Middleby Corp (MIDD) 2008 Q1 法說會逐字稿

Good morning, my name is Toshanna, and I will be your conference operator today. At this time I would like to welcome everyone to the Middleby Corp. first-quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Tim Fitzgerald, you may begin your conference.

Thank you. Good morning and thank you for attending today's conference call. I'm Tim Fitzgerald, CFO of the Middleby Corporation and joining me today is Selim Bassoul, Chairman and CEO. I have some initial comments about the Company's 2008 first-quarter results and then we will open up the conference call for questions and answers.

We were pleased to report our 25th consecutive quarter-over-quarter record net earnings. The first-quarter results include the impact from five acquisitions completed during the last 12 months including Jade Range, acquired on April 1, 2007; Carter Hoffman on June 30, 2007; MP Equipment on July 2; Wells Bloomfield on August 3; and Star Manufacturing on December 31, 2007. The first-quarter results did not reflect the impact of Giga Grandi Cucine and FriFri which were completed on April 22 and April 23 subsequent to the Company's first quarter.

Net sales in the first quarter increased 52% to $160.9 million as compared to $105.7 million in the first quarter as 2007. Sales from the acquisitions completed over the last 12 months amounted to $55.3 million in the quarter. Excluding the impact of acquisition sales were flat with the prior year first quarter and were comprised of a 2% growth in sales of commercial foodservice equipment group. While domestic sales were affected by a slowing economy, international sales for that group increased 16%. The rise in international sales reflects strong growth in emerging markets with the U.S. and international restaurant chains.

Growth in new products including in a new combi line from Houno and the positive effect of the weaker U.S. dollar. Sales of the food processing group were 16% lower and reflected delayed customer purchases during the quarter due to economic conditions and the timing of impact of large orders which can cause quarter-to-quarter variability for this business.

Gross profit increased from $41.1 million in the first quarter of 2007 to $58.9 million in 2008 on higher sales volumes and the gross margin rate decreased from 38.9% to 36.6%. The gross margin rate for the quarter includes a $1.5 million charge to adjust inventories at Star to fair market value. The gross margin rate also reflects the dilutive impact of the acquisitions completed in the last 12 months as gross margins at these companies continue to improve.

The newly acquired companies had an average gross margin of 33% reflecting improvement from 29% in the fourth quarter of 2007 and 25% in the third quarter of 2007. Excluding the impact of these recent acquisitions, gross margins would have been 40% during the quarter despite the continuing challenges of rising steel costs.

The recent acquisitions will continue to dilute margins during the first half of 2008; however, we should see continued improvement in margins at those operations as integration initiatives implemented are fully realized.

Selling expenses increased $5.1 million to $16.2 million and general and administrative expenses increased $5.5 million to $16.6 million. Of the $10.6 million increase in selling, general and administrative expenses, approximately $9.7 million was attributable to the recently acquired companies.

Interest in deferred financing costs increased from $1.2 million in the first quarter of 2007 to $3.7 million in the first quarter of 2008 as a result of higher debt balances associated with the recent acquisitions. And other non-operating expenses of $400,000 included $200,000 of unrealized foreign exchange losses and $200,000 of unrealized losses on interest rate swaps.

The provision for income taxes of $8.7 million was reported at a 40% effective rate as compared to a $6.9 million provision at 39%. The increased tax rate reflects an increase in tax reserves of approximately $275,000 recorded in accordance with Accounting Standard FIN 48 primarily for increased state tax exposures. These increased reserves requirements are due in part to growth of the Company through acquisitions.

Net earnings for the 2008 first quarter increased 23% to $13.1 million from $10.7 million in the prior year and diluted earnings per share increased 20% to $0.77 per share from $0.64 per share in the prior year quarter.

Turning to the balance sheet and first-quarter cash flows, the net changes in the balance sheet from year end reflect the impact of the 2008 acquisition of Star. The Star acquisition added $11 million to accounts receivable; $11 million to inventory; $7.9 million to property, plant and equipment; $6.5 million of accounts payable; and $10.7 million of accrued expenses. Additionally recorded $100.1 million of goodwill and $73.8 million of other intangible assets associated with this acquisition. 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 $12.6 million during the quarter as compared to $4.4 million of cash utilized in the prior year first quarter. Non-cash expenses added back in calculating operating cash flows included depreciation and amortization of $3.5 million for the quarter and non-cash share-based compensation costs of $2.3 million.

Operating cash flows for the year were utilized to fund the acquisition of Star for $188.4 million. The Company also had capital expenditures amounting to approximately $2.1 million during the first quarter which included $1.2 million associated with the purchase of a manufacturing facility for our recently acquired Carter Hoffman division and $900,000 for the replacement and upgrade of manufacturing equipment.

Total debt at the end of the 2008 first quarter amounted to $272.7 million. This compares to $96.2 million at the end of 2007 prior to the Star acquisition. This net increase reflects the first-quarter funding of the Star acquisition net of $12.6 million in cash generated from our operations which were utilized to reduce borrowings.

Now as it relates to the acquisitions, we were pleased to announce the acquisitions of Giga on April 22 and FriFri on April 23. Giga is a leading European manufacturer of ranges, ovens and steam cooking equipment located in Italy. FriFri is a leading brand of fryers based in Switzerland. The combination of these leading brands with our Houno combi-oven line provides us with a complete line of cooking equipment for the European market. The combination of these companies provides for certain manufacturing and sales and marketing synergies amongst the group.

Additionally, we believe the combination of this complete line of European cooking along with our portfolio of U.S. brands will allow us to further penetrate the international markets. Giga and FriFri have combined annual revenues of approximately $35 million and EBITDA margins approaching 5%. As with prior acquisitions, we believe we can improve these margins during the remainder of the year and expect to be at a run rate in excess of 10% by end of 2008 and in excess of 15% in 2009.

We are pleased to report continuing progress at our Star acquisition which was completed during the first quarter. As we've previously announced, Star at the time of acquisition had approximately $100 million of revenues and was generating approximately $20 million of EBITDA. As with other acquisitions, we anticipate that there will be some industry reduction in sales as we rationalize lower margin or unprofitable SKUs which could result in a reduction of sale for the short term.

We have started to realize improvement in the EBITDA margins resulting from completed integration initiatives and are on track to improve the EBITDA margins to 25% or better at this operation by the second half of this year.

We are also pleased with the continued progress made at the four other acquisitions completed during fiscal 2007 and we remain on track with our profitability objectives at these companies. As I previously mentioned, these companies reported gross margins in excess of 30% in the quarter, up from 20% at the time of acquisition. Additionally, the operating margins have more than doubled approaching 15% for the first quarter and we anticipate continued improvement in 2008 and anticipate these companies will improve to operating margins in excess of 15% as we move into the second half of 2008.

Toshanna, can you please now open the call for questions?

(OPERATOR INSTRUCTIONS) Peter Lisnic, Robert W. Baird.

Good morning, Tim. I guess to start off on the top line, the comments that you have on orders or sales being deferred potentially. Is that just in the food processing business that you are seeing that?

I think we've seen a general slowing on the commercial side as well. I think the food processing which is more of a capital equipment purchase with some of the products you tend to see some deferral right but some of it is just driven frankly by quarter-to-quarter variability too. We have large orders in that business and the timing of when those hit can cause a spike up or down in orders. If you remember in the fourth quarter, the sales growth in that business was up double-digit. So I think you see some variability there but I would also say both businesses are slower right now due to the economic conditions.

All right. And then how do we -- I guess how do we get comfort that deferrals aren't necessarily just -- that they actually are deferrals instead of people just never ordering in this environment? Are you still haring your customers talking about buying new equipment? They are just -- the uncertainty in the first quarter is causing them to buy equipment in the second, third and fourth quarter?

I think that is our general feel, yes. And as it relates to the food processing business, there is a number of projects that are -- you see specific quotations out there. I don't think it is a situation of where projects are being canceled, you just see them being delayed or taking longer for finance departments to make a decision on those.

And do you have -- can you give us maybe color commentary on what April looked like in terms of either orders for the commercial foodservice business and food processing and/or if you have like a backlog number?

As we've always indicated, the backlog we don't think is meaningful overall to Middleby because our backlog tends to be three weeks out.

But would that be true of the food processing too?

We don't want to get in the habit of reporting what our quarterly order rate is. We haven't done that in the past.

I understand that but I'm just trying to get a sense as to what gives you the comfort that these deferrals will actually be realized in terms of revenue in the second quarter and the back half of this year? Because I'm not sure the macroenvironment is getting a whole lot better.

I agree with that. I think and I'm not saying orders that we saw deferred -- in the first quarter all come into revenue in the second quarter. I think we do believe that in '08 will be a generally slower environment than what we saw in '07.

Okay. If I can ask it this way. In terms of the organic growth number that you saw -- you know, first quarter is kind of flat. Is that a reasonable expectation for the rest of this year based upon what you are seeing in terms of orders right now or how do we think about that?

I don't think we are going to -- I think what we've always indicated in the past is that we will -- we believe we will outpace the rate of growth in the industry. So when the industry is slower, we will be slower but outpace and when it is stronger, we will be stronger. I think that is consistent. I think this is -- we're in uncertain times right now. I think the first quarter was slower and we'll kind of wait to see how the second half of the year unfolds.

Okay. Thank you.

Tony Brenner, Roth Capital Partners.

A couple of things. Number one, are there -- in the commercial foodservice side, are there particular parts of the business that are especially weaker than others? I know at your analyst meeting it was pointed out that Pitco sales in particular were weak. Some customers were anticipating purchasing a new Rocket Fryer which is not yet available and I wonder if there are distortions along those lines in these numbers?

Tony, I think maybe addressing Pete at the same time. There are a lot of elements that are converging to throw off a little bit the ordering process that has been stable in the past. One, we are introducing a bunch of new products. And I said in my previous conference call, we are testing a lot of new innovation with many of our customers. So a lot of people will want to look at a fryer are waiting for the Rocket Fryer.

The other situation which is a macro situation has nothing only to do with Middleby. It is a fact that a lot of people are looking at this economic stimulus package and I assume that it has something to do with it when they say I want to be able to take advantage of that accelerated depreciation which I understand kicks off starting May 15. And this could have had an effect on what happens in the ordering process between the first of the year till May 15h when people say, well, why would I buy a piece of equipment today when I can buy it after May 15, if I'm a franchisee and get accelerated depreciation?

Number three, I think we have an [instance] with every chain -- I don't think that the business, the U.S. restaurant sale have never declined. If you look and you have been covering the restaurant business for a long time, you go to Technomic which I'm looking right now about and you go back to 25 years, restaurant sales have never declined.

I think what is the issue right now we are seeing with our customers is that operational costs and their margins, their commodity prices are way up, cheese is way up, many commodity prices are way up. Utility costs are way up. And I think that as those people are reconsidering ways to make more money to go back to the margin that they have been experiencing a year ago or two years ago, we are seeing a lot of increase specifically for us for our energy-saving equipment.

I think there are a lot of things moving right now. It's not a matter of -- I don't think people are going out and starting up their stoves at home. I don't think that and I think I will debate with everyone on the conference call that people haven't gone back and say wow, wait a minute, I'm going to start cooking at home. I don't think that trend is switching.

I think that what is happening is our customers are under significant margin pressure and that is affecting the whole industry, it's not only Middleby's issue. And now Middleby is better positioned than anybody else to come and offer solution to reduce utility costs for some of our customers. And finally, I think we see our energy saving devices that our patented, we are seeing a lot of increase about those.

It sounds like the two acquisitions that were recently made, Giga and FriFri are going to be -- going to have a neutral impact or close to it on the bottom line in 2008? Is that about right?

Yes, I would say it would not be meaningful.

Okay. And lastly, given that you've expressed guidance through the prediction I guess that earnings per share would be up between 20% and 25%. Given the lack of any organic growth in the first quarter, the nickel charge for a new store and a number of other extraneous negative items virtually thrown in there, should one be pretty comfortable that you are at least on track if not ahead of that guidance at this point?

I think we never gave guidance, Tony. What I said is that over the next five years we're going to average 20% to 25%. I thought longer-term we're going to continue doing what we've done. At this moment, I feel very strongly that we will not give guidance. I don't want to get into the guidance game. I think the environment is very tough out there. I think our customers are trying to figure ways to make more money on the sales, we're to help them.

I think that we're going to manage through contingency planning. We're working with our suppliers. We do not understand the impact of steel again. There is rumbling that steel is going up again in the third and fourth quarter. I think we are taking all of that. This is an environment that is very unique for the economy. We are not the only company facing that. I think is not the only industry facing this.

I think across the board, I don't know what is going to happen if oil goes to $200. I read in The Wall Street Journal people are speculating a barrel of oil is going to $200. I don't know what it means. If any of you can call me back afterwards and tell me what it means to Middleby, and then I'll welcome those comments.

This is a new venture for all of us. We don't understand what it means, and we need to figure out where we go from here. At this moment, this management have had a lot of other headwinds and we've managed them very well. This is another headwind. We are going to have to manage it, we are going to have to come back and strategize and say what is this new winds are meaning for us.

I think at this moment we're not going to make any prediction one way or another. But I will continue saying long-term, Middleby is better positioned than anybody else. I will finalize with a conclusion once all the questions are asked with what -- I will summarize what I see the next three years to look like; not the next quarter, not this year, but the next three years, how it will look like for Middleby.

Okay, thank you.

Amit Daryanani, RBC Capital Markets.

Good afternoon, guys. Not to beat a dead horse, but these program push-outs and deferrals, can you just talk kind of when you saw this happening in the quarter? Was it fairly linear? It's been about 40 days since Q1 closed. Have you seen some of these push-ups translate into revenues for Q2 so far?

I think the order rate has been volatile. So I don't think -- when you have a period like this, there's a lot of uncertainties at the customer level. There's a lot of things that were going on in the financial markets and access to capital that affects certain of our customers. Because of that, I think we've seen some inconsistency in the order rate, which is typical during periods like this.

Have you seen that come back? You're talking about sort of March -- May 15th when you can take advantage of accelerated depreciation. But I would imagine people need to place orders to you right around now to at least get their product in the next few weeks, right? So are you seeing those orders come back in Q2 so far?

At this moment, let me summarize that we've had a good day and a bad day. So one day, we've had a good day, one day we've had a bad day. At this moment, we have not been able to forecast domestically -- I'm talking on the domestic market -- it has been very, very uncertain. So our feeling is we are sitting back and saying, what do we do?

The other thing that is happening is there is a lot of trends in the industry right now by some of our customers to ask for significant reduction in price. And the other things we have been very cautious about is the fact that while the temptation is here to stimulate sales, which some of our competitors have done, I'm very worried that today whatever I commit to today looking at steel prices in the second half of the year, we're very concerned about stimulating orders through discounting.

So we have been very disciplined not to give equipment at a discount, stimulate the top line, and then be hurt with a double whammy. Not only we gave more discount so we reduced our margin, but then by the time we shipped that and replaced the steel, we already have an inventory, we're going to replace it with a lot higher steel cost. So we've been very disciplined.

So what you expect us all who have followed that company for the last eight years, we have been very disciplined. We've had a lot of headwinds. We've had not long time ago a discussion with Middleby came very strong better than any other competitors we've had and we believe that we're going to continue becoming very strong moving forward.

What does it mean during this time? We are going to be -- let me summarize to your question, orders are at certain at this moment. Going forward, we do not know what is going to happen day in day out. I think that customers are looking for discounts, customers are looking for energy-saving devices which we can offer and at the end, we are looking at creating a process during that time that get that company much stronger to the bottom line. So that we can continue growing the 20% plus earning per share growth that we are committed to.

That is fair enough. And just on the Rocket Fryer, could you just update us as to where you are with regard to those launches? Are these products getting tested with the customers today? Are you still doing some internal tests? When do you expect those programs to be sold to customers?

Okay, the program is being tested right now with one customer. And it is being tweaked internally. The Rocket Fryer is having significant interest. It was recently shown at a major, major franchise convention of the QSR. The response -- and I'm sorry this was not the right fryer -- I take it back. This is not the right fryer.

We showed another fryer that was very well received, It is also some type of an energy-saving fryer that was well received at a QSR. The Rocket Fryer will be shown at the National Restaurant Show launched at -- which is next week. And we are expecting sales in the first quarter which we always committed in '08.

All right.

So we will be first quarter of '08 we will launching the sale of the Rocket Fryer which we always said that is going to happen and we are going to be showing that full launch. We've shown it in the past and there's a tent for a few customers now we are going to be showing it openly to everybody at the National Restaurant Show in Chicago next week.

Tim, what percent of total sales came in from international segments or markets? And did you give that out?

I didn't give it out, it is roughly 20%.

All right. Just in terms of the industry headwinds from the Star acquisition as you marked to market with the inventory, is there anymore of that that needs to be done or is this the $1.5 million kind of headwind done with now?

I'm anticipating that's the end of it.

All right, perfect. Thanks a lot.

Jamie Clement, Sidoti & Company.

Selim, I think a lot of the questions have been about end markets and sales and all that kind of thing and what I would like to focus on is just productivity and manufacturing and that sort of thing. You all acquired a fair number of businesses last year. You have the Star that you brought on in January and two recent ones. I think that the concerns for a manufacturing company are that if sales soften, you get kind of a reverse operating leverage system in your plants. And it sounds to me like you've got a lot of productivity initiatives in gear. And I just want to make sure that I'm hearing correctly that you understand the sales environment is going to be volatile but you still expect to gain significant productivity as the year goes on?

That is correct. I think we are working on a lot of productivity gains. We have a lot of processes in place that are working in our favor and we are very excited about that. By all means the year is not a lousy year. I have to tell you I look at it and I say everybody's expectation have to be reset. Let's make it clear, we delivered a phenomenal first quarter, okay. It is a very good first quarter. I want to address that very, very strongly.

If you look at this, it is truly vintage Middleby. When everybody is including companies like GE having hard time which are well run by management and all that, you look at a company like us, Middleby where flat organic sales which we still delivered a 20% -- and if you take the one charge away, we will be more than 20% -- 28% earnings per share growth. I have to say that you have to give credit to my management team. I don't want to leave that conference call and having people say what is going on? You have been around me. Everyone of you unless the investors come on, you can go back and see, we have had a lot of headwinds and we have managed.

But I don't want to be cornered into guidance. I think I'm finding out more and more that people want guidance. I don't want to deal with guidance. I am definitely -- this management team and this board have made a philosophy not to give guidance. I think you should trust that we are productivity improvement. You should trust what happened in the first quarter was a string of strong indication of a strong management team that delivered.

And at this moment everybody is trying to pin me on the top line. I think the top line is difficult, okay. We know that. I'm not telling you anything new and if you are surprised by this then you must have been sitting somewhere in Burma or maybe in (inaudible). (inaudible) in the United States is difficult. And my feeling is we have to manage it and this is not the only headwinds we've had. This company has had headwinds last year of strike, we've had stainless-steel, we've had SARS, we've had issues such as introducing a wall oven which had energy-saving and we have had customers say they were not going to order anything till the wall oven come. We have seen as before and we have managed through them.

This is a different type of headwind, totally different and we are going to manage through it. And you have to sit with me and said okay, the expectation has to be reset. I could not come into a quarter like this quarter came as strong and people say, wow, he did not deliver, the management team doesn't deliver. Then something has to come in, something has to change.

I think the productivity gains will continue very strongly. I think we are going to continue doing that. I think we are testing a lot of products to our customer. I think the energy-saving is going to be very good for us. Finally the payback on most of our new equipment are going to be less than two years so we are feeling very strongly about it. We are working with our customers in one end. I don't want to turn my customer off.

Some customers are struggling, their business model is somewhat struggling right now with their margin being affected. I've gone out to my customers and say, you know what, Middleby is unlike anybody else. We're going to help you. If you need the equipment to be calibrated or repaired, we're going to help you to whether that storm. I'm not pushing our customers to replace their equipment today. I want to be able to be in line with them and in partnership with them to sell them the right equipment. I don't want to just sell for selling because I am here for a sustainable long term.

If you go and audit our customer and you look at the level of service and the trust that has been established between us and our customers, it is very strong. I don't want to push our people to buy something they don't need. So in many cases, we are telling our customer don't buy this piece of equipment yet. Wait till the Rocket Fryer because the savings will be huge. Wait till mini-WOW. We don't need to buy the WOW oven. We launched the Mini-WOW, get the Mini-WOW because that has a lot -- it can produce, you don't have the volume for the WOW oven but in the Mini-WOW is good for you.

So I think we are working in partnership with our customers, the same way we work with partnership with our investors. We've been very transparent and we have been very, very committed to delivering the results. I don't think this year will be different. But the expectation has to be reset instead of what happened in the first quarter to everybody, not to the analyst only, but to that individual investor who is expecting okay, what is going to happen? I think that we cannot reset expectation to say well, he's going to now deliver 10% earnings per share but cannot be 25%. Somewhere between around 20%, 18% to 20% is a good resetting.

Okay, fair enough. And if I could just ask one more just manufacturing related follow-up. On the fourth quarter call, you gave a little bit of an update about the Elgin plant because obviously you had the work stoppage and then you were taking some actions in the latter part of 2007 that you wanted to take. That is obviously an important plant. What -- have you taken the actions there that you want to take? How is that progressing?

We have, we have. I think we have seen improvement in Middleby very, very strongly. We have by the second quarter of this year will have significant margin improvement which is superb. I think I credit our management team at Middleby Marshall. They've done a fabulous job and we're going to see significant productivity gains from that division as we go into second and third quarter. Remember, last year we had a strike.

Well aware, I am well aware. Thank you very much for your time.

(OPERATOR INSTRUCTIONS) Jason Rodgers, Great Lakes Review.

Hello. You gave out what the growth was on the commercial food service side internationally. I was wondering if you could give out what the number was domestically?

It was flat domestically.

Okay. It was up 2% internally, up 16% internationally, so you are saying domestic was flat?

Yes.

Okay. And on the international side, it was about 20% of sales. Do you have the number for the corporate growth internationally?

I'm sorry, I don't understand that question.

What is the growth internationally?

What is the growth internationally?

Yes, I think you gave it for the food service 16%. I was just interested in the company as a total internationally (multiple speakers)

Oh, breaking out the food processing side as well. Oh, I don't have that right now.

Okay. For steel costs being up, I think of the last call you might have mentioned what the basis point impact on the gross margin was. I wondered if you had that for this quarter?

It has been running 1.5% to 2%.

Okay. And looking at the acquisition side of things, do you have the number of what acquisitions contributed to the earnings per share in the quarter?

We are -- it was over half of the earnings per share growth in the quarter.

Okay. And around $55 million in sales from acquisitions in the quarter, I wondered if you had an estimate or range for what acquisitions may contribute to the top line in the current quarter?

No, that is not something that we -- I think we've given the size generally of all the acquisitions so we are not going to specifically go quarter by quarter.

Okay. And then finally looking at -- just wonder what your appetite was for acquisitions currently or what funds you may have available for acquisitions in the environment now?

We've continually said that acquisition is a key part of our growth strategy here. And we continue to believe that we are very well positioned with our -- strategically and financially with our balance sheet and we are continuing to evaluate opportunities.

Okay, thank you.

Peter Lisnic, Robert W. Baird.

Hey, guys. Can you give us a sense for the order of volatility? Is that at the big chains? Is it at mom-and-pops? Is it across the board? Just kind of where are you seeing that more specifically?

Peter, I think at this moment the volatility is across the board. I think that there is not one segment that is not doing better than others. I think that at this moment we see our volatility being across the board. We've seen it at all the chain levels and we've seen it on the institutional side. So the volatility continues to be across commercial food service, across the board. So it is not related to one segment.

And as I mentioned, it's not because of (inaudible) sales have declined. It is just because of a lot of those people have margin issues and they are trying to figure out new menu changes, replacement equipment, trying to figure out ways of cutting their costs and we could be part of the solution. But the biggest part is food costs. To be honest with you, food costs have been way up and if you've been out -- I mean if you go out just for the market and buy milk, even milk has gone up. Everyday product is up significantly.

Corn is way up and many of our product, many of our customers use corn significantly or cornstarch whatever. All those our way up. Wheat, you know what wheat is, wheat is going through the roof. And they have issues and we are trying to work with them and as they continue finding ways to substitute ingredients without affecting quality and that is what we are working with our customers. Remember, Middleby is known to have the best labs around the world in terms of cooking equipment and we've seen a huge drive of customers coming through our labs to figure out a way to change menu and some of our equipment are key to changing menu changes. To continue delivering quality using different ingredients or whatsoever.

So a lot of changes in the industry and I think this is good for the industry. I think our restaurant businesses -- customers will get stronger through this. Some concept will be flushed out. There is no doubt that in the next 12 months to 18 months many what I call badly run, badly managed concepts will be flushed out. But the stronger one will get stronger and we are well positioned with companies like (inaudible) very, very strong doing extremely well. Cheesecake Factory doing extremely well addressing trans fat. A lot of quick serve companies doing well, Papa John's, give you a great example.

Papa John's is launching along with other pizza chains are launching the text message ordering. Phenomenal things for them. Great innovation to get closer to the customer where people can order pizza by text messaging instead of calling restaurant figure out what it is, they could be on their way back and text message Papa John's. They made it so easy. Domino's is doing the same way, the same thing. I think this is fantastic. Great for us. It will create a lot of demand for our customers.

We are truly partnering with the creme de la creme of chain restaurants. Those people are not dying. They are doing what we are doing, changing their prophecy to increase their margins, to service their customer better and to improve the quality. And I think that if you look a year from now, you will remember that conference call and you will remember how well those restaurant concepts will be doing. They are all investing in smart ways of getting closer to their customer on increasing their average check or increasing their margins.

Okay. I guess if I could go back to Tim, your comment on steel priced to 150 to 200 bps in the first quarter, is that after price and was that a gross margin comment?

Yes, that was a gross margin comment. I'm comparing it relative to a year ago obviously.

Okay, and then the inventory write-up charge was only $1.5 million. And I thought last quarter you said it was going to be $3 million. So just to reconfirm that you are basically done with that $1.5 million? You're not going to recognize anymore in the second quarter or beyond, correct?

I believe, yes, that is my expectation.

Okay. Do you guys mind commenting on -- you've got this order volatility and you also have some pretty significant competitive changes in the landscape with two or three big competitors battling it out and somewhat consolidating the space. Does that change the competitive environment for you relative to those competitors? Or just kind of what do you see the competitive landscape doing because of a couple of these announcements that we've seen on the wires over the past couple of weeks?

One of them is very recent so it happened this morning so like you, we don't know what it means for us. We haven't assessed it. Preparing for this conference call we haven't yet had a chance to digest it. I assume you are talking about ITW putting a bid (multiple speakers)

And we are not going to comment on (multiple speakers)

We don't know what it means for the competitive landscape. Let me go back, Peter, to tell you what -- the landscape in (inaudible) is being bought by one or another and we don't understand what it means. We are focused on what we do. We have competed against (inaudible) in one way or another. We have competed against ITW. We competed against a lot of companies and we manage our business our space extremely well. Our margins continues to be extremely strong.

I think that we have been leaders on the hot side of delivering patented product addressing trends ahead of every competitor whether it is on energy-saving and that is documented. For those new investor or those analysts who haven't been with us, this company talked energy-saving in year 2000. It is out. It is public. We have been investing in energy before anybody else and we know energy-saving in cooking equipment or appliances better than anybody else.

We have been now addressing the trans fat free oil now for the last 2.5 years with the Rocket Fryer and the Solstice Fryer. We have been addressing a speed in terms of addressing speed in conveyor ovens and automation 20 years ago. We understand automation better than anybody else. We have done some great things.

We are now talking about -- we talk about the Hydrovection which addresses energy, cleaning, ability to cook product better than any other oven in the marketplace. We have disrupted the marketplace with technologies that change the way it is. And I've said many times we might not be as good as Apple but we look like Apple. So in our business, we have disrupted. We have created many iPhones, many iPod and we will continue.

So just to remind everyone, I think everybody's focused on trying to get me to guide you, I'm going to try to walk away a little bit from this and show you and remind you the number of new products that we have coming up in 2008. I'm going to read them to you. We have the high gage oven. We have the Hydrovection convection oven from Blodgett; we have the Rocket Fryer; we have the ventless hood from Wells; we have the visual cooking combi-oven from Houno which are phenomenal, phenomenal combi-oven. We have unique ethnic products from Jade, some [other] fryer, barbecue, saute station, rotating Mongolian grill.

We have a conveyor fryer from Alkar, a coextrusion from Alkar, a forming equipment from MP, an intelligent water cutter from MP Equipment. Let me tell you what we are addressing. We are addressing safety in the food processing business. If you look at the biggest concern at food processor right now, it is safety. And we are addressing safety by introducing coextrusion, by introducing in our RapidPak business, flash pasteurization. We are addressing in terms of the U.S., we are addressing convenience innovation.

With Star, with Mini-WOW, with High H, we are addressing ethnic and exotic inspirations. There is the huge growing interest in food from far away, both Latin, Spanish, Caribbean flavor are on the rise. And it is truly unbelievable how many combinations I'm seeing. If you've been to restaurants, I'm sure many of you have, you look at garlic jalapeno, tequila lime, ginger garlic, sesame pineapple, sauces and marinades and we're working with many of our customers especially on the Jade side to introduce product specifically that talk about that.

We are looking at as the coffee and beverage wars among chains continue to make news, interesting that the increased incidence of snacking is going way hand in hand and that is where our Toastmaster, our Star, our Houno and our Wells business is continuing to have major impact in 2008 and 2009.

I look at our fast casual and I'm leading here where we are a dominant player in fast casual, the overall growth rate of that segment continues to do very well. And we continue to be very active in that sector. So on this, we are feeling very, very strongly about the dynamics of where we are taking our innovation and what does it mean from a competitive landscape? It means that we continue focusing on food safety, on energy, and on basically addressing trans fat oil.

So we are feeling very good. I don't think any of our competitors have come close to us on any of those three items. Energy-saving continues to be the leading of that. Everybody talks about energy, nobody has addressed it the way we measure it. We quantify it we give you the payback. Whether it is on our ovens, whether in our fryers, whether in now introducing it in some of our holding cabinets through Carter Hoffman.

Mark Grzymski, Times Square Capital.

Good afternoon. Tim, on the international business, I guess you said about 20% there. Does that -- is that a true number or is it hard to quantify since some of your domestic customers of course are buying for international or how should -- I just want to clarify that?

That number I gave is an approximate number. I don't have the exact number in front of me but I expect it is pretty close to the 20%. And it will be in the 10-Q and that number will be an accurate number.

Okay and then just to follow up on Pete's question there regarding the landscape. I know you can't comment on the ITW Manitowoc bid here for [notice]. But I'm just curious, have -- given where the valuations are coming out, I'm just curious have you ever been in discussions over the last kind of a year with either of these companies --

We are not going to comment on that at all.

Okay. Well, thanks, guys.

I would now like to turn the call back to today's speakers.

Okay, well thanks everybody who (multiple speakers) Go ahead.

I have comments to make. First of all, let me back into industry dynamics in general. If you look at other's life span of foodservice companies, eight years. We have a large installed base of over 850,000 establishments in the U.S. and replacements represent of approximately one-third of the market. So we are going to continue seeing replacement occur. Even though it is delayed maybe from one-quarter to another, it will continue showing that trend.

Let's talk about Middleby and I want to give you the landscape for the next three years. We are the leading value-added manufacture of hot commercial foodservice and processing equipment. We have number one, number two market share in each product. Our products are now critical to our customers and they represent a small portion of their budget and provide high ROIs. Our payback on most of our product today especially the new platform that were introduced in 2006, 2007 and the new product in 2008 have a payback in most of them of less than two years.

We have a unique global operating platform that provides significant barriers to entry. We have been in emerging markets more than anybody else and we continue to grow those emerging markets for us.

The U.S. restaurant sales have never declined over a 25-year period and we don't expect that to decline. We have a diversified revenue base with exposure to high growth end markets. We focus on continued operation improvement and margin expansion. We have a successful track record of creating significant values through acquisition and our long-term annual EPS growth target of 20% is consistent with historical performance.

Most important, for all of you on this conference call and everybody investing in Middleby, there has been a very stable and proven senior management team of significant years of industry experience and we will continue looking at opportunities to grow our margins and grow our EPS in the next three years. Thank you.

Okay, thank you everybody for attending today's conference call and we look forward to speaking with you next quarter.

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