Middleby Corp (MIDD) 2007 Q1 法說會逐字稿

Good morning. My name is Phyllis and I will be your conference operator today. At this time, I would like to welcome everyone to the Middleby Corporation's Quarterly Earnings Conference Call. [OPERATOR INSTRUCTIONS] Mr. FitzGerald, you may begin your conference.

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 2007 first quarter results and then we'll open up the conference call for questions and answers.

We were very pleased with the results for the first quarter, which represented our 21st consecutive quarter-over-quarter record net earnings. The quarter results included the impacts from Houno, which we acquired on August 31, 2006.

Net sales in the first quarter increased 9.2% to $105.7 million, as compared to $96.7 million in the first quarter of 2006. Sales from the recent Houno acquisition amounted to $3.6 million and accounted for 3.7% of the sales growth for the quarter. Excluding the impact of the Houno acquisition, sales organically grew 5.5% as compared to the prior year first quarter. This included sales growth of 8.2% at the commercial equipment segment, offset by a 10.9% reduction in sales in the food processing segment.

The Company realized sales increases at most of the divisions during the quarter. Sales at our Blodgett division increased 11%, reflecting strong combi oven sales. And sales at our Southbend division increased by 6%, as we continue to realize growth in our new line up of premium ranges. Net sales at our Pitco fryer division increased 8% during the quarter, reflecting continued success of the high efficiency solstice fryer platform and business with new restaurant chain customers. Sales at our Middleby Marshall oven division increased 28%, with increased sales of our new high speed and energy savings WOW oven, which was introduced in the second quarter of 2006. And sales at our Nu-Vu Toastmaster division decreased 25% due to the relocation of production of our Toastmaster product line to our facility in Michigan in an effort to reduce production costs. This relocation resulted in a temporary disruption of sales in the quarter, which we anticipate will largely recover in the second half of this year.

Middleby Worldwide, our international sales and distribution division sales increased 1% from the prior year quarter. Sales in Europe increased 9%. Sales in Latin America were down 10% compared to a very favorable prior year quarter. The Latin American markets grew approximately 36% in 2006 and despite being down the first quarter, those markets remain strong and we anticipate will perform well in 2007. Sales in Asia were flat as increased business in China was offset by a decline in Europe, due to lower sales from a major pizza chain that had expanded aggressively in the prior year quarter.

In our food processing equipment segment, which is comprised of the Alkar and Rapidpak brands we acquired in December of 2005, we realized a reduction in sales of 10.9% as compared to the prior year first quarter. This reduction was due in part to acquisition integration initiatives put in place in 2006 to increase profit margins by enhancing pricing controls and eliminating unprofitable sales. So, as a result, we do anticipate that this reduction in sales will continue for the next several quarters.

Gross profit margin increased from $41.1 million to $35.5 million. Higher sales volumes in the gross margin rate also increased from 36.7% to 38.9%. The increase in gross margin rate reflects significant improvements at the food processing equipment segment, as a result of the acquisition integration initiatives that I just described, which included efforts to eliminate the unprofitable sales, as well as the cost reduction actions we instituted in the prior year. And as a result, gross margins at the food processing business unit increased from 22% in the 2006 first quarter to 34% in the current quarter.

The gross margin rate of the commercial equipment business also improved as a result of increased production efficiencies and higher sales volumes and an improved product mix, which was favorably impacted by new product sales with higher margins. However, this improvement was offset in part by rising cost of steel, which increased on average 35% to 40% from the prior year first quarter. Fuel costs have continued to increase significantly in the second quarter and we anticipate will continue to rise moving into the third quarter. And we continue to make efforts to offset these costs by raising prices, where possible, and increasing our production efficiencies.

Selling expense increased $1 million to $11.1 million, reflecting increased expenses associated with the recently acquired Houno operation, as well as increased sales commissions on higher sales volumes. General and administrative expenses increased $900,000 to $11.2 million; also reflecting the incremental costs associated with the acquired business of Houno operations and increased incentive compensation costs.

Interest and deferred financing costs in the first quarter decreased from $1.8 million to $1.2 million, reflecting the impact of lower debt balances from the prior year first quarter.

Net earnings for the 2007 first quarter increased 33% to $10.7 million from $8.1 million in the prior year. And diluted earnings per share increased 32% to $1.28 per share from $0.97 per share in the prior year quarter.

Now, turning to the balance sheet and the first quarter cash flows, net working capital increased during the first quarter due to increased working capital requirements on higher sales volumes and working capital requirements as we move into the peak seasonal periods of the second and third quarters. Accordingly, accounts receivable increased $2.2 million to $53.7 million and inventory increased by $4.9 million.

Accrued expenses decreased $9.2 million to $16 million due to payments of 2006 annual customer rebate obligations and employee incentive obligations, which were made after the 2006 year end in the first quarter.

Cash flow as used in operations amounted to approximately $4.5 million in the quarter and were a result of funding increased working capital needs. During the quarter, capital expenditures amounted to approximately $600,000 and were associated with replacement and upgrade of manufacturing equipment and facility improvements.

Total debt increased during the quarter to $87.5 million from $82.8 million at the end of fiscal 2006. The Company historically is [inaudible] in the first quarter due to the payment of prior year annual rebate and incentive obligations, along with increases in seasonal working capital needs.

Additionally, as it relates to the balance sheet, the Company adopted financial accounting standards interpretation number 48, accounting for uncertain tax positions. And the adoption of this new accounting pronouncement resulted in an increase to tax liabilities and a reduction to retained earnings of $1.6 million. It's treated as an adoption of an accounting principle. And this adoption had no material impact to the first quarter earnings.

We are also very pleased to have completed the acquisition of Jade Products from Maytag. We completed that acquisition on April 1, 2007. The acquisition had no impact on our first quarter financial statements, as it was completed early in the second quarter and accordingly will be reflected in the results in future periods. As previously discussed, Jade is the leading brand in the commercial cooking industry and further strengthens Middleby's position in the ranges and ovens. Jade also provides Middleby with an entry into the residential market. Jade has revenues of approximately $20 million and historically has had operating losses in excess of $3 million annually. We anticipate this acquisition will detract from earnings for 2007, although we expect financial performance to improve in the second half of 2007 as we realize the benefits of integration initiatives. And we expect this newly acquired business to be accretive to earnings in 2008.

The Company also announced yesterday that its Board of Directors has approved a two for one stock split, its common stock. The two for one split will be affected as a stock dividend and stockholders at the close of business on June 1, 2007 will be issued one additional share for each share of common stock held on that record date, with a payment date of June 15, 2007. And the stock split will increase the number of basic outstanding shares from approximately 7.8 million to approximately 15.6 million shares.

And we're also pleased to be attending the upcoming National Restaurant Association Tradeshow in Chicago, which will be held on May 19th through May 22nd. We will have several of our new products recognized by the National Restaurant Association with a kitchen innovation award at that show. These products include the Blodgett hydro-vection oven, Pitco's Solstice Supreme gas fryer and a new rethermalizer product, which is also from Pitco. And these products are anticipated to be introduced during the course of 2007.

Phyllis, that's all for our prepared commentary. Phyllis, can you open the call the questions now? Phyllis?

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Mark Grzymski with RBC Capital Markets.

Hi, it's [Angela Chang] in for Mark Grzymski. Good morning. With margins coming in so impressive for the quarter, are you still in the mid 20's range as far as a longer term goal?

Yes. Angela, this is Selim. As we do not give guidance short term or any earnings guidance. As a Company we've never given. I have always said that within the next three to four years we expect our gross margin to go from the high 30's to the mid 40's and our operating income to go from the 18% to 19% to the mid 20's. But that's over a period of three to four years and we are still standing by our --

Objectives.

Yes, objectives.

Okay. Great. Now, in terms of the Alkar business unit, what are your current plans for replacing the lower margin business that you're currently deferring? Is there a plan?

Well, I think typically with any acquisition, we go in and we size the business down to its core profitable business. And then we grow it from there, through new product introduction and innovation. So, basically we eliminated -- there were a number of unprofitable sales. Historically they had taken sales at either no margin or a very low margin and that's not business that we're interested in picking up. And they had some product lines that were less profitable and we decided not to focus on those products, moving forward. So, we identified what the core profitable business is and then we grow it from that base. That's really a formula that we've used at all of our acquisitions. So, it's not unusual for us to take a step back before we start to move forward on the top line.

Okay. And just one final question and I'll get back in queue. Just if you could provide some color as to some of the trends in fast casual? Are they still positive? And just a quick update on how the Rocket Fire is doing?

The Rocket Fire will be out basically for sale for orders by the end of the third quarter. We expect by September or early October to deliver the rocket fires. The Rocket Fire is doing very well in our lab right. It's a unique, highly patented fryer that will extend the shelf life of oil significantly, beyond even what we expected it to be. It will also have energy saving and will have significant impact to our business. This will change the fryer business. We believe it's a highly disruptive technology. It has a lot of features, a lot of patents and we're still on track to deliver that product by the end of the third quarter. And then we'll go into testing with several chains and it will take -- usually from the time we launch the product, it will take usually 8 to 12 months to start seeing huge traction on this, similar to the wall oven or the pizza oven when we introduced it.

okay. Thanks.

So the launch is still set for the third quarter of '07.

Okay. Perfect. Okay. Thanks and congrats on the quarter.

Thank you.

Thanks, Angela.

Your next question comes from the line of Peter Lisnic with Robert W. Baird.

Good morning. It's actually John [Housholter] on for Pete. Just kind of a question on Jade. Can you guys give us an idea as to the gross margins there? And I mean, with a kind of $3 million loss and you guys saying you can narrow that and make that an accretive acquisition. What steps do you have to take to do that, kind of in the next 12 to 18 month timeframe?

Well, we're not prepared to comment on what the gross margin is. I think it's a moving target right now and we've owned that company for 30 days so we're digging in right now to better understand the business model of what we want it to be going forward and the past is somewhat irrelevant to us.

And what we're focused on right now is reorganizing the company to focus on the profitable products and how we deliver value to customers and reducing the workforce. We've done a workforce reduction, as there were a lot of non-value added processes going. So, it's really a workforce reduction and then focused on purchasing synergies and then focusing on product, value engineering, pricing to customers. So, those are really the things we're looking at right now.

Okay. And then I guess switching over to steel costs. To some extent stainless steel pricing is relatively unavoidable at this point. What can you guys do really outside of kind of your normal productivity improvement initiatives which, I mean, you guys pretty much do every year? I mean, is there something special you can do to mitigate this? Like swapping the different grades of steel or things like that?

John, this is Selim. I'm going to answer that question. One, I have to say that steel is affecting the whole industry. This is not a Middleby impact, so it affects everyone. Every one of us and our competitors use steel. You can mitigate it a little bit by changing grades, but in the long run it's costs. It's [inaudible] of cost that has to be passed along to the customers. It's simple. Simply put, no manufacturer will be able to absorb the stainless steel costs unless they are willing to lose money. The cost of stainless steel has gone up significantly. It will continue going up and we're going to have to pass it to customers. Simple.

Okay. And are you seeing competitors kind of raise prices similar to what you're planning to do?

I think you're going to see price increases of everyone in the industry, across the board. I just came back from a buying group meeting and everyone -- I didn't talk to my competitors. I didn't talk to anybody else. But from what our customer is saying, it's like a continuous price increase that's taking place. People are reacting to it and I think it's well entrenched within our customers and our distribution channels that stainless steel is on the rise. And it's going to continue to be on the rise it seems for a while. And I think everybody is getting used to it. And I haven't felt that the distributor or the customers are being phased away by this. So, they're going to have to overcome it and they're going to have to deal with it.

Okay. I'll get back in queue. Thanks, guys.

Your next question comes from the line of Jamie Clement with Sidoti and Company.

Good morning. And Darcy, if you're back there, good morning, as well. Most of my questions have actually been asked and answered. But just a little bit more on Jade. Tim, it sounded like -- I mean I sort of got the impression that there was a fairly significant overhaul that you were going to bring there. But in terms of like actually breaking down the losses there, I mean, is there a primary driver for the losses? I mean, is their manufacturing inefficient? I don't know if that's a fair question.

Jamie, it's a fair question. I'm going to answer it differently. I don't think we broke down the losses at this moment. And if we did, I don't think we're going to basically tell everybody what is a loss and what [inaudible]. I'm going to answer it differently. I'm going to tell you the biggest problem with Jade, it's simple. Jade is bar none the best cooking equipment company in terms of ranges in high end in the United States.

And that's why I don't understand why they're losing money.

Okay. It's [inaudible]. You can't be the best quality, everything is welded. You use frames and then you don't price it accordingly. Pricing is an issue. That pricing has to be communicated to the customer. They do unique stuff, something that nobody else can do. Nobody. We are one of the leading companies in cooking equipment and ranges. The way Jade built that unit is unique. It is like -- I can tell you it, it most probably built like a Porsche. It's a very high performance, very unique product. However, it's priced at the price of a high end Toyota. And that's simple. It's simply said. I will have to go back -- I go back and I tell you it's used by customers like Cheesecake Factor. They use that range product, that Jade range product for hours. For long, long hours. They have unique features on that Jade product. Or P.F. Chang's. But they don't price it correctly. This is a customized piece of equipment. You cannot build a product that's unique, whether it's from the way it's built together, the way it is configured. They were the leader. They introduced what we call fire and ice, which is refrigeration plus cooking in one unit, which allowed a lot of chains to be able to do what they call line up, exhibition line up where they don't have runners, people running back and forth to the walk-in freezer. And cooks, they have all those refrigerated, whether it's condiments trays or refrigerator drawers right at the point of cooking. And this is phenomenal to be able to combine refrigeration and cooking in one piece in a very high heat environment, where compressors are sitting right next to ovens. And they've been able to do that. And it's a lot of change to deliver fast food, exhibition kitchen and they don't price enough for it. That is the biggest issue.

Okay. Thank you very much. And just moving onto Houno. I just got back from Europe a couple of weeks ago and talking with some operators over there, it sounds to me like the European market for high end combi ovens is a lot more robust than the U.S. market. And I know that obviously, Houno's products flow into Europe. Why is the U.S. market for that kind of product not so robust yet?

Well, Jamie for two reasons. One, in the United States we tend to be more interested in speed and cooking at all the points where you get the order and you cook it. In Europe there's a lot of batch cooking. It's that simple. Those are big differences. Where in Europe, even when you go to a restaurant, the chef has cooked beforehand. They reheat, rethermalize and give you the food. I'm talking about your main diner. I'm not talking about fine, fine dining. I'm talking about your, what I call European casual dining versus a U.S. casual dining. Or a European school system versus a U.S. school system.

Number two, the biggest difference as a combi unit is a high technological piece of equipment. It has controls. It has programs. You have to understand its combination. Let me maybe tell everybody else who is listening on the call what a combi oven is. A combi oven is a combination, convection oven, steamer at the same time, where you could use it as a steamer only or a convection oven only or a combination of heat and steam at the same time. In order to use a combi oven, you have to, one, be efficient in cooking. You need to be truly a chef to use the combi oven, to use the full utilization of the combi oven. That's one. Which many of our restaurants are not using chefs there. They are having people coming in. They train them on cooking specific pieces and then they deliver the food.

Number two, because of the complexity of that piece of equipment, it has a tendency if it's not maintained properly to fail, just because the control is very sophisticated. The injection of steam and cooking and heat at the same time, they tend to be more delicate than when you buy a steamer on its own and a convection oven on its own. And that's why the reason in Europe you have chefs, even if they work in a cafeteria or in a school or in a hospital, they are -- it's a trade. Those people spend their lives being chefs in a school and they have pensions so they are more like owners. They take care of those pieces of equipment and they are paid to take care of those pieces of equipment.

If you go to a hospital, chefs in hospitals are not there for a career. They are usually transient people. They come in. They are immigrants that come in as a stepping stone to a better life somewhere else. So, that's the big differences. I don't know if I'm explaining it right.

Yes. Absolutely. No, I appreciate it. I appreciate it.

Your next question comes from the line of Joel Tiss with Lehman Brothers.

Good morning. How's it going? I wonder, someone asked before and I guess you've sort of done it in pieces; can you just sort of characterize the end markets? It seems like there's a little bit of slowdown going on and maybe an update on the competitive landscape? If there's anyone getting more aggressive? Maybe they're dragging their feet on price increases or just a little better sense? Thank you.

Let me address that. I would say while we haven't seen the slowdown in the first quarter as you've seen on the food service side, commercial food service side, it was still pretty robust. It was double what the industry has been and continued to deliver 7% to 8%, which has been pretty consistent what you've done on the food service side. So, we continue to see those numbers to be pretty solid for us. We haven't seen a slowdown. I think also the fact that some of our customers might have had a very strong fourth quarter. The first quarter, if you look at what happened the fourth quarter of '06, we had basically 7 out of 10 chain restaurants reported increases quarter over quarter in -- I'll take the first quarter off, '06 versus '05. And going into the first quarter, there must have been some slowdown. People were still concerned. Maybe some of the winters in certain parts of the country were a little bit tough. I think also you had issues with fuel prices going up and down. You had a lot of volatility in fuel prices in the first quarter of '07. However, we continue to see over a trend of several years, we see our business to remain solid on the food service side. And I'm going to explain that.

I have to tell you that some of the companies that -- we just finished a big study for us. And the study looks like if you are the restaurant today that is not in either an expert in a single favorite food category, or with a good intriguing position you're not going to make it, if you're a chain. And let's talk about things like wings -- buffalo wings, upscale steak, seafood, burgers, doughnuts, coffee. You have to be in a dominate position in a single favorite food category. Otherwise, you're not going to make it. It's simple. You have to own that and you have to have good position in that segment. So, that's something where Middleby has been very close to each one of the segments I've just mentioned. We've been with them. So, you look at things like casual wings in the sports bar concept. They're going to continue booming. There are a few players that play well in that segment, like Buffalo Wild Wings. And they will continue doing very well. And we continue to cater to those types of restaurants and we've done a very good job.

I'm going to go back to a different trend. I talked about where our customers are. I had mentioned many years ago, if you've followed this Company and you've been an investor of this Company that we're going to continue playing the big role in the fast casual. We have spent a lot of energy on the fast casual side of the business. We are a big player in the fast casual and that fast casual is now being supported by what I call Generation X, which are now aged in the late 20's to early 40's and right now they number about 50 million or 1 in 6 Americans. And those people, those under the age of 35 are eating out 10% more frequently than the national average. So, we are well-positioned in the fast casual over the long term. Maybe one quarter down, one quarter up, but I'm giving you a long trend. You know, if you're going to invest in Middleby, you have to invest -- this is not an investment that's opportunistic where you're going to look at this and say I'm coming in one quarter and go out. And if you look at how it's been, it's been an ongoing trend. And I look at our position in the fast casual as being fantastic because we're catering to that next generation who are the customers of our fast casual. And they are not going away. They are eating more and more out. They are heavy users of the fast casual chain restaurants and limited service. That's where we are a big player.

Now, with [acquisitional chain], it allows us to target the Baby Boomers, which are now aged between 43 to 61 and they still represent more than a quarter of the U.S. population. They tend to have totally different eating habits than the Generation X. So, the Baby Boomer like me eat very differently than the Generation X and Jade will allow us to continue growing and growing that segment. I think that segment will continue growing most probably for the next few years until the Boomer spending will decline somewhat as they retire.

So, opportunistically with Jade it allows us to continue going after the segment they have. They tend to service -- Jade is very strong. If you look at New York, they are very strong in all those upscale food service restaurants. In Chicago they will be very strong with also the top restaurants in the Chicago area. And in L.A., Las Vegas where the Baby Boomers like to go and spend their money. So, truly it will be -- is well-positioned in the fast casual, with Jade giving us an opportunity to go after these Baby Boomers and tie this opportunistically the next few years. It's after that, I believe the Boomer spending will decline as they retire. I don't know if, Joel, I gave you a little bit of a good trend.

So, I really feel very good about our business. We feel good about the emergency saving devices that we've put together. We feel good about trans fat oil. And the Rocket Fire going there. That has nothing to do with trends. Those are driven by consumer activism. It's driven by administration. It's been forcing our restaurant customers to move outside [inaudible] from trans fat free or a trans fat oil or solid shortening to trans fat free oil. And we're going to be there and capturing a lot of that business.

Okay. You have to get the Baby Boomers to buy your stock so their spending can accelerate when they retire. Just to switch gears a little bit, too. Can you talk a little bit about prices of acquisitions? And are you guys in a position to look at more deals? Or do you feel like you have your hands full at the moment? And that's it. Thank you.

Well, I think we're definitely going to continue to look at more deals. I think we think there are opportunities both on the commercial and the food processing side. The industry [inaudible] method and we're continue to look for opportunities with leading brands and technologies.

So, in terms of pricing, I don't think that's something we want to comment on for competitive reasons.

Okay. Thank you.

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

I think Tim just stole my thunder. I was going to ask that on the food service side you've grown that core business by adding features and expanding the product line by acquisition. And I understand that Alkar is still in an early stage of adding features to its equipment. But my question was going to be will you pursue the same strategy of doing that? And then broadening the product line by acquisition? I think Tim just said the answer is yes?

Yes, the answer is yes.

Thank you, Tim.

Tony?

Yeah.

This is Selim. I'm going to answer -- your question is a very good question. I'm going to answer it in a very good sense. One, we weren't in the food processing business. We believe that the food processing business has somewhat similar characteristics to the food service business in the sense that customers want features and benefits. Our customer is Sara Lee, Kraft, Hormel, Mrs. Fields, Nestle, all of them are looking for features and benefits to be more productive in their factories, to be able to get more yield. They want food safety. They want energy savings and at this moment we felt that the industry is highly-fragmented and many of those features have not been, and many of those companies have been innovating, even including Alkar. When we bought it, it was a so-so -- it was a leader, but it was a [inaudible] company. They were producing a few products that people have liked. It was durable, reliable products but they didn't have as many features. And we are accelerating the innovation there. And we will continue changing this business. The margin in that business should be pretty high as you come in and save money to your customers. And there are a lot of savings there. Energy alone, I mentioned that before, could be a huge savings for our customers. And I look at it and I say even Alkar has not tapped into the energy the way we [inaudible] on the food service side with our wall oven and our EMS system and we're going to take some of this and [inaudible] and educate our customers that we can save them a lot of money on energy alone. They might have to replace their equipment, but we're trying to put in place equipment which generates [inaudible] which allows us to go in and require some of that equipment that has been sitting as the food processors.

The other situations, the other thing that I see happening within the Alkar and the food processing business is when we bought Alkar, it's really a neat processing business. It's hotdog, bacon, sausage, ham and one of the things we'd like to expand is getting to the chicken business. We'd like to get into other segments of the market, the seafood business. So, we have a lot of growth in that segment.

Have you eliminated all the product lines of Alkar that you will have intended to eliminate or is there still more to go?

I think we've eliminated some. There is a few that we're just finalizing. We have committed to our customers that we'll fill the orders. We've accepted the orders; we'll take them. But once those orders are done, we'll have a few more pruning to do. Just, I feel like they were distributing items that were not in the distribution business. They were producing items that have no margin; they were [inaudible] product. It pretty much reminds me, also reminds me of when Middleby was the same way in 1999. It was a one stop shop, trying to relate to everybody. And that's what I like about Alkar. And we're doing it a little bit faster but we're going to get there. So, there's going to be a little bit more pruning. We're going to see a little bit more decline in sales as we go along the next few quarters. But the margins should continue going up. And I don't know if, Tim, did we mention what the EBITDA was from one quarter to another? Let's reinforce that our position is phenomenal. We went down 10% in sales in Alkar.

Right. And I mentioned we increased the gross profit margin from 22% to I think 34%. And the --

How much was it in dollars?

The operating margin increased from about $1 million to over $2 million. So, it more than doubled.

And we're going to keep doing that.

Thank you very much.

Thank you.

Your next question comes from the line of [Greg Halter] with Great Lakes Review.

Hi. Good morning. Good morning and thanks for taking the calls, sorry, taking the questions. I missed it if you said it on the cash flow from operations for the quarter?

What the number was? Cash flow used in operations was $4.5 million in the quarter.

Okay. And did foreign currency have any impact, either on the top or bottom line?

We had small, very small exchange gains and those were reported in other income. You'll see a line below the operating income.

Right. Okay. And for the quarter, what were international sales as a percentage of the total? And where do you see that going over the next, Selim, you're talking three to four years? Where would you see that going over that type of timeframe?

I would say, Greg, this is a very good question about our international. I think that we see international growing well for us. Growing fast. I think one of the things we need to do is we have spent a lot of time innovating. We have spent a lot of time restructuring. If you look at the last six years, Middleby did two things. We will be a [inaudible] business totally, it [inaudible] something a one-stop shop having refrigeration, everything to becoming a very focused cooking line company. We then had integrated the acquisition of Blodgett at the time was bigger than Middleby. We spent time doing that. We reshaped our business, which was truly a business made up of pizza business and of mom and pop and we went back to chain and that's where we early in 2000 we started posting the fast casual segment.

Then we started going after international and we went into China, India, Latin America and we went after Asia aggressively. We then went after energy saving innovation. My feeling today is that I told our people while international continues to grow for us, I am not happy with where we are internationally. I think that we need now to go back and spend time refocusing on international business. The reason I'm not happy about it is, while let's give you an example. We just entered the Middle East. In the Middle East we grew from $700 million a couple of years ago to $2 million in the Middle East. And of course, the regional director of the Middle East [inaudible] doing a fabulous job and I say no, we should look at the market. We should be maybe a $10 million in the Middle East.

How do we get there? And I think part of it is as we grow China and as we grow India, we seem to be happy. But I think we need to accelerate the growth where we are. One, because we have a great infrastructure. We need to stretch our goals a lot stronger internationally. And I think by hiring Lyall Newby who is totally focused on international. I think one of the other things we find we had [Sam Susani] prior to that who is President. In addition to doing international, he was doing supply chain. And now we split those responsibilities where Sam is doing on supply chain management and Lyall who came from Yum and prior to that he was at Boston Market and McDonald's is going to take us to the next level. And his challenge is in the next three to four years, I would like to see our business grow and become 30% to 35% of our total sales.

I think what's going to help is the addition of Houno. It's going to help. The other thing that's going to help is the fact that finally we have started getting the brands to look at getting CEs for our international for going after markets in Europe where you need to have CE. CE is like having UL and AJ approval and that's here in the United States and many of our companies didn't [inaudible] us to get that done. And there was not an emphasis, as long as they hit their numbers, however they hit. But there is now [inaudible] saying you cannot only be a U.S. manufacturer. You need to go after and support our Middleby Worldwide division.

The other thing is we're starting to get what I mentioned the last quarter's conference, I came from [inaudible] and we had lunch at some very localized, regionalized products, like the [inaudible] oven, like shish kabob oven. We're not introducing [inaudible] for India. So, I think we're feeling very good about that. And I say Greg, within the next three years we should have 30% to 35% of our sales coming from international, a very good margin.

Okay. That sounds excellent.

And Greg, right now in this particular quarter, international sales were 20% of the total.

Okay. Great. Thank you. And just a couple of other number questions. I know the business generally is not very capital intensive. I was just wondering if you could give us your plans on capital spending for all of 2007?

We would anticipate that the capital spent fro the whole year would be somewhere around the $3 million range.

Alright. And one last one, if I could? On the steel side, obviously the costs have gone up there. At what point in the year, if we stay where we are currently do you start to lap some of those higher costs, where you may anniversary those types of high prices?

If we it still stays where it is right now?

Correct.

I guess it would be a year.

Okay.

Each of the last four quarters steel has crept up. It's just accelerated in the first quarter and going into the second quarter here.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] At this time, there are no further questions. Are there any closing remarks?

No. Thank you, Phyllis and thank you everybody for attending today's conference call and we look forward to speaking with everybody next quarter.

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