We're working on those type of technology where it's
really, because gas is cheaper than electrical, it gains
what I call a "catalyst design," because it will deliver
measurable values to the bottom line of our customers.
We're very comfortable as we continue funding the R&D.
Our customers are coming to us with additional things.
For example, automation - many of our customers saying,
"(Unintelligible) we would like you to automate more
than just the pizza." And now we automated the seafood
with Red Lobster, where our conveyor oven is used
exclusively there.
What you would like to do is basically take that
automation off, that principal off, converyorization off
cooking and take it into the steaks, into the burgers,
into the chicken, take it into toasting, the rapid
toasting. So we have a lot of unique technology
application that we see that.
I see self-cleaning is another thing that our customers
say, "(Unintelligible) you made it easier for us
(Unintelligible) to have us wash. Your equipment is
waterproof now. We would like you now to make it
self-cleaning." That's the next frontier for us. How do
you make it self-cleaning at a very affordable rate
where it's not, you take a range or a convection oven
and finally you take that convection oven that cost five
grand and now you say, "Well I gave you a self-cleaning
module to it and it cost ten grand."
What we're looking at it is to make it affordable to our
customer but we make huge margin on that cleaning
module. So the next ones here would be automation,
self-cleaning, applications in steam where we're not
even a player, we'd like to do that, we'd like to look
at steam.
We'd like to also look at holding and warming where
we're not a major player in that business. And there are
some niche businesses where through maybe strategic
acquisition would like to go after and...
(Tony Brenner): So wait a minute, are you suggesting then that once that
caution gets to the point where the rate of expansion
actually slows in the industry that it doesn't really
have an effect on you?
Selim Bassoul: No I'm saying if, yes, of course. If the demand slows in
the industry people aren't going to buy. I think what
I've always said that if the industry slows down, we're
going to slow down. I think we're related to the
industry. We're not - maybe when we introduce some
disruptive design maybe we can box the trend.
But the stuff we design and introduce that's one
division, and one division alone can pull the whole
company. We're large enough now that we can't rely on
one design that's minimally marginal to carry the whole
company through.
Or a disruptive design at a larger - what I'm saying is
that we will commit to the industry. And I think that's
what I've always committed. We will commit to the
industry is a fact that we will take the growth of the
industry, whatever that growth is, and we'll double it.
So my feeling is the industry right now is growing at 3
to 4%. It's always grown at 3 to 4% in general. Except,
in my opinion the last 15 years we've had - in 15 years
we've had maybe a couple of years where the industry
grew negatively.
And when it grew negatively, we still grew 2 to 3%. It
was in 2001, 2002, and I think those are the years of
September 11, mad cow disease, recession in United
States, bird flu, SARS. I'm going to give maybe a better
- to answer your question, I'm going to answer it
differently (Tony).
I think we're going to most probably see a growth for
us. We're more comfortable in a growth of 6 to 8% on the
top line. I'm committed in the next three years to hit
our margins, to continue growing our margins.
Today our margins are in the high 30s. I would like in
the next three years to go beyond 40%.
(Tony Brenner): Fair enough.
Selim Bassoul: That's a challenge I want. And I want to make sure that
we increase our cash flow significantly to pay down the
debt unless there is a great strategic acquisition that
makes sense for us to acquire.
But we would like to increase our cash flow
significantly to continue driving down the debt; would
like to increase our gross margin to over 40%, and would
like our operating company to exceed - we are today in
the 18%, to exceed 20%.
And the top line growth we should be in the 6 to 8%. And
we should focus beyond that on making sure that we
continue managing the margins.
The other thing I want to be very careful, as we
introduce disruptive designs, I want to make sure that
we don't get - we get our customers coming to us saying,
"(Unintelligible) I love that design. I love that
technology. I'm willing to place an order for 1,000
units. But what about if you gave me 20% discount?"
Our issue is not to give up any dollars on anything.
It's not every year we can come up with a disruptive
design. So I've challenged my selling organization to
make sure that even if the sale - we can sell 1,000
units a year, I would rather sell hundreds but at a much
higher margin. Because once you give a chain a price
it's hard to raise them up.
So I want to make sure when we introduce the disruptive
design that we get the full margin of our R&D
incorporated and not be lured by a quick, big order or
whatever. So we want to focus on the margin; more
important than getting the rush orders that raises our
top line and end up stuck with that price.
(Tony Brenner): Thank you (Unintelligible). Thank you.
Selim Bassoul: Thank you.
Operator: At this time sir there are no further questions.
Tim Fitzgerald:: Okay, thanks (Eileen). Thanks everybody for joining us
in today's conference call. And we look forward to
speaking with everyone next quarter.
Operator: Ladies and gentlemen this concludes today's Middleby
Corporation Second Quarter Earnings conference call. You
may now disconnect.
END