Middleby Corp (MIDD) 2008 Q3 法說會逐字稿

Hello, and thank you for joining today's Middleby Financial Conference Call on Third Order -- Third Quarter Earnings. As a reminder, all lines will be on listen-only mode. We will conduct a question-and-answer session at the conclusion of the call.

At this time, it is my pleasure to turn the call over to CFO Tim Fitzgerald so that we may begin.

Good morning, and thank you for attending today's conference call. I'm Tim Fitzgerald, CFO of the Middleby Corporation, and joining me today is Selim Bassoul, our Chairman and CEO.

I have some initial comments about the Company's 2008 third quarter results, and then we'll open up the conference call for questions and answers.

We were pleased to report our 27th consecutive quarter-over-quarter record net earnings. The third quarter results included the impact from four acquisitions completed during the last 12 months, including Wells Bloomfield on August 3, 2007; Star Manufacturing at December 31, 2007; Giga Grandi Cucine on April 22, 2008; and FriFri on April 23, 2008.

Sales in the third quarter increased 22.4% to $166.5 million, as compared to $136 million in the third quarter of 2007.

Sales from the acquisitions completed over the last 12 months amounted to $32.4 million in the quarter. Excluding the impact of the acquisitions, sales declined by 1.4% as compared to the prior-year quarter. This included 1.4% growth in sales of the food-processing group, offset by a 1.9% reduction in sales of the commercial foodservice group. The increase in sales at the commercial foodservice group included a 14% increase in international sales which were (inaudible) in emerging markets with US and international restaurant chains and growth in new products, including the continuing growth of the new combi oven line from Huono.

Sales at the end of the quarter were impacted by a drop in incoming orders that occurred in conjunction with the disruption in the financial markets late in the third quarter. Reduced access to capital has impacted the ability of certain customers to obtain equipment financing. Additionally, general economic uncertainty has caused the deferral of customers -- customer orders in the short term. This reduced order rate is anticipated to have a greater impact on the fourth quarter results from the third quarter.

Gross profit increased from $51.4 million in the third quarter of 2007 to $64.7 million in 2008.

Gross margin rate increased from 37.8% to 38.9%. The gross margin rate reflects improvement at the acquisitions completed in the last 12 months as gross margins at these companies have increased from the prior-year quarter. The newly acquired companies had an average gross margin approaching 39%, consistent with the Company's average. While significant margin gains have occurred at these acquisitions, we anticipate some continuing improvement in margins at those operations as integration initiatives are fully realized.

Margins continued to be adversely impacted by higher steel costs in the third quarter; however, the adverse impact of steel lessened during the third quarter as steel costs began to decline. We anticipate steel costs will continue to decline through the remainder of this year and the adverse impact on margins will lessen in the first half of 2009.

Selling expenses increased $3.3 million to $16.8 million, and general and administrative expenses increased $4.5 million to $16.9 million. Of the $7.8 million increase in selling, general, and administrative expenses, approximately $6 million was attributable to the recently acquired companies.

Interest and deferred financing costs increased from $1.6 million in the third quarter of 2007 to $3.2 million in the third quarter of 2008 as a result of higher debt balances associated with the recent acquisitions.

Other non-operating expenses of $850,000 is comprised primarily of unrealized foreign exchange losses that were incurred as a result of the strengthening US dollar at the end of the quarter.

The provision for income taxes of $10.6 million was reported at a 39.5% effective rate, as compared to a $10.1 million provision at a 41.7% effective rate.

And net earnings for the 2008 third quarter increased 16% to $16.3 million from $14.1 million in the prior-year quarter, while diluted earnings per share increased 16% from $0.96 per share from -- as compared to $0.83 per share in the prior-year quarter.

Now, turning to the balance sheet and cash flows, the net changes in the balance sheet from year-end reflect the impact of the 2008 acquisitions of Star, Giga, and FriFri. These acquisitions added $21.2 million to accounts receivable, $19 million to inventory, $8.6 million of property, plant, and equipment, $9.7 million of accounts payable, and $5.4 million of accrued expenses.

Additionally, we recorded $112.4 million of goodwill and $71.8 million of other intangible assets associated with these acquisitions.

Other changes in the balance sheet accounts primarily reflect normal variations driven by seasonal working capital requirements.

Cash flows provided by operating activities for the first nine months amounted to $64 million, as compared to $46 million in the prior-year nine-month period.

Non-cash expenses added back in calculating operating cash flows included depreciation and amortization of $10.3 million for the nine-month period and non-cash share-based compensation costs of $8.4 million.

Depreciation and amortization include $4.6 million of depreciation, $5.3 million of amortization of intangibles related to acquisition, and $300,000 of amortization on deferred financing costs.

Operating cash flows for the year were utilized to fund the acquisitions of Star for $188.2 million, Giga for $9.9 million, and FriFri for $3 million, all completed in the first half of 2008.

During the third quarter, the Company also made a final $3 million deferred payment related to the MP equipment acquisition that was completed in July of last year.

The Company also had capital expenditures amounting to approximately $3.4 million during the year, which included $1.2 million associated with the purchase of a manufacturing facility for our recently acquired Carter-Hoffmann division and $2.2 million for the replacement and upgrade of manufacturing equipment.

During the year, the Company also has utilized cash to repurchase 210,000 shares of common stock to $12 million in the first half of 2009.

Total debt at the end of the 2008 third quarter amounted to $257.7 million, as compared to $274.6 million at the end of the second quarter and $96.2 million at the end of 2007.

The Company's borrowings are funded under a $497.5 million revolving credit facility that becomes due in December 2012. The credit facility is with a syndicate of 11 banks, led by Bank of America.

We are pleased with the continuing progress made at the four acquisitions completed during fiscal 2007 and remain on track with our profitability objectives at these companies.

Gross margins have improved to approximately 35% at these companies, up from 20% at the time of acquisition, and operating margins have increased to approximately -- to 20% in the third quarter. We will continue to focus on operating efficiencies at these companies and anticipate continued gradual improvement in operating margins at these companies over the next 18 months.

We're also pleased to report continued progress at the companies acquired in 2008, including Star, Giga, and FriFri. As previously reported, Star at the time of acquisition had a -- 20% EBITDA margins. We have completed integration initiatives associated with this transaction, and a result, EBITDA margins improved to over 30% in the second and third quarters, with operating margins of 25%. We believe we will continue to maintain those margin levels as we move forward.

We are now focused on the integration of the Giga and FriFri European operations acquired in the second quarter. Gross margins at these operations are approximately 25%, and EBITDA margins are 5%. We anticipate a 10 to 15% improvement in margins at these operations by mid-2009.

As previously announced during the quarter, the Company has entered into an agreement to acquire TurboChef Technologies. TurboChef is the leader in high-speed cooking applications, complementing Middleby's leading portfolio of brands and technologies.

A registration statement pertaining to this transaction has been filed on October 31 and is pending review by the SEC. This registration statement can be found on the SEC website. The merger agreement can also be found on the SEC website filed on Form 8-K back on August 15.

Transaction is subject to a number of closing conditions, including a vote on the transaction by TurboChef shareholders. A summary of the transaction can be found on Middleby's website at www.middleby.com. We anticipate that TurboChef will be filing their third quarter results on Form 10-Q sometime next week, and we will not be commenting on those results on this call.

[Admin], that's all for our prepared comments or if you could now please open the call for questions.

Certainly. (OPERATOR INSTRUCTIONS)

Tony Brenner.

I've got a couple of questions.

First of all, in your food processing business, it was a pretty sharp positive turnaround in the third [inaudible] organic growth. That business, I believe, had been down 20% organically in the first half. It was up 1 to 4 in the third quarter, and I'm wondering if in the economic slowdown that's reverted back to a decline or remains positive. As I recall, there was a very large order here deferred until the beginning of '09, and I wonder if [that] remains in place, as well?

Hi, Tony, this is Tim. We saw some growth in the third quarter, driven by new products, so some of the products that we have introduced last year and this year were performing very well. With that being said, clearly, the environment is more difficult right now, and those being pieces of large capital equipment we are seeing deferral on orders. The order that you mentioned that was deferred earlier in the year we still anticipate would occur in the first half of next year, but we are seeing large orders being deferred during this period.

Okay. Similarly, it appears that (inaudible - technical difficulty) given the stronger dollar and the weaker global economies, their international business --positive organically or double-digit positive organically?

Yes. The number that I just referred to, the 14%, was organic growth. So I think we are seeing some slowing in the international markets, as well, but we did grow 14% organically during the third quarter.

Well, I'm not sure what that means, though. You could've been up 30% in July and August and flat or down in September. I mean as a run rate, what does that persist in doing?

Well, let me answer that, Tony.

First of all, I have been the architect of the international strategy since 1999. We have built our business in emerging markets in India, in China. We have taken selective markets in Latin America. As of recently, we've opened up some Middle East. We have been very, very strong in the international market, and this is not a phenomena driven only by the dollar being strong or weak.

In addition, in the last two years, we have built a phenomenal global platform with buying companies that are very innovative, and similar to Middleby, whether it's a company like a Houno in Denmark, which is very innovative, energy-efficient oven, combi oven and bakery oven, in Europe, whether it's Giga, which is a leading manufacturer of ranges, ovens, and steam equipment, or FriFri, which is a leading fryer manufacturer in emerging markets and in Europe, I think we've built a phenomenal platform since 1999, and we see that market to continue to grow. I don't think it's been affected by the dollar. I think we have a lot of market share in that market. Our market share internationally still today is around 3 to 4%. I think we have a lot of room to grow internationally. So we will see over a long term our international market continue to grow very significantly and very strongly.

And over the short term?

I can tell you the short term seems to be still holding out very well. So to answer your question, we have not seen the erosion we're seeing in the US and we're seeing internationally, but I can't tell you tomorrow what would happen. Again, it's a market that's global, and everybody who thought that the US is not linked to the rest of the world, we were all wrong and think when we started seeing a slowdown across the US almost a year ago, and I started anticipating that, I think the global markets were totally disconnected. And now I think we're seeing that some of the global markets are following the US, so I can't predict what's going to happen. But so I could tell you that infrastructure there, we can gain market share as we go forward. So we will control what we can control, which is growing our emerging markets, growing our market share. If there is a business to be had internationally, we are very [inaudible] positioned to take it.

Okay. The shipment of (inaudible) ovens to KFC, is that now ramping up and going at full pace, or will that ramp up more slowly?

We have not started shipping ovens to KFC yet. I mean we anticipate we will have an order and perhaps may start to ship as early as the fourth quarter, but that is a program that will occur over most of that --

Will occur over the next three quarter.

Yes, particularly in a -- strong in the first quarter.

Okay. And my last question. In the release, Selim, you referred to some initiatives being considered to reduce your cost. Could you elaborate a little on what it is that you are considering?

I think maybe we should talk about what makes this company unique.

First of all, we have been generating contingency plan, and I think the [contingent plan] were generated in the fourth quarter of 2007. So we have been a company -- if you know us, and you've known us better than anybody else, Tony, and I think I will talk to all the analysts on this call who have been with us for a long time, and I thank you for it -- you know that we have always been very much looking at a culture of frugality, which means that nothing we do is totally flashy. We are lean, and in this sense, we have always looked up margin instead of market share growth.

And now, remember, if you go back to many of my transcripts, when the economy was growing very fast and I told you margin protection is very important, going forward, we'll continue looking at that.

And the Street initiative that we have right now is, one, is to take out operating efficiency, and that includes all the way from back office to manufacturing efficiencies, taking out excess capacity, and we're trying to basically work through that. And I think there are a lot of savings in our manufacturing and operating efficiencies. So between operating and manufacturing, we see significant synergies there, and we see significant savings.

Number three, our sales and distribution costs. We are targeting those costs by working with our partners, whether it's the dealers or our sales force or our reps, to minimize their inefficiency there. And we found out that there are a lot of ways we can do together as we partner strongly with our dealers and our customers and our reps, and we have targeted several points away from those type of costs that we've seen in the past. And I think everybody is receptive to it because they understand that Middleby is partner with our customers, and they have been willing to give us some benefits of some cost savings, and I thank them for that on this call by working, and that's what made us very strong with partnering with our dealers, and they -- we're going to put a program that rewards them growth and it pays for performance, and they have been all -- most of them have signed on to this program.

Thank you, Selim.

Thank you.

Peter Lisnic.

Tim, I guess if you could just give us a little bit of insight into how substantial the drop-off was at the end of the quarter and what that might mean? I know you don't like to talk about the short term, but just getting some visibility on how quickly things turn south at the end of the quarter and what you're seeing [would] be helpful.

We did see a -- as you know, the orders are -- we don't have long lead-times, so I don't like to talk about order pattern because it doesn't necessarily translate to sales per quarter, but our industry, as much of the world was disrupted when -- with what happened in the financial markets, so we did see a sharp drop-off. It was double-digit in nature during the time of what's going on with the (inaudible).

We've seen some improvement as we've kind of moved or distanced ourselves from kind of the initial shock that went through the system, but order rates are still volatile, and it's difficult to predict what the short-term impact is. But we're still very confident in our position in the industry and think that we'll -- this is a short-term issue, not a long-term issue for Middleby.

Okay. And then just -- I guess along those lines -- maybe Selim can throw in some commentary too -- if you go back to the '01 period, where you had revenue fall off at 20% clip, and this recession seems to be unfolding in a more adverse way than that one, what sort of gives you the confidence that -- or maybe you don't have this confidence -- that this cycle will be not as bad as what you'd experienced in '01?

Peter, that's a great question. I want to tell you, first of all, in 2001, the Company was very different. The Company was at the time 40% in pizza business, 60% of independent, which is mom-and-pop, country club, hotels, institutions. And we were not as diverse in the way we were with our customer base, and we did not have the brands we had. We did not even buy Blodgett at the time.

In addition, at that time, in 2001, when you look at the drop of 20%, it was not really -- it's not really a true drop because some of it we had shed so many products, so when you look at it, part of the 20% that came down was product that we had shed the year before, and we were shedding as we went to create the hot side strategy.

If you remember, starting 1999, 2000, and 2001, we transformed our business. Went from being a -- truly totally dependent on three pizza chain and independent to creating a company that went after fast casual and became a total hot side.

Despite the fact that we had September 11 and the recession, this Company recreated itself during that time. We did not sit there and say the status quo, and if you look at 2001, we then went ahead and made the acquisition. And at that time, everybody -- and it's reflected in our stock price -- everybody went back and thought we were crazy to buy Blodgett and Pitco. At the time, we paid a lot of money. We leveraged the company significantly. And the Blodgett and Pitco acquisition at the time was a lot more expensive while bigger. And we were the highest bidder at the time, and everybody looked at us saying, "What is Selim and the board and Middleby doing?" And, in fact, if you look at stock price, it dropped during that time and really created the Company.

This Company does extremely well. This management team does extremely well, and it's not about Selim or Tim on this score. Our management has been with me, most of them, since the late '90s, has over 200 years of experience, have gone through the cycle of remaking the Company.

Middleby has had a very challenging time. We had a challenging time when we took over the Company. This management team in the late '90s had nothing to do with the market. We were basically not making the money. Our customer was squeezing [afterward], dependent on three major customers, and we had no leverage. We recreated the company during that time, and we refocused on the hot side.

In 2001/2002, in the middle of recession, went out and created a strategy that allowed us to go after [inaudible] casual and after buying Blodgett and Pitco, which I think is very similar to what we've done now.

In addition, in 2000, we had sat in this room here, where I am here, me and Tim, in this conference room, with all my management team and said, "What would you do, number one?" We did not shy away and say, "Well, we are in a crisis mode." And recession is hitting and the dot-com had just burst. What did we do? We went after the energy efficiency, if you remember. And I started talking about it since.

And it makes a joke about when we launch our energy efficiency strategy, many of you looked at me, including members of the Board (inaudible). America might not ever be interested in energy savings. And at the time, it's the same years that Hummer introduced the H2. So I think I look at it, and I say this is a great time for us. It is very similar to what has gone through. We have made a number of acquisition now, so we have a lot of benefits of integration. We have also taken our business, which is no longer aligned on two to three customers. We have also looked at targeting some very fast-growing segments that are still growing very well. We have an international platforms that in 1999 and 2000 was just being built.

(Inaudible) there is no comparison between where we went in 2001 and where we are today. And I think we will manage this extremely well. Our margin will be protected, and I can assure you that when we've done that, I think the slowdown will occur. We will control what we can control ourselves.

And I can tell you -- I can tell you right now the way I feel. I feel strongly that a customer, like a large chain, like KFC, is putting in today's environment the 2009 strategies in our hands. On this, I think, Peter, I responded to you in a much lengthier [inaudible], but I wanted to give you a strength of what this management team, not Selim and Tim, but the strength of our -- depth of our [benches].

No, that's very helpful, Selim, and I guess if I could just summarize, it sounds like even though you saw some maybe double-digit deterioration at the end of the quarter, maybe into the fourth, that you may have seen some of that come back a little bit.

And then (b) just given the strength of the model, you would think that something on the order of a double-digit decline for all of '09 top line is sort of a draconian scenario.

Is that the right way of summarizing it?

I would say you're right. First of all, we've seen what happened in the last six weeks has been -- I think, we've seen it -- we've seen that the industry were not immune. We talked to other people. We talked to our customers. I think what happened in the last six weeks, [a drop] of orders has been very drastic. We should not walk away from it, and it would affect somewhat a little bit our fourth quarter.

But we started to see a normalized back stable order rate starting to come up in the last, I would say, two weeks, which is not a trend. So the last -- prior to that, the six weeks before that we're drastically down, and I think we started seeing a little bit more normalized level. And I think -- I cannot talk to what happened in the next two weeks because nobody knows. I don't think anybody knows in this environment. We're still in a very troubled time.

But I think what we can control, we're controlling. We're controlling our cost containment. We're controlling our spending, which we are good at it. We are masters of that. And we've been doing that for a long time. So we have a culture that allows it. It's not only dictated by Selim and Tim. I think our incentives have always been margin driven to all our reorganization, our management team, and they're all behind me.

Okay.

So I feel good about it.

Okay. And then, Tim, just the last question. On the organic growth being down around a percent, can you give us volume versus price and what each of those contributed to the quarter?

Pete, I don't have that for this call.

Okay. All right. Thanks for the information.

Okay. Thanks, Pete.

Greg Halter, Great Lakes Review.

Want to ask about your receivables in terms of the type of shape you feel they're in relative to the accounts you have on hand, your customers, as well as your reserve levels.

Yes, hi, Greg. We've not experienced any -- essentially, our DSOs are pretty consistent with where they were in the first half of the year and last year. We really haven't had -- seen any increased bad debt exposure to this point. Obviously, we're monitoring it closely, but we've had a strong history in terms of collections because we've got good credit practices. So even if you dialed back to over the last eight years, this company hasn't experienced significant write-offs, and we do carry some credit insurance on our international portfolio, which will review the greater risk. So we feel comfortable that we're not going to have any blips, so to speak, in increased bad debt write-offs. We think the reserves that we've got on the books are adequate to cover those.

Okay. And I know in the second quarter you had a charge for the inventory write-up, I think it was. Now, was there anything similar in this quarter?

No, there was not.

All right. And relative to steel, are you locked into any of your contracts or looking to lock into any contracts?

No, I think we -- we're seeing steel come down. We anticipate that trend will happen through the remainder of this year, so we're just continuing to monitor that environment, and then our supply chain group will probably reevaluate where we're at towards the end of the year going into the first part of the year, whether it makes sense to lock any of the reduced prices in as we go onto 2009.

Okay. And I know you mentioned that had a detraction on your gross margin in the quarter, in the third quarter. What kind of impact was that on the negative side?

It's approximately 1% impact.

About 100 basis points?

Yes.

All right.

I mean we're seeing lessening in steel, but steel is still substantially higher than where it was a year ago because you'll recall, steel prices went up substantially in the first half of 2008, and we saw certain grades of steel, such as carbon steel, even go up 70% in the beginning of the third quarter. That's not one of our major buys of steel, but it had an impact.

So we're starting to see the trend revert. We'll still be higher in terms of the cost of steel through the remainder of this year even with the prices coming down, but I think as we get to the second quarter of next year, if trends continue as we anticipate, then we'll break even or start to get ahead of steel perhaps even a little bit if we're lucky here.

Okay. And one last one on the new products. Talking about the [hydrovection] and [miniwow] and [rocket fryer]. If you could give us specific statuses of each one of those and anything else that may be coming, that would be helpful. Thanks.

Greg, we have -- we're very excited about the new product. It's most probably one of our most innovative product pipeline ever.

First of all, you just mentioned three of them. The [hydrovection] is a unique product, the [rocket fryer], and the [wow]. What is making them unique is that they are multi-million-dollar platform in revenue, each one of them [inaudible], and it's not targeted to one customer specifically. They are also the most patented and the most and the most disruptive technologies ever. And what is unique about them is that payback, and the payback of -- to the customer of each one of those platform is usually less than two years and return.

We are also working on other products that we are also launching in the food processing having to do with food safety and packaging. So we have a lot of new product also coming up in the food processing side of the business. We also are launching unique products that might not be as disruptive as those in the commercial foodservice, but we're launching also several products that could generate 2, 3, $4 million launch with high margins, and they have also significant payback to our customers.

So the pipeline is the best. So I look at 2009, and I have to tell you, if you remember, you go back to a transcript of first quarter of 2008, somebody asked me the question. They said, "Selim, how're you going to manage?" I think we started seeing a little bit of slowdown in the economy, and somebody said to me, "Well, how are you going to manage?" I said, "Our innovation is phenomenal, bar none on the hot side, I don't think anybody is even close to what we do in innovation, and especially looking at '09. And I talked to you about putting so many tests within our customers.

Those tests are paying off right now. In '09, we know about the rollout that you talked about with a large chain. We have another rollout, not be as significant as this, with another chain that has tested one of our product, and they love it. So we are very excited about what our customer -- and if they talk environment, coming to us saying, "You are helping me change my menu, you are helping me save money, and you're helping me make it easier on my employees to deliver better products." So we're very excited about our pipeline.

Thank you.

Thank you.

Thanks, Greg.

[Gary Farber], CL King. Gary, you may proceed with your question.

Yes, thank you. Can you just discuss how you see the competitive environment, what you're seeing from your competition as far as pricing and new product introduction and just overall behavior?

I think that internationally -- let's go over the international market. I think as we -- both those companies then became very well positioned in the emerging market and the acquisition of Houno, Giga, and FriFri, it puts us as a good player in Europe. It allows us to get a platform that takes us -- similar to what you've built in the US, it's allowed us to build overseas.

The most important that has happened to us versus the competition is we've been able to pick up some phenomenally talented individual that we picked up from our competitors that I would say a year ago would not have joined. I think the (inaudible) was one of our major competitor as a (inaudible), and we've been able to pick up a few individuals from there that are very, very strong for us, great tray makers that we've been able to pick up.

So we're looking at truly seeing some people coming to us specifically, and we are also looking at the partnership we have in our customer at the dealer level, where we're getting stronger partnership. I just mentioned early on in the call. So I think we're seeing significant partnering toward us, whether it's people who are looking at Middleby as a place to come and thrive given our culture and/or it's partnering with people in the field, with dealers and customers who are looking at us and saying, "I trust Middleby going forward."

We've been stable. Our management has been stable. And we've been able to provide the innovation to make our [rainmakers'] job a lot easier. So I think I feel very strongly about our marketing position versus our competitors'.

And as far as pricing, are you seeing anything sort of irrational in the market or anything?

I don't think we've seen any changes in pricing in the market at this point, and as Selim indicated, a lot of our strategy is driven on innovation where we're trying to deliver a unique piece of equipment with features and benefits. So in many of our products, we're -- we don't believe we've got a direct competitor. It's a unique piece of equipment. But where we are competing, I mean we haven't seen changes in the market landscape to this point.

Right. Okay, thanks.

Jimmy Kim, RBC Capital Markets.

Just a couple of quick questions for you. First, the drop-off in orders, was that consistent across all geographic regions, or did it impact one more than the other?

You know, Jimmy, I don't think we're going to -- we don't necessarily measure it all by geographic region, and even if we did, I don't think that's something that we'd want to get in the habit of commenting on.

Oh, okay. Then my second question for you is the commercial foodservice segment. It looks like margins are up 150, 170 basis points year over year. I was just wondering if you could comment on the improvement?

In the -- I'm sorry, on the commercial foodservice sectors?

Yes.

Yes. Well, as I mentioned, a lot of that had to do with the benefits of the integration acquisition. So the companies that we had bought in 2007, we've seen substantial margin improvement as we've integrated those companies within Middleby. That would be one of the [first] drivers, [inaudible] driver.

Okay. Thank you very much.

[Joel Kiss], [Buckington] Research.

I wonder if you could just give us any sense, anything you're seeing or sensing from opportunity in terms of the consolidation with Enodis and Manitowoc?

Okay. I tell you, we truly -- we do not want, Joel, to address that. I think I'd mentioned the fact that we have been able to look at some of the -- they've let some people go as part of the integration. We've been able to pick up some of those people. So we've continued to build our team.

We do not know what's going on with the integration. I tell you what, maybe you should tell us. I think they just acquired the company. It just happened, I think. It hasn't been even a week ago. Maybe it might have been 10 days ago. So I really do not know what's going on out there in terms of the integration.

I know what's going on in my customers, and I can talk about my customer all day long. I could talk about the international markets all day long because I've been traveling nonstop. I could tell you in the last 90 days, I've been home only two days, two nights, so I can talk about that. I can't talk about what the integration of Manitowoc and Enodis is going to happen. I think as it unfolds, I think we'll -- it becomes more public to all what they are doing, and I wish them the best. I think Enodis has some great brands, and Manitowoc is a great company. I wish them the best. I hope they do a great job integrating it, and we'll continue competing fairly, and that's it.

I don't think it changes for Middleby. The competition doesn't change who we are. I think we've always said that Middleby is made up of a different structure. We're very unique in what we do. We are very focused on innovation, on energy saving. We are very focused on being only on the hot side, which is not the case with most of our competitors. We are very focused on truly going after emerging markets, as well as fastest-growing segments, which are a very large part of our business.

So we're very different. Our make-up is very different. We're -- our incentives are very different than most in how we incentivize our people. You look at the ownership of the Company; it's very different than any of our competitors, any. We are very well invested in this company. You, as an investor, when you look at me and Tim and the Board and our management team, we're ahead of all of you. None of you buys -- owns more shares than us. So when all of us is -- makes us unique. So that's what I wanted to respond to you is that we are a unique company in many ways.

Okay. And just can you give us maybe any quantification you can just sort of on the levers you can pull in 2009? I'm not asking for guidance. I'm just talking about internally some of the cost savings, you know, some of the run rates that you can get from some of the other businesses across selling opportunities just to give us some quantification as much as possible to help us understand?

Well, Joel, I think we're still working through some of the strategies that Selim talked about, so I don't think we're willing to kind of put a number on what the impact of some of the efficiencies and sales and distribution channels are.

At this point, I think we've indicated there's opportunities with the acquisitions and what some of the target margins are there. We believe that the companies that aren't performing at 35 to 40% gross margins and 20-plus operating margins, we're still on target to bring those up, and that's where we do some opportunities. But --

Joel, let me answer that a little bit better maybe to give you a little bit more (inaudible). We're not going to give you numbers, but this is not a $0.5 million strategy, okay? So it's a multi-million-dollar cost-saving strategy. We can't define exactly what it is, but it's not -- I can assure you it's not $0.5 million to $1 million savings here. So we're looking -- we're going through all of that to go through, and we've been trying to work on this since, as I mentioned, at the beginning of '08, and we look at -- looking at in '09 several million dollars of savings.

I mean I think what I would point you to is we've consistently had a longer-term target for operating margins that were in the mid-20s, and that's a three- to five-year target, and these are steps that we're planning on taking to bring us towards that longer-term goal.

Okay, yes. All right. And then, last, can you give us any sense -- TurboChef, we haven't spoken at all about that. The financing still sounds like it's fine. Can you give us any sense like how far would you take the balance sheet if you complete this deal? Is this pretty much where you want to be and then you're going to focus on integration? Or are there other deals out there that look attractive? And just a little bit on the strategy and what you're thinking there. Thank you.

Well, acquisition continues to be one of the strategies of Middleby. Obviously in the current market, the capital constraints are a little bit stronger, but I think we still -- well, I think the capital markets will evolve next year, and we still have some capacity within our current financing structure. And beyond that, I think we're going to look at acquisition very opportunistically, I would say, as we move into 2009.

Okay, thank you.

Thank you.

[David Cohen], Midland Capital.

Hey, guys. It's [Midwood] Capital. A couple questions. One, related to the TurboChef acquisition, by my read of the preliminary filing, there is not a financing contingency. Is that accurate? And if it is accurate, is the use of the accordion feature, is that all effectively in place? Is there any -- or what's the potential for that financing to not come together?

Well, we have -- currently right now, we've got a $497.5 million revolving credit facility, of which $257 million was outstanding at the end of the quarter. So that facility's in place. It's been in place. So that's -- it's not -- we're not putting together financing for this -- for that transaction.

Okay. So you could just draw on your existing --

Yes, we can draw on our existing facility, that's correct.

Okay. I thought I saw in like a presentation there was some mention of an accordion feature. Do you not even have to deploy that?

Well, there's an accordion feature in there, so we could further expand that facility up from $497 million up to $600 million.

Okay.

So if we wanted to invite other banks into the group and if there was other banks that wanted to come in to the facility, we would have the ability to do that.

Okay, great. And then just in terms of TurboChef, that's actually a company that we've followed for a long time, and they've had some pockets of success in their commercial business, but it has been these sort of -- I know they built a kind of more day-to-day, week-to-week business with smaller chains and operators, but they've had some big, big deals. So how do you sort of think about the lumpiness of their sales and how that will translate to sort of the returns that you think you can get on this acquisition?

Well, first of all, I can answer that. One is you have to remember that Middleby partner was almost 90% of the leading chains, and TurboChef has minimal penetration of those accounts. They are -- you're right, David. They have three, four, five accounts. And they've done a very good job getting those accounts. Those are very difficult accounts. They are not easy accounts to get.

So my philosophy is that they were able to please Starbucks and Dunkin Donuts and Subway, of which some of those are our customer, in the sense that due diligence those people do, that means the acceptance of them to go to other accounts is easy. I think as they build this company, they built it by getting recognition, by going after the big accounts to build it. But I have to also tell you that they do sell to the channel market. They've done a very good job going after the channel market. And we believe that the cross-selling between the two companies is relevant, cross-selling where internationally we have -- I talked about that in the call. We've built a phenomenal international presence, and I think we can take them internationally very strongly.

I also believe that some of our customers have -- when this was announced have come to us say, "Oh, now that I know that Middleby is behind Turbo, it makes me feel comfortable because I've dealt with Middleby. I know that Middleby is here to stay. I understand your culture. I understand your service level."

So there's a lot of strategies if you can go through on cross-selling, and that was the subject rationale of our going after Turbo, so there are a lot of cross-selling opportunities in the marketplace.

Yes, I mean it seems like it's going to be a great deal over the longer term. I guess I'm just wondering whether or not there's -- is there -- if you've had the ability to sort of diligence their pipeline and sort of feel pretty comfortable you're not going to see some dramatic shorter-term revenue lumpiness?

Well, it could happen. It could happen because you're taking business that is driven by three, four, five customers, and it could happen. And our job is to do what we did at Middleby. We used to be similar to them. We were not different. We were driven in 1999 and 2000 by literally three customers -- Domino, Pizza Hut, and Papa John's. And we were able to transform the Company, and we did a very good job.

So we had a history of going from a company that was heavily reliant on three, five customers, and the way the pizza chain went, the way Middleby went. And you can go back. It's public records.

And I think our job with Turbo is to get some more acceptance quickly. I can tell you that their products -- its effect on Middleby. Forget Middleby. They have a very good accepted product. Their technology is unique. It's very innovative. We know that. That has -- it's patented, it's protected. Has nothing to do with Middleby. We did not do any of this. So we know that we could expedite their ability to be accepted more generally in the marketplace with us. And that was the attraction for them. And, remember, by the way, we should be careful. At this moment, the deal is not done.

I understand.

It is subject to shareholder -- their shareholder approval and all that.

One last question. With the acquisition, a bath of acquisitions in 2007, if you sort of looked at -- I'm not sure what the aggregate sort of revenue contribution on an annualized basis is from those, but what -- if you sort of get those to the level of margin potentially you think you can get them, what -- let's say that's $100 million or $150 million of run rate revenue. What is the incremental sort of operating income potential on that revenue base with your changes to their business model?

Well, we said over three to five years, David, we say that we're going to take all the acquisitions that you've made to the level of Middleby. So when we bought many of those acquisitions, they were less than 10%. We've gotten many of them to be in the 18, 19, 20%, and our objective is to (inaudible) them. And I'm talking -- let me make sure I'm talking correctly -- in gross profit margin is to take them into what Middleby is.

So -- but we're not going to do it overnight, so we're going to be doing it over the next three years is to take those companies and to go to the same level of what Middleby has been. So we have another -- we should double almost where we stand or maybe add a third -- not double sorry, add a third. Today we are at 18, 19. We should see some going to 30%.

What -- is that gross margin or what margin level? What line? What level in the P&L are you referring to, gross--?

I'm talking about EBITDA at the sales margin.

He's talking about EBITDA, the sales margin, yes.

You'll take that margin up by a third?

Yes, over the next three to five years.

Okay.

But I would say next three years.

I think, you know, David, you said -- I mean there's probably another five, maybe up to 10 points for some of the companies that it's still an opportunity. So if you called that $100 million in revenue, then you'd think there was 5 to $10 million over a period of several years.

Well, it sounds like Star being the biggest is already actually the most --

Star, yes --

-- highest earning?

That's correct. Star has been integrated very quickly and is already operating at Middleby-type margins.

Okay. All right, guys. Thanks.

Okay, great.

I would like to make comments, please. I would like to finish with the final comments.

Also, we find ourselves in a challenging environment. It is worth remembering that we have been operating in this difficult market environment for most of the year and have been through periods like this in the past. In the last downturn, we were able to generate significant value with a focus on taking market share and operational improvement and came out of this as the industry -- one of the industry leaders.

We will -- we believe we will further differentiate ourself from our competition as we navigate through these tough times. We continue to take market share from our competitors and add a (inaudible) professional to the team. In addition, orders that have been deferred are creating pent-up demand that we believe will come back in a strong way in the future.

We have new product launches, and we have our -- I've talked about that. We have some of our most innovative product launching in the coming year. They are multi-million dollars in revenue. They are the most patented and innovative we've ever seen, and they create significant payback value to our customers. We are in diversified end markets, many of which continue to grow in this downturn, such as [fab casual]. In addition, the maintenance and replacement markets are driven by a large installed base of equipment, and the rest of them continue to drive menu changes to compete in a challenging environment.

Cross-selling among the brands including Star, Houno, [Lang], Well, Carter Hoffman, where we are already making significant progress, is a meaningful opportunity. Steel has been a significant challenge over the last two years, and we see prices moderating in the near future. If you recall, steel represents around 10 to 12% of our sales, so this could drive margin improvement.

On the operating efficiencies, I've talked about that. I've talked about the manufacturing, the sales force, and the distribution cost, and we're looking at all those contingencies to basically offset. We are also continued profitability initiative in acquisitions, and we'll continue to focus on smaller tuck-in acquisitions, especially where the management team are not equipped to navigate through a difficult market.

While the environment is difficult, we have numerous ways to create value in the short and long term. When we look at the market, we are reminded of the Warren Buffett saying, "You never know who's swimming naked until the tide goes out." Many of our competitors were mainly beneficiaries of a strong market. They did not put in place a system that practices to prepare their businesses for anything less than a perfect environment. We at Middleby have always operated our business knowing that the good times were rolling but that they could end. As such, we come into this difficult environment having prepared for it in the beginning of 2008. Unfortunately, we cannot control the macro economy, but not only can we control -- not only can we control what happen within this company, but we do control it very well. We have proven success in navigating this environment and overcoming headwinds. This is, by far, the fiercest we have dealt with, but we also move the most aggressively we have ever moved and well ahead of time. The contingency plans we generated early on in the year are enabling us to maintain margin despite a top line that is not growing as it has in the past.

Our balance sheet discipline is enabling us to generate significant cash flow to bolster our balance sheet. Our culture is already one of frugality, which means that nothing we do is disruptive to that culture. We get no pushback from our people, and everybody on my team and on Middleby's team has bought in, which is very important in these trying times. We are exceptionally well positioned from a balance sheet perspective to not just weather this downturn but to capitalize on it. We are also very well positioned to pick up great talent and rainmakers. We have always run the company very lean and are now looking at booking up talented individual that are the victims of the other company's missteps.

While we do not control the environment, we anticipate it, and I have to tell you, it's all about right now execution, and our execution team and our strategy is here to continue improving our margin, which has been the history of this company.

And I have to tell you, and I want to thank you, all the analysts and all the investors who have gotten to know this company and stuck with us with all humility and truly a thank to all of you and to our customer and to my employees. While those are difficult times, we are confident and cautious at the same time without letting our hubris, our egos come in front of us, that we are managing the best we can, and we will continue our culture of managing margins and planning ahead. For this, I thank you.

Thank you, ladies and gentlemen. This call has been concluded.