Middleby Corp (MIDD) 2005 Q4 法說會逐字稿

Good morning. My name is Kim and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Earnings Conference Call. (Operator Instructions.) Thank you. Mr. FitzGerald, you may begin your conference.

Thank you, Kim. Good morning, and thank you for attending today’s conference call. I’m Tim FitzGerald, CFO to Middleby Corporation. And joining me today is Selim Bassoul, our Chairman and CEO. I have some initial comments about the Company’s fourth quarter and year-end results And then, we’ll open up the conference call for questions-and-answers.

As previously announced in December, the Company acquired Alkar Holdings for $26.7 million in cash, plus adjustments associated with increased working capital, which were expected to result in post-closing adjustments of $3 million. The results of the Alkar acquisition are included in the fourth quarter results subsequent to the completion of the acquisition on December 7, 2005 through the year-end.

We were pleased with the results of the fourth quarter, which are seasonally lower than the second and third quarters due to higher business with school systems and catering companies during the summer months and a slower schedule of restaurant openings nearing the year-end holidays during the fourth quarter.

Net sales in the fourth quarter increased 18.1% to $76.9 million, as compared to $65.1 million in the fourth quarter of 2004. Sales from the Nu-Vu acquisition completed during the first quarter of 2005 amounted to $3.8 million and accounted for 5.8% of the sales growth for the quarter. Sales from the Alkar acquisition completed in December amounted to $2.8 million and accounted for 4.3% of the sales growth during the quarter.

Excluding the impact of the Nu-Vu and Alkar acquisitions, organic sales growth amounted to 8% for the fourth quarter. The organic sales growth in the quarter reflected strong domestic growth due to strong demand from restaurant chain customers and growth resulting from new product sales. The Company realized sales increases at all divisions during the quarter. Sales at our Blodgett division increased 9%, reflecting continued momentum of the Blodgett Combi ovens and the Blodgett steam line of products launched in the second quarter of 2004.

Sales at our Southbend division increased by 15% with continued success in the heavy duty platinum range lineup. Middleby Marshall sales increased 5% with increased sales of conveyor ovens utilizing our patented energy management systems. And net sales of Pitco increased 11% during the quarter, reflecting continued success of the high efficiency [solstice] fryer platform. And at Middleby Worldwide, our international sales and distribution division, sales increased 2% from the prior year quarter, including a 13% increase in Latin America and a 10% increase in Asia, offset in part by a 6% reduction in Europe due to lower purchases from chain customers in certain markets compared to the prior year quarter.

Gross profit increased from $24.3 million to $29.5 million on higher sales volumes. And the gross margin rate improved from 37.3% to 38.4%. The improvement in gross margins for the prior year reflects an improved sales mix with increased sales of higher margin new products and the impact of continued operating improvements. Although the cost of steel continues to remain substantially higher than in the prior year, initiatives to offset the steel impact, including a price increase instituted in the first half and efforts to switch to more cost effective grades of steel, largely offset the gross margin impact of the increased sales costs.

The gross margin in our Nu-Vu operation, which had detracted from our gross margin in the first half, continued to be strong to finish the second half of the year, reflecting the impact of our integration efforts. The fourth quarter gross margin was, however, adversely impacted by lower margins associated with the recent Alkar acquisition. The gross margin at the Alkar business has historically been approximately 18 to 20%, and we have made substantial progress in our integration efforts at Alkar and expect to see gradual improvement in the gross margin rate during fiscal 2006.

Selling expenses increased $1 million, to $8.1 million, reflecting increase expense associated with the acquired Nu-Vu and Alkar businesses, which accounted for approximately half of the increase. The remaining increase in costs reflects higher selling costs associated with the increased sales volumes and increased marketing and promotional costs.

General and administrative expenses increased $2.6 million to $8.1 million, reflecting incremental costs associated with the acquired Nu-Vu and Alkar business operations, increased profit sharing and incentive-related compensation, and increased professional fees and integration costs associated with the acquisitions.

In the prior year, operating expenses included unusual items amounting to a net expense of $10.7 million related to the stock repurchase transaction completed in December of 2004, and reserve adjustments related to idle lease facilities, which were vacated as part of the restructuring of the Blodgett acquisition. Excluding the unusual items from 2004, operating income increased $1.7 million to $13.6 million, reflecting the benefit of higher sales volumes and the improved gross margin rate.

The results of the--the results of operations of Alkar resulted in a $215,000 decrease in reporting--reported operating income for the quarter. The operating loss was anticipated due to a reduction in productivity resulting from the completion of the transaction late in the year, just prior to the shutdown of production operations during the year-end holidays.

Interest and deferred financing costs for the quarter were $1.4 million , as compared to $700,000 in the same period last year. The increase in interest expense is due to higher debt balances resulting from the funding of the December 2004 stock repurchase transaction and the funding of the Nu-Vu and Alkar acquisitions. Interest expense was also somewhat impacted by our higher interest rates, which have increased during 2005.

Net income for the quarter was--for the 2005 fourth quarter was $7.2 million, or $0.88 per share, as compared to a net loss of $660,000, or $0.07 per share in the prior year, which included the unusual charges for the stock repurchase transaction and adjustments to restructuring reserves. Excluding these unusual items, net earnings in the fourth quarter of 2004 would have been approximately $6.5 million, or $0.67 per share.

Now, turning to our balance sheet and fourth quarter cash flows, there are significant changes to our balance sheet account as compared to the prior year as a result of the impact of the acquisitions. Balances associated with the acquired businesses--business units included in the 2005 year-end balance sheet are $8.2 million of accounts receivables, $6.9 million of inventory, $4.1 million of property and equipment, $5.1 million of accounts payable, and $8.7 million of accrued expenses.

In addition, the Company reported a total of $4.8 million in goodwill associated with the Nu-Vu acquisition, and $19.2 million of goodwill associated with the Alkar acquisition. The goodwill is non-amortizing in accordance with GAAP. The company also reported other intangible assets of $1.3 million associated with Nu-Vu and $7.9 million associated with Alkar. These intangibles are comprised of the value attributed to trade names, customer relationships, backlog, and developed technology. A portion of these intangibles will be amortized and the Company expects approximately $850,000 of intangible amortization expense in fiscal 2006, as compared to $74,000 reported in fiscal 2005.

Capital expenditures amounted to approximately $300,000 during the quarter and $1.4 million during the year, primarily associated with the replacement and upgrade of manufacturing equipment and display equipment used for marketing purposes. Depreciation amounted to approximately $850,000 during the fourth quarter and $3.2 million during the year. We anticipate the requirements for capital expenditures will increase by approximately $300,000 to $500,000 per year associated with the Alkar business. And depreciation expense with that business will amount to approximately $600,000 per annum.

Cash flows from operating activities for the fourth quarter amounted to approximately $11.4 million. And operating cash flows, along with $17.3 million of net borrowings, were utilized to fund the Alkar acquisition in the fourth quarter, along with the fourth quarter capital expenditures. The year-end debt balance declined slightly to $121.6 million at year-end, as compared to $123.7 million at the year-end of 2004. During the year, the Company utilized operating cash flows to fund the $11.5 million acquisition of Nu-Vu and fund $28.2 million for the acquisition of Alkar.

Now, as it pertains to the Alkar acquisition, we continue to be very excited about this acquisition. This acquisition allows Middleby to expand its customer base to include food processing operations and enter this market with the leading Alkar brand name. We have made significant progress in the first 90 days in reorganizing the business operation and realizing initial cost reduction opportunities. Over the past few years, the gross margin rate of Alkar has ranged from approximately 18 to 20%, and its EBITDA margins have ranged from approximately 5 to 7%.

We expect to realize gradual improvements in the profitability of these operations during 2006 as a result of our integration efforts, and by the end of fiscal 2006 anticipate that we will reach an EBITDA margin run rate of 10 to 12%, and believe within a three-year period we can achieve profit margins approaching Middleby’s existing business divisions. To improve profit margins we are focusing on improving operating efficiencies, reducing material costs through greater combined purchasing leverage with Middleby, and refocusing sales efforts towards the higher margin products. We expect this acquisition will be accretive to 2006 earnings, including net earnings in the first quarter of 2006.

That’s all for our prepared commentary. Kim, can you please now open the call for questions?

(Operator Instructions.) Your first question comes from James Clement with Sidoti.

Good morning, gentlemen.

Hi, Jamie.

Hi, Jamie.

Hey. Good thanks. I was wondering if I could ask each one of you guys a question, and then, I’ll get back in queue. Tim, the last two years, irrespective of the tax rate in the fourth quarter of 2003, the first quarter of the following year has been sequentially seasonally a little bit stronger than the fourth quarter of the prior year. Is that a trend you would expect to continue?

Well, I guess the way I think about it is simply that the second and third are the strongest. The first and the fourth tend to be a little bit slower. And that’s because of the concentration of the institutional business in the summer. And also, the restaurant chains are putting together their store opening plans and really getting--don’t get running until the second and third quarters, and then, it slows down with the holidays. So, sometimes it’s tough to differentiate the first versus the fourth quarter.

But, if you go back historically, the fourth quarter has been a little bit stronger actually than the first quarter. That was slightly different in 2005 just because we had such a large increase in orders in the first quarter of this year ahead of anticipated price increase, which if you remember earlier in the year we talked about it. So, we were actually up this year in the first quarter--or in the fourth quarter versus the first quarter, but that included the Alkar acquisition . If you were to back that out, we would’ve been--the fourth quarter of this year would’ve been about flat with the first quarter. But, that is slightly different than historically. Historically, fourth quarter has edged out the first quarter.

What--just a little thought. So, you’re saying that the fourth quarter of this year would have been flat with the--the fourth quarter of ’05 would have been flat with the first quarter of ’05 without--I thought Alkar was kind of a negative.

Well, from a--you’re asking from a sales perspective I thought.

Oh, okay. Yes. I was actually--I was sort of thinking about it from an operating profit--that’s okay. I think your--I think the answer--.

--Okay. Yes, well, I’m sorry. I was addressing sales, so--.

--Yes.

Jamie, it’s Selim. I would like to address the fact that our business is seasonal. It has been seasonal for all those years and I don’t expect that seasonality to go away. And I need to help everybody understand our seasonality because there are a lot of people who try to compare our fourth quarter to our third quarter, which is not a relevant comparison because our business, again, between the institutions--and I’m talking about schools where we are a big player in the school market. They tend to purchase and install all of the equipment in the summer when the school year is closed where they don’t disrupt the classes and the cafeterias and whatever.

In addition, as Tim has mentioned, most of our customers are basically opening up their stores and building their store opening in the second and third quarter where the equipment is ordered and shipped to be installed. And we see that not changing. So, again, I repeat, second and third quarter are a lot stronger. And the comparison between the fourth and the third quarter are irrelevant. You can go back and look at it for the past five, six, ten years, and we don’t expect that to change.

Okay. I’ll get back in the queue. Thanks very much.

Okay. Thanks, Jamie.

Your next question comes from [Andrew Capowitz] with Lehman Brothers.

Good morning, guys.

Hey, Andy.

Could you talk about the fourth quarter a little bit more? I remember on the third quarter call you had mentioned that maybe you’d see some slowdown from hurricane impacts. It looks like we didn’t see that. I mean, you had strong organic growth in the U.S. And then, you had the--then you had Europe falling off a little bit. So, could you kind of talk about what’s going on in the U.S.? Why your organic growth rate continues to be sort of higher than projected and maybe what’s going on in Europe for the future?

Well, I think that what you’re seeing, Andy, in the U.S., we’re continuing to see the restaurant market and the restaurant business do very well. I think that’s driven by a lot of reasons. I’m going to give you the top four trends that are driving our business. And those are trends that have started--we started to see that in most probably the summer of ’05. We saw some four trends that are becoming very, very powerful for us.

One is we’re starting to see greater diversity on the menu, not only among the restaurant customers. And we’re seeing significant diversity. So, a lot of menu changes that’s occurring and driving a lot more equipment purchases. And I think I’ve been talking about that in the past. And I said that one time store openings are no longer as relevant as menu changes. It seems that menu changes today is becoming the number one driver of our equipment purchases, both at chains and full-service restaurant casual dining. So, that’s trend number one.

Trend number two is more emphasis on technology. As restaurants are one of the most labor intensive in the nation, I think the restaurant industry is starting to integrate technology into their operation and trying to boost efficiency and productivity. And some of the products we introduced in the past few years seems to have caught on. And we’re starting to see a lot more orders coming onto our automated equipment that requires a lot less cleaning, a lot less change of temperature or whatever. So, we’re seeing a lot more with it on our ovens or on our steamers, on our ranges. We’re starting to see a lot more emphasis on technology and it’s driving more equipment demand.

Number three. Our third trend that is becoming--it’s the demand for convenience by our customers. They are looking for a speedy drive-thru or a piping hot meal delivered to the car or to take home. And we’re seeing our customers going back and escalating the need for equipment that delivers that speed and they are embracing truly a lot of equipment that offers speedy--speed of cooking, temperature where we keep the menu hot, a lot hotter than it is. And we’re seeing a lot more aggressively our customers going after the take-out and delivery markets and it’s driving a lot of equipment demand from us, especially on the equipment that requires--speed up the cooking process.

And number four. I think we’ve talked about that. And I think that’s something that continues to be. It’s increased attention to energy efficiency. We see higher energy prices will continue forcing belt-tightening among restaurant operators as well as consumers. Roughly--that’s according to the National Restaurant Association. Roughly, four out of five restaurants who were surveyed in October 2005 are anticipating utility expenses to eat more of their bottom line next year. So, what you’re seeing is a huge amount of restaurants going back to updating or replacing their equipment with energy efficiency.

And I’m going back to the National Restaurant Association 2006 forecast and their survey. And they are looking at going in the next two years, in ’06 and ’07, they expect over 50% of all restaurant operators to replace or purchase energy saving equipment in ’06 and ’07. So, I think that while we anticipated Hurricane Katrina to slow down our orders in the Gulf, I think we started picking up some of those trends. And I think there is a lot of pickup that occurred both in--following those four trends.

I’m going to repeat. One, it’s more diversity of the menu, so it’s getting a lot more equipment ordered, labor saving equipment because of more emphasis on technology, demand for convenience and speed, and finally, purchasing energy efficiency and updating their equipment, not only in terms of cooking equipment, but they are updating their refrigeration, their air conditioning and heating systems, to be able to curb those utility costs.

Okay, that’s great, Selim. Is Europe just a blip or is it something that could continue at least being a little soft?

I don’t think we see any changes in that market. I think we’re a diverse portfolio of brands. And I think at any point in time you see ups and downs across the brands and the markets. And I think one of the things that we’d emphasize is that international is also a more volatile market than domestic. So, if you look at our overall growth rate internationally, it was--I think it was north of 15% for ’05. But, it ranged anywhere from a low of 2% this quarter up to I think as high as 25% in one of the quarters.

So, I think you’re going to see that volatility continue. And I think overall we expect that growth rate to outpace the U.S. But, you’re going to see movements between markets and in overall international versus domestic on a quarter-to-quarter basis.

Okay, I understand. Let me just ask you one more question before I get in the queue again. On the Alkar acquisition, you kind of mentioned the same targets as you’ve mentioned before. So, I guess the question is are you sort of ahead of your own expectation or are you in line? And then, the other sort of related question is it’s a relatively decent size acquisition for you guys. So, does it sort of strain the management resources enough where you might not want to go buy other big things, or can you still go do that if you find something?

Well, I think--well, your first question, I think it’s still early in the acquisition. We’re happy with the progress that we’ve made. So, the plans that we’ve put in place are on target, but we’re still--we still want to--we’re still learning that business and want to see the numbers unfold. So, I think those were the targets and we still believe in those in that we’ll meet those targets.

There is a solid management team up there. And we’ve ensured that the right people are in place. So, I think we continue to look at other opportunities and if the right one arises, that wouldn’t--this acquisition wouldn’t preclude us on moving on to another one.

Okay, that’s great. Thank you.

Your next question comes from Tony Brenner with Roth Capital Partners.

Thank you. A couple of things. One is that you’ve said a number of times that you will be focusing on higher margin products at Alkar and probably discontinuing some other products that don’t fit with your strategy. What sort of a sales impact would the discontinuation of those products have? If Alkar is roughly $60 million in annual sales, what portion is likely to be discontinued?

Tony, I think you should think of Alkar as roughly a $50 million business.

Is that--so, $10 million? Is that the answer?

Yes.

Is--will--aside from the improvement in gross margins that you’re showing, what can we expect from general and administrative expenses? It was up sharply this quarter. How quickly can that be ratcheted down as a percent of sales?

I--let’s see. I’ll have to get back to you on that. I don’t have a quick answer for you as a percentage of sales.

Okay.--.

--[Inaudible]--.

--Would there be any charges for severance or any unusual items as you--?

--I mean, I think we talked about the increase--about think of it--it was a $2.6 million increase. About 40% of that is associated with the newly acquired operations. So, that’s an incremental cost with those businesses. And there was higher--there was maybe 20% of the--in there was related to professional fees and integration costs. So, I think you would think in terms of about maybe half of that coming out as kind of one-time costs that we incurred in the fourth quarter.

Okay. And lastly, will you ever split the stock?

I think, Tony, I’m going to answer that. I would say this is something that the Board has looked into it, and it’s a Board decision. It is something that has been discussed at the Board level, but no decision has been made one way or another. So, I think that we’ll leave it up to the Board to decide. While we run our businesses, I think the independent board members can make a decision on whether to split the stock or not. But, I think Tim and I are more interested in running our business at this moment to make sure that we continue performing the bottom line.

And I think that this may be an opening to talk about a little bit of what I’ve always said. We continue to see margin improvement at the gross profit line and the bottom line, the operating income line. And we’re doing a lot of efforts over the long-term to outperform. We’ve mentioned that before. We’re going to be north of 40% in the next few years. That’s our objective is to be as a company north of 40% in gross profit margin. And there are a lot of initiatives going on--underway right now at all our divisions to try to hit that number in the next two to three years.

Very good. Thank you, Selim, Tim.

Tony.

Your next question comes from Mark Grzymski with Needham and Company.

Good morning, guys.

Hi, Mark.

Just on the Alkar products. Are you able to pass--are you able to increase prices here? Is that something you guys have been talking about? You mentioned steel prices and obviously steel is a major component here. What’s the potential there?

I think, Mark, it is one of the initiatives we have to make sure that we are--so we remain competitive in the marketplace. But, at the same time, whatever [indiscernible - accented] to increase pricing we will. And one of the things we need to do is make sure that Alkar continues to price well their added-value products where there is specific value to the customers. And it goes back to the question that was asked before--is we’re going to rationalize that product line. We are not--Middleby is not a commodity-driven organization. It is very added--the value-added product line.

And I think one of the things that’s going to occur at Alkar this year is going to prune a lot of those commodity products that the customer can go and get somewhere else because they do not have any innovation or any patents to them that aren’t being built by 10 other competitors. We want to focus on those products that have unique technology, that provide savings to the customer, whether it’s energy saving, whether it’s speed, whether it’s automation, whether it’s yield, more yield, more safety, and that are uniquely driven and designed by Alkar.

So, this year is going to be a huge year of transition because within that portfolio they carry commodity products. And our interest would be to look at those products very hard. And if we don’t see the need for them--to retain them, we’re going to get rid of them. And we are going to continue also developing new products. We’re going to take our energy saving devices that we develop at Middleby and put them onto the Alkar product line. And it’s something that--the food processing industry has not yet been as sensitive as the restaurant industry.

And I went out and talked to many of those food processors recently. And they see the need right now to start looking at energy savings. It has not been a hot button for them in the past, while the restaurant industry for the last three to four years have been pushing for more energy efficient equipment. And they are being a lot more aggressive about it. So, I think we’re starting to take some of those--back to the technology we have on the energy saving and putting it on our Alkar product.

All right. So, if you’re looking at the business the last two years and you’ve shown fantastic operating margin improvement, does the Alkar acquisition--I mean, what are your expectations in ’06? I mean, obviously, the--with the lower margins and what not you are going to see gradual improvement. But, what kind of--we’re just trying to get a feel for overall operating margins for ’06.

Well, if we’re talking about gross margin, I mean, obviously, the--we--in the existing business, we continue to expect improvement. Alkar will initially detract from that--.

--Okay--.

--As Nu-Vu did initially. And then, we’re going to gradually get improvement there. So, I think in the first half of the year, the--I would say there’s going to be some netting effect there of improvement at the existing business offsetting the lower margins at Alkar.

Okay, great. And, if I may, just one more. Selim, on the new product front, we’ve been talking about five to 10 new products in ’06. Just curious, one, the timeline of the disruptive technology. And if you could just elaborate more on that?

Yes, I would. I think we’ll have--I mentioned that the next three years I’ll be saying that we’ll have roughly 20 to 24 new products coming up in ’06, ’07, and ’08. And out of the 20 to 24, there will be seven to eight that will be disruptive. This year we’ll most probably introduce--we’ve just introduced--launched the wall oven, which is a very disruptive technology. It’s our conveyor oven that’s increase--basically improves speed by 25%, which is huge in terms of big operation. It has huge energy saving implication and utility--highly realizable utility saving for our customers. So, that just got launched right now. It just got released and we’re going to start seeing orders in the next 60 to 90 days from that introduction.

We expect the second one to be released in the third quarter. And it will be a product that’s going to be also disruptive that’s coming out in the second--in the third quarter of this year. So, we’ll have two disruptive technologies coming on this year. And usually, I would say by the time we launch a product, I would say that it’s 60 to 90-days lag for it to start getting traction. Customers want to make sure that it does exactly what we say it’s going to do.

They are going to try to make sure that the application--because it entails higher margin [indiscernible - accented]. It’s going to take them to say, well, I’m going to have to get rid of a piece of equipment I bought two to three years ago because I have to have this. I can’t afford to have my competitor have a much faster oven than I do. Or I can’t have--the payback on the energy saving makes it no-brainer to buy this [Wow] oven or buy this new equipment, which I am not revealing right now. But, we’ll have another disruptive technology coming up--released in July.

Okay.

So, we’ll have two this year.

Right. And is--does the disruptive technology--does the [Wow] oven, for example, with say a pizza chain. Are you--do you think you’ll see a speed up in the replacements here, or--?

--Yes.

Okay.

Just to answer that question, yes.

Okay, thank you.

Thanks, Mark.

Your next question comes from [John Ashatar] with Robert W. Baird.

Hi, guys.

Hi, John.

I want to kind of follow-up on that launch of the Wow oven. Are there--if you were to kind of estimate launch support costs and just kind of increased marketing before you kind of have the sales traction in 60 to 90 days, what would that be for like a typical product launch for you guys?

It’s going to vary based on the product. With the Wow oven, we’re really going back to an existing customer base and they’re very familiar with that technology. So, the costs there are really no different than our usual run rate. Other products, which may be--are more of an expansion beyond technology we’ve had in the past, we might have--we’d have incremental costs. It’s really dependent product-by-product. You’d have promotional trade shows, advertising. You might bring customers in. So, it just really depends on the marketing strategy for each product.

Okay. But, for--kind of like for the Wow oven because it’s kind of a core area, not as bad as say some of your other disruptive technologies, if you grew more towards new areas of growth?

Well, I can give you, John, a little bit more feedback. I think the Wow oven didn’t have as much marketing cost. Well, we might have incurred a lot of R&D costs in testing. We must have--we developed--in the third and fourth quarters of last year, we must have had--we must have built almost 100 prototypes of those units that have been sitting at different customers or different whatever you call it--agency approval.

But, I would look at the second disruptive technology for launching this year, which will be in the third quarter. I expect us to have a marketing cost between, most probably $400,000 to $650,000 of marketing costs, if that gives you some numbers, and for the most part will hit in the second and third quarter. So, we’ll have --we’ll incur for that disruptive technology somewhere around $500,000 of increased marketing cost.

Okay. And then, just a follow-up. Other than professional fees in Q4, were there any other one-time charges with Alkar, like an inventory write-up or anything like that?

No. All those types of balance sheet changes are recorded in the opening balance sheet purchase accounting.

Okay.

So, there’s really more cost associated with closing the transaction and transitional type costs.

Okay, thank you.

(Operator Instructions.) Next, you have a follow-up question from James Clement with Sidoti.

Thank you. Selim, I understand you recently did a little bit of an international tour. Can you kind of fill us in on some of the trends that you’re seeing abroad, particularly, ones that may be a little bit different than what we’re used to seeing in the U.S.?

Yes. Well, that’s a great question, Jamie. We see a lot of [emphasis] internationally. And I think in addition to the trend that you see here, which is the four trends I talked about - diversity of menu, emphasis on labor savings and technology, speed, and energy, we see--I see two trends that can impact Middleby and can be very positive for Middleby as we move forward.

We’re seeing the--in addition to U.S. chains, we’ve started targeting aggressively what I call the regional local chains. And we’re seeing an emergence of regional chains all over the emerging markets. If you look at Asia, I would give a great example would be Jollibee, which continues to grow very aggressively. Jollibee, out of the Philippines, is now branching into China, into other markets in Asia, and we are a very strong supplier to them. And they are trying to grow fast. They don’t have the same infrastructure as let’s say U.S. chains. So, our test kitchens around the world have become very, very uniquely positioned for those regional chains to train and introduce menu and products very quickly.

We’re seeing--so, then we’re seeing a lot of local, regional chains emerging, which will give us a huge boost for our emerging markets. And we see that a lot more aggressively going on in emerging markets that we are seeing in Europe, and maybe that addresses a question that was handled before - where do you see Europe going. I think we see our penetration of the emerging chains--the emerging markets, Asia, India, Middle East going--being our future growth. Latin America.

Number two. I see another trend which is interesting for us. We have started localizing some of our equipment that has specific local applications. And in Asia, for example, introduced a rice steamer that was specifically applicable to Asia. And now, we just launched at the Dubois show an oven that is applicable to Middle Eastern specialties--uniquely done to Middle Eastern specialties. And it was very well received. And we’re going to look at India and look at things like a [somota] fryer, for example. And we’re driving a lot more local technology, rather than taking a one-fits-all product line that fits a Pizza Hut or that fits a Domino’s and say, well, we’re going to apply it to the Middle East, we’re starting to be a lot more taking the same technology and adapting it to local markets.

So, there’s two trends I see different than the U.S. where Middleby is going to benefit significantly because of our infrastructure is one--the local regional chains that are going to be growing very fast and they are willing to pay the higher margin to outsource their training, their test kitchens, their servicing to us. And the ability to produce locally-adaptable equipment that fits those specific markets.

Okay. Thank you very much.

Thank you, Jamie.

Your next question comes from Mark Grzymski with Needham and Company.

Yes. If you could just follow-up on that--on your expansion internationally. Where do you see overall international--what percentage of your revenue, say, two to three years down the road, do you think is going to come from international?

I think today our sales are for international around 20%.

Yes.

And should continue going to double-digit growth internationally. It wouldn’t surprise me that in the next five years or less, a third or more of our business will come internationally. We seem to be putting a lot of infrastructure there. We seem to be growing fast there, the receptivity. I just--in less than a year, I’ve been around most of the markets. I went to the emerging market. I’m talking most about the emerging markets where we seem to have a strong foothold. We seem to have gotten a lot of acceptance.

Middle East brands are very well accepted in those markets. We see that our technology is becoming valuable to many of those markets. And our infrastructure is helping us. So, it goes back to saying a third of our business should come from--in less than five years, 33% of our sales should come from international.

Okay, great. Thanks. Nice quarter.

Thank you.

Next, you have a follow-up question from Andrew Capowitz with Lehman Brothers.

Hi, again. You talked about the four trends in the U.S. and how that’s driving growth. Does it look the same in 2006 in the general end-market? Should the strength sort of continue to 2006? And then, for your company, specifically. Obviously, you had a very strong 2005 in terms of organic growth in the U.S. Could that continue in 2006 at the current pace?

Yes. I would say--I want to reemphasize a little bit because I think that people have followed Middleby for a long time. And newcomers to Middleby need to understand that we have been growing at double the industry growth on the top line. We’ve been committed to that and we’ve said whatever the industry grows, which has been between 3 to 4%, we’re going to continue outpacing that. And in the case of ’05, we more than doubled it. And I think we’ve--we expect to see that organic growth continuing somehow in ’06. So, I continue to say that our growth organically continues to be very, very strong. And then, we’re going to continue doing accretive acquisition on top of that that keeps going very strong.

And I think we continue--what I’m going to also reemphasize--reinforce is that we’ll continue seeing in ’06 and ‘07 doubling our industry growth on the top line. I think we’re going to continue seeing in what you saw in ’05. So, I think similar to ’05, ’06 and ’07 will be organically almost the same. I think that on the bottom line, I would like to say on the operating--even though we don’t want to give guidance. We don’t want to give guidance. I think that I would like to give some type of a trend. I think our bottom line is going to continue being north of 15%. So, that’s what we would like to do in our operating income. And our gross profit should be, in the next two to three years, north of 40.

Okay. Thank you very much.

Thank you.

At this time, there are no further questions. Mr. FitzGerald, are there any closing remarks?

No. But thank you, everybody, for joining us on today’s conference call and we look forward to talking with you again next quarter. Bye.

This concludes today’s conference call. You may now disconnect.

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