Middleby Corp (MIDD) 2007 Q2 法說會逐字稿

Good morning. My name is [Dashanta], and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter Earnings Conference Call. (OPERATOR INSTRUCTIONS).

Thank you. Mr. FitzGerald, of Middleby Corporation, you may begin.

Okay, thank you and good morning. Thanks 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 second quarter results, and then we'll open the conference call for questions and answers.

We were pleased to report our 22nd consecutive quarter-over-quarter record net earnings. The quarter results included the impacts from Houno, which we acquired on August 31, 2006, and Jade Range, which we acquired on April 1, 2007. We also completed the acquisition of Carter-Hoffman during the quarter on June 29, 2007. While the impact of Carter-Hoffman is reflected in the second quarter balance sheet, it had no impact on the operating results, as the acquisition was completed on the last day of the quarter.

The second quarter results also included the impact of the work stoppage that occurred at the Elgin, Illinois conveyer oven facility. The work stoppage began on May 17th, after the unionized work force failed to ratify a final contract proposal of an expired collective bargaining agreement. Sales at the Elgin, Illinois facility were $5.8 million lower than the prior year second quarter, and operating income was $2.9 million lower than the prior year at this facility as a result of the work stoppage.

On July 30th, subsequent to the end of the second quarter, the Company entered into a new five-year collective bargaining agreement, and is in the process of resuming full production at this facility, although it is anticipated disruption from the work stoppage will have a similar effect on the third quarter revenues and operating income.

The new union agreement included a ratification bonus and a voluntary retirement program offered to the union employees, which we anticipate will result in one-time payments of approximately $2 million to be incurred in the third quarter. This voluntary retirement program will allow us to permanently reduce the work force at this facility by more than 40%, as we restructure the manufacturing processes and outsource the majority of fabrication requirements for this facility.

We anticipate gains in production efficiencies at this facility as a result of these actions, as we move into 2008, and anticipate we will resume full production in the fourth quarter.

Net sales in the first quarter increased 8% to $113.2 million, as compared to $104.8 million in the second quarter of 2006. Net sales from the Houno and Jade acquisitions amounted to $7.2 million and accounted for 6.8% of the sales growth in the quarter.

Excluding the impact of the acquisitions, sales grew organically 1.2%, as compared to the prior year second quarter. This included sales growth of 3% from the commercial equipment group, which was offset by a 9.9% reduction in sales from the food processing equipment group.

The 3% sales growth in commercial food service equipment includes the adverse impact of the work stoppage at the Elgin, Illinois conveyer oven facility. Organic sales of commercial food service equipment, excluding the conveyer oven products affected by the work stoppage, rose 8.6% during the quarter. This 8.6% increase includes a 13% sales increase at our Blodgett oven division and increased sales of our new combi-oven lineup, and a 12% increase in sales at our Southbend division on higher sales of the new platinum series of ranges.

These increases were offset, in part, by a 2% reduction in sales at our Nu-Vu Toastmaster division due to the relocation of production of our Toastmaster product line from our Elgin, Illinois facility to our production facility in Michigan. This relocation of production was completed in an effort to reduce production costs. And this relocation resulted in a temporary disruption in sales, which we anticipate will largely recover in the second half of the year.

At Middleby Worldwide, our international sales and distribution division sales increased 3% from the prior year quarter, and were effected by the disruption in conveyer oven production due to the work stoppage, which impacted availability of product in the quarter. Sales growth for the quarter was primarily driven by increased sales in Asia, which Europe and Latin America were flat.

In our food processing equipment segment, which was acquired in December of 2005, we saw a reduction in sales of 9.9%, as compared to the prior year quarter. This reduction was due in part to acquisition integration initiatives put in place in mid-2006 to increase profit margins by enhancing pricing controls and eliminating unprofitable sales. These initiatives resulted in a profitability improvement of more than 50% during the quarter. And this business has reached a sustainable level of operating margins of 20%.

Gross profit increased from $41.7 million to $44.9 million on higher sales volumes, and the gross margin rate increased from -- or I'm sorry -- decreased from 39.8% to 39.6%. The gross margin rate remained relatively constant despite a reduction in profitability at the Elgin, Illinois facility, a significant rise in steel costs, and a dilutive impact on the gross margins from the Jade acquisition.

These negative factors were largely offset by increased margins, new product sales, and increased production efficiencies at the commercial food service group, and a significant improvement in the gross margin rate at the food processing group as a result of the acquisition initiatives, including efforts to eliminate the unprofitable sales and cost reduction actions instituted in the prior year.

As a result of these initiatives, gross margins at the food processing group increased from 26% in the 2006 second quarter to 42% in the 2007 second quarter. As we move into the second half of the year, steel costs will remain substantially higher than the prior year comparative periods. However, we do not anticipate the same rate of continued price increases that we saw in the first half of this year. We have continued to make efforts to offset these increased steel costs by raising prices where possible and increasing production efficiencies.

Selling expense increased to $1.2 million to $12 million, and general and administrative expenses increased $1.1 million to $11.7 million. The increases in selling, general and administrative expenses were most attributable to the increased expenses associated with the acquired Houno and Jade operations.

Interest and deferred financing costs in the second quarter decreased from $2 million to $1.3 million, reflecting the impact of lower debt balances from the prior year second quarter, offset in part by increased interest rates. Other income from the quarter amounted to $600,000. This included a one-time insurance settlement of $300,000 received during the quarter from the flooding at one of our production facilities which had occurred in the prior year.

Net earnings for the quarter increased 13% to $12.6 million from $11.1 million in the prior year quarter. Diluted earnings per share increased 12% to $$0.75 per share from $0.67 per share in the prior year quarter. As reported, the impact of the acquisitions diluted earnings per share by $0.01 during the second quarter.

And turning to the balance sheet and second quarter cash flows, the changes in the balance sheet accounts reflect the impact of the Jade Range and Carter-Hoffman acquisitions. The acquisition of these two companies during the second quarter added $5.5 million to accounts receivable, $8.4 million to inventory, $4.2 million of property plant and equipment, $3.9 million of accounts payable, and $7 million of accrued expenses.

Additionally, we recorded $9.7 million of goodwill and $1.6 million of other intangible assets associated with these two acquisitions. Other changes in the balance sheet accounts primarily reflect normal variations driven by seasonal working capital requirements.

Cash flows provided by operating activities amounted to approximately $26.8 million during the second quarter, and $22.4 million for the first six months of the year. Operating cash flows were utilized to fund the acquisitions of Jade Range and Carter-Hoffman, which amounted to $23.3 million in the second quarter.

The Company also had capital expenditures amounting to approximately $500,000 during the second quarter, and $1.1 million for the first six months, associated with the replacement and upgrade of manufacturing equipment and facilities improvements.

Total debt decreased during the quarter to $85.4 million from $87.5 million at the end of the first quarter, inclusive of the acquisition funding. Subsequent to the end of the quarter, the Company also funded the acquisitions of MP Equipment and Wells Bloomfield for $44 million, which was funded from our revolving credit facilities.

We were very pleased to have completed four acquisitions since the end of the first quarter. This includes three acquisitions in the commercial food service sector and one acquisition in the food processing equipment sector.

The acquisition of Jade Range was completed on April 1, 2007. As previously discussed, Jade is the leading brand in the commercial cooking industry, and further strengthens Middleby's position in ranges and ovens. Jade has revenues of approximately $20 million, and has historically incurred operating losses in excess of $3 million annually.

We were very pleased with the progress made at this division during the first 90 days post-acquisition. While the acquisition was dilutive to the second quarter results, we reached a break-even level of operating profitability by the end of the quarter, ahead of our original expectations, and anticipate this acquisition could be slightly accretive to the fourth quarter earnings as we continue to realize the benefits of integration initiatives. We will continue to implement in the second half of the year.

The second half results will also reflect the impact of the recent acquisitions of Carter-Hoffman, Wells Bloomfield and MP Equipment. These acquisitions further strengthen our portfolio of leading brands in both the commercial food service equipment and food processing equipment sectors. The combined annual revenues of these businesses amount to approximately $85 million.

In commercial food service equipment, Carter-Hoffman and Wells Bloomfield provide Middleby with the leading market position in holding cabinets, food warming equipment and counter line equipment. Our recent acquisitions of MP Equipment provides a complementary portfolio of products and patented technologies to our food processing equipment business, as we continue to grow this platform.

These acquisitions have reported historical operating profits of approximately 5% of sales on a combined basis amongst the three acquired companies. And we will focus on improving the profitability of these operations in the second half of this year. And we anticipate we'll reach a 10% operating level by year-end.

Longer-term, we expect these businesses to generate operating profits in excess of 15%. While these acquisitions will be slightly dilutive to the third quarter earnings, we anticipate they will be accretive to earnings in 2008.

Dashanta, if you could please now open the call to questions.

(OPERATOR INSTRUCTIONS). We'll pause for just a moment to compile the Q and A roster. (OPERATOR INSTRUCTIONS). Please hold for the first question. Mark Grzymski, RBC Capital Market.

Good morning, guys. It's Mark Grzymski.

Yes. Hi, Mark.

Hi, Mark.

How are you?

Good. How about you?

Doing well, thanks. A great quarter, considering everything that you guys are -- all the headwinds and whatnot, especially related to the lockout.

Tim and Selim, I'm just curious here on the acquisitions that you've made, if you could give us a little bit more detail. I understand you want to get to 15% operating margins, and that it is going to be dilutive in the coming quarter. But, could you kind of rate these companies in their operating performance as we speak? And I'm specifically talking about Carter-Hoffman, Wells Bloomfield, MP Equipment, too.

Well, they're all in the similar range of operating profit levels. As I mentioned, they're roughly running at a 5% operating margin. MP's probably on the higher end of that, and Carter-Hoffman on the lower end. But, they're all operating at less than 10%.

Okay. And as far as the integration process is going, I mean, there's a lot of synergies, obviously, with the Wells Bloomfield. So, I mean, would you expect this to be slightly more accretive on a go-forward basis than the others?

I can answer that, Mark. I would say, at this moment, we always say that we're going to be very disciplined in buying those companies.

Um-hmm.

So, if you look at what we paid for those companies, we really captured those companies at very, very good multiples compared to what our multiple is. So, when you think about what we fetch in the market place versus what those companies were bought from, I think it was a very disciplined approach.

The other thing is we never bought those companies to just get some -- for one or two quarter, or for one or two years, and flip them. Our concern is very simple, and it's we believe that those companies will be accretive. They will be accretive right away. We're talking about Carter-Hoffman and Wells and MP. So, they are all accretive right off the bat. So, unlike the Jade acquisition, which was -- we knew when we went in, it would be dilutive. Those acquisitions are accretive right from the get-go.

However, let me share with you a little bit better perspective of what we see those acquisitions will do for us. The Carter-Hoffman acquisition is the leading brand in holding and warming cabinets. And I've been preaching for a long time, when you look at the total pie of cooking, we're missing a market, which is a sizeable market, in holding and warming cabinets, which is a growing market. And we were not players in that market. So, now, it allows us to capture, with a leading brand like Carter-Hoffman, that segment.

I think, with Wells, it brings a lot of phenomenal perspective to us on the ventless, and we'll talk about that in a little bit, in a minute, which gives us a unique ventless capability in addition to the ability to get into what I call the fast-casual. They are a big player in the fast-casual, and I have always said that fast-casual is one of our major trend, major cycle, that propelled this company when we bet on the fast-casuals three years ago. So, Wells strengthened our position there.

So, let's go back to the financial that you asked about. We are now running at net operating margins of -- prior to taxes, prior to interest, at around less than 20%. We believe that we'll take those businesses within three years or less to the 20% mark in operating margins.

So, we believe that's going to happen. The proof is in the pudding. We've done that with Blodgett. We've done that with Pitco. We've done with Nu-Vu. We've done that with Alkar. You've seen what happened to Alkar. I think this quarter is another -- within a year and a half of acquiring Alkar, we've taken it from the same perspective of 5% margin to, I think -- Tim, how much is it today, or how did it--?

--It was north of 20%.

North of 20%. So, I think that trend isn't going to jump. So, if you're betting on us integrating those acquisitions, well, definitely. So, I think within two years to three years, we'll see all those companies that we just acquired now, in that short period of time, will be running in the 20% operating margin.

Okay. Well, thank you for the color. And one last question, and then I'll get back into the queue. An update on the Rocket Fryer and the new product pipeline and how that's progressing.

Well, we said that we were going to introduce 10 to 12 products this year, and we are in line to introduce those products. The Rocket Fryer will be unveiled selectively at our [Natham] show which is coming up in next October. The customer will be able to see it, touch it, feel it, which we haven't done before. So, it's been under complete wrap.

I just was up at Pitco with a great team up there, and had a chance to see how it worked. It's performing better than we expected, by far. It is extending the oil shelf, oil life, more than we talked about. It is energy-saving, beyond that, saving of flavor. It's an unbelievable product. It's one of our most trumped up technology ever at Middleby so far.

It even handles the WOW! Oven, which continues to do well, by the way. And we continue to win with the WOW! Oven. We introduced a Mini WOW! which was introduced at Pizza Expo.

We are introducing a bunch of new products that target the chicken segment, which target the chicken offering segment. So, we have a few products now targeting the chicken market, which is growing very fast, not only domestically but globally, not only in the chain but also in the fast-casual. So, we have a ton of those products going on.

Alkar launched the flash pasteurization. They've launched their Cyclone. They launched a couple of products, also under RapidPak, as well as the cooking side. So, the 10 to 12 products we talked about are out, and we're starting to see momentum from them. And we continue to be very excited about that. We're now working on the next 12 products that are coming out for next year.

So, just to mention to you about the new products, we were pleased to announce that we got three kitchen innovation awards this year. Last year, we got two. This year we got three and the National Restaurant Show. We also recently got the Professional Chef Association giving us a big award for our combi-oven, which is totally -- we introduced a brand new platform of combi-ovens, and we won the top award for that combi-oven, which is a combination steamer/convention oven. So, we continue to get accolades independently from panels of judges who are recognizing all those new products.

Okay. And looking at the Rocket Fryer, do you have any preliminary demand, and what you're expecting from that product on an annual basis in sales?

Well--.

--Mark, I think it's too early to talk about that. I mean, we think the demand will be significant because it's really a product that all the chain customers would need, with the issues they've got with trans fat oil. But, it's really -- that's too early to put an estimate on that.

Okay, all right. Well, thanks, guys.

Thank you.

Peter Lisnic, Robert W. Baird.

Good morning, gentlemen.

Good morning, Peter.

Hi, Peter.

Tim and Selim, I guess if we could just stay with the acquisitions for a bit. Can you talk about any sort of product pairing that you might do with the three or four recent acquisitions?

The one I'm really, I guess, particularly interested in is your sort of entrance into beverage dispensing, and whether or not you consider that to be core business and something that you'll grow, or is it something that doesn't fit into the portfolio currently?

Peter, it's a good question for us. We got the Bloomfield acquisition as part of buying Wells. We are very excited about it, for the simple is that, as you know, the trend of coffee is not going anywhere or slowing down.

Everybody's getting into the coffee business. McDonald's now, on top of Duncan Donuts, on top of Starbucks, now Burger King introduced the Joe coffee. Everybody's getting into the coffee business. Fast-casual is now getting into the coffee business, a huge margin.

So, it puts us in one of the top five players worldwide in coffee. That's what Bloomfield does. So, we'll be one of five players worldwide in the coffee dispensing.

What is unique about Bloomfield is they have been working on doing equipment for specialty coffee, which is also another big trend. So, Bloomfield is expanding into specialty coffee. So, we're very excited about the trend of this company. It's too soon for us to understand the platform. It's a new platform for us. It's definitely still a small part of our portfolio, in terms both of materiality and sales.

But, we feel very strongly about it because what made this company successful, what made Middleby successful, is to be able to manage trends. And now, it puts us again in one of the major trends, which is coffee. And we did not buy a large brand. We did not do it organically. We got experts who understand coffee, that have been working. They understand specialty coffees, and we're going to watch it very much. We're very excited about it.

Okay. And then, I guess if you could talk a little bit more about, I guess, the synergies that you get in terms of technology sharing between the acquisitions and the current portfolio, kind of what your top one, two or three sort of, I guess, technology or just the synergies that you get out of having these, outside of penetrating new markets like warming and holding, for example.

Great solutions. Warming and holding is a great global market. It's not only in the United States. It's a big chain market. It's a fabulous, fabulous entry for us. And we bought the leader. Basically, we bought one of the two leaders in that segment, which is [Pope].

So, as we always say, Middleby's about brand. Middleby's about line brands, building them and going globally with them. Our synergies with Carter-Hoffman is to take it globally, where we could take it all over the world, which they have not had an opportunity to do that. That's number one.

Number two, there are a lot of synergies between our holding and warming Carter-Hoffman and our Nu-Vu and Toastmaster divisions. There are a lot of synergies right in our Wilder division. So, we are now talking about integrating Wilder, which we own, which with Carter-Hoffman there are a lot of product extension that make sense for us.

So, we see manufacturing efficiencies. We see significant efficiency in [push sink]. We see efficiencies of marketing both products better, funding up the gaps that we have. So, we are very excited about Carter-Hoffman. And we believe that Carter-Hoffman, maybe to answer Mark's question a little bit better, will jump very quickly to a 15% operating margin in less than 12 months, from a low of I would say 3%. We'll get to 15% in 12 months or less on that company.

Let's talk about Wells. Wells, a phenomenal brand in what they do. They dominate the built-in warmer equipment, and they do it for most of the chains. So, everywhere you go, Wells is an important part of the Waffle House, of the McDonalds, or the KFC. They keep on going. They dominate that big fast-food, quick-serve market.

What they have also, they have two products that are [futurist] to us. Two products that were introduced recently, and they have not had a chance to truly market aggressively. Number one, they have a pressure fryer that is a phenomenal product. I just was visiting with [Jim], and they acknowledge that the pressure fryer of Wells is a great product. But, since they've been up-for-sale since (inaudible) of United Technologies is not to keep those companies, they've been preparing for to be up-for-sale for most of the year. So, they haven't penetrated that segment as well.

So, now, it gives us an opportunity at the upcoming North America Food Equipment Show, which is the big show in our industry -- it's occurred every two years -- to launch the pressure fryer big time. And there are going to be a lot of synergies between Wells and Pitco, our fryer companies. And that is a complicated product. They have a patent for it. It's a unique product that they're going to introduce.

The other product that is unique for us, we believe the next trend in equipment is called ventless, Nu-Vent. And Wells is the dominate player in ventless technology. Now, one of the issues they have is they've enacted that ventless technology to that equipment, only to theirs. What we're challenging them to do is to take that technology and adapt it to all our brands. Now, it has been applied to a Pitco flyer, to a larger convention oven, to a middle commercial oven.

So, they are working around the clock to -- basically, it's like taking your phone, which now you buy from Verizon or AT&T, while it could be a Three or a Blackberry, it's locked. It can only be used through Verizon. That's what their ventless is. We're challenging them to unlock it, to take that technology and make it an unlocked phone or an unlocked ventless, where I can roll any product underneath it. That's a huge trend for us, a huge market. And that's our attraction about this business.

Let's talk about MP Equipment. MP Equipment gets us in the chicken business, which is it's a chicken -- they dominate the chicken food processing business, which is a large market, normally domestically, but globally. And there are a lot of technologies there.

We are also working together to look at the pet food market, which both Alkar and MP have been working together to penetrate that market, which we feel is a huge high margin, fast growing market, is the pet food market. And if you had a chance to look at the recent Business Week, it talked about the pet economy. And we've been working on that for a while, to introduce some processing equipment for the pet food industry.

Okay, all right. That, as usual, is a very thorough and good explanation.

Tim, if I could ask, I guess, you one question, and that's on steel costs. Do you have a sense as to how much that cost you in the first half, and what it might be in the second half in terms of headwind?

Well, steel costs for us were about 35% to 40% higher in the second quarter relative to the second quarter of last year. And the rate of steel, I mean, it increased throughout the first quarter. We see it leveling off right now, but at a leveling off level that'll still be 35% to 40% higher in the third quarter than it was in the third quarter of last year. So--.

--All right. Then--.

--It'll continue to be a headwind. But, hopefully, we'll be able to catch up on it a little bit in the second half of the year. We were set back pretty significantly as the increased cost of steel far exceeded the price increases that we were able to pass on.

All right. And steel is, what, 15% to 20% of [COGS]?

Yes, it's about 20% now.

Okay. Thank you very much.

Yes, thank you.

Thank you.

Joel Tiss, Lehman Brothers.

Good morning. How's it going?

Good. How are you, Joel?

Hey, Joel. How are you?

All right. I wondered if you could just talk about -- like, switching gears a little bit, just talk about sort of the capital spending that's going on in the end markets?

And I know you guys have a lot of new product introductions, so the overall momentum in the end markets is not as much of an issue for you guys as it would be for other companies. But, just to take a step back and give us a sense of what the customers are doing, and what they're saying, just from a capital spending standpoint.

Well, it's interesting. I just came back and visited most of our major customers. I was out traveling not only domestically, but internationally, and I had a chance to meet a lot. I just came back from Mexico, and I've been meeting with our top customers there. I was all over the United States meeting with customers.

The chains are saying, simply, that's what customers want. They want good food, lots of choices. So, if you look at that segment, this is not going to go away. They're going to be looking at technologies. They're going to keep on looking at meeting that customer demand. So, good food, and you're seeing people getting into better products, whether it's from the McDonalds to a casual dining chain.

They are all looking at upgrading their ingredients. So, one of the issues is they are trying to upgrade the ingredients across the board. I think they have learned, ala Starbucks, that if you introduce, provide, great coffee or great products, customers are willing to come back to it and pay a little bit more for it. And we've seen that, whether on the menu in McDonalds or on the menu of a TGI Friday's. And they are upgrading all the ingredients.

On that process, the equipment tends to be heavier duty. They are trying to look at equipment that tends to cook 100% burger beef, which is a little bit thicker, a lot faster at the same speed or even faster. So, they are looking at speed. They are looking at equipment that lasts. So, we're seeing a lot of, still, demand on menu changes. We see that happening.

We see the chicken, breakfast and seafood markets growing fast. I would say the breakfast market is growing extremely fast. And there are two trends in that. There's trends of going out and doing what Starbucks did, which is putting a small microwave conduction oven in there, or you go through what the McDonalds is doing, which is expanding the breakfast menu significantly.

We tend to see a lot of companies, from corner bakery to the Burger King to the Chick-fil-A, to all of those expanding their breakfast menus and coming to us with that. So, we're gaining a lot of foothold in the breakfast menu.

On the chicken side, we are now rolling out a bunch of new product targeted specifically for chicken. Chicken is a tricky product to cook because it has a lot of fat, a lot of grease. So, there's a lot of cleaning involved. There is a lot of odor, smells, from chicken. So, we are now -- and customers -- and also, there is a lot of grease that goes into (inaudible).

So, a lot of things that we're talking about is how do we get product that handles chicken more efficiently, keeping the quality and keeping it most, not drying it out, and effecting controlling cleaning, controlling grease, controlling odor, and controlling holding of chicken.

On the seafood side, we continue to see the grill as huge grilled items on the seafood, and we continue to see that happening big and big, as we continue rolling out our Magic Kitchen Grills, our Southbend grills and our Jade grills, and Plunger, which it's a product they just introduced, Jade introduced, which is the Plunger that addresses the salmon, specifically salmon and swordfish. We're seeing a lot of demand on those products.

So, to answer your question, yes, people ask me all the time. Well, I review the stock price or the performance of casual dining and the season slowing down. We don't see that happening in our business. They are continuing to evolve, and continue to change their menu. And they are forced to change the menu to be able to remain in existence.

So, globally, I'll be honest with you. I'll tell you what's interesting. Globally, I was just in Mexico. And the biggest challenge both Mexico and India have, because I am aware of those two markets recently, is labor. As labor costs have gone up, both in Mexico as well as in India, they are having a hard time filling the restaurants with labor.

So, we're starting to see automation taking place. We just converted a chain in India to our higher end automation equipment, which is the Middleby Marshal, from traditional equipment, in India. And it's interesting because they could not get labor. All the labor is going somewhere else. They are being recruited somewhere else, and they are not being able to recruit the labor in India.

Mexico is the same way. They have the same issues of labor. They have issues of speed, of quality of food, and other things we've noticed while (inaudible) is eroding. Let's take Mexico, for example. Mexicans are spending their vacation in Mexico. Because of Visa requirements, because of difficulty to get to the United States, and because of the properties, whether in Cabo or in Cozumel or Cancun, have all upgraded, Mexicans are traveling within Mexico.

So, a lot of expansion for us, which is a dominant market for us, which is a huge market for us, which is Latin America, Central America, and we see a beautiful trend in that market where the economy is doing better and people spending it there in a market that's very, very pro-Middleby.

Okay. And just a quick follow-up. Can you talk a little bit more specifically about some of the terms in your new contract, and what -- you talked a little bit in the press release about what you gained. Can you talk also about what you had to give up to get that?

The primary things that we wanted to have in the contract was basically the ability of management to basically run production as we saw fit, in terms of flexibility, of managing the work force, what the job requirements were, how we're going to manage performance, and the number of people required.

In return, we wanted to institute performance-based compensation, which is the concept that we have at all of our other facilities. So, there is opportunity to have significant increases in compensation based on attendance bonuses and performance bonuses. So, that was kind of the trade-off.

We also instituted -- all the employees now in the Company are on the same medical program, which was important for us to get everybody on the same group plan across the Company.

Okay. Thank you very much.

Thank you, Joel.

(OPERATOR INSTRUCTIONS). Greg Halter, Great Lakes Review.

Hi, Greg.

Hello, good morning.

Good morning.

Good morning.

I'm glad you're so excited.

Well, we are.

It's a good thing. A question for you regarding the recent acquisitions. Can you speak to the management status of those entities? Will they be remaining, or how will that work?

Greg, we've always been very, very -- our culture is total decentralized. At Jade, we have retained 99% of management because they were good.

And I'm going to give you a little bit of culture there because what is phenomenal about Middleby is that it's the same management team. Now, let's take (inaudible) and then I'll step back because I want to answer your question first.

And when we ended up putting one house, the presidents happened to have -- were not part of the acquisition of Jade, left and we had to put in one of our own guys from the Southbend division. So, Ray Williams is the President of that company, and he's been with me forever. He basically came with me when I came to Southbend, and has been with me throughout this whole period. So, he understands our culture, and he runs it there.

But, I have to give you a perspective about Jade. What is unique about this culture, about Jade, is that the same people, this company, for seven years under the ownership of Maytag and Whirlpool, does not generate one-month profit. Here we come, we generated, I think, in June, we generated some profits in June, 90 days after owning this company.

And the reason is simple. Not because we are fabulous, I think because we understand the space. Customers trust us. They understand that we know how to serve them. We understand how to work with them. I think our incentive program, our performance incentive is unique. We empower people. We decentralize them to run their business as owners.

We want them to basically be able to come back and say this is an ability. Which (inaudible) using, which resources I need. I personally spend a lot of time there. I think I am committed. You all know me. Greg, you've known me recently, and you know I'm passionate about this business.

I went there and told the employees it's your business. You need to win. And I give you a true thing that they didn't do in the past. They did not have the power to -- the customers came back, and they'd be complaining about knobs. Jade has a great product, but their knob was one of the defects. They had knobs that were hot.

So, people had to use mitts or whatever to turn the knob. And for years, nothing would be done about that. Well, I decided to fix this problem because you want to keep -- because of the heat, you don't want to go to plastics. We want to keep the metal knob, and metal transfers heat.

When they are a part of Middleby, it's not to bash anybody else, for Maytag or Whirlpool or anybody. But, when you are a part of Middleby, we understand that space. We have knobs that work. We use them at Blodgett's, we use them at Southbend. There's a lot we do. So, it was easy for us to go and put some of our technology on knobs onto the Jade very fast. And now, finally, the problem went away.

So, it gives those people resources that they never had. It gives them a reach (inaudible). They went to the show. They were part of one. It gives them open doors to customers that we service. And other situations, it's simple.

At Jade, they used to do two motors, a motor for lower-end product, a motor for higher-end. And I said, well, what's the difference between the two motors? They'd say, well, that's a lower-end motor. I said we don't believe in that. Put that across your brand, all the better motor. They said, well, this is more expensive. I said it's okay. You're a high-end brand. Customers, when they buy your product, tell them that's what you did. Put the better motor, and give people four-year warrantees.

And that's the type of marketing that happened at Jade. And despite a four-year warrantee, despite a price increase, orders have been up significantly from where the level has been because customers trust Middleby. They trust that we're not going to flip them. Employees trust us because they've been up-for-sale now for over a year. They know we're committed to that space.

Number two, we deliver better quality to our customers. We put in a four-year parts and labor warrantee on all our Jade products because we believe in that quality. And still, we made money in 90 days.

Now, when I look at Carter-Hoffman, we inherited a great President, [Bob Fortman] and his team, great sales people. And what we're doing now is allowing them to run. And we're sitting together and saying, well, what resources now we can give you, and we put an incentive program there. We just spent all day yesterday with Paul Angrick from Wells, and he's going to be running the business for us. And we're going to retain management.

And look to all those people, they are more excited working with us, and us with them, than they've ever been in their careers. Here are the choices. You could have gone back somewhere else. [Peter Bethlehem], he's a class act in the business. Bob Fortman is locked into the industry. He said, wait, I was dying to be owned and working for somebody like Middleby.

You look at the MP Equipment. It's two brothers, and their family founded this business. They came to us, said we would like to be a part of Middleby. And now, they are running the business. They said we would like the discipline of running a business under Middleby. And that's what happened.

You look at Blodgett's. Blodgett's is run by Blodgett people. [Logan Mick], and [Danny Gubass] and all those people are Blodgett people. You look at Pitco. It's run by [George McMahan], [Bob Granger], [Dennis Bowl], [Tom Chanson], I could keep on going. They are all Pitco people. We stimulate those people to deliver.

But, talking about human capital, I'm delighted to talk about the addition of two new people to our organization who will make a huge difference. And those people left big jobs, big positions, to join us. They know us from a different perspective.

[Lyle Newby] joined us to become President of International. Lyle Newby, he was at McDonalds, Boston Market and that's where he spent his career. Very top position at McDonalds, Boston Market and Yum!. Many years at Yum!. He left a position at Yum! to come to us. He had seen Middleby from the other side. He was our customer. We were his supplier. And of all the suppliers he could have joined, he said I would like to join Middleby.

And he saw that there was a significant opportunity to grow our business globally. And Lyle Newby joined us beginning of March or April, somewhere in this time frame. And he's been out traveling significantly, putting a lot of spirit and a lot of tailwinds behind the international growth for powers.

And we just hired David Brewer. David Brewer just started August 1. David Brewer was the top head of engineering for Yum!, and every project, every innovation, every technology at Yum!, which is Pizza Hut, Taco Bell, KFC, A&W, Long John Silver, went through him. He had 200 engineers working for him.

And he's known our company forever because every project, every innovation that has to pass, whether it's a Wing Street fryer, whether it's a wall oven, whether it's a [Saltos] fryer, it had to go through his group and him. And we are proud to say that he joined us to be President of Pitco, and to help me take the innovation to the next level. I'm so excited about not only the asset acquisition we've done, but this human capital acquisition that we've gotten.

And I can talk about [John Pulucho], who's at Southbend or [Depill Hill]. I can go on, even in the middle management, we've accrued some unique talent to join us out of choice. And--.

--That's great. That's a great testament to what you guys are all about.

I'm also wondering if any of these acquisitions bring any new customers that you -- or existing, I guess, that you can or hope to cross sell to?

Yes, I think Carter-Hoffman brings us a lot of business in places that we have not been able to go, which is I would say segments such as -- they made us huge footholds in the correctional segment, which is a segment that, unfortunately, is growing around the world.

And it's a huge segment. I hate to laugh. When I talk to my family about it and say, well, we're going to get into the prison system. And Carter-Hoffman gets us there. It's a complicated business to get into because the requirement all over the world for safety and for holding food, so there is no riots in the -- of the quality of food, so you don't have riots. And believe me, you can't underestimate what cause some of that.

And the correctional system ends up paying quite a bit. They want quality in their system. They want to see people well. They have to safety, so the people don't use equipment as weapons against guards. All this, big issues of that. And unfortunately, the prison population is growing faster than any population in the developed world. And that brings us into that segment.

Okay.

On the Wells segment, it puts us into customers that -- gets us closer to the Waffle House. It gets us closer to customers like McDonalds. It gets us closer to the fast, the quick-serve business where they are a dominant player, as well as the fast-casual. So, they have a lot of fast-casual customers we don't have that allows us now to cross sell.

Then, the equipment is a complete new market for us. It's going to get us into two segments. The chicken processing business, which is a large business growing worldwide, and the hope that we can enter the pet food segment with some, which is a complete new segment, completely new.

We're still -- just to not mislead anybody, it's a segment that we are just working to get into. We are working with equipment. We have done no sales there. So, I don't want anybody to think -- but, we believe, with MP, it's a big market for us to get into that segment.

All right. And can you update us on the Jade's move into the residential market? I know that's out into the future, but just wondering if anything's happened there significantly in the last three months.

Well, they basically introduced, at the Kitchen and Bath Show in May -- I was there -- we introduced a new lineup of classic ranges that were very well received in the market place. They look commercial.

The other thing that made a huge connection at that show, we are the only, literally, the only commercial cooking equipment manufacturer to enter residential. So, if you look at all our competitors, they are not in that segment.

So, Actavis, you look at Wolfe owned by Sub-Zero, and you look at Viking, you look at Decor, you look at [Termidor], even (inaudible), they play a little bit in the commercial, but they are not like Middleby, a totally commercially-driven cooking equipment manufacturer. So, there was a huge amount of buzz by people saying this is a true commercial equipment company that now entered the residential. And that's the marketing play that plays on it.

We also -- let me tell you what we've done. We've positioned. We will never be a $200 million business. We have no intention to be. We don't have the capacity to do that. Today, it's a $3 million business. We expect it to be a $15 to $20 million market. We just increased the price to be the highest brand.

When you buy a Jade product, you'll have a four-year parts and labor warrantee standard. It will have standard colors. Any colors you want, you can have it free of charge. It will have features like our non-clock burner, which we crossed from our -- oh, what do you call -- from our commercial to the residential. And it was very well received.

And at this moment, what we are doing is we held and recaptured so many leads at the show. And we decided to not jump at it to really make money. Our number one objective at Jade was to make money. So, we didn't want to dilute all our efforts. Now, we understand how to make money at that company.

Everybody's excited. Everybody's going to -- I want everybody there to make their bonus this year. So, it's important that we get down on a winning team, and then we can start reinvesting some of that profit into some marketing dollars on the residential.

But, remember, our entering the residential is not to compete against Viking and Wolfe and Décor, but to be a niche player for that unique buyer who wants a unique range that looks unbelievable, that performs well, that looks like a unique piece of equipment, a unique piece of furniture that they are willing to pay a lot of money.

So, we are now the highest priced of any ranges residentially in the market place that nobody would pay. There were a lot of interior designers that came in, or a lot of kitchen distributors came in. They were in awe by the way we made it easy.

Everything's standard on this range. The burners are standard. The sliding glass are standard. The colors are standard. It's all made of heavy material. And even the knobs are now the better knobs. So, talking about that, we feel very comfortable that next year the residential will have a lot more momentum.

Okay. And I know you've done a lot of deals in the last couple of months. Just wondering if you could provide some input on the M&A outlook going forward.

I think that the M&A will continue. We're going to be very acquisitive going forward. We'll continue looking at brands. We'll continue looking at synergies. We're going to be disciplined, the way we've been. But, we'll continue looking at acquisitions as part of our makeup.

But, it has be higher disciplined. It has to have (inaudible), and we need to capture synergies. And we need to be able to take some from where we are to the 20% operating margin very fast. And we see a few coming on board, I think in the next few months. And we're excited about that, too.

Okay. And yesterday, I think, a notice came out with an announcement that their Mary Chef 402 or something like that has been approved at the 20,000 Subway sandwich shops. I guess this is an oven? Can you speak to that as how it impacts your business one way or the other?

It has no impact on our business. We're not in that segment. We don't play in that segment. (Inaudible) presentation, I think there are two segments.

And when I made all those investor conferences, even four months ago, I said there was two segments we don't play in, the holding and warming and microwaves. And now, with the acquisition of Carter-Hoffman, we got into holding/warming. We're not in the microwave business. So, there is no overlap.

I think I will let that be addressed by -- a TurboChef would be a better company to address that than us because that's their segment. They dominate that market, and they've done very well in it. And my hat's off to them. They have a unique product, and that's them. We don't play in that segment at all.

Okay. And one last one. I wondered, Tim, if you had your capital expenditure expectation for the year, and whether or not any of these acquisitions are in the need of new equipment or capacity?

The companies that we bought have capital expenditure requirements that are pretty similar to our existing businesses. So, we've indicated in the past that, on an annual basis, we'd be something less -- on the $3 to $4 million range on an annual run rate. Now, I'd expect that. And that might not jump a little bit. So--.

--Okay, great--.

--We're well under $5 million per annum going forward.

And what is international as a percentage of total sales? Or at least what was it in the quarter?

I don't have that number handy, but it would have been right around the 15%.

Okay, great. Thank you very much. And Selim, thank you for your enthusiasm.

Well, thank you very much. Thank you, Greg.

Tony Brenner, Roth Capital Partners.

Thank you.

Hi, Tony.

Selim. Previously, Selim, you had indicated that you intended, over the next year or two, I think, to consolidate some of Middleby's production facilities. These three recent acquisitions give you a bunch more production facilities. I wonder what kind of consolidation opportunities these now present.

They do. They present some consolidation. We have not sat down and evaluate that, to be honest with you. We've got a little bit distracted by the work stoppage, which we did not expect. I will address that in a minute because that's a great question you've asked, Tony.

And I think the consolidation at this moment, I'm still committed. I think we have capacity in all our plants to consolidate. As we become more productive, more efficient, space has become available. And I think we're going to continue looking at consolidation as a strategy.

So far, it has not been a strategy we've played on because -- we believe that there's a lot of savings in that strategy. But, it requires also a lot of unique execution. I think that we need to make sure we don't impact shipment putout, disrupt our customers, we don't inflict pain on our distributors and distribution channels. We have some great employees, which we don't want to put some in a position.

So, it has to be done in a way that's smart. It's not something that we just decide to do. Well, you get captivated by -- I think there are millions of dollars at stake if we consolidated. And we always talk about it.

Me and Tim, every time I'm flying somewhere with him, I look at him and say can you imagine if we could consolidate, how much more money we could bring to the bottom line? And I think we should make sure that we don't get tempted by the millions of dollars of savings, and don't do it right. And we end up with something our customers -- or flawed goods, and the quality of our product.

And I think it's not an easy task. But, it's going to be a task that, one day, sooner than later, Middleby is going to be committed to get it done. I think this year, between the acquisitions, between this work stoppage, between the innovation that we needed to address, and learning the food processing business, I think this got put on the back burner.

But, I can tell you, it remains on my mind because there's so much savings and synergies for us. So--.

--And your comment, Selim, that the margins on these three recent purchases would increase quickly to 15% to 20% from 5% or so currently, was a consolidation assumed in that?

No, no.

No?

No consolidation.

Okay.

That's keeping the business side the way it is.

Okay, very good. Thank you.

Thank you.

Let me -- I would like to go away from the script a little bit, but you've been with me a little bit, and I would like to give you a little bit of flair of our culture.

I have to say that for you investing in Middleby, or flowing Middleby, over the past years, we've faced crises. We faced some mad cow disease. We faced SARS, the bird flu. Recessions, stainless steel price increases. And we managed every one of them so well. But, we've never got hit at one time, or at the same time. What happened is we got hit by mad cow in one year, in one segment.

What happened in the last quarter is -- you have to witness what makes Middleby unique. And I hope to give credit not to me, but to every one of my management team and my whole employees to have been hit by a work stoppage, which we didn't expect to occur. And I'll talk about that in just a minute. By an acquisition change, which was dilutive in that order. By the fact that stainless steel was, in that specific quarter, the highest it's ever been, and we still delivered the numbers. We still delivered numbers that are acceptable. Of course, the quarter would have been a lot better if we didn't have the work stoppage.

But, let me talk a little bit about the work stoppage. The work stoppage made me sad. We're a company that we did not expect a work stoppage or a lockout to occur. We have a turnover that is one of the best in any industry. We have a 2% or less turnover among our company, of our workers.

And when we went to our employees here at Middleby Marshal in Elgin with a new contract, we tried to get productivity out of them by compensating them for giving up some healthcare benefit, as well as some productivity by paying them a lot more. And they turned it down, and it pained me.

It pained me to know there were 135 employees without job deciding to not wanting to adhere to a health plan that the other 1,000 employees have in the Company. I was pained to know that they did not want to adhere to a performance-based -- and I was not proud in the history of Middleby, or in my history here at this company, to have had a lockout.

So, I want to tell everybody, while it has been resolved, and it has been resolved to the success of the Company, I'm not happy about it. It doesn't -- I would have liked to not have that track record on my record, personally.

But, on the other hand, I would like to thank our stellar employees, employees in the senior management and at all levels, who without any additional incentive, without extra pay, rolled up their sleeves, went down to the factory to create, to build ovens, to ship parts. I want to thank our employees from other factories, whether the welders or assemblers, who drove or flew on their own time, even on Memorial Day Weekend, to be with us, to alleviate the pain and be able to ship, and crossed picket lines.

I'd like to tell you the testimonial of our customers, who stuck with us, and we did not lose one customer during throughout this whole ordeal. And finally, I have to tell you, we've had a union relationship with a Teamster for over 30 years.

And I wanted to say that the union leadership came through. They were in a tough position between our employees, their members and us, management and the Company and the Board, where we wanted to implement productivity improvement for productivity gain. And I have to say that they came through trying to manage two constituents at arms, and they came in with a fair and balanced approach, while they tried to secure more money, which they did for their members, and they delivered for us the productivity gains that we were seeking.

To that, I thank all our employees, all our management team, all our workers from other factories who contributed to making -- at least the shipping part, and to our customers who stuck with us, and to union leadership.

And I'm pleased to note that this is resolved, and I hope to come back and build the trust with the people who remain in our company, who came back to work with us. And I hope that you, as investors, give us credit for the culture at Middleby that it will not use weather-related or storms, it will not use work stoppage, it will not use stainless steel increase, it will not use an acquisition to not perform, and adds value to the shareholders.

On this, I thank you, and I wish you a good weekend. Bye-bye.

Any other questions? Is there anything? Dashanta, is there anybody else in the queue?

No, sir. At this time, there are no further questions.

Okay. Well, thank you, everybody, for attending this morning's call. And we look forward to speaking to you again at the end of the third quarter.

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