Middleby Corp (MIDD) 2006 Q4 法說會逐字稿

Good morning, my name is Jenna and I will be your conference operator today. At this time I would like to welcome everyone to the Middleby Corporation fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS) Thank you. Mr. FitzGerald, you may begin your conference.

Thank you, Jenna. 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 2006 fourth-quarter results and then we will open the conference call for questions and answers.

We were very pleased with the results for the fourth quarter which represented our 20th 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 31, 2006.

Net sales in the fourth quarter increased 27.8% to $98.3 million as compared to $76.9 million in the fourth quarter of 2005. Sales from the recent Alkar and Houno acquisitions amounted to $14.3 million and accounted for 14.5% of the sales growth for the quarter.

Sales at Alkar which can be lumpy from quarter to quarter slowed from a particularly strong third quarter and are expected to continue at a lower rate in the first half of 2007 due in part to productline rationalization as we have focused on the sale of higher margin products. Excluding the impact of the acquisitions, sales grew organically during the quarter by 13.3%. 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 at our Blodgett division increased 17% reflecting strong convection and combi oven sales. Sales at our Southbend division increased by 16% as we continued to realize growth in the Platinum Range line. Net sales at Pitco increased 9% during the quarter reflecting continued success of the high-efficiency Solstice fryer platform including the Solstice Supreme series was recently won the National Restaurant Association Kitchen Innovation award.

Sales at our Middleby Marshall Oven division increased 11% with increased sales of our new high-speed and energy savings WOW! Oven which was introduced in the second quarter of 2006. Sales at our Nu-Vu Toastmaster division were flat as a result of lower store openings from a major restaurant chain customer. And at Middleby Worldwide, our international sales and distribution division, sales increased 10% from the prior year quarter.

Sales in Latin America and Europe increased 40% and 9% respectively with increased revenues from expanding restaurant chain customers. The increase was offset in part by a 7% decline in sales in Korea which had a particularly strong quarter in the prior year due to a major pizza chain customer opening stores in that country.

Gross profit increased from $29.5 million to $39.1 million on higher sales volumes and the gross margin rate increased from 38.4% to 39.7%. The increase in the gross margin rate reflects the impact of increased production efficiencies on higher sales volumes and an improved product mix which was favorably impacted by new product sales with higher margin.

The 2005 prior year fourth-quarter results were negatively impacted by lower margins at Alkar in December 2005 during the first month after a completion of the acquisition of that company.

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 had been implemented during the year. The division has also focused its efforts on the sale of higher margin products. Gross margin at this division was 36% in the second half of the year as compared to 24% in the first half.

Further improvements in the gross margin rate at Alkar RapidPak will be more gradual as the impact of the initial restructuring efforts have been fully realized and reflected in the second half of this year.

Our gross margins at our Houno acquisition which was completed in the third quarter were 29% and slightly detracted from the fourth quarter. We anticipate margin improvement at this division late in the second half of 2007 as we introduce a new line-up of visual cooking combi ovens.

Selling expenses increased $1.4 million to $9.5 million reflecting increased expenses associated with the newly acquired Alkar and Houno operations which accounted for most of the increase. Sales commission expenses also increased due to higher sales volumes.

General and administrative expenses increased $1.1 million to $9.1 million also reflecting the incremental costs associated with the acquired Alkar and Houno business operations. And these costs included intangible amortization which increased 250,000 from the prior year quarter.

Beginning in the first quarter of 2006, the company also began to expense stock options in accordance with Statement of Financial Accounting Standard 123(R). As a result of this adoption, the company recorded pretax expense of $238,000 in the fourth quarter of 2006 associated with stock options. On an after-tax basis, the impact of the stock option expensing reduced net earnings in the fourth quarter by $168,000 or $0.02 per share. No such expense was recorded in the prior year period.

Interest and deferred financing costs in the fourth quarter increased slightly from $1.4 million to $1.5 million reflecting the impact of higher interest rates which have risen approximately 2% from one year ago, more than offsetting the benefit of the lower debt balances.

The 2006 fourth-quarter tax provision amounted to $7.8 million at a 41% effective rate as compared to a provision of $4.7 million at a 39% effective rate in the prior year quarter. The fourth-quarter provision of this year reflects increased reserves for state tax exposures associated with state tax audits and potential audits.

Net earnings for the 2006 fourth quarter increased 53% to $11.1 million or $1.34 per diluted share as compared to net earnings of $7.2 million or $0.88 per share in the prior year fourth quarter.

Now turning to the balance sheet and fourth-quarter cash flows, net working capital increased during the year due to increased working capital requirements on higher sales volumes and working capital acquired as part of the Houno acquisition. Accordingly, accounts receivable increased $13 million to the $51.6 million on higher sales volumes. This balance also included $1.7 million of receivables associated with Houno.

Inventories increased $6.3 million to $47.3 million of which $2.7 million related to the Houno acquisition. Accrued expenses increased $8.2 million to $70.9 million due to increased reserves for operating liabilities including customer rebates, insurance and incentive compensation accruals which have increased in conjunction with the higher sales volumes and increased earnings. The increase in accrued liability also reflects $1 million associated with the Houno acquisition.

Cash flows provided by operating activities amounted to approximately $16.4 million for the fourth quarter and $49.9 million for the 2006 full year. Operating cash flows were utilized to fund capital expenditures and reduce debt. During the quarter capital expenditures amounted to approximately $1 million and for the full-year were $2.3 million and were associated with replacement and upgrade of manufacturing equipment and facilities improvements.

Total debt was reduced during the quarter by $14.4 million to $82.8 million as compared to $97.2 million at the end of the 2006 third quarter and $121.6 million at the end of 2005. The net reduction in debt for the year is inclusive of 8.6 million funded for the Houno acquisition.

We are also very pleased to have recently announced the acquisition of Jade Products from Maytag. This acquisition is due to close on April 2 and will be reflected in our 2007 second-quarter results. Jade is a leading brand in the commercial cooking industry and further strengthens Middleby's position in ranges and ovens. And Jade also provides Middleby with an entry into the residential market.

Jade has revenues of approximately $20 million of which approximately 15% is sold into the residential mortgage. Over the past several years Jade has incurred operating losses in excess of $3 million per annum. Post acquisition we will initiate efforts to improve the profitability of this business although we expect this acquisition will detract from our earnings for the first several quarters until this business unit has been fully integrated.

We were also pleased to announce that several of our new products were recently recognized by the National Restaurant Association with a kitchen innovation award. These products include the Blodgett hydrovection oven, the Pitco Solstice Supreme Gas Fryer and the Pitco Solstice Rethermalizer. And these products are all anticipated to be introduced during the course of 2007.

Jenna, that is all for prepared commentary. Could you please now open the call to questions?

(OPERATOR INSTRUCTIONS) Peter Lisnic.

Good morning Tim. Good morning Selim. Tim, I'm wondering if you can maybe talk about your operating margin improvement. If we look at the -- just looked at the whole year of 2006, you showed very strong sequential improvement. If you exit 2006 at somewhere at 20.5% or 21% operating margin, what is your outlook for the business in terms of profitability in '07 and '08, particularly as you get the sweet spot of the WOW! Oven into the mix there and as some of the new products come on board? Do you see the business as being mid 20s operating margin potentially or how do we think about that?

I think we've stated that we have targeted getting to mid 20s in the long term. I don't think we anticipate that in '07 although we expect to continue to have improvement in operating margins as we move through 2007. There will be some negative impact from the Jade acquisition initially most likely in the second and third quarters which would temper some of the improvement that we might have otherwise.

Okay, fair enough. And then as long as we're talking about Jade, the residential piece that you get there. We haven't frequently heard you talk about residential as being really a market that you'd like to address. Is this a change in strategy or Selim, is this -- is residential the next market that you are going to try to penetrate and try to gain some share there? Or how do we think about residential in terms of your growth profile going forward?

A great question. I've always felt that there were a lot of synergies between what I call the stainless-steel residential not the white good appliances, but the stainless-steel residential it looks like ours. It has all the characteristics of stainless-steel. It has all those heavier burners. It definitely doesn't perform like a commercial if you look at my (indiscernible) range in my business in my house it does not -- has none of the power of a Southbend range that we produce.

So we always felt that as the customers looking more and more to have their kitchen look more commercial that it was a natural extension for us. The other thing is we feel that that market is a large market. It is most probably -- we perceive it to be almost $1 billion market by itself with very high margin.

And we always felt that we will be one of the first commercial, true commercial cooking equipment manufacturer to enter the residential and differentiate ourselves from all the other players in that market who are really residential player only. Whether it is a Wolf, or a Viking or a Decor, we will be a true commercial coming into that where we can put feature like our non-clog burner where we have a unique oven configuration that we can provide -- those are patented technologies that we can provide to Jade.

So we would like to enter into that business. We feel it is a very end top market. And just to give you an anecdotal, I just have back from Lebanon from Beirut, my sister in the process of selling her flat in Beirut so she had to a hire a broker. And the first thing the broker said, you need to update your kitchen. She's thinking of tiles and ceramics. She said no all you have to do is move your (indiscernible) like a very white good of all type of appliances -- go-ahead and put in a stainless-steel appliance and that is what even in Beirut that is what that residential buyers are looking for even in Beirut, Lebanon.

We see that trend to be not only a U.S. trend. It is a global trend. It has nothing to do with housing market, it has to do with updating the kitchen, remodeling. And truly in most cases that piece of equipment in my opinion -- you look at my house we don't use it often to justify the cost of that piece. It looks like a furniture piece in our kitchen. And I see that market to be totally untapped and want to go after it very aggressively.

But are you concerned that that is a market that is going to drive your margins or returns lower because anything residential typically I would think would be a lower margin. In other words is a consumer really going to pay premium dollar for non-clog burners or some of the other selling points of your commercial equipment when you are buying a base oven or appliance that is already significantly higher than your typical white good to begin with?

Peter, I would have to say that looking at the pricing in those ovens and the way we can build those ovens ourselves, we feel that there is significant margin in that segment, significant margin given the price (multiple speakers).

What you're getting now out of the commercial business or is it higher, lower? (multiple speakers)

I think we can drive as strong of margin in that business. Remember we are not trying to take away the Viking and the Wolf. We are not trying to be a $200 million business. We've always believed that we want to grow that business to be a 20 to $50 million business residential at the high end. We are not trying to sell everything to everybody.

There is another residential manufacturer who has come in and imported a piece from Europe and they are selling them as high as $14,000 and they have created a niche in that market. We're not suggesting we are going to be a $14,000 piece of equipment but you've got to be high-end. We're going to be for this discriminate buyer who is looking to be truly looking at a unique piece at a beautiful piece of residential which allows them to boil water a lot faster than anybody else, to have burners that are unique, that is what you are looking at.

We are not trying to be the biggest in the high-end residential. We are trying to carve a niche for us that is in the sweet spot of 20, 30 to $50 million at a very high margin the way we did it in the commercial. Remember I'm going to state to everybody listening on that message that when we entered that business and we decided to focus on the hot side, the margin of the hot side in our commercial was never to be the margin that we have had. We took a stodgy industry, a stodgy business that was in the low teens in margin and we took it you now being in the 20% plus.

So I think what we've done in the commercial equipment, we were the trendsetter in leading with prices with innovation, would like to do the same thing in the high-end residential.

Do you think you have a brand-name to actually do that, because that would be one of the differences. I mean you have brands in the commercial side of the business but --

Let's address that. I think we should address that. I think we don't have definitely a bad brand name. Jade is well recognized. I think they have had some type of a misstep between the change of ownership from Maytag to Whirlpool and all that. And ultimately they decided to sell. This was not part of their core business and they said, hey, we're going to sell it.

I think they have suffered a little bit from the transition of ownership. They suffered a little bit from the fact that it had been up for sale for a little while. What you are doing and I think that is part of maybe talking about, we are going to invest this year. We've decided to go to the KB show which is the kitchen and bath international show in Las Vegas which we're going to invest in that show.

It's new for us. We're taking a very nice side booth. We're going to make a nice splash there. We're going to be working on introducing some new prototype and we're going to be investing in the residential market. So this acquisition will be a dilutive for us this year because we would like to take advantage of growing that residential business moving forward.

Okay. All right, I will jump back in queue. Thank you for your time.

(OPERATOR INSTRUCTIONS). James Clement.

Good morning, gentlemen. A little bit of a follow-up question there. How are Jade's residential products typically sold and distributed? And then I've got a follow-up question after that.

They are sold through distributors and dealers, high-end kitchen and bath dealers. And they use distributors. And we are committed to that distribution channel at this moment.

Okay. And just a follow-up question. Tim, can't you just refresh our memory a little bit on the seasonality of the business from a 4Q to a 1Q? Last year obviously you had an acquisition thrown in there so your margins were down reasonably significantly sequentially. Should the fourth quarter and the first quarter -- I mean shouldn't they be kind of comparable looking? How should we look at it?

I would expect some -- we expect some continued growth organically in the base level of business. We acquired Houno, so we're going to have a little bit of an add-on for Houno. And then with Alkar, which first quarter of '06 would have been the first complete quarter of that acquisition, as I mentioned, we expect that the sales in that division will likely be at a lower level because we rationalized some of the product.

But presumably at a higher margin than it was in the first quarter last year?

Yes, absolutely.

Okay, and just a follow-up there. I think that earlier on in 2006 you talked about -- I think you sort of laid out the goals for Alkar with regard to timing and that sort of stuff. And I think that you alluded that you'd expect the end of the year from a margin perspective there to be a lot stronger than at the beginning of the year. Did you see a boost in terms of profitability or margin at Alkar from Q3 to Q4? Or was Q4 consistent with Q3?

We took a big step up in Q3 so the first half of the year was improved from when we had -- prior to when we owned the business but there was a big step up in Q3 and Q4. There was some incremental improvements in Q4 but we had realized a significant portion of all the cost reductions and integration initiatives in Q3 period. So Q4 really was a slight improvement and that really was more productline focused on increasing the margins in the products that we are selling.

Okay, I was just trying to get a sense of how much of your sequential margin improvement was as a result of manufacturing and cost control initiatives of what you had acquired versus in your existing core business. Thank you very much. I will get back in the queue.

Tony Brenner.

I have two questions. One is, what Middleby products aside from the Jade line do you think are most suitable to be adapted for the residential market?

On the Jade line, let's go back to Jade line, Tony. On the Jade line, we're going to be introducing a brand-new lineup of ranges and we're going to be introducing some wall ovens later on this year. It will be a unique with specific controls, specific unique ergonomics. We also have the ability to enter the outdoor through MagicKitch'n, the MagicKitch'n division produced some very high-end catering, outdoor catering units that are used at the Ritz-Carlton. They are used at most of the hotels and we're expecting that to be a synergistic move between MagicKitch'n and Jade on the residential site.

Because MagicKitch'n -- we've been -- since we own MagicKitch'n, it was a Blodgett acquisition in 2001, I've had so many people ask me -- can I buy MagicKitch'n? And we did not have the channel or the distributor or the dealers interested in that. And what we are going to do is take the MagicKitch'n lineup and pass it along to the Jade distributor and dealers.

Is it a grill, Selim?

It's a grill. I can tell you the unit is fabulous. If you have been at any of the high-end hotel, if you have been at any of the catering events, MagicKitch'n dominates that market. It is char broil. It is an additional char broiler. They have a steamer with it which act as a steamer right next to it. It is a combination char broiler, steamer which is a beautiful combination.

It is beautiful unit. It comes up with a lot of fancy ways of catering the food. It is a beautiful unit. Because many of those caterers are attending weddings or outdoor where customers see it. So already MagicKitch'n has done a lot of work on reconfiguring that outdoor to meet the Ritz-Carlton or a Ritz-Carlton outside is charging -- they are not charging $2 for their burger outside to deliver a burger around a pool or around the ski slope. So we had to meet the looks and the fit of what a high-end hotel will demand and that fits very nicely in the high-end homes.

Second, for the past several quarters Middleby existing productline excluding the impact of acquisitions, has presented a 10% or less rate. And I know you have warned that it's probably going to remain at a high single digit rate. But now the pipeline of new products is beginning to have a significant impact. This quarter your existing productline sales increased more than 13%. With that pipeline continuing to burp out new products, isn't it reasonable to look for a sustained double-digit internal growth rate?

I can answer that, Tony, very nicely. One, this company has never been driving top-line, we've never drove top-line. We've always been chasing higher margin. We have never chased this incremental business to drive -- that will affect our margin. We've been more a margin driven company and we have been very careful to not be affected. In fact this morning prior to the conference call, I sat with some of regional people and we have an opportunity for example to introduce a WOW! Oven to a segment. But it is a lower margin for us and that segment will ultimately buy the WOW! Oven.

Do we sell them today the WOW! Oven at the lower margin or do we wait until they come around? And we made a decision this morning prior to the conference call to wait around. I think that the WOW! Oven is unique. It is highly patented and we don't need to chase that incremental business to remain -- we're not a company driven by top-line growth.

So my feeling would be is we will not drive incremental business at the expense of margin. So I will tell you that I am not committed to a double-digit growth but I'm committed to over the next two to three years to continue a 20% to 25% earnings per share growth.

I don't know if I have answered that question nicely. You triggered another question for me. Let's talk about the WOW! Oven. For example, we did last year we signed this agreement with Papa John's and the WOW! Oven. Then we just recently got a second large pizza chain that just signed on the WOW! Oven. So they just basically committed.

We didn't go around and started saying well we just got Papa John's and there were a lot of pressure by investors and shareholders to say well when are you going to sign the pizza chain. We said no, we're going to take our time. Want to make sure that we design what is right for our customers. We didn't want to go around and say well we just got Papa John's, why don't you sign on board, why don't you do that. We wanted to make sure that the customer tests the product, are certain that it is right thing for them and then to get some time.

That second pizza chain we had to tweak that WOW! Oven for them to design something more important for them. Similar to the way we did it with Papa John. I want to make sure that people understand that we're not going to take a product and roll it out at the expense the way some of our competitors do. I could refer to another company that seems to roll out product at the expense of margin. I don't want to do that.

Fair enough, thank you.

Jason Rogers.

It's actually a Greg Halter for Jason Rogers at Great Lakes review. Feeling fine. I hope you guys are as well and congratulations on the very fine results. Wondered if you could provide some color on what you are doing regarding the supply chain initiatives that you've talked about several times if there has been any meaningful progress made there at this point?

Well, there is ongoing initiatives with supply chain and I think we've got a team that has been focused on sourcing in Asia. I think we started to see some of the benefits of that in this fourth quarter and expect that would continue in 2007.

Okay. Will your stock compensation expense be similar in 2007 as it was in '06?

No, I would expect stock compensation expense will increase in 2007.

Any magnitude that you can provide?

We don't have a number at this point in time. But it would be maybe several million dollars, say $2 million to $3 million.

Higher than '06?

Yes.

Okay. I don't know if you provided it or not but do you have the figure for depreciation and amortization for 2006?

Amortization for 2006 was -- just bear with me for a minute -- is $325,000 in the fourth quarter which was amortization for intangibles associated with Houno and Alkar and it was $1.2 million for the entire year. And depreciation for the fourth quarter was $819,000 and for the entire year was $3.4 million.

Okay, great. Can you provide your expectations for capital spending for 2007?

We would expect it to be in the $3.5 million type range.

Okay.

Between 3 and 4.

Last question is what kind of impact did foreign exchange have on the sales for the quarter and the year?

We sell -- primarily the impact would have been in Europe there would have been some benefit of the lower exchange rates that would have made our products a little bit more competitive in the European market.

Okay, so it was not significant?

No.

All right, thank you very much.

(OPERATOR INSTRUCTIONS) Peter Lisnic.

Okay, Tim, I get to put you on the box now. You talked about the incentive comp of 2 to $3 million, right, and Jade is going to be dilutive. First question I guess would be how dilutive may it be if and when it closes? And then the second question is, with those two headwinds and then Selim mentioning the 20% to 25% earnings growth targets that you've set for yourselves, does that become difficult to do in '07?

We expect we're going to have continued margin improvement at Alkar. So even despite maybe having a lower top-line we've had significant profit improvement and we expect that to continue into '07.

The commercial foodservice business, we continue to expect it to grow that both in the top-line and the bottom line. Those things are going to be positive factors offsetting Jade and we're not prepared to announce what the impact of Jade is yet. At this point we don't own that business. We will be closing on it obviously we will have a better handle on this as we move into the second quarter of how quickly we can integrate that business and turn the losses into profits.

Okay, --

And Selim, he is referring to -- those are not quarter-to-quarter targets, they are longer-term targets and we think are achievable and so Jade may hurt in the short run but in the long-term we believe that we are going to be very successful with that business.

All right, that is fine. Last question I guess, in terms of Papa John's, you announced that now there is a second chain that is interested in WOW!. But in terms of Papa John's, can you give us a sense as to where you are in terms of filling out the company-owned stores right now and whether or not there has been any adoption by the franchisees yet?

I can address that. Yes, we have been fulfilling the corporate store and we've had franchisees buying the WOW! Oven. In fact, last week they had what they call [UPCON], which is their franchise convention meeting and the WOW! Oven was extremely well-received. It was displayed more than one place. It was displayed by Papa John's themselves and it was displayed by us. And it was the topic of the franchisees.

We are moving now to start fulfilling the franchisees and I was in San Diego myself and met with one franchisee who just bought the first WOW! Oven and has been very pleased with it. He is thinking of (indiscernible) more of those WOW! Oven. He feels that that is what can help him his lunch business. So that is what driving the WOW! Oven because of the speed for the lunch business plus of course the energy. So, yes, it is going to be looking good.

As I mentioned also we just got the second large pizza chain that just approved the oven. And we are very thrilled about that ands we are working closely with them to adapt that oven to their needs which is a different need than what Papa John wanted. So the configuration of that oven is differently configured. The software, while the hardware is the same, the software is different for that second chain.

Okay but in terms a Papa John's if you look at their 500 company stores, are those done?

No, they are not all done.

So there is some of that in '07, you've got the franchisees. And then when does this new agreement with the other large pizza chain, when does that start to impact (multiple speakers)?

It just happened. It should start rolling out I would assume some time in the second quarter.

In the second quarter.

The Papa John's order was unusual in the fact that we usually don't have a single order that covers all the systemwide restaurants. Usually an oven is approved and then there's -- and it rolls out over time. That was a specific commitment. It just gets introduced in the system and then we actively sell into that market to try to trade out the ovens and so forth.

Yes, I think the way I was understanding it was it could be like a two to three year kind of rolling timeframe on rolling out Papa John's for example and I would assume it would be the same case for this new contract?

That is correct.

It will start slow and then pick up as people get to know the oven, get to play with the oven and kick the tires of the oven. As I mentioned, I've always made a statement that every time we've rolled out a product or made an agreement with someone it usually takes eight to 12 months to see that agreement in full force. So I need you to take into account that whatever is approved today, you're looking at eight to 12 months from it to get it full force.

All right, okay. And then the big question always comes up on these calls I guess is you've done well. You've got the fryers, the rocket fryers, then talked about and introduced and all that. But kind of what is next? Because I think there is some concern that if you look out maybe not two years but after that the growth rate potentially slows. What is in the hopper in terms of new products and how does that relate to current eating or cooking or dining trends and kind of how you see the industry evolving, Selim?

Could I get back to the speak? Is there somebody else because I prepared some comments to that question and that I would like to give you a flavor on this. So instead of taking it right now, if somebody has any technical question I would like to deal with that. I think that is a good question. I think similar to the way Tony, Jamie, Greg and you Pete, have asked the questions, I would like to make sure that I emphasize. This is the part of why you invest in Middleby.

It is a great question. If you are investing for the short-term, I think that this is not the investor we want. We want the investor to stay with us for a longer term. And I want to address that question because we have had a great run and when I talk you about what happened on that run and what we see in the next three to five years. I want to know if -- I want to go back and see if there is anybody who wants technical before I get into answering that question specifically.

I don't have a problem with that. Thanks very much.

Mark Grzymski.

First off you should be commended on this spectacular 2006. And all the best in the coming year. Before you get to that big question that Pete asked, maybe if you could just update us on the international markets and how things are going in broadening your exposure from both a product standpoint and from a distribution standpoint internationally?

I can address that. International market continues to be a big commitment from us to it. I think what we've seen one, we're seeing a significant growth internationally. We see change exploding in the Asian realm. You are seeing significant growth across the emerging markets.

I just came back -- in '06 I visited almost all our markets. I visited Europe, I visited Asia, China and I just came back from the Dubai show. Our booth was jammed. We were packed. And because we've introduced a lot of very unique technology that caters to local tastes, we introduced the tandoori, the shish kebab oven. A few years back we introduced the rice steamer in China, we are in the process of introducing some specific like a (indiscernible) warmer for the Asian markets. And we've done a great job taking our company and catering to the local demand.

In addition, we are seeing significant growth in the U.S. chains going overseas. Also, we are seeing regional chains like a chain like (indiscernible) which is opening up businesses in China. And in Spain, they are opening up 50 stores in Spain which is a customer of ours from Central America going into specific markets.

When I look at chains in India like the Pizza Corner continues to grow which is a big customer of ours in India which are a regional chain. When I look at Telapizza growing, when I look at (indiscernible) coming from Philippine opening up in Asia, Malaysia, Indonesia and China. And we are all positioned well. We have our 17 offices that are servicing and selling those customers. We have our test kitchen that are catering to those people.

I think what we have now done in the past in our international, and I have to say we've built an infrastructure but we have not taken a leadership of that international and made it prudent for that market. So in the first quarter we have been looking for somebody to lead our international. We embarked on a big search and it was not easy to look at that individual who could come in, take all our offices and travel 90% of the time. Because prior to that Sam Sidani was President of International also doing -- gearing up our China plant and our Philippine plant and have been gearing up our supply chain initiative.

So he was almost split in his time. So finally we are able to land Lyall Newby, who was the director of global supply chain for Yum and prior to that was with Boston Markets and McDonald's driving their international initiative. And he just joined us. He just started this week. This will be his first week. And we feel that he is going to be spending 60% to 80% of this time traveling. He's going to help drive our initiative internationally full-time and we are very excited about that.

So there was a little bit of what I call a disconnect because by the time we moved Sam from International to lead our supply chain initiative, which I mentioned to everyone was a big initiative for us for '07, we lost and little bit of momentum. And so we waited to get somebody to lead our international division. We are very excited. So finally we are going to see -- I spent some time this week with Lyall putting together and how we are going to grow the next two years.

The dollar being low is helping us. The U.S. chains going internationally is going to be a big growth for us. Regional chain where we are very well-positioned is helping us. Our infrastructure is going to be great for us, and engineering product for the local market. And finally, the other thing that has been new for us is the acquisition of Houno. So the acquisition of Houno allows us now to tap a global market of $400 million of combi oven, which is mostly overseas. And that acquisition, which is one of the highest end combi-oven manufacturer is going to allow us to grab that market.

The other thing that we haven't done as well is take Nu-Vu, take Nu-Vu and go after Subway internationally. Now with Lyall being in place with the (indiscernible) CE product which is a type of a UL approval for the international market, we're going to take our Nu-Vu product and take it internationally. So I am excited about the international markets.

I guess with the hiring of Lyall, I would just assume then that your appetite and ability to do an acquisition in Europe has now just gone up.

I would say yes. If it's not in Europe, I would not know about Europe. But one of the reasons he joined us, leaving a big position at Yum to join us, is specifically to grow the business. He didn't come in -- this is a heavy hitter. This is not somebody who just came in from another supplier, another competitor. He just left a big operator where he was having a very growing career to join us, not to keep the company stodgy. I expect it to be similar to all our domestic people to grow our business internationally very fast. Yes, and the acquisition will be definitely some of the things that we're going to be looking at.

Okay. Great, thanks, guys.

James Clement.

I was actually going to ask about the acquisition environment, but you just touched on that and I suspect you might be able to comment on that with the prepared remarks that you have. So I will stop --.

No, no, I will answer that because the acquisition is definitely something on everybody's mind. It is a big part of our D&A. However, we've been highly disciplined. We learned a lot from our attempt to buy Enodis last year. You've learned how disciplined we've been. We put an offer. Everybody was concerned that we were going to go into a bidding war, and we did not get into a bidding war. There have been some other acquisitions that has come into the foodservice business that we haven't gone after.

Our position is simple, we want to buy companies that are going to be accretive to us, our number one, number two brands at a fair price. We're not trying to steal those companies, but we're not trying to be the highest bidder by any means. We want to make sure that we buy fairly, that the synergies are there. We are willing to give powerful synergies to the seller, but not all of them. That is very important to us.

I think when I look at our buying pattern, Jade most probably will distract from that buying pattern. It has the number one brand. It might not be -- it will be most probably one of the first that's not going to be accretive right away. But I would say the reason is it allows us to go into a new put platform, which is the residential business. I will believe by '08, it will be highly accretive for us. It might have some dilution in '07, but that will be unusual. Because we were willing to take that chance to get into a new platform.

Now we have three platforms. We have the commercial food equipment platform, we have the food processing platform with Alkar and RapidPak, and we have the residential platform with Jade. And we believe all those platforms on a trend basis are phenomenal. You look at the food processing, I can challenge every one of you to tell me if your freezer is empty. Look at your freezers at home. I bet you every one of you, your freezer is full.

So processed food is not going away. Packaging of food isn't going away. I look at the residential and I look at that market, and I told you it has nothing to do with housing market; it has to do with remodeling. And I think the residential, high-end residential market isn't going away. I look at the commercial business, I don't think it is going away. People are eating out more and more, and not only in this country, all over the world.

So I think we're at a position in great trends, and I feel good about that. We're going to selectively make acquisition in either one of those segments.

Okay, thanks very much.

[Jeff Tibble]

Good numbers. I don't want to get in the way of what I am sure will be a pretty interesting conversation, but I did want to ask just briefly about the Alkar commercial division, and maybe just if you have comments on the new product that are going on there and then maybe customer response; maybe just what you are seeing over the last couple of quarters as you go in the business.

Let's talk about Alkar, our new product. We introduced the Cyclone oven, which is an automated smoke oven, which has application not only in the meat processing but also in the chicken and the snack food. And that oven has gone out. We just got the first two orders. We just introduced in the first quarter the flash pasteurization product. The flash pasteurization is a innovative patented technology that allows us to inject some type of sterilization inside a package food. So I'm going to explain that in layman's term. If you take a hotdog or a ham or a bacon package, today what people do, they put in some type of liquid in it, either salt or brine or whatever it is to keep bacteria away.

This flash pasteurization which is patented for Alkar will change that process. It will inject steam inside that package, and the result is not only the cost per package will go a lot less, but it will extend the shelf life by 20% to 25% longer. So just to give you a perspective, to add any type of enzymes, brine or liquid inside a ham package could cost as much as $0.03 to $0.05. In the flash pasteurization, the cost of injecting steam is between $0.01 to $0.02. So you have a huge cost per package that goes down.

So the payback for flash pasteurization is less than a year. So we will see this technology becoming extremely relevant to many of our customers, whether it is in the meat processing or even in the chicken processing to get that flash pasteurization. So those are two technologies that occurred in the fourth quarter and the first quarter of this year.

Alkar has also a couple (indiscernible) technology coming up in '07 that will be very interesting. We are looking at food safety within that segment. In addition to injecting energy-saving, which we are working very hard to inject our energy-saving devices that we have taken from Middleby to Alkar, we are also looking at food safety. If you see what happened recently to one of the large food processing companies, they were affected by salmonella. And one thing we are doing is we are adapting some of our equipment and technology to go after food safety in that segment.

Did I lose you or are you still on the line?

Great, thank you. It that is helpful.

There are no further questions, sir.

So at this moment, let me go into what I think looks at the trends that answers Pete's question and many of your questions. Those are my prepared notes. I just prepared them prior to this conference just to make sure that people understand the trends and where we are going. Because you have been with us -- some of you have been with us for a long time; some of you have just joined us. I wanted to give you a flavor of what makes this management unique, what makes this industry unique.

The fundamental demand for foodservice will advance at a steady pace, as restaurants provide the convenient, reasonably-priced (indiscernible) that offers flavors and taste most consumers can't get at home.

Let's look at the key drivers for the industry growth that are in place for IV 2007. One, we believe there are two drivers that make people go out more and more to restaurants; one is rising disposable income. It is an important indicator of restaurant industry growth, and it is expected to increase at 3.3% inflation-adjusted rate, up from 2006. Simply put, what is going to happen is the users will have more cash on hand to spend as rising disposable income goes up.

Number two, jobs, that is very important. People have no job, they got to not go out and eat, simple. They are going to try to skimp on eating out budget. We believe that U.S. economy is projected to add jobs at a rate of 1% to 2% in 2007. A stronger population than in the past two years, the job population growth in the past two years. I'm sure all of you had a chance to look at today's labor report, and this was validated today at the labor report. So those two tends and two drivers will affect our restaurant business and the amount of food consumed. In addition to the overall growth trend, those are definitely better trends than they were in 2004, 2005 and 2006.

Let's look at most probably the challenges that we've had in the past three years, and I'm going to specifically address also '06. So for some of you who looked at the performance of Middleby and you look at it and say, I missed that; I missed the stock surge or I missed the opportunities, I'm going to give you some challenges that we've had.

In 2003, we were still coming out of a recession. We had just bought Blodgett in end of '01. We're integrating the Blodgett while still in a recession. Then in the UK, our largest market we had in Europe got hit by mad cow disease. Then shortly after, we got hit by SAR and bird flu in Asia, our largest emerging market.

Then we got hit by the carbs, and as you know, we are the biggest purveyor of pizza oven, so pizza business. And the carbs, I'm talking about the Adkins Diet, the South Beach, the Zone, and you name it, there were most probably 20 other diets based on elimination of carbs that affected our business. Remember we are selling pizza, we are selling a breaded product, oven for breaded product customers, and that affected us.

And then we had stainless-steel price increases that hit us significantly in '05, '06. And then in the summer of '06, we had a run-up in gasoline prices that took a bite out of consumer disposable income. And then we had wholesale food costs that hit our consumers in the period of 2000 -- late 2002 to 2006, and we will talk about that. So when you look at all these things and you look at how Middleby has performed, it hasn't been a road without any clouds. It hasn't been flying with no clouds. We've had some clouds, we've had some thunders, we've had some storms, and we've managed very well navigating that company.

Are we going to have more challenges in '07, 08, 09? I think yes. I have to tell you, I don't know what they are going to be, but we are going to manage them. But I'm going to tell you what is going to happen. I'm going to tell you one right now. In the first quarter of '07, the tough and rough winter this quarter across the Northeast, Midwest and Rockies affected some of our customer business. There is no doubt that we've had a rougher winter than we've had in the past two years.

So it did affect our business. Are we going to manage this quarter? You bet, we will manage the quarter. But when I look at what is going to happen, I think falling oil prices will bring relief to the restaurant business. Now, still it is going to be bringing relief because some of our customers or the users, not the customers but the user to our customer, will have more cash on hand.

But according to the National Restaurant Association study that just came out, still over 65% of all restaurant operators say that utility costs are having a negative impact on their business. So we're going to address that. We are well-positioned to address that, but I will get back to this.

The other good negative -- the good positive in addition to the fact that oil prices are going to give more cash on hand to the users, the fact that wholesale food costs according to the U.S. Department of Agriculture is projected to rise only 0.3%, which is a big relief for our restaurant operators after the 13% increase in food prices between '02 to '06. So if you look at wholesale food cost, it's going to be most probably the lowest increase in food cost that our operators are going to (indiscernible). They are going to have more money to spend on other equipment, on updating others. So that is a nice trend.

Okay, to summarize the macroeconomic restaurant business environment in 2007, the National Restaurant Association in their recent survey say that around 60% of all restaurant operators think that business will be better in 2007 than in 2006. Okay, that came from macroeconomic. It's easy to check out this. You can go back and check them out through the National Restaurant Association surveys, through the Department of Agriculture.

Let's focus on equipment now. What does it mean specifically to Middleby? Three out of ten restaurants or 30% of all restaurant operators will update their back-of-the-house or their kitchen with more energy-efficient and faster-cooking equipment according to the National Restaurant Association study. To be more specific, 4 in 10 QSR, quick serve restaurant operators, say that their number one challenge for 2007 will be recruiting and retaining employees, along with the cost of labor. Not only recruiting and retaining, the cost of labor is going up.

So over 50% of them will be remodeling their units with more automated equipment which requires less labor and less training. So again, over 50% of the QSR will be remodeling their units with more automated equipment which require less labor and less training in 2007 and 2008.

Let's look at specifically another trend. According to the National Restaurant Association survey, 28% of restaurants are now owned by women and women chefs, which is one of the largest ownership of all restaurants overall. We have been designing our equipment to be ergonomically designed for them. We have been a driver. We have been not talking about this at all. We have had a Women's Chef Council, we've been for the last three or four years talking to women chefs. And I've been mentioning that and I made that in certain articles that were published. I said what differentiates a woman chef from a male Chef is simple; male chef wants more BTUs, they want their Chevy to have a lot more horsepower. The woman chef wants to design equipment to be easier for them and their staff, to have slide-in racks in our oven, to have lower heights in our equipment, to have equipment that is more friendly, user-friendly. So we have been, as this trend has continued to move, Middleby is well-positioned into that.

In addition, the next trend that we see is what I call building the breakfast business. Many Alkar customers are looking at building the breakfast business. And we are being very positioned to help building that business with them.

Number three trend, according to Technomic, they did a survey. They have a report that came out that say that seafood business or the seafood chain concept is thriving all over the country with 20% spike in revenues, and they expect that business to continue growing the same rate in 2007, 2008. We are one of the largest players in this segment. From Red Lobster to Phillips Seafood Restaurant, to Wild Fish Seafood, to Quarterdeck Seafood, and I can name any, Middleby has been a big player in supplying that segment. And we see more and more places opening up with seafood concept, and we are going to be there to serve them.

Number four, the cobranding, when you look at our experience with Pizza Hut and Wing Street, which is the merging of pizza and wings, they have -- so far have 800 units. And we've been successful with that, and they have just launched a new initiative where they are opening up 200 units by 2007. And they are changing their concept, which has been very successful for them, and we are going to be working with them.

We're going to work with others in other quick-serve restaurant which is now working with us where they are going to be spending over $60 million a year over the next five years innovating their kitchen, and offering another $25 million a year over the next five years as an incentive for their franchisees to operate their restaurants. I am not going to name that restaurant, but we are working with them to operate that kitchen and work with them on this upgrade. We are going to be seeing a lot of equipment specifically designed for that chain.

Let's talk about trans fat oil. T.G.I. Friday's, Uno's Pizzeria, Wendy's, and many, many others have moved away from trans fat oil to trans fat free oil. The Rocket Fryer is going to be a significant segment for us to play in.

On the energy-saving, I look at that and I say on the energy side, as I mentioned to you, 65% of all restaurant operators say that utility costs -- that's according to the National Restaurant Association study -- are going to be negatively impacted in their business still in 2007. So our energy-efficient equipment, whether it is WOW!, whether it's Rhapsody Oven, whether it is our Solstice platform of fryers, whether our Rocket Fryer, are all going to have energy-saving that are measurable and they will give significant payback to our equipment -- to our restaurant within no more than 18 months or less in just energy-saving.

I look at the rise of the bakery cafes, and I can name one -- I'm not going to name them, but you will know who it is. It is a large bakery cafe just that just introduced pizza, and they are working with us to introduce the pizza oven in the bakery cafe. So I look at the rise of the bakery cafe, and ability to introduce sandwiches and deli and wings is going to be very big for us.

The extension of operating hours. Many restaurants, quick-serve and casual dining and (indiscernible) are expanding their operating hours. They are adding an hour or two, and some of them are going 24/7. That will drive the replacement business significantly. Why? Because they will have no downtime to repair their equipment. Their equipment will be utilized a lot longer. It will break down -- it will have to break down a lot more. They don't have time to prepare it because they are going to be serving food, which that is what they are going to be doing. They are going to be replacing their equipment instead of repairing.

We talked about a hot breakfast meal. We all understand that; we are seeing it.

Finally, I'm going to give you two other things, think inside the bun. In addition to seafood concept, we have seen a trend through NPD. NPD did a survey with several of the quick-serve restaurants, and they have come up with a study that says that everybody is looking at no longer just salad, but looking at inside the bun, protein, and whether it's chicken, meat, turkey, whatever, is going to be on the rise in the next three or four years, which is fantastic for us.

Finally, I'm going to sign off and give you a final anecdotal, and people when I shared that with our board, I said miniature desserts or bite-size desserts, and they say, what does that mean? I'm going to tell you what it means for Middleby, for Blodgett specifically. As people are going away and being more health-conscious, we all have a sweet tooth. The restaurant operators have become smarter and they are saying, I'm not going to offer you this big slice of cheesecake or this huge chocolate cake; I'm going to give you smaller bite-size desserts. And this is a high margin for them. And everybody says, okay, I'm going to order it and make me feel not as guilty.

Now, to cook a bite-size desserts -- it's taking a fruit tart; let me give you an example. Taking a fruit tart or pecan tart and it looks like a little bit larger than a quarter. It is a little bit larger than a quarter. If you bake that in our low-end oven which has two-speed fan, what do you think is going to happen to that tart? It will be not a lot of fruit or pecan left on that tart. All of the fruit and the pecan will be splashed on the wall of the oven, just because that is a delicate product. So when Blodgett saw that trend and then speeded that trend, they created a specific bakery oven and a specific oven that had a specific variable speed fan specifically for that, and we've been selling a lot of that oven through our customer base.

So it gives you the impact of what Middleby does and how we anticipate trends and why it's not a one quarter, a two quarter. Are we going to have challenges? Yes. Are you going to expect management to overcome those challenges? Yes. Are we going to learn the residential business? Yes. Have we learned the food processing business? Yes.

So I am very bullish over the next three to five years in our business. I have to tell you that the improvement in the fourth quarter is sustainable. I can tell that our margin will remain intact and we're going to continue having phenomenal years beyond the next two to three years.

On this, any questions?

(OPERATOR INSTRUCTIONS) There are no questions at this time.

Thank you for all of you to attend our conference call today. Have a great day and a great weekend.

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