Middleby Corp (MIDD) 2008 Q4 法說會逐字稿

Hello, and welcome to the Middleby Corporation fourth quarter earnings conference call. With us today from Management are the Company's Chief Executive Officer, Selim Bassoul, and Chief Financial Officer, Tim Fitzgerald. Following Management's opening comments there will be a question and answer period, and at that time I will give instructions on how to get into the queue.

Now, I'd like to turn the call over to the Company's CFO, Tim Fitzgerald, for opening comments. Please go ahead, sir.

Thanks, 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 fourth quarter results, and then we'll open up the conference call for questions and answers.

We were pleased to report our twenty-eighth consecutive quarter-over-quarter record net earnings. The fourth quarter results included the impact from three acquisitions completed during the last 12 months, including Star Manufacturing on December 31, 2007, Giga on April 22nd, 2008, and FriFri on April 23rd, 2008. The results for the quarter did not include our most recent acquisition of TurboChef, which was completed on January 5, 2009.

Net sales in the fourth quarter of $151 million increased 4% from $145.5 million in the fourth quarter of 2007. Sales growth from recent acquisitions accounted for $26.5 million in the quarter, and excluding the impact of acquisitions sales declined by 14% as compared to the prior year quarter. This decline included the sales reduction of 29% at the Food Processing Group and an 11.5% reduction in sales at the Commercial Food Service Group.

The sales at the Commercial Food Service Group included a 1% increase in international sales resulting from the impact of recent acquisitions. Excluding the impact of acquisition international sales were also off by approximately 15% with softening European markets and slowing emerging markets.

Sales at both the Food Processing Group and the Commercial Food Service Group were impacted by the slowdown in the economy that began in the third quarter of 2008 and continued through the fourth quarter. The challenging industry conditions have continued into the first quarter, however, continued lower levels of demand in the first half are anticipated to be partially offset by several equipment rollouts with major chain restaurant accounts that will occur in the first half.

Gross profit increased from $55 million in the fourth quarter of 2007 to $57.5 million in 2008. The gross margin rate slightly improved from 37.8% to 38.1%. The gross margin rate reflects profit improvement at the acquisitions, which offset the impact of lower volumes.

Although steel continued to adversely impact margins during the fourth quarter, the cost of steel declined during the quarter. Current steel costs were lower than in the first half of 2008, and at current pricing levels could have a favorable impact to margins beginning in the second quarter of 2009.

Selling and distribution expenses during the quarter decreased $300,000 to $13.9 million. Selling and distribution expenses include $2.7 million of expense from new acquisitions. The increased cost from acquisitions were offset by a $1.7 million reduced commission expense as a result of lower sales and lower average commission rates. Additionally, marketing and other discretionary spend were reduced in an effort to offset lower sales volumes.

General and administrative expenses increased $200,000 to $14.5 million, $1.8 million of additional expense associated with recent acquisitions were offset with cost reduction initiatives, including savings from headcount reductions and payroll related costs, reduced insurance cost from implementation of self-insurance programs, and other general spending reductions.

Interest and deferred financing costs increased from $2.2 million in the fourth quarter of 2007 to $3.1 million in the fourth quarter of 2008 as a result of higher debt balances associated with recent acquisitions.

And other non-operating expenses of $600,000 are comprised primarily of unrealized foreign exchange losses that were incurred as a result of the strengthening U.S. dollar.

The provision for income taxes in the fourth quarter was $9.2 million at a 34.5% effective rate, as compared to a $10.4 million provision in the prior year at a 40.5% effective rate. The effective rate for the full year was 38.7%, this compared to 40.2% in fiscal 2007.

The fourth quarter and full year effective rate reflects the benefit of lower state income taxes due in part to recent acquisitions located in lower tax jurisdictions, increased deductions from tax incentives related to domestic manufacturing activities, and the benefit of nonrecurring prior year state tax refunds.

Net earnings for the 2008 fourth quarter increased 14% to $17.3 million from $15.3 million in the prior year quarter and diluted earnings per share increased 17% to $1.04 per share from $0.89 per share in the prior year quarter.

Turning to the balance sheet and cash flows, the net changes in the balance sheet from the yearend reflect the impact of the 2008 acquisitions of Star, Giga, and FriFri. These acquisitions added $17.6 million to accounts receivable, $16.7 million to inventory, $8.5 million of property, plant, and equipment, $8.8 million of accounts payable, and $12 million of accrued expenses. Additionally, we recorded $120.9 million of goodwill and $70.9 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 and increases in working capital related to timing of a large customer order.

Cash flows provided from operating activities for the year amounted to $85.3 million as compared to $59.5 million in the prior year. Noncash expenses added back in calculating operating cash flows included noncash share based compensation costs of $12.4 million, depreciation of $5 million, and $6.4 million of intangible and deferred financing amortization.

Operating cash flows for the year were utilized to fund the $205.7 million of acquisition related activities, including the purchase of Star Manufacturing for $189.5 million, Giga for $9.9 million, and FriFri for $2.9 million. All three transactions were completed during the first half of 2008. During the third quarter of 2008 the Company also made a final $3 million deferred payment related to the MP Equipment acquisition, which was completed in July of 2007.

Investing activities for the year also included capital expenditures amounting to $4.3 million during the year, which included $1.2 million associated with the purchase of a manufacturing facility in conjunction with the 2007 Carter Hoffmann acquisition, and $3.1 million for the replacement and upgrade of manufacturing equipment. The Company also utilized cash to repurchase 12.5 million of Middleby common stock during 2007.

Total debt at the end of 2008 amounted to $234.7 million, as compared to $257.7 million at the end of the third quarter, and $96.2 million at the end of 2007. The Company's borrowings are funded under its $497.5 million senior secured revolving credit facility that becomes due in December of 2012.

Immediately following the end of the quarter the Company completed the acquisition of TurboChef Technologies for $116.3 million in cash, and 1,540,000 shares of Middleby common stock valued at $44 million. Proforma debt after completion of the transaction, including transactions and transitional costs, amounted to approximately $369 million.

On a proforma basis the Company's leverage ratio as computed under its senior debt agreement was approximately 2.25 times as compared to a maximum leverage covenant of 3.5 times, and the fixed charge coverage ratio was 8 times as compared to a minimum coverage ratio of 1.25 times.

The Company was in compliance and continues to remain in compliance with covenants under its banking agreements, and we continue to expect to generate strong positive cash flow in 2009 and anticipate a reduction in the leverage ratio.

We were very pleased with the progress we made at the four acquisitions completed during fiscal 2007, which we continue to realize profit improvement. These initiatives, or these acquisitions included Jade Range, MP Equipment, Carter Hoffmann, and Wells Bloomfield, and we remain on track with our profitability objectives at these companies.

Gross margins for the year have improved to approximately 35%, up from 20% at time of acquisition. Additionally, EBITDA margins have more than tripled from the time of acquisition at these companies to over 20% in the fourth quarter.

While we have realized significant efficiencies at these companies, we anticipate continued gradual improvement in operating margins at these companies over the next 12 months as we fully complete our acquisition integration initiatives.

We're also very pleased with the results of the Star acquisition, which was completed early in 2008. EBITDA margins at Star have increased from 20% at the time of acquisition to over 30% in the second half of 2009, and we believe we will continue to maintain those margin levels as we move forward.

We continue to focus on the integration of Giga and FriFri, the European operations acquired in the second quarter of 2008. Gross margins at these operations are approximately 25% and EBITDA margins are 5%.

In the fourth quarter we began initiatives to consolidate those two manufacturing operations to improve efficiencies and take advantage of the superior production capabilities at the Giga facility. We were largely complete with that initiative by the end of the fourth quarter of 2008, and should realize savings from that initiative beginning in the second quarter of 2009. By the end of the second quarter of 2009 we expect the EBITDA margins will improve to over 15% as a result of this consolidation initiative.

As we recently announced, the acquisition of TurboChef Technologies was completed on January 5, subsequent to the Company's fiscal yearend. We're very excited about this latest acquisition and continue to believe TurboChef has significant growth potential as the leader in the developing speed cook segment.

In 2008 TurboChef had approximately $85 million in revenues and an EBITDA loss of approximately $5 million. We have made significant progress in improving the profitability at this business unit over the last 60 days, and as previously reported we anticipate cost reduction of approximately $15 million through restructuring of its residential business and roughly $8 million through the closure of the corporate office. And cost reduction efforts associated with these two initiatives will largely be completed by the end of the first quarter, and we anticipate we will reach an annual run rate of approximately $20 million EBITDA starting in the second half of 2009. Initial estimates of depreciation and amortization for TurboChef which have yet to be finalized are approximately $8 million [per annum].

In the first quarter we will record onetime charges associated with the purchase accounting requirements associated with the adjustment of inventories to fair market value and other transitional related items. We have not made the final evaluation of the impact of these charges but anticipate they will range in the amount of $3 million to $5 million. And we anticipate this acquisition will be accretive to earnings by the fourth quarter of 2009.

That's all for our prepared commentary. Eric, can you now please open the call for questions?

(OPERATOR INSTRUCTIONS.)

Our first question comes from Jamie Clement with Sidoti & Company. Please go ahead.

Tim, good morning.

Hey, Jamie. How are you?

Good, thanks. Let me ask you something, you know, with respect to the order flow that you all experienced in the fourth quarter or even are experiencing now, I mean a lot of companies are talking about real inconsistent shifts from week to week. Question A is that what you saw in the fourth quarter, is that what you're seeing now? And, B, how do you maintain your gross margins in that kind of an environment, because obviously this was a pretty strong number in the fourth quarter?

Yes, well, the order rate has been somewhat up and down, so I would say our -- what we've experienced is not significantly different from what you've described at other companies. But, as you saw, we were able to maintain our gross margin with lower volumes in the fourth quarter. The acquisitions that we've completed, we've continued to have margin improvement there and anticipate, as I mentioned, further improvement in 2009 with some of the initiatives that we've got in place.

And, also, expect that steel will start to benefit us starting in the second quarter. So we're -- we had significant increases in steel in the first, second, and third quarter that kind of flattened out and then started to come down in the third and into the fourth quarter. So based on current trends that would be a benefit that we'd start to see in the second quarter. So I think when you net that out, we feel that we'll be able to do a pretty good job of upholding the margin rate.

Okay. And then a last question, one of the segments that I think people don't really ask you a lot about is really the institutional market. How has that been holding up?

Jamie, this is Selim. I'm going to answer that. This market has been, for us it's almost 10% to 15% of sales and it's growing for us. We are specifically very strong in the schools, hospitals, and nursing home segments. This market continues to hold-up well. We expect that this market, as the stimulus package is enacted that the school segment will benefit significantly in that market.

But remember in the last few years that school segment has been hard -- very strongly hit by the cuts in after school programs, they've cut back on the lunch program, and in many of those schools they are underfunded and we believe that being a major player in the school segment we will benefit from the stimulus package.

So far, we continue to see orders coming into that segment, and it's a very fast growing segment for us, especially if the stimulus package is enacted. They are expected to get around $50 billion to $100 billion for the school segment in that stimulus package, so we're watching it very closely.

Okay. Thank you very much for your time.

Okay. Thanks, Jamie.

Our next question comes from [Greg Holtzer] with Great Lakes Review. Please go ahead, Greg.

Yes, thank you for allowing me to ask. A question for you on your tax rate expectations for '09, I guess including TurboChef, have you come to any conclusions there yet given their favorable tax nature of what the rate may be?

Okay. Well, I think historically we've said kind of 38% to 40% is the expectation for the tax rate, and I think obviously we've had favorability in the fourth quarter, and so it was in that range. So that is kind of what I'm anticipating for 2009. We've not fully evaluated the impact of TurboChef on the effective tax rate, although I don't think it will have a significant impact on the effective rate.

From a cash standpoint, TurboChef did have significant net operating losses, and as we had announced earlier those, they will not run through the P&L, but it's set-up and effectively is an asset that we get to utilize over the next 15 years. And we expect from a cash standpoint that we'll over the next several years we'll benefit about $5 million a year in cash tax savings.

Okay. And your backlog, I think you had indicated about $47 million versus $60 million, does that include the completed acquisitions? And, also, TurboChef? Or how does that $47 million fall out?

It does not include TurboChef, so none of the numbers in our press release or in our 10-K would include TurboChef other than the subsequent event footnote, but it does include the more recent acquisitions, yes.

And is most of that related to the food processing, or is it a combination?

It's a combination.

Okay. And any -- I know you gave some commentary on the order rate and book and so forth, but just given that January is over, February is completed, and we're five days into February, wonder if you could comment on how your order trend sales are looking so far in 2009?

Well, I think it's too early for us to say what the trend is for 2009, and obviously these are different times right now, but I mean through the first quarter I think the underlying business I think we're seeing kind of a continuation of some of the volatility and negative order trends that we saw in the fourth quarter that carried into the first part of 2009, as it relates to kind of the underlying business now. As I mentioned, offsetting that we do have some large rollouts with some major customer chains, and we do anticipate that that would largely offset kind of some of the softness in the underlying market.

Okay. And one last one for you, I think this year, 2008 had a 53-week year versus 52 and 52 the prior two years, is 2009 back to a 52-week year?

Yes, I believe it is.

Okay. Thank you.

Next is Tony Brenner with Roth Capital. Please go ahead, Tony.

Thank you. I wonder, Selim, if you could talk about the macro outlook given the current state of affairs? Particularly with respect to two things. One the international business, which for the first nine months of the year had held-up very well from a sales standpoint and appears to have hit a wall in the fourth quarter? And, secondly, with respect to the sharp decline in energy prices and how that's affecting demand for products, such as the WOW oven and Rocket fryer?

Very good. Let me first talk about the international, international market for us represents 20%, roughly 20% of our sales, and we have seen a little bit of softness in the international market but I think that we will see the international market holding much better than the domestic. And I think that we'll continue seeing growth internationally.

Given the fact that our market share is very small and the fact that we've added significant amount of [frame makers] and reorganization in the [sum] organization in our international markets. We continue to see China, we continue to see emerging markets, and to grow. And our market share is very small in the international market. With the acquisition of Giga, FriFri, and Houno, Houno is -- continues to do well for us, I think that the international market will hold-up pretty strongly.

So in '08 you were referring, we're growing north of 10% in our international market. I think that we will most probably not grow as strong as 10% to 12%, but it will be north of 5% to 6% internationally in '09.

On your second question about the energy and how do we see the fact that the energy now has gone down in price, I have to tell you I don't believe energy will go down for a long time. Once the economy recovers, China and India will continue using energy like crazy. I think energy prices will start climbing again.

So many of our customers will look for a seven to 10 years investment are looking at the wall oven. We have seen an uptick in the wall oven, so the wall oven continues to do well. Just to give you a perspective, so far since we introduced the wall oven which was in 2006 we have sold over 4,000 units of wall ovens. So we continue to see penetration of the wall oven.

The Rocket fryer just got launched in the first quarter. We have 50 of them in test, and they are performing very well for our customers. The payback is strong for our customers. However, we are tweaking it. It's a very, very complicated technology because it not only extend the shelf life of the oil, it also have a [sub system], it also has an ability to take less oil, and it's a faster frying and energy saving.

So you look at all of this, we're working with our customer to tweak certain things that we see as being now rolled out and being sold, so we have a lot of enthusiasm for the Rocket fryer, but we need to tweak some of the things we're finding in basically with our customers saying, "Well, could you do this better, could you understand maybe making sure that the oil is doing better, the filtering is a little bit working better"?

So we need some tweaking on that Rocket fryer. And it might be another 60 to 90 days to get all those tweaks out, but it's doing fantastically. It's doing exactly what you want it to do. Our customers are happy with the return. They're happy with the savings, but we need to tweak it a little bit longer, more.

Okay. A second question, in addition to bringing in-house the business that the production that TurboChef had outsourced are there additional facilities, consolidation opportunities that might be pursued over the next 12 to 24 months?

Well, we are right now looking at consolidating the Wells facility in Star, so this is underway as we speak now. And we do not know the impact yet of that integration because they're going to be two things, there is the investment at Star that needs to take place. And the reason we're doing it mostly is for efficiency (inaudible). We're integrating Wells and Bloomfield into Star, and we believe there will be more than some significant saving for that business. In '09 between the severance packages, the moving of the equipment, and some capital investment in Star, we will not see much -- the net affect will not be felt in '09, it will be heavily felt in '10, and we believe the saving will be multi million dollars.

Great. A last -- my last question is the decline in general and administrative expenses that we saw in the fourth quarter, aside from affecting the first part of the year from severance at TurboChef and the sales reorganization, is that -- does that resemble an ongoing run rate for you?

I would say that part of it does, some of it does, but not all of it. I mean I think there was some favorable items in the fourth quarter as we looked at some of, frankly, some of the cost savings initiatives we put in early in the year, such as restructuring of insurance programs, the savings, you know, that we recorded in the fourth quarter really related to the whole year.

So I mean that, so some of the annualized savings was felt in the fourth quarter, as we were able to validate actually the savings on the program. So I would say roughly half of the savings is real, well, it's all real, but I would say half of it is related to that quarter and the rest of it might get spread over a 12-month period instead of a 3-month period.

Thank you very much.

Thank you, Tony.

Our next question is from Peter Lisnic from Robert W. Baird. Please go ahead.

Good morning, gentlemen.

Good morning, Peter.

Tim, I guess the first question, if you could maybe -- it sounds like what you're seeing in the first quarter is comparable to the fourth, and I don't know what the industry outlook is but it's probably not great, but this impact from new programs and how much that might offset, can you maybe give us a scale or some magnitude on how much of an offset some of these new programs will give you this year?

I'm going to answer that, Peter. First of all, you know we do not provide guidance, so but given this environment I'm going to elaborate a little bit more. So let's build, let's try to build the year for all of you sitting on that conference call. You have to use the fourth quarter as the base, so you go back to the fourth quarter and say, "Okay, this is the base of what order rates will be." Because we've seen a significant decline in food processing. We've had erosion in our order rate.

So we start with the fourth quarter build-up, and you add to it the rollout that we're having. So assume the rollout is going to be in the $20 million of rollout is going to take place, because we've shipped some of it in the fourth quarter.

The steel we're seeing roughly in the steel reduction between 2% to 3% of steel savings, which you should account for. And then you're going to see a TurboChef integration. And, as Tim said, the run rate is going to be around $20 million of EBITDA starting the second half, so it should say we're going to make $8 million to $10 million of EBITDA growth, EBITDA addition on TurboChef in '09. And then there are some other cost cutting savings, that I would attribute to being around $3 million to $4 million dollars on top of that. So this is a little bit of a build-up that you could build-up the year going through from the visibility we have.

Okay, that is very helpful, Selim. The thing I'm wondering is whether or not, you've always been very aggressive on new product introductions. I'm wondering if in the current economic environment that customers are not as readily adopting some of the new products? And have you had to kind of scale back your plans for some of these new product introductions?

Peter, maybe -- I mean you've opened the stage for me to talk about my [tirade] here of our business. You've all been with me for a long time now. You've all, every analyst have followed our Company, and I have to tell you today, what we just reported today, or last night, separates a good operator from a bad operator.

We are a heck of a good operator, and I'm not being what you call that, obnoxious about it. I think we work very hard over many years on two things. On customer retention, and we're very proud of that, our customer retention is over 90%. And, most important, our price retention. If you look at us when the good times were out there everybody wondered why we were not growing our wall oven and our innovation by 20%, and we were very clear even in 2006, in 2007 when times were great, we said that it is very important for us to manage margins.

And we did not chase every order out there, and this is reflected today in the fact that our customers have, are creditworthy, they are financially strong, our accounts receivable are at the same level they've been before. Our bad debt to sales ratio has not been out there crazy, it's still at the same rate it was in 2006, 2007. Our inventory levels, other than the rollout that's being accounted for right now, is the same. So we are a good operator. We did not go and chase every order out there.

On the price retention, let me tell you what makes Middleby unique. Not only we offer our customers innovation that is measureable, we have are offering people energy savings, and we were the first and we continue to be the first publicly to tell our customers we will measure the energy saving. And if you don't get savings on what we tell you it is, we'll take back that oven. That's number one. We look at the Rocket fryer, we tell our customers, if we don't save, extend the shelf life of that oven, of that fryer, of that oil, I will take back that Rocket fryer.

We have a one-year warranty. For one year, if it has been in places now since 2001, any product that you buy from Middleby, for one year if it does not meet your expectation we'll take it back. It's not new. We have paid back on every one of our product that is engineered, innovative, so that we can tell you the payback is less than two years. We have call centers, you call in, we now have call center for our major accounts, whether it's [Darvon], or Yum, or McDonalds, they have a call center.

So if you look at our margin and our price retention despite all what we do in terms of marketing, our customers get lots from us. However, we only choose the customers that are willing to invest with us on our innovation, that the innovation gets some payback. And that's why our margin will continue to grow.

We were disciplined in our acquisitions, we did not chase every deal out there. While we made a lot of acquisitions, we stayed focus on the acquisitions that were relevant to us, that were synergistic with us, that were strategic for us, and if you look at every one of them, we are able now to look back and say, "Middleby delivers on their integration of their acquisitions."

So going back to your question, "How can we retain the margin"? Number one, number one, we continue to introduce seven to eight new products, the (inaudible) products in 2009. We just introduced eight in 2008, and we introduced eight in 2007, and today they account for over 20% of our sales. They account, also, between 5% to 10% higher margins for us, and they bring a higher payback for our customer of less than two years.

Second, we continue on our margin, in addition to working through the innovation, we have created a national accounting where we've added a number of great employees that are out, going directly to our customers, and in many cases taking away our rep in between, and we've outlined around 35 to 45 accounts that we're going to go direct where they used to be an independent manufacturer rep between us and that account. So we've eliminated that commission, and we're taking it direct which will increase our effectiveness with that account as well as bring us some additional savings from the commission we're paying to our reps on those specific accounts.

So we've moved a lot of things. We expected a slowdown. We managed for a slowdown. This doesn't happen, the fourth quarter didn't happen by Selim turning a switch on. I think I would like to give kudos to every one of my employees, to my Management Team, that went out and anticipated and took actions in late 2007, early in 2008 to make what the fourth quarter looks like, to make what 2009 will look like in terms of aggressive change in our business model, whether it's a national account, whether it was our dealer network, whether it's introducing new products, whether it's the call centers, whether it's laying off people and becoming efficient, whether it's plant conservation like the FriFri going to (inaudible) the Wells Bloomfield going to Star. Thank you.

Okay. Thanks for that, Selim. That is very, very helpful. Just a couple of quick ones. Tim, can you maybe give us a sense as to how comfortable you are with revenue visibility at TurboChef and how early revenue synergy opportunities there are in terms of penetrating your legacy customers with the speed cook technology that they have?

Yes, okay. Well, we're very excited about the opportunity with TurboChef, so we still feel that the premise of why we did the acquisition, this is a great technology, they're positioned as the clear leader in a -- in the fastest growing segment of cooking, which is the speed cooking and the (inaudible) technology.

So I think our belief is while clearly the industry conditions are difficult and that business is going to experience the same issues, it will hold-up better than other businesses in a period like this. So I'm not going to say we have visibility to the revenues, but there's -- but the growth may be dampened there but I think that they'll, you know, that business will fare better than others we believe in this period.

It's still early on, but as Selim just mentioned, the National Account Team, I mean one of the strategies here is we've grown the Company to do a better job of cross selling the products across the major accounts, and that's really the initiative that we've just started on. But we believe that there is a lot of opportunities there. And we really haven't gotten too far with it yet, but I think we are seeing opportunities and we're starting to go after them. Some of them will take time to develop, as with any kind of new product or approval at a major customer, but they're there so it's a matter of time, of getting after it and harvesting it, and being there at the right opportunity.

Okay. And then just a last quick one, in terms of balance sheet, you sound pretty comfortable given the free cash flow that leverage isn't all that great of a concern I guess is the way of maybe summarizing it, but maybe talk about acquisition environment and appetite for bolt ons and whether or not the strategy is still focused on [hot side], just a quick synopsis on acquisitions, I guess?

Well, clearly one of the strategies here at Middleby has been growth through acquisition, so new products and acquisition that's been kind of a two pronged growth strategy, and we continue, we believe that there will be acquisition opportunities in this environment. Clearly the financial markets are much different than they've been in the past, and we've got some constraints.

With that being said, we're going to continue to evaluate opportunities as they become available, and work within our existing capital structure and what's available to us and make sure that we're very comfortable in a period like this that the leverage that the Company has continues to remain very manageable, and we are very comfortable with the leverage that we have right now. We expect that we'll generate cash flow this year. We're comfortable that during this period that although it may be a more difficult one, covenants is not something that's going to come into play for us.

Okay. That is very helpful. Thank you both.

Thank you, Peter.

Next is Gary Farber with C.L. King. Please go ahead, Gary.

Yes, just a couple of questions. Can you talk about the competitive environment, what you're seeing from the public companies you compete against, the private companies? And then maybe distinguish between if there's any difference between domestic versus international, and as well as within that context, pricing?

Okay, first, what differentiates Middleby from most is that we're very focused on what we do. We are very focused in terms of our customers, in terms of our brands, and we've been very much on the hot side. So if you look at it, we've been in the past we understand the hot side, we understand the cooking side.

What the constraints are between us and most of our competitors is we've invested in technologies that are disruptive. I think we are one of the companies that introduced the most products and invested in the most amount of introduction over the last few years. I think if you look at where our innovation has been, we were very strong in introducing the [Ventis] technology and introducing energy. We were the first to talk of energy in 2000 and 2001 before anybody else even tackled energy across not only in our industry, in the car industry they were not even, maybe the only one I would say would be Toyota that was talking about Prius. And I think we were the only two companies focusing on energy and took it seriously. We bet this Company in 2000 on energy and we won. Today most of our products have energy saving in them versus anybody else in our competitors. We're much more advanced on that.

We're a Company that's done more acquisition than anybody else in our industry in terms of focusing on brands and taking the brands in. On our international, we are a leading player in emerging markets. We were in China, we were in India, we are in Latin America, before anybody else. We started investing with plants in the Philippines, in China, and sales and service in India before anybody else was there.

So we focused on markets early on, and it's cost us a lot of money. I remember in year 2000, 2001 we were investing literally millions of dollars in our international infrastructure before we were getting any return. And today that international food service business has become a very big driver for us, and not only on the top line but also on the margin side.

I think we look at also what differentiates Middleby than everybody else is the fact that our technology is not centralized. We are very decentralized as a corporation, so we have centers of excellence. So when you look at our fryers, we had the (inaudible) fryers, the people who run our fryer business at Pitco, that's all what they do. They understand fryers, so when we bring a customer to look at our Pitco business they only see fryers. If they have a frying need they go to New Hampshire. If they have a baking need, they're going to go up to Vermont. If they need a automated cooking need in a pizza business, they're going to come to Chicago. If they want a holding and warming need, they're going to come to Chicago at Carter Hoffmann.

So we're highly decentralized in our centers of excellence, and that's what makes us unique. And, as I mentioned just early on, we are the only one that offers "No Quibble" warranty. We are, in writing, it is in writing that in one year you don't like the product we take it back. We've been putting our "No Quibble" warranty out forever, and that's some of the things that makes us unique.

But given the sales decline in the last quarter, I'm just wondering are you seeing anyone doing anything irrational as far as their pricing strategy in the market?

I can't address that, literally, I would say some competitors are very, like us, are margin driven, some are not. Like every industry. You always find people wanting to give things away, and I could tell you even in good times when things were very good we did not chase every chain out there.

We've had customers that liked our technology but they wanted us to give it away, and we walk away from those opportunities. And while we have other customers, competitors that do the same like us, and there are some who are always market share driven, and then you wonder why they don't make any money.

And I think a great example, could be many, I think one of them was a publicly traded company that you're all aware of and will remain unnamed, that did not make any money for years and years and years, and they grew their top line significantly, but that's not what Middleby is all about.

Middleby is about customer retention and price retention. We want to give our customers great value, but they have to -- we have to manage our margins. And we have plenty of customers who like that business model with us, because they know we'll be there to take care of them. We are stable, we have been an acquirer, not seller of businesses and brands, and we create some great brands, so.

And that would sort of imply that the margins you're putting up now are sustainable, basically?

Yes, I mean I think that's what I indicated earlier, early on, I mean clearly with the volume pressures that puts pressure on margins but we believe we've got some initiatives to offset it.

And, Gary, I mean I think as Selim was mentioning we've always had competitors out there that we felt that their pricing was irrational, so I think that we have not seen a major change kind of in the discounting environment. That doesn't necessarily mean it won't occur but at this point that's not occurred.

Okay. Thanks.

Next is Joel Tiss with Buckingham Research. Please go ahead, Joel.

Hey, guys. How's it going?

Hi, Joel.

Hi, Joel.

Just one cleanup question and then a real question. The interest expense, can you just give us some help for 2009?

In terms of what the rate is going to be?

Yes, what the, you know, I mean I calculate out --

If you go, I mean obviously we're not -- we don't give guidance and interest can be a function of our debt, but I mean in terms of the rate we're -- there's a grid that we're paying on and it's LIBOR plus 150, that can tick down to 125 perhaps. LIBOR is going to be whatever LIBOR is, but we've locked in roughly half of our debt, and it's locked in at a rate that's about 3.25% and the rest is going to be floating, is floating as of right now.

Right, I read the 10-K last night, so the average is 2.36%, so all right, whatever. I just figured you could make it easier.

And then can you just explain one thing, too, on -- when you look on the balance sheet, the inventories and the receivables are up by around $40 million, but then when you go through the cash flow statement not that much of that is reflected, maybe more like $20 million of that is reflected. Is there anything in there that --

Well, it's mostly because of the acquisitions, so when we buy a company we're buying a bunch of inventory and receivables that get put on the balance sheet, but that's not an operating cash flow, that's part of the investing activity.

Okay. So there's not stuff piling up in the work in process and all that, it's all from acquisitions?

We did -- yes, and that's why I went through kind of the increases and each of the balances that were driven by acquisition. That being said, there were some increases in working capital at yearend, and that's primarily driven by the large kind of rollout that we're, started to have in the fourth quarter and that will continue in, mostly in the first quarter this year where we've had some inventory build associated with that.

And that $30 million positive change in the prepaid expenses and other assets, about half of that is just catch-up, like onetime things to clean out? And the rest is sustainable, is that fair?

Yes, I mean most of the change in prepaids was from -- we had a prepaid tax balance coming into the year.

Right.

So we utilized that in 2008.

Okay. Thank you.

Yes.

Thank you.

That is our allotted time for the question and answer portion of the call. I would now like to turn the call back to Management for any closing remarks.

Yes, I would like to make some final remarks, is if you think about Middleby today, if you look at our debt which is something that's very important to our investors in today's climate, we are managing our free cash flow which is recurring. Our covenants are not at any risk to be ever broken, and our CapEx are low.

We are very excited about TurboChef. It will be accretive in the second half of this year, and the new products that they've introduced, including the I-Series which allows now to cook and roast, which was introduced at the show in February and drew a lot of attention.

We are thrilled that steel prices are coming down and will continue to come down, so it will allow to relieve some pressure on our margins. We are -- we have no surprises as we move forward, we understand the environment, we've taken contingency planning. We are anticipating the environment continuing being very difficult, and we are, have had some headcount reduction and some cost saving measures that allow us to offset.

So despite all the difficulty that we've seen in the second half of 2008, our earnings grew in 2008 and we expect the earnings to grow in 2009, but they could end up somehow being impacted in the first half by the integration of TurboChef and the integration of Wells into Star.

We'll continue doing a very strong cash flow generation. We'll continue our cost saving and synergies from the acquisitions we made in '07, '08, and '09, as Tim indicated in his comments. The replacement business is a key driver for us in the U.S., and we continue seeing growth in our international markets.

We have created a very strong Team and invested in [rainmakers] in this industry, and we've created a new National Account Team that will focus on our customers, including a call center. We have a high retention rate of our customer base, and we continue seeing our margins to remain as they've been.

We look at our stock price and where it is today, it is literally valued at a very low multiple, and fundamentals still matter. While we continue seeing that the macroeconomic issues will continue affecting segments of our business, we feel that the introduction of our innovation and our new products will continue, impacting some rollout, such as what we're doing in the first quarter, and we continue seeing the introduction of the Rocket fryers, the hydrovection, the Mini-WOW, the [Ventis] technologies, the I-Series of TurboChef to continue being a very well positioned, when the economy recovers to be in a phenomenal position in the next 18 months.

For this, I thank you for being with us on this conference call, and we'll continue managing our business the way we've managed, and thank you.

Okay, thanks, everybody. We look forward to speaking with everybody next quarter.

Thank you, ladies and gentlemen, this conference is concluded.