Middleby Corp (MIDD) 2006 Q3 法說會逐字稿

Good morning. My name is Meredith, and I'll be your Conference operator today.

At this time, I would like to welcome everyone to the Middleby Corporation Third Quarter Earnings Conference Call. [Operator Instructions]

I would now like to turn the Conference over to Middleby Corporation's Chief Financial Officer, Timothy FitzGerald. Please go ahead, sir.

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've got some initial comments about the Company's third quarter results, and then we'll open the Conference Call for questions and answers.

We're pleased with the results for third quarter, which represented our 19th consecutive quarter-over-quarter record net earnings. The quarter results included the impact from Alkar Holdings, which we acquired in December 2005; and Houno, which we acquired on August 31st, 2006.

Net sales in the third quarter increased 27.6%, to $103.2 million; as compared to $80.9 million in the third quarter of 2005. Net sales from the recent Alkar and Houno acquisitions amounted to $16.4 million and accounted for 20.3% of the sales growth for the quarter.

Sales at Alkar, which can fluctuate widely from quarter to quarter, were particularly strong in the third quarter. Excluding the impact of the acquisition, sales grew organically during the quarter by 7.3%. The organic sales growth in the quarter reflected strong demand from restaurant chain customers and growth resulting from new product sales.

The Company realized sales increases at most divisions during the quarter. Sales in our Blodgett division increased 7%, reflecting strong convection oven sales and continued momentum of the Blodgett line of steam cooking products. Sales in our Southbend division increased by 18%, as we continued to realize growth in the platinum range line. Net sales at Pitco increased 10% during the quarter, reflecting continued success of the high-efficiency Solstice fryer platform and increased business with several restaurant chain customers.

Sales at our Middleby Marshall oven division increased 9%, with initial sales of our new highspeed energy-saving Wow! Oven, which was introduced in the second quarter of this year. And sales in our Nu-Vu division declined 29% as a result of the discontinuance of certain lower-margin product lines as part of our acquisition integration initiatives, and lower store openings from a major restaurant chain customer as compared to the prior-year quarter.

At Middleby Worldwide, our International Sales and Distribution division, sales declined 5% from the prior-year quarter. Sales in Latin America increased 20%, with higher revenues from expanding restaurant chain customers. The increase in Latin America was more than offset by an 18% reduction in sales in Asia, which were impacted by timing of store openings with major restaurant chain customers and delayed purchases resulting from local concerns related to the situation in North Korea.

Gross profit increased from $32.5 million to $40.6 million on higher sales volumes. However, the gross margin rate declined from 40.1% to 39.3%. The decline in the gross margin rate resulted from lower margins at the newly acquired Alkar and Houno business units. Excluding the impact of the acquisitions, gross margins improved slightly from the prior-year quarter, despite the unfavorable impact of increased steel and other material prices.

We continue to realize margin improvement at Alkar RapidPak as compared to the first half of the year, as a result of cost-reduction initiatives and operating improvements that have been implementing during the course of the year. Gross margin at this division was 32% during third quarter in comparison to gross margins of 21% in the first quarter and 28% in the second quarter. Further improvements in the gross margin rate at Alkar will be more gradual, as the impact of initial restructuring efforts has been completed. And these improvements in the future will be driven largely by new product development.

Selling expenses increased $1.3 million to $10 million, reflecting increased expenses associated with the newly acquired Alkar and Houno operations, which accounted for most of the increase. General and administrative expenses increased $2.1 million to $9.5 million, reflecting incremental costs associated with the acquired Alkar and Houno business operations, increased incentive compensation and increased professional fees due in part of acquisition-related activities.

Included in the increase during the quarter was $250,000 of intangible amortization associated with the Alkar and Houno business operations. The Company did not have any intangible amortization expense in the prior year.

Beginning in the first quarter of 2006, the Company also began to expense stock options in accordance with Statement of Financial Accounting Standard 123R. As a result of this adoption, the Company reported pretax expense of $238,000 in the third quarter of 2006 associated with the stock options. On an after-tax basis, the impact of stock option expensing reduced net earnings by $168,000, or $0.02 per share. And [such] expense was recorded in the prior-year period.

Interest and deferred financing costs in the third quarter increased slightly, amounting to $1.6 million, reflecting the impact of higher interest rates, which have risen approximately 2% from one year ago, which more than offset the benefit of lower debt balances.

The 2006 third quarter tax provision amounted to $7.3 million at a 37% effective rate, as compared to a provision of $4.8 million at a 33% effective rate in the prior-year quarter. Both periods reflect favorable adjustments to tax reserves, which amounted to $350,000 in the current year and $722,000 in the prior-year quarter.

Net earnings for the 2006 third quarter increased 23.6% to $12.2 million, or $1.48 per diluted share; as compared to net earnings of $9.6 million, or $1.19 per share in the prior-year third quarter.

Now turning to the balance sheet and third quarter cash flows -- networking capital increased during the first nine months, due to increased sales volumes and increases in working capital requirements during the seasonally strong third quarter. Additionally, the increased working capital levels reflect balances acquired as part of the Houno acquisition. Accordingly, during the first nine months, accounts receivable increased $14.1 million, to $52.6 million. This balance included $2.2 million of receivables associated with Houno.

Inventories increased $5.5 million, to $46.5 million, of which $2.5 million are related to Houno. Accrued expenses increased $4.8 million, to $67.5 million, due to increased reserves for operating liabilities, including warranty and insurance reserves, which have increased in conjunction with the higher business volumes. And the increase in the accrued liability [mailfulse] reflects $1.4 million associated with the acquired Houno business operations.

Cash flows provided by operating activities amounted to approximately $19.6 million for the third quarter and $33.4 million for the 2006 full year. Historically, third quarter is the strongest cash flow quarter during the year.

Operating cash flows were utilized to fund the acquisition of Houno, fund capital expenditures and reduce debt. During the quarter, capital expenditures amounted to approximately $350,000, associated with the replacement and upgrade of manufacturing equipment and facilities improvements. Houno was acquired for $8.6 million, including $4.9 million funded in cash and $3.7 million of debt acquired as part of the acquired net assets.

Total debt was reduced during the quarter by $12.1 million, to $97.3 million; as compared to $109.3 million at the end of 2006 -- I'm sorry -- at the end of the second quarter of 2006, and $121.6 million at the beginning of the year. And this net reduction in debt is inclusive of the $8.6 million funded for the Houno acquisition.

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

[Operator Instructions] Mark Grzymski, with Needham & Company.

Good morning, guys.

Good morning. How are you, Mark?

Doing well. Congratulations; great quarter.

Thank --

Thank you.

Just first -- wondering if you could just comment on Asia. And obviously some weakness there for things that's out of your control. But could you comment on whether or not this is like a little road bump, or some of this is going to linger for awhile?

No, I think it's a road bump. My feeling is Asia remains a very strong market for us. We've had a little bit of a slowdown in this past quarter. And I think it's driven by several things. One, we are -- in Asia had to work with some of the regional chains. We have a lot of penetration of regional chains that are coming into Asia. And those chains are taking a little bit longer time to get their [plants] open up.

I'll give you -- one example is one of our largest customers in Philippines, which is Jollibee's, just made a plan and budget and an infrastructure into penetrating China. And that took them a little bit longer than expected. And that might have delayed some of our increase. I think also, we've had some delays from some of the KFC stores that were pushed into the fourth and first quarter of next year.

So I think it's just a bump in the road. I continue to -- we continue to invest in Asia. In fact, we are in the process of hiring additional salespeople in Asia. And we believe that Asia will be a double-digit growth for us in the next two to three years, year-after-year.

Okay.

And then just kind of flipping to Latin America -- I mean, some robust growth continuing. Do you expect that to remain steady, or -- generally speaking?

I think the -- this is Tim -- the Latin American markets have been strong all year. And I think that they'll continue to remain strong.

Okay.

I'll just make an overall comment. The sales of the international markets are far more volatile than the U.S.'s. Because the bases are lower in their emerging markets. And the timing of store openings have a greater impact. But overall, I think we still feel strong about the international business. Asia -- the economies are doing well, and the restaurant chains are expanding there. And I think overall, that's what we're seeing in Asia as well.

Okay.

And then, just looking at the organic growth rate of 7.3%, Tim, wondering what percentage of that is really volume-driven as opposed to pricing.

I don't have that broken out for this call.

Okay. Okay.

And then, just any more color on new products would be great.

Okay.

[inaudible] be introducing eight new products every year. I think we talked about ramping that up. We will most probably introduce 10 this year. I think that -- well, this year I'm talking, as well as '07 -- in '06, we introduced eight. In '07, it will be 10. Of those 10, we'll have -- counting Alkar, we'll have five of them that will be totally disruptive technology. We'll have a new fryer, we'll have a new oven. We'll have a new packaging machine, and we'll have a new steam machine that will work for the food processors. All those equipment are focused on speed, on energy-saving. And so just to give you perspective, every one of our equipment [that are] going to come in will have minimum a 15% to up to 50% energy savings. We're looking at paybacks on each one of those disruptive technologies between one year to no more than 18 months. So it's a huge payback to the customers measurable that are [effective] from day one, and that also enhance the quality of the food. One of the things we did not want to do is affect the quality of the food or the throughput.

So again, to summarize our new product strategy -- we're going to introduce 10 new products in '07. Four to five will be disruptive. All the new product will be focused on energy-saving and speed. They will also have the payback of a year to 18 months. And they will have -- they will increase the throughput and improve the quality of [the bake or] of the food.

A very strong pipeline this might be. In the next two to three years, we'll have, most probably, stronger pipelines than we've ever had.

Great.

And I imagine that the new products will garner -- be some premium from a gross margin standpoint. So should we also look for the new products to help offset these kind of steel prices that -- Stanley Steel prices that you were talking about in the press release?

Yes. Yes. And I think we're seeing the effect of that right now. Because --

Yes.

-- price has went up double-digit in the first half of this year, and then we took a second increase in the second half of this year, of an additional 10%-plus. So one of the things that has been allowing us to offset that has been the higher margins on some of the new products.

Great. And what percentage did the new products represent in the quarter?

It's -- the way we look at it is products introduced over the last three years.

Yes.

And roughly a quarter of our sales relate to products introduced [inaudible].

Well, great quarter, guys, thanks.

Thank you.

[Tony Brenner, with Roth Capital Partners.]

Thank you.

I'm wondering about SG&A, given the acquisition, $2.25 million of Houno, and whatever expense you incurred in your pursuit of the notice during the third quarter -- why or how SG&A declined, and whether that is now a sustainable level of expense.

There really wasn't much of an impact to SG&A during the third quarter. Most of the -- well, the expense associated with the Houno acquisition would have been capitalized as part of that acquisition. And most of the expense for Houno -- I'm sorry, for -- that we incurred with the notice -- well, the transaction didn't go through a lot of what would have been performance-based. But what we did incur was incurred in prior quarters. So we've seen some of that in the first and second quarter.

Tony, I'm going to add a little bit more flavor in a different way. Looking at the SG&A, given the fact that we're ramping up our product pipeline, and they're all -- half of them are disruptive, I believe that we need to invest in our selling infrastructure, in terms of salespeople -- not only domestically, but internationally. I believe also we need some marketing people, just because those products need to be marketed, they need to be tested at our customers. And I think we will need to invest in salespeople across the Company. And we are in the process of starting, in the fourth quarter, to hire additional people to join our companies in sales and marketing.

So my feeling would be that we'll have a higher SG&A going forward, given the investment of those people. And we expect those people to be plug-and-play, [that these] people are trained; we're not going and hiring college graduates. But I expect them to take usually three to six months before they can be effective. So it will have a drag on volume before those people get trained on our product and can get out and start bringing -- closing orders.

Oh. So that number's going up?

That number is going up.

What about Houno, in terms of its initial impact on your bottom line? Will that be dilutive for awhile before you do enough with it to make it accretive?

Well, I'd say it's not going to have much of a significant impact, just because it's a smaller acquisition, at least initially. That's one where the real opportunity is growing the top line into the economy of a market, which is a large global market. So I wouldn't expect much of an impact. It might be -- the first quarter or two might be slightly decretive. And then we would expect, moving into next year, might be positive. But we're talking pennies, basically.

Selim, maybe you could talk a little about what your plans are for that company and that market, and what exactly do [inaudible]?

Okay.

We've been looking at this market. And I'm [going to] give you a better perspective. I think that if I go back, and I look at the $1.5 billion market in the U.S., and if you look at our business units -- I will divide that $1.5 billion as part of markets compared to us -- I would say we have 50% of that market we already serve [the value of], whether it's fryers, whether it's ranges, whether it's grills, whether it's convection oven; conveyer ovens. There is a 33% market, which includes three elements that I see that Middleby has not yet -- just now penetrating.

33% of the $1.5 billion in the U.S. includes bakery oven -- hence the acquisition of Nu-Vu -- combi-ovens and steam cooking. And we have decided to approach the combi-ovens and the bakery ovens through acquisition. And we decided to take the steam cooking through organic growth; through building our own product. And that represents 33%.

So it's all three markets for us. And I look at the combi-oven and say, You know what? Internationally, it's a $400 million market. There are very few players in it; very high margin. And we decided to go and acquire a very high-tech company. Houno is a very high-tech. It's unlike any other combi-ovens. Remember, we manufacture some combi-ovens in the United States under the Blodgett name. But this -- the technology that's being developed and sold through Houno is truly the high end.

I don't know if many of you are familiar with stereo system. The Houno is to the oven market what Bang & Olufsen is to the stereo system markets. I don't know if many of you know that brand. And it's a very high-end, very high-tech, unique control. And I looked at Houno for two ways. One, it allows us to enter a $400 million market worldwide dominated by two or three players. And we enter it with a high-tech, highly patented technology. We enter it with high margins. And number three, we think that there are some cross-technology importation from Houno on [their] control, which -- they have unique control -- touch screen, easy to use, [menu] recipes, all in the front of the oven. This oven does a lot of things in [a] simple way, that we could utilize in our fryers, in our conveyer ovens, and in our other convection ovens, in general.

So the rationale behind Houno again is to enter a big market, high-margin market; and get the patented technologies [can] utilize on the control, across our product lines.

[inaudible] the ability to leverage Houno with other Middleby products and expand in that market more aggressively?

Well, we're hoping. Mostly Houno will have an impact internationally. Our Middleby Worldwide division is excited about it, which is -- one of the reasons we looked after going after Houno is simple -- one, the fact that it allows us now to penetrate Europe, which combi-oven is a huge market -- allows us now to go in our Chinese infrastructure and to go in China, where it's starting to grow very fast. And we could not compete the way our combi-oven out of United States would have allowed us.

Our combi-oven in United States is very durable combi. It looks like a Sherman tank. But [gift] for the U.S. market, where you have a lot of turnover in institution, in a hospital or a prison, where they're more concerned about making sure that that piece of equipment lasts for a long time.

The Houno product is geared more to that chef owner or to that chain, that is more concerned about training on the control, being able to get higher speed, being able to control the quantity of steam going in in a much more precise way, so they can choose -- from eggs, they can go to soups; from there, they can go to chicken, to roasting. And we did not have that expertise at Blodgett. And now with this, I think we will have an ability to penetrate globally that market.

I see Houno to quadruple -- just to give you a perspective -- I see Houno to quadruple in less than four years. [inaudible]

Thank you.

Thank you, Tony.

[James Clement, with Sidoti & Company].

Good morning, gentlemen.

Hi, James.

Hi, Jamie.

Two questions, first about Alkar -- have your engineers had a chance to kind of get in there? And do you have plans in terms of new product introductions, and potentially being able to take some of your technology and apply it to Alkar? How far along in the process are we?

Well, remember, we did that by moving the architects and the [engineers] behind our engineering department at Middleby Marshall to become the president of Alkar. So that occurred in June or July.

Right.

And so Magdy Albert, who is now the President of Alkar, is working to introduce -- he will introduce four new products at Alkar in '07.

Okay.

Some of them are to increase throughput and improve yields, which is a big factor for that market. The food processors are concerned about throughput and yield. And he is working around making sure that he continues working along those lines. And he's taking the energy-saving that we've had success at at Middleby, and now incorporating it into those ovens. And he will be working on it in '07, [in] integrating those things.

The first thing we needed to do is we needed to go back and do the following, Jamie. We needed to understand -- I'm going to take -- we needed to understand and identify -- remember it's a new market for us. What we did is we worked very hard to identify important customer needs. And we figured out that yields and throughput had to be delivered very fast. We needed to create solutions that filled those needs.

For example, we have a [certain kind of] oven, called [Jaycon]. And we needed -- because of space requirement, where many of our existing customers wanted to add a new line of bacon or sausage, but they didn't have the space -- so we needed to create solution where they can create the same improved yield, improved throughput, that's in the smaller machinery. So he's introducing smaller equipment to fit in the existing factory, so they don't have to build another factory. So we're introducing two new equipments that will have smaller size, huge throughout and huge yield improvement.

Then, he went back and built the R&D team. Because remember at Alkar, when we acquired that company, they didn't have as much innovation as we needed to do. [It's the] other thing that Middleby is very well known about. We are known about payback.

When we go [out and] introduce the Wow! Oven, we [sit] down with our pizza chain customer and say, Listen, it's clear to you, in addition to speed, the energy-savings will be able to be paid back in X amount of time. And we measured and measured and measured. And we're now basically building the same type of [DNA] in culture at Alkar, where when we build a new product, it has to have a payback. And we have to measure that payback. And we're challenging Alkar to come up with payback of 18 months or less.

So he's rebuilding his team. He's empowering the innovators and trying to create that payback measurement which creates value for our customers.

Very good.

If I could ask another general question about manufacturing -- Selim, obviously, over the last couple years, Middleby's grown tremendously. You're continuing -- I think you alluded to investing in the sales force a little bit earlier on the call. Can you give us a sense of -- are your manufacturing facilities at this point -- I mean, are you feeling any strain? I mean, are you going to have to invest in new space, new people, new equipment at some point? Or are you all in pretty good shape right now?

No, we decided to invest $100 million in capital expenditures the next two years. No, Jamie, I'm joking. No, we have been able to do that in a very -- you've been around us. I think the way we have approached our business -- which has been paying off significantly for us -- is to spend more time on the engineering design up front.

One of the things when we came to Middleby -- and I can give you the difference -- when I came to Middleby, and I became Group President -- even before I became CEO -- and I walked through the Elgin plant, where we produce conveyer ovens, we produce toasters, we produce griddles -- if you look through the plant, we saw our employees basically being like Cirque du Soleil. They were acrobats; people on top of the oven, drilling from top; the oven sitting sideways, two, three people -- it was very difficult to build those ovens. There was a lot of fasteners, there was a lot of process that required our people to jump through hoops to build the oven.

And one of the things we've done is we've gone back and redesigned those older equipment to be able to be built like [Lego]. And we are very big on that. And one of the issues we've done, as we hired engineers and as we incentivized engineers, is to spend more time building product that can be manufactured easily. And that has paid off a lot for us.

We've gone from a process where the design was completed in the manufacturing from a design now that is built like [Lego] across all our plants. If you go through our plants, and you look at how everything -- and one of the things that has helped us immensely; it's not only the credit to Middleby alone -- is the fact that a lot of the software and the [cad] system, and the [cam] system -- which [were both] -- through the years have been a lot easier for design engineering -- 3D engineering, whether it's [Pro E] or others, have helped significantly in building -- in designing product that can go into the manufacturing a lot easier.

So I do not expect our capital expenditure to change at all. I think, if I look at it -- and I turn your question differently, Jamie, which is a great question -- I think that as we continue becoming more efficient at how we build our product, as we nationalize our SKUs even more, as we take -- let's take the conveyer ovens -- as we move from the 500 series platform to a Wow! Oven platform -- and everything is going to shift to the Wow! Oven platform -- my belief -- it's going to end up having a lot of space in many of our factories. And we believe that we'll have a lot of capacity in those factories.

And the challenge is, can we consolidate some of those plants in the next three years, to go from seven to five? I think that's something that might be worthwhile to look into. Because you look at our Elgin plant today, there is a lot of space. You look at Southbend -- our President at Southbend, Nestor Ibrahim, has taken 30,000 square feet that are now open. It's like a soccer field in the middle of a plant. And he's been able to increase the throughput out of that plant by almost 10 to 15% a year, and added new product, and added most throughput through it, with less people and less space.

So our question [mark] is, can we consolidate? And that's something that's an opportunity for us. We have to be very careful to balance disruption and culture versus plant consolidation. But I would say this is something on our [mind], on our [subject plan], as we move forward. Because every one of our plants have more space now, despite the fact that we've increased our volume.

Okay. Thanks very much for your time.

Thank you, Jamie.

[Joel Tiss, with Lehman Brothers].

Hi, Joel.

Hi, how are you?

Very good.

That's good.

Two just sort of clean-ups, and then one -- most of the other questions have been answered.

Can you talk about sort of a run rate on taxes, and also just dig a little more into the account receivable? I know even if you take out the Houno $2.2 million that's in there, it's still up 30%. So that seemed a little out of whack.

And then the last -- I guess I'll just do them all together -- is, can you talk a little bit about the acquisition pipeline?

Thank you.

The tax rate -- I would still expect a normalized tax rate to be in the 38 to 40%. We have periodic adjustments from time to time, as we did this quarter with some favorable tax reserves. But the run rate is a -- 38 to 40% is what we consider to be normalized.

The receivables -- the DSO actually was very consistent with where it was last quarter, and also the quarter in the prior year. So some of the impact of the receivables is frankly just the timing of when sales come in the quarter -- end of quarter versus beginning of the quarter, or the middle, can impact what the balance looks like as you're measuring it as of a specific date. But the DSO's actually been pretty constant.

I'm sorry, Joel, what was your last question?

I just wonder if Selim can talk a little bit about the acquisition pipeline.

Yes. The acquisition pipeline will continue looking at acquisition in a very disciplined manner. I think one of the things that I think investors in the market did not give us credit for was [inordis] deal. I think that as you can see, there was a softness in our stock price as we were looking at [inordis]. And I think people expected us to start outbidding and overbidding. And we remained a very disciplined buyer in those acquisitions.

I think that in every acquisition we've made in the past, we wanted to be accretive. We remained committed to that accretion within the first year. We wanted to also make sure that there are significant synergies. So we don't go in trying to buy, just to make -- even the Houno deal has synergies for us. Even as small as it is, it will be accretive, when you look at '07. It might not be accretive in the first or second quarter. But when you look at it [in year terms,] will be accretive. And my feeling is, we'll continue looking at [certain] acquisitions.

And I'm going to give you some interesting parts for us that make sense. I think there are two areas. If I look at the cooking side, where we are not a player -- we're not a player in the microwave oven, we've not a player in the heating cabinets, which are big market; they represent [16]% of the $1.5 billion in the U.S. -- and we're not player in that. So we might be looking at those type of acquisitions to fill in, to complete the circle of cooking products that we can offer. We haven't seen anything right now. And we're not talking to anybody on either one of those two companies -- two segments.

But those will be interesting for us. We continue looking at the packaging business and the food processing. And I look at that, and I say there are some interesting things going on there in that business.

So we're going to remain committed to acquisitions that are accretive, that have synergies with us, that are high brands and that have technology that will affect our customer base. For example, we'll continue looking at things that -- as we continue getting closer and closer to our fast-casual segment, which is a great segment for us, and we're doing -- we continue to do very well in that -- we're learning from them that they need some application that we do not have within our existing portfolio. And we would like to work on that. So again -- accretive, it should fit our existing type of customers. It should be patented and high-brand.

So I believe that we're going to continue looking at acquisitions; at least spending the money on that, to make sure that we continue looking at those [tuckin]. And if we don't find the price acceptable to us, we'll walk away. We're going to remain very disciplined in the way we buy.

Okay, thanks.

[inaudible]

One more, as long as you're here -- can you just talk about -- since a lot of disruptive technology's coming out, a lot of consolidation in the industry -- can you talk a little bit about what's happening on the competitive landscape front? Are you seeing competitors just sort of walk away from different segments, or -- just a sense of what's happening there?

Thank you.

I would say -- I'm seeing one thing that's very interesting. I'm seeing that all our competitors have been raising prices recently and been able to pass on some of the stainless steel price increase to our customer and end user. So we've seen that happen consistently, which in the past used to lag. But currently, all our competitors are starting to affect price increase. So we're seeing a lot more emphasis on profitability than I've seen before in the industry, which is good and healthy for all the industry.

I am seeing also the fact that many of our competitors are dealing with specific segments. I look at one competitor, which -- I'm not going to name any competitors on the conference call. But I give you a large competitor of ours, who seems to have focused on businesses which we've abandoned several years ago, and they're doing very well with it.

So I'm seeing a segmentation in the marketplace among the big players. For example, that specific competitor is now focusing effectively and successfully on fine dining, on country club, on hotels and [stagens]; while we have become more focused on fast-casual and casual dining chains. So you're seeing segmentation in the marketplace which seems to create less competition in each one of those segments. I'm also seeing our competitors continuing to be a one-stop shop. None of them have adopted our strategy of being focused on cooking. You look at every one of our competitors; they continue to invest in [reprevation], in display cases and in cooking, while we continue to be focused very much on cooking. So that's the differentiation between us and them.

I also look at the fact that we are a lot more global in our infrastructure. We spend a lot more money than most of our competitors internationally. So our international infrastructure is a lot heavier than most. It has had significant great impact for us. Because it has allowed us to grow in the emerging markets.

So again, a lot of things are common. We're seeing them follow us as the price leader, so we're seeing that happen. We're seeing segmentation among the competition. While we focus on certain segments, some big players are focusing on other segments. And it's creating less of a disruption.

I am seeing also the fact that we are different, in the fact that we are very focused on one segment, while they are all still adopting the one-stop shop, and wrapping around a whole kitchen, which we do not do. So --

Okay. Thank you very much. That's great, thank you.

Thank you.

thanks, Joel.

[Allison Benton, with Port 5 Capital].

Hi. Congratulations.

Thank you.

Selim, I'm hoping you can speak to the recent increase we've seen in announcements from chains like Burger King and Kentucky Fried Chicken regarding the switch to the trans-fat-free oils. And I'm wondering how big an opportunity you see this being for your fryers, and when you expect to see sales ramp if they aren't already.

Okay. [Allison], thank you very much [for what] -- well, it's a great trend for us. Because the next -- the stuff -- the technology we have is our [Rocket fryer], which is a fryer that will be introduced in the second half of '07. And that fryer addresses basically the trans-fat-free oil, in a sense that it allows to set some of the costs of -- [plus the operator] of the trans-fat-free oil, which is more expensive than the trans-fat oil. Basically, going from a solid shortening to a liquid oil is always more expensive.

[In addition], the way we do that is we have a unique fryer, which is patented, which will have -- is 15% more energy-efficient than any fryer today that's in the market. It will also have a filtering system that allows the oil to extend its shelf life, which is an issue with the trans-fat oil versus trans-fat-free oil. The trans-fat oil tends to last longer, as it goes from heat to cold, cold to heat. And the problem is, with the trans-fat-free oil, it tends to break down a little bit longer.

And so this fryer, which will be introduced and will be highly patented -- it will basically -- the results have been fantastic for us so far. And it will allow to extend the shelf life. And we believe the payback of that fryer is less than 16 months -- huge payback. It keeps the taste the same. It does not affect the taste. It gives better [energy] efficiency. And it will basically reduce the cost of the oil for our operators.

So we think that this is a huge Wow! -- it's a Wow! product for it. It will be our next disruptive technology coming out. And I'm glad to see legislation now taking -- [is] being discussed. I know it's being discussed in New York City, it's being discussed in Chicago. And I think that many of our customers are looking at going to a trans-fat-free oil. And many of them have not yet because of the cost. And the cost is not only the initial cost of the oil; it's also the fact the oil doesn't last as long. And now, you have to use [inaudible] more oil. In addition, it's a cost, because you have to spend -- [to charge] the oil, you have to get the cost of getting that oil [that's charged] also.

So our [Rocket fryer] will basically address many of those costs.

So when you're saying you're seeing good results so far, is that in discussion with existing clients; them being interesting in that margin preservation that you're speaking to?

We have not -- no, we have not shown that fryer to any of our customers yet.

Okay.

In our lab results -- remember, we have -- one of things that differentiates Middleby than anybody else on cooking -- we understand cooking; that's all of what we do. So we have a lab and a frying lab in New Hampshire that does nothing. We have a lab technician. And I was there -- just happened to be there. I spent a week at Blodgett and Pitco. And I spent a full day looking at the results of that [Rocket fryer] with our lab technician. It's unbelievable. It's not hard to see. It's very unique to see it in the prototype, and how it works. It's very, very unique. It has patent-pending, as we speak. And we've been working on it for many, many -- for many years.

This is the -- we originally wanted to speed up the cooking process. And then we ended up -- the way we ended up with the Wow! Oven -- we found out that it extends the life of oil. And through the way it filters, the way it recycles that oil into the filter, and [then] how the hot zone and the cold zone works -- very unique fryer. And I saw it.

So it's [only] in our lab at this moment, [Allison]. We haven't shown it to any of our customers yet, [until] we start going out and test sometime in the second quarter of '07.

Okay.

And do you know if there are any competitors who are hoping to also capitalize on this emerging trend?

Well, I don't know of any at this moment. If they are, it's a huge market, believe me. It's a huge market. Because everybody is now -- the consumer is demanding a trans-fat-free oil. In fact, interesting enough, everywhere I go, people know that I am a fryer [inaudible]. What about this trans-fat-free oil? It's -- everybody's asking about it. Everybody -- it's in the news. It's not something that people can get away -- and believe me, the demand will be huge.

So the two major manufacturers of fryers -- us and another company -- we'll be busy, believe me. This is going to be a busy replacement cycle. Because the legislation is helping us, the consumers are demanding it.

You know what? Restaurant chains are turning -- staring to turn green. They cannot forget about that. [Because] all of their competitors, like Wendy's, [took the bite]. They went on trans-fat-free oil, okay, in all their restaurants. Now, they don't have those fryers, but it's costing them a lot more money to do it. So they would love to have a fryer that can reduce their costs. But they've already gone ahead and taken the jump and said, You know what? We're going to take the jump. We're going to become responsive to the legislation and to our consumers, and took it.

But it'll be nice when we introduce that fryer. I bet you they will be interested in looking at it, because it will cut their costs significantly.

It seems like a phenomenal opportunity.

It is a great opportunity --

So thank you very much, Selim.

Thank you, [Allison] --

All right, [good].

-- very much.

[Operator Instructions]

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

Well, thank you, everybody, for joining us on today's Conference Call. And we look forward to speaking with you at the next quarter.

Thank you very much. Bye-bye.

This concludes today's Conference Call. You may now disconnect.