Middleby Corp (MIDD) 2006 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the First Quarter 2006 Earnings Conference Call. [Operator Instructions] Mr. FitzGerald, you may begin your conference.

Thank you. Good morning, and thank you for attending today's conference call. I'm Tim FitzGerald, CFO of the Middleby Corporation, and joining me today is Selim Bassoul, our Chairman and CEO. I have some initial comments about the company's first quarter results, and then we'll open the conference call for questions and answers.

We are pleased with the results for the first quarter, which included the full quarter impact from Alkar Holdings, acquired in December of 2005. Net sales in the first quarter increased 29.2%, to $96.7 million, as compared to $74.9 million in the first quarter of 2005. Sales from the Alkar acquisition, completed during the fourth quarter of 2005, amounted to $13.7 million, and accounted for 18.3% of sales growth for the quarter. Excluding the impact of the Alkar acquisition, organic sales growth was very strong and amounted to 10.9% for the quarter. The organic sales growth in the quarter reflected strong demand from restaurant chain customers and growth resulting from new product sales. As in the prior years, the first quarter also benefitted from some pull-forward orders, in advance of anticipated price increases to customers. The company realized sales increases at most divisions during the quarter.

Sales at our Blodgett division increased 9%, reflecting strong convection oven sales and continued momentum of the Blodgett steam line of products, launched in the second quarter of 2004.

Net sales at Pitco increased 13% during the quarter, reflecting the increased business with major restaurant chain customers, and continued market penetration of the high-efficiency Solstace frier platform.

Sales at our South Bend division decreased by 6% as compared to a very strong first quarter in 2005, which had grown 30% in the prior-year quarter, due to a pull-forward of orders ahead of price increases.

Sales at our Middleby Marshall Oven division increased 10%, with increased sales of new conveyor ovens, utilizing our patented energy management systems.

And at Middleby Worldwide, our international sales and distribution division, sales increased 11% from the prior-year quarter.

Gross profit increased from $27.1 million to $35.5 million on higher sales volumes, and the gross margin rate improved from 36.1% to 36.7%. The improvement in gross margins from the prior year reflects increased production efficiencies on higher sales volumes, and improved sales mix, with increased sales of higher margin new products and the impact of continuing operating improvements, including the success of completed integration initiatives at Nu-Vu Food Service Systems, which was acquired in January of 2005.

The gross margin improvements were offset in part by lower gross margins at our newly acquired Alkar business unit, which historically have averaged 18% to 20%. 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 at this business operation.

Selling expenses increased $2 million, to $10.1 million, reflecting increased expense associated with the newly-acquired Alkar operations, which account for slightly more than half of the increase. The remaining increase in costs reflect higher variable selling costs on the increase in sales volumes and increased marketing and promotional costs. General and administrative expenses increased $3.4 million, to $10.3 million, reflecting incremental costs associated with the Alkar business operations, increased profit sharing, and incentive-related compensation, and increased professional fees and integration costs, due in part to the acquisition. Also included in this increase was- during the quarter was $302,000 of intangible amortization associated with the Alkar business operations. The Company did not report any intangible amortization expense in the prior-year quarter.

During the first quarter of 2006, the Company also began to expense stock options in accordance with FAS 123R and as a result of this adoption, the Company recorded pre-tax expense of $240,000 associated with the unvested stock options. On an after-tax basis, the impact of the stock option expensing reduced net earnings by $169,000, or $0.02 per share, and no such expense was recorded in the prior-year period.

Interest and deferred financing costs were $1.8 million in both the 2005 and 2006 first quarter, as the impact of higher interest rates offset the benefit of lower debt balances in the first quarter of 2006. At the end of the first quarter of 2006, the total debt amounted to $120.5 million, with an average interest rate of approximately 6.1%, as compared to total debt of $138.5 million with an average interest rate of 5% at the end of the prior year first quarter.

Net earnings for the 2006 first quarter were $8.1 million, or $0.97 per share, as compared to net earnings of $6.3 million, or $0.79 per share, in the prior year first quarter. The Alkar acquisition was accretive to net earnings in the 2006 first quarter, adding $0.02 per share.

Now turning to our balance sheet and first quarter cash flows, net working capital increased during the first quarter, due to increased sales volumes in the quarter, and increases in working capital requirements, as production levels are increased, moving into the seasonally strong second and third quarters. Accordingly, accounts receivable increased $2.8 million, to $41.3 million. Inventories increased $2.3 million, to $43.3 million, and accounts payable increased $3.2 million, to $20.8 million.

Accrued expenses decreased $11.1 million, to $51.6 million, primarily due to payments made in the first quarter for 2005 annual customer rebate programs and incentive compensation plans.

Capital expenditures amounted to approximately $500,000 during the quarter, associated with the replacement and upgraded manufacturing equipment, and investments in marketing and training equipment. Depreciation amounted to approximately $900,000 during the quarter, and intangible amortization amounted to approximately $300,000 and deferred financing amortization amounted to $60,000.

Cash flows provided by opportunities activities for the first quarter of 2006 amounted to approximately $1.1 million, as compared to cash use in operations of $3.9 in the prior year first quarter. Historically, the company does not generate significant operating cash flow during the first quarter, due to payment of annual rebate and incentive obligations from the prior year, and increased working capital requirements moving into the seasonally strong second and third quarters.

Operating cash flows were utilized to fund the capital expenditures and reduce debt, and as I mentioned, the total debt at the end of the quarter amounted to $120.5 million, as compared to $121.6 million at the beginning of the year and $138.5 million at the end of the first quarter of last year.

Now, as it pertains to the recent Alkar acquisition, we were pleased with the progress made at Alkar during the first quarter. We have reorganized the business and completed actions to realize initial cost reduction opportunities. As previously mentioned, over the past few years, the gross margin rate at Alkar has ranged from approximately 18% to 20%, and EBITDA margins have ranged from approximately 5% to 7%.

During the first quarter, we reported gross margins of 22%, and EBITDA- and an EBITDA margin of 8%, and we expect to realize gradual improvements in the profitability at this operation during 2006, as a result of the integration efforts, and by the end of fiscal 2006, anticipate we can reach an EBITDA margin run rate of 10% to 12%, and we'll- continue to believe that, within a three-year period, that we will achieve profit margins approaching Middleby's existing business divisions.

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

[Operator Instructions] Peter Lisnic, Robert W. Baird.

If I could just ask a quick question on Alkar, I guess, and kind of the gross margin progress - 18 to 20 historical, you're up to 22%. Can you maybe distinguish or discern how much of that improvement is just kind of going in there and picking the low-hanging fruit off the tree, versus maybe some portfolio rationalization activities, if there were any, and then comment on- because I think you've said this before, that there could be some rationalization of the business there in terms of the products, kind of where you are on that front as well?

Well, I think the initial efforts have really been focused on cost reduction at this point in time, on re-evaluation the business model and taking costs out of that. We're just making initial efforts to reduce material costs. We think there's some synergies in the way they buy materials, so we've started efforts there, but they're far from being completed. From a product standpoint, there is more of a significant, I guess, lead time and backlog to that business, so some of the things that we do from a product perspective don't' impact the business right away, so there's more of a light there. But I think we're in the midst of, I guess, continuing to evaluate that product portfolio right now, so I think we're- we're not complete with that.

Peter, this is Selim Bassoul. I would like reiterate what I just mentioned on my previous conference call. We expect the Alkar acquisition to be up to the margins of Middleby within the next three years, so we do not see that acquisition to be, in 12 months, reaching up our goals of being at Middleby's 40- roughly 40% margin. So we believe in the next three years, we'll get to that number, so as we continue learning that new industry and implementing changes, whether at the pricing level, introduction of new innovation, and cost reduction, we will see accretion going on every year, but I don't think it will be similar to the Nu-Vu acquisition, where we acquired it a year ago and we are now reaching the Middleby margins this year, in a year and a half. I think it was a [inaudible] acquisition and because of what Tim just mentioned, some of those projects are- have been quoted and contracts have been placed and it will take a little bit longer lead time to get our orders and the pricing in effect that you would like to initiate, most [possibly] starting the second half of this year.

OK, all right, and if I could just transition to the non-Alkar business, I guess, the organic growth number, again, was very good, at 11%. And I gather that some of that is due to, you know, kind of your focus on new product introductions. But you know, none of the disruptive technologies were really, or I guess the [Wow II] wasn't necessarily out yet. So, there's something going on here where you're able to generate or continue to generate growth above, you know, what the market is generating. Can you just give us a little bit more flavor, more color, on exactly how you're doing that? You gave us pretty good sales breakouts, you know, for Blodgett and Pitco, but I'm just wondering, from a product perspective, what is driving your above-market growth?

I think one-- I'm going to answer that, Peter. You know, we are not only relying on disruptive technologies. If you remember, for the past three years, we've been introducing eight new products per year, and those eight new products are innovative, patented. They might not be totally disruptive, but they are a great value to our customers. And those products are now getting traction. As we've always mentioned, it usually takes almost 12 to 18 months to seed the new products, so the product that was introduced in sometime early '05 is starting to take traction and will continue taking traction. As long as we continue the pipeline of new products, you're going continue seeing our growth rate to be faster than the industry. The growth rate-- the new product seems to be hitting home, seems to be very customer-focused, and I think that's something that seems to be paying off for us.

And I have to share with you, some of you might have [found it in] the annual report and read it, but I'm going to go back and talk about what is unique about our customer focus. I'm going to read to you a quote from Morton's Steakhouse. We've been a [inaudible] for Morton's for over 20 years, and it says, ``Our restaurants have a stellar reputation because of Middleby brand cooking equipment. Our customers expect the best and we only use the best.''

I think when you look at Morton's, as they continue opening up restaurants and maybe add some menu items to their menu diversification of menu a little bit away from steak, they keep on coming back to the Middleby Corporation for additional items such as steamers, in addition to the broilers. Now, we seem to have done a great job retaining customers, along the way. So when they think of adding a new piece of equipment, they seem to come back to us and we seem to be fulfilling their needs, so I think that has been very successful for us.

The other thing is, we seem to be convincing new customers - let me give you another quotation from Carraba's, which is a division of Outback Steakhouse. This is a new customer of ours. They just switched from a competitor. And ``we prefer Southbend equipment because we found it to be the most reliable. There is excellent and their people are responsive and easy to do business with.'' They went through extensive testing, for over a year, before they switched to us, and now it's been a very successful switching to our new Platinum line, and it has been very, very successful. And I think that's some of the thing that I am sharing with you, tells you of the success of the company -- not only customers who were already current customers, continues to be highly loyal to the company, we're starting slowly, slowly, to convert customers who have been loyal to other brands to find that, you know, Middleby brands are superior in quality, our customer service is phenomenal, and the way we treat them has been fantastic, whether it's after-sale service or in the way we help them design their application of needs of their product to their specific kitchen design.

OK, and then along those- I guess along those lines, you know, you're newest or maybe hottest product, I guess, is the Wow oven. You decided to go exclusive with Papa John's. Do you see- is there some element of risk in alienating your current customer base with going exclusive with that product to Papa John's?

Well, it's a misnomer about going exclusive to Papa John's. Let's first address that. It's a great question. We have been the exclusive supplier of ovens to Papa John's since the founder, John Schneider, opened his first restaurant over 20 years ago. We are-- and I will tell you, we are very proud of our association with Papa John, and they have invested, well, the new CEO, Nigel Travis and his team, invested significant resources [with us] to double up features to their Wow oven, such as tying oven control to their POS system, or their cash register. But I want to make it clear, that the standard Wow oven, with speed and energy savings, is available to everyone. What we've done here is we've gone-- Papa John's came in and said, ``I would like a specific application for my usage of that Wow oven,'' and they took the Wow oven, we added the features that are specifically designed and tailored to Papa John. And this is what is exclusive. But the Wow is not exclusive to Papa John's. We are working with another chain right now to take the Wow oven and make some features to some that are unique for them, that streamlines their business a lot easier. So-- I think it's a misnomer to say we took the Wow oven and made it exclusive for Papa John's. We took the Wow oven and added features to it that Papa John's wanted, and those features are not available to anybody else. But no, if somebody else, like this other chain, is looking at totally different features, and they are looking at different things, and we're working them and testing some additional features with the Wow oven, that becomes most probably exclusive to them.

Well, let me ask you the question this way, then -- I guess the, you know, the attractive parts of Wow for Papa John's are the 30%, you know, reduction in cooking time and the reduction in energy consumption by a quarter, or something like that. Are those same sort of savings going to be available to any other- to your other customer base?

Well, let me change it differently- I think Papa John's was interested in a specifically four to four and a half minute speed time, and they were willing to get there, in working with us, and they are developing specific products that are very high-quality products, but they met that four to four-and-a-half minute speed time.

Other chains are not interested in a four- to four-and-a-half-minute speed time. They are more interested in streamlining maybe the way they take their dough to the oven and the way they streamline more efficiently their process, and we're working with them on that. So the energy and the speed will be available to everybody. It depends on to what extent a customer is willing to go in working with us in changing basically some of their preparation and-- I wouldn't say their ingredients, but the way- the shape of the pizza or the depth of the pizza and the number of toppings on it.

OK. And I guess- I mean, if I own my own pizza restaurant, I can basically come to you, buy a Wow oven, assuming I want a Wow oven for the energy consumption, because that seems to be the most attractive part of the equation for me, at least - I can come to you and buy a Wow oven and this Papa John's thing, there is no exclusivity? I can still get--

No, you can buy the Wow oven today, and you could go-- first of all, if you buy the Wow oven, forget the Papa John Wow oven, which is a very sophisticated oven that has a lot of things- control, a lot of things- [inaudible] the cash register to get to the four, four-and-a-half minutes. But you are today an independent or any other pizza chain, you're in seven and a half to eight and a half minutes. This oven will get you at least a minute to a minute and a half and it will get you, million, 20% savings in energy from where you are today.

OK, OK, that answers it. Thank you very much [inaudible]

James Clement, Sidoti.

Hey, Tim, I think in your prepared remarks, you alluded to a price increase - was that roughly around April?

Well, the price increases that we have usually just rolls into the first quarter. The timing varies somewhat across the divisions, but usually it's in the, you know, between January and March, most of the price increases would roll in.

OK, so I think you said-- you know, and I think the same thing happened last year, you may have seen a little bit of pre-buying ahead of the increase, so should we, like last year, maybe expect a little bit of moderation in terms of organic growth heading into the second quarter?

Yeah, I think that's right.

OK. And Tim and Selim, can you give us a sense of what you're seeing in the steel market? You know, first quarter earnings conference calls, you know, sort of seems like a little bit of a mixed bag. I guess some people maybe had worse expectations heading into this time of year, others are negatively surprising. Can you give us a sense of what you're seeing and you know, are any kind of potential increases manageable with, you know, the margin improvements you expect to see in Alkar?

Jamie, I'm going to answer that. I would say that the steel prices are out there, they have been volatile for the last two years, I wouldn't be surprised to see them slightly higher as we go into the second half of the year. I think this is- it could happen. However, it's only 15% of our cost of sales, and our organization is mitigating that cost by working with our supplier, one, or figuring out other ways to mitigate that cost through operational efficiencies. So I do not see steel moving forward, to be a huge- at least in the second half, from all what we've been reading, and talking to our suppliers, becoming a huge impact on our margins moving forward.

And just one last question, Selim - can you talk to us a little bit about regional-specific products? That's something it seems you started talking about, say, two or three quarters ago. Can you give us a sense of what you're seeing out there among some international customers and you know, what kind of products you're looking to bring to the table?

I think, Jamie, it's still too early. I would say we started that initiative some time in the third, fourth quarter of last year, when we started localizing some specific [needs], like we introduced, at the device show, a new oven that's being tested right now in the Middle Eastern markets for specifically breakfast- specifically designed for a breakfast menu that's highly in use throughout the Middle East. And I think it's too early to tell at this moment where we stand on this.

However, I would like to turn-- so we're going to continue that initiative. But I would say those initiatives, whether it's an Indian product or a Chinese product or a Middle Eastern product, or a European product, we're looking at all that and I think we'll be rolling products as they go growth regional, sol we're taking our innovation spirit and taking it to our local markets, where we see in India significant application for Indian-style equipment or Chinese-style equipment, as we go around. But I think it's too early for us to say any impact from this. It's a new initiative for us, we're very excited about it. I think it's going to be-- down- five years down the road, we'll look back and say, ``This is the best thing we've done,'' similar to today, when we look back five years ago, when we bet the company on energy. And I laugh about that, because I remember vividly when we sat in the room where I am now sitting, right now, speaking to all of you, with my management team, everybody said, ``Selim, do you think Americans would be ever concerned about energy savings?'' It was in year 2000. And it was the year where Hummer introduced H2, and I keep on saying that because I love the comparison. We were betting on energy while a car manufacturer is betting that energy will never be an issue, and they introduce a car that was, I think, seven or nine miles per gallon at the time. And my feeling today is similar to that energy drive, we're localizing our technology innovations throughout the world, and I think five years from now, I can tell you more intelligently about how it's going to be, and I think our report card, so far, we seem to be reading trends very well and I think it will be a huge interest from our customers. So far, the test sites where this Middle Eastern oven is being tested, it's been extremely well-received, it needs to be still more tested, it needs to be tweaked, but I think we see a phenomenal signal from that.

But I want to go back and talk about something else, which is more relevant to the next few quarters that we have. Now there is much attention-- I have been promising that we will continue introducing disruptive technology. And I have to talk, because have a number of other products coming out this year that are as disruptive as the Wow oven. We have a new series of high-efficiency fryers coming out, we have basically at the national restaurant show, which is being held next week, we have a new oven, which is a combination proofer and bread oven, which was designed and manufactured by Nu-Vu, that just received a Kitchen Innovation Award from the National Restaurant Association. Normally, it's the first-- only oven that can proof and bake in the same unit. That saves labor and space, and it reduces basically the baking time by more than 1/3. It also has energy savings in it. It is also a pass-through, so that means you can bring in trays from either side of the oven, and it has-- it was so innovative that it got the Kitchen Innovation Award for it, and we're excited about that product. We're very excited about our [Pitco], a new series of high-efficiency fryers. And not only we are expecting to basically save on energy, we're looking at also, through those fryers, to extend the oil life. So that should be huge for our chain customers, a heavy users of fryers, to be able to extend the shelf life of their oil shortening.

So we're very excited about those disruptive technologies that are coming up in the next new quarters. The Rhapsody combo back oven is going to be on display at the National Restaurant Show next week and we're ready to take orders for that, and I think that's another disruptive technology that Nu-Vu, since we have acquired them, have been able to double up and come up with that patented technology.

Andrew Capowitz, Lehman Bros.

Question on international - in the quarter, obviously it was pretty strong and it was much stronger than last quarter's year-over-year growth. My hunch is that Europe turned around for you guys, and I know that these businesses are quite lumpy, but is there anything going on there that we could talk about and could give us the breakdown regionally, in terms of growth?

Yeah, you know, as historically, it's- you know, all the international market are involved, just because it's such a small base for the company, so most of the growth for the quarter actually came out of Latin America, which was up over 60%. Europe was up 11%, although we were affected by the weakness of the U.S. dollar, so when we translated it back into U.S. dollars, although local currency growth was 11%, we reported a 3% growth in Europe. And Asia was actually slightly down in the quarter, just because of the timing of some of the store openings, but we expect that to rebound in the second quarter.

My comment on international is, we are not looking at market by market, Andy. Our interest is to go after markets that are out there and start building and reinvesting. Like we are spending a lot of time in China, building specific products for the Chinese market that will tap into the general market, rather than just the U.S. chains. We are spending also our energy both on our Philippines plant and the China plant to basically develop that engine in Middle Eastern products. So I think that truly, we're taking international to a complete different step, so we're moving globally in a very different area, where now we're trying to target those markets, emerging markets, with specific product as the middle class and [inaudible] eating out continues to be rising and we see India, China, Middle East, to be strong markets for us, and we're going to continue investing to get there.

That's great. Selim, Latin America seems to be particularly strong for you guys. Is it just a regional chain phenomenon? Again, more traction there?

Yeah, we seem to have gotten a lot of chains out there, in Latin America. I think also the fact that Middleby has had a presence a long time in those markets. We have a very, very strong infrastructure in those markets, because it's been one of our oldest infrastructures- in the world. And you've seen that we, over the years, similar to what happened in the United States, we're starting to see customer loyalty to be very, very strong. We're starting to also convert chains that in the U.S. might not use our products, in Mexico, or in Latin America, end up using ours-- strongly-- our service locally, and our ability to connect with those customers helps them ramp up their stores a lot faster. So I think that's truly the success of Latin America, is our infrastructure is very solid in the Latin American countries.

OK, great. If we could go back to Alkar for a second, you know, it's a rather sizable acquisition for you guys, you know, as you've said, and I guess the question I have is, you know, the customer base is slightly different, the products are somewhat similar but a little different. Is there anything that you've seen, either positive or negative -- you've owned it now for a little over a quarter, that you didn't expect. You know, just sort of a lay of the land of what's going on with the Alkar integration?

I think some of it that we did not expect is how long those contracts are, so in one sense, it's a longer contract period than ours, so we have to be very candid about that, that some of those orders have been because they are- especially, specifically designed, engineered for a specific customer. Some of those orders have been placed maybe in the third quarter of last year or fourth quarter of this year, and to be delivered somewhat between six to nine months later. So pricing for us is a little bit of an issue, as you move forward, just because we- those contracts, we want to honor those contracts. You know, we don't want to upset those customers and say, ``well, sorry, now we're the new owners, sorry whatever-- this management signed with you, now it's not acceptable.'' So we have to honor and bleed those contracts through, and that's one.

Number two, I think- I'm surprised how much little-- and I look at that as an opportunity, but I'm surprised how many- how much little emphasis there has been on energy saving in that industry, both from the customers as well as from the manufacturers. And you look at some of those ovens- well, I look at energy savings in a store, and I'm looking at our pizza ovens that are in the 100,000 to 175,000 btu per oven per hour. And I'm trying to save 20 to 30 or 40% energy savings. You look at some of those ovens installed in some of our customers, they are two million BTUs per hour. Two million BTUs, and energy has not been at all on the forefront of that industry, and one of the things we're doing is taking energy savings, and putting it into whatever we've learned from energy here and trying to apply it to those big ovens. And the I think the payback is going to be humungous, and it hasn't been a big issue for some. So, on one hand, I'm surprised. On the other hand, it's a great opportunity for us, and when I started telling the customer about it, it hasn't been originally a big emphasis. I don't know- and maybe it's the same thing that happened in our industry here. If you look at our competitors, energy was not in their vision plan, it was not something that they focused the way we focused, laser-focused on it, and I think now we're laser-focusing on energy in the food process arena and cooking equipment business, where it's two million [dollar] btu per hour, and if it can save 20%, that's a huge amount of savings per hour per oven. So I think those are the opportunities that I see.

Yeah, that looks like quite a bit of opportunity. Just shifting gears again, we've-- you have mentioned in the past higher fuel costs and the impact on sort of your business or customers' business, so fuel costs have been rising again a little bit. I think it's sort of a double-edged sword, because it'll help you in terms of they might want to replace their ovens and that kind of thing. So I get the question all the time, how does it impact the chain restaurants and that kind of thing, so what are you seeing in terms of what's going on right now with higher fuel costs?

Well, it's too early for me to tell. I think people thought maybe when it gets to $4 a gallon, we may have a shock through the economy. I don't know. At this moment, it's hard to tell. As you've seen, our first quarter, we had 10% organic growth in the midst of all fuel prices, and I believe many of our customers are doing very well. My feeling is, if I have to guess, I would say people aren't going to go back and cook. I don't think people are going to go back and say, ``Well, I am not going to go out to a restaurant.'' I think they are most probably cut the cable TV, they might cut other things before they cut their ability to go out and eat. So I would think within the restaurant industry, I think if I was a mom and pop, who is a fine dining restaurant, I would be worried. I'm not talking about the high-high end, I'm talking if you're a tavern or a mom-and-pop, mid-range, fine dining, I think you can be affected, because look at it and say, ``OK, it's not only the price of the meal I have to pay, which is higher. I have to pay the tip,'' so you're going to see most probably movement, migration, on both sides. I think the high end will remain very anti-recession, I would say anti-fuel prices. The Charlie Trotter's, Wolfgang Puck's, the [Daniel Balouds] will not see those type of impacts. It will be- those are destination/celebration restaurants, and they will continue seeing business.

I would say the chain [inaudible] start getting the business from those mid-range, family dining, tavern, mom-and-pop, fine dining, bistro-like businesses that so many people look at and say, ``You know what? I am not interested in going to that restaurant because I can save the tip and I'm going to go, most probably, somewhere where it's less priced and go to a casual dining, where not only the menu meals is less, and the tip is less. And, maybe even at lunch, I'm going to go to specifically fast casual, where I [inaudible]. And I think you're going to see some of this happening.

You're going to also see, in my opinion, pizza chains doing a lot better. People are saying, ``You know what? I'm not going to use fuel on my car. Let them deliver to my house. Let the fuel be on their dime, not mine.'' And many of them have not yet put surcharges on their fuel delivery, but I think if they do, it's most probably I think one or two chains are putting $1 fuel surcharge for delivery. It's still cheaper than you going out and going to the pizza store or to another chain.

So I think as the fuel prices go up, I believe the pizza chain will do very well, because the delivery will be right there. People will call in and say, ``Deliver my pizza. I don't want to get into my car and run fuel.''

Makes sense. Selim, just one more question - you've mentioned in the past maybe some incremental business from Gulf Coast reconstruction, you know, toward the end of this year. Are we seeing anything, you know, what's the lay of the land in terms of that question?

Well, we started seeing it-- it's a great question. We started seeing it most probably now. We started seeing it a little bit earlier than we expected. I think some restaurants have gone out and opened, sooner than expected in New Orleans and the Gulf Coast, and we started seeing-- and I think some of it goes back to the question Pete asked originally, about the 10% growth. I think some of it could have had Katrina, Hurricane Katrina effect in it. I think we're going to continue seeing some of it bleeding into second and third quarter.

OK, thank you very much.

Tony Brenner, Roth Capital Partners.

Couple of things. Tim, I had been under the impression that virtually all of Middleby's international sales were made in U.S. dollars, so I'm a little curious about your comment about the currency impact in Europe. Could you explain that?

They are not all in U.S. dollars. I mean, there's a mix of U.S. dollars and local currencies, so it depends on the markets, and the markets that we are the distributor, we often sell in local currency, particularly when it's not to a major type chain. So for example, in the UK, where we've got our own distribution company, the sales there are predominantly in British pounds.

Secondly, your tax rate was a little higher than it has been and a little higher than I thought. Is that reflective of the international mix or some other reason?

It was a combination, one, with the stock option expensing, there's slightly less of a tax benefit on that. And then we- we also put aside- we also had some reserves related to some audit exposures that we're going through right now, some audits.

Is that a reasonable rate for the full year?

Yeah, I would say it's a reasonable rate. It would be maybe towards the high end of kind of a range.

OK. Lastly, it appears that the Wow oven is going to generate a good deal of replacement, 1,500 just from Papa John's, and I'm sure a great deal more from other chains. In the past, you've, I believe, sold some of that used equipment, particularly in emerging market areas, where they're happy to have it. I'm wondering whether those markets can absorb this great amount of conveyor ovens, and what the difference in your profit margin might be between selling a used oven a new one?

At this moment, it's a very good question, Tony. Our used business, refurbished business, has been a very, very small part of our equation in the past. And my concern is, you might be right -- the emerging markets might be reeling even more from the price energy costs and we're starting to get a lot of emails and inquiries from global customers, asking about the Wow oven, just for some energy is even more of an issue than it is in the United States. The cost of energy is significantly higher overseas. You take Latin America, you take Europe, you take Asia, it's a lot higher than it is here - the Middle East. Even in the Middle East, in countries like Lebanon, which are not oil-producing countries. India, it would be very, very hard. And my feeling is, we don't know what's going to happen if those people are going to demand-- you know, ask for that obsolete equipment that doesn't have an energy management system.

One of the reasons that Papa John's has been interested in obsoleting that is that because a lot of those units don't have the EMS on them, the Energy Management System, so that's why-- the savings for them to go to a Wow oven is dramatic, and I don't know if we can absorb them and send them to emerging markets, given the interest in the Wow oven today and given the fact that the Wow oven is definitely- it's a very huge leap in energy savings from any oven that we've had in the past.

I don't know, it's something for us to assess and see, and I wish I could answer your question a little bit better, but I don't know, on refurbished, what's going to happen. In the past, the refurbished ovens had as high margins as our ones, because there was demand for them, especially when it got refurbished by Middleby, where we gave the warranty on them. We refurbished them. But remember, every oven that refurbished in the past did not have Energy Management System, so because the way we got them, we could not retrofit the EMS on them, and so I don't know what's going to happen in the future, given the fact that energy continues go up globally.

[Operator Instructions] Brian Coleman.

Yeah, hi. Have you guys provided a breakdown on the organic sales growth between new products and existing products?

No, we have not done that, and a lot of the new products, sometimes they're new generations of existing, so it's- you know, it's not as-

Can I address that, Brian, in a-- we believe that usually 30% of our sales are coming- of our incremental sales, gross sales, are coming from the new products, that are introduced in the last three years. And we have a goal right now, because remember, in the last three years, we've introduced 24 new products. This year, we'll introduce seven to eight new products, and we're going to do, literally, what we did the last three years, we're going to do the next three years, including this year. And my belief, which is the fact that we will, most probably, see that 80% of our product sales will come from products that we didn't have five years ago. So if you look in next year or two, and you look back five years, I believe that up to 75, or 3/4 of our sales, will come from products that were just introduced in the last five years, just because of the strong pipeline that has come up. We would be most probably doing 24-plus 16, so you don't have-- basically, almost 40- 40 ovens. I'm talking about 40 new products, across all our brands. And what is unique about Middleby is that because we're decentralized, we're seeing that the product introduction is not only consisting on one company, where you are seeing one company introducing oven after oven or fryer after fryer. It's across all our products. The [main] like Middleby Marshall, that introduced the Wow oven, to Pitko, which is introducing this year a series of high efficiency fryers to Nu-Vu, which we acquired a year ago, that is introducing this new combo bake, this is a bread oven that proofs and bakes and passthrough in all one, to Southbend, that introduced a new steamer and then introduced the Platinum Series a year and a half ago, and now introducing a brand-new-- new products coming up at the National Restaurant Show, which are very high-margin, very, very strong value-addeds to our customer, extremely strong value-add to customers. In fact, they will be exhibited at the National Restaurant Show next week.

So every division, if you come to our booth, and I welcome everybody to come to Chicago, if you're interested in seeing us and see what makes our company vibrant, you can just come into our booth and you will see. You can barely get into our booth. Year after year after year I've been doing that for many, many years. Every show at the National Restaurant Show, you can come into the booths. It's so busy, it is driven by all the new products at the show, it's driven by all the applications and the patents that we have. It's unbelievable, and you are welcome. It will be-- the show is being held at McCormick in Chicago. It starts next Saturday, I think it's the 20th, and it goes through the 20th, 21st, which is Saturday, Sunday, Monday, and Tuesday, and you can see us versus our competitors. It's a great way to see what makes us different than anybody else.

There are no further questions at this time.

Well, I would like to wrap up, then. Let me wrap up to everyone and talk about the excitement of our Middleby and where I see Middleby. I think that I'd like to talk about the- to set the priorities that this management has in place. I think one is growth. I think you've seen the growth, both globally and internationally, and I look at it and I say, the growth is going to come through not only organic growth and pursuing strategic acquisitions. I mean, we're going to continue pursuing strategic acquisitions, that make sense in the field we're in, where we see significant accretion and significant, immediate accretion and technology improvement from those aquisitions, where we can drive higher margins and we can drive products for our global infrastructure worldwide.

Number two, innovation. We're going to continue driving new product innovation. We'll introduce seven to eight products a year in the next three years, starting this year, and we'll have between five, seven, or eight innovative, disruptive technologies, similar to the Wow oven and the Rhapsody combo bake. We'll continue being very customer-focused. We'll continue working with our customers in terms of retaining them and getting new ones, like the Carraba's, is a new one.

I'm going to read to you another one that got last year at the NRA show. Last year, that was a interesting chain, new chain. It's a fast casual called Five Guys Enterprises, and I'm going to tell you what they say about us, and it's written in our annual report of this year.

``After meeting at the 2005 National Restaurant Show, Pitco and the Middleby companies were with every step of the way. They worked with us on the equipment required to fit our specific needs. As a 20-year-old chain, we reviewed many options and brands, but it was Middleby's response and their outstanding engineering team, they were by far the best. They designed and shipped the products 60 days after our first meeting.'' This is from Greg [DeSalle]. He's the head of franchise development at Five Guys Enterprises, which is a fast casual chain. So we're going to continue, similar to the Carrabas, similar to the Five Guys, similar to [Newmont] Baking Company, where they are starting to use our Nu-Vu equipment, in addition to our Southbend equipment, which they found the most reliable and consistent baking in the industry.

We're going to continue our customer focus. We're going to continue our excellence in operation. That excellence in operations is going to require a lot of things. It's going to require, continuing to look out, pushing savings and working with our suppliers to reduce saving on our supplies and our components and our parts, so to reduce our cost of goods. We're looking at SKU rationalization and plant rationalization as we continue looking at things that we can do globally, as we have more and more expertise in the Philippines and we ramp up our China plants.

The biggest drive that's new to us this year is our people and our organization. I think two weeks ago you've seen the announcement on Phil Dei Dolori as becoming Group President for Southbend, Blodgett, Pitco, Magic Kitchen, and our [combi] line. It will allow us to now, me and him, and every leader of our organization, to focus on developing the annual talent review, and we're in the process right now, in looking at beefing up our organization, both in engineering, and in general management and in sales, where in the next 60 days, we will most probably hire some very, very attractive talent to our company. In addition, we have just spent a phenomenal time on our global team. We have done significant reviews with our global team, and I have just spent a lot of time, starting in the fourth quarter, as well in the first quarter, overseas it personally, informing and keeping our global team involved, informed, and assessing them, very heavily, the way we assess our talent here in the United States.

Coming today and tomorrow, our management team is having an engineering review meeting with all our engineers across the company, which has never occurred in our company, to share a platform and ideas. Now, whether it's energy savings, whether it's disruptive technology from one company to another, while we remain committed to decentralized organization, we want to be able to share a platform for our engineers to be able to share ideas and platforms. So for example, I talked earlier on about taking our energy saving through Alkar, and that's where we've had a lot of interface between our Middleby Marshall engineers and Alkar engineers to basically talk about energy savings and be able to develop a platform [inaudible] to start taking it early next week- next year. Early next year, to our customers, with significant savings, the same way we did with the Wow oven.

Finally, we want to talk about value creation. I think we continue our emphasis on economic value added, and we continue strengthening our commitment to shareholder value and instilling it into [inaudible] and our employees. And I want to thank our Board and I want to thank our shareholders to continue incentivizing us on significant incentives, not only for people that have been with us to continue to remain hungry throughout the process, but also people who are coming new to organization, to continue incentivizing them. And I'm going to make it clear - our incentives are not fake. The Board has not come out and said, ``Well, if you grow 3% to 5%, we're going to give these big bonuses.'' Our incentives are to grow at double-digit growth year after year, and to grow and deliver our share value to go up, our EBITDA to go up, our payments- repayment of cash to go down, of debt, to go down, through significant exercising and discipline on working capital, and CapEx. If you look at our CapEx, we continue to remain committed, despite the acquisitions we make, to remain committed to a very low CapEx. It's part of our DNA, so we can continue growing and continue introducing all those innovations with very minimal CapEx, and I give that credit to our engineers, both in the design area as well as our industrial engineers. And most importantly, to our operational people, who have been able to deliver all those new products with very minimal capital requirements.

So I'm going to re-summarize -- growth, innovation, customer focus, excellence in operations, people in organization, value creation. I am very upbeat on where the company is going forward and thank you for being wit us, unless there are any further questions on my comments.

All right, well, thanks, everybody, for attending today's conference call, and we look forward to speaking with you next quarter.

This concludes today's conference call. You may disconnect at this time.