Middleby Corp (MIDD) 2009 Q1 法說會逐字稿

Hello, and welcome to The Middleby Corporation first-quarter earnings conference call. With us today from management are Chairman and Chief Executive, Selim Bassoul and Chief Financial Officer, Tim Fitzgerald. We will begin the call with opening comments and later there will be time for questions and answers, and we will provide instructions at that time.

Now I would like to turn the call over to Mr. Tim Fitzgerald. Please go ahead, sir.

Good morning, and thank you for attending today's conference call. I'm Tim Fitzgerald, CFO of the Middleby Corp. and joining me today is Selim Bassoul, our Chairman and CEO. I have some initial comments about the Company's 2009 first-quarter results, and then we will open the conference call for questions and answers.

We were pleased to report our 29th consecutive quarter-over-quarter record net earnings. First-quarter results completed the impact from three acquisitions completed during the last 12 months, including Giga Grandi Cucine on April 22, 2008, frifri on April 23, 2008 and TurboChef Technologies on January 5, 2009. Results for the quarter did not include our most recent acquisitions of CookTek or Anetsberger, which were completed subsequent to the end of the first quarter.

Net sales in the 2009 first quarter of $181.5 million increased 12.8% from $160.9 million in the first quarter of 2008. Sales growth from recent acquisitions accounted for $27.4 million in the quarter. Excluding the impact of acquisitions, sales declined by 4.2% as compared to the prior-year quarter. This decline included a sales reduction of 35.6% at the Food Processing Group and a 0.3% increase in sales at the Commercial Foodservice Group.

Sales from the Commercial Foodservice Group included a rollout of our hydrovection oven, with KFC to support their new grilled chicken program. This rollout was completed in the first quarter and accounted for approximately $30 million of revenues in the quarter.

Sales at both the Food Processing Group and the Commercial Foodservice Group were impacted by the continuing difficult economic conditions which have continued into the first half of the second quarter.

Gross profit increased from $58.9 million in the first quarter of 2008 to $68.8 million in 2009 and our gross margin rate improved from 36.6% to 37.9%. The first-quarter gross profit includes $1.7 million of purchase accounting adjustments, which resulted in a reduction in the first-quarter gross profits. Excluding this adjustment, gross profit would have amounted to $70.5 million at a gross margin rate of 38.8%.

The gross margin rate reflects profit improvement at the recently acquired companies as a result of integration initiatives and a favorable product mix, which offset the impact of lower sales volumes. Additionally, the adverse impact of steel prices, which began to subside in the first quarter of 2009 -- they should have a slight benefit to gross margins in future periods as steel prices remain stable.

Selling and distribution expenses during the quarter remained relatively constant at $16.3 million. Selling and distribution expenses included $3.6 million of expense at the newly acquired businesses. The increased costs from acquisitions were offset by $2.4 million in reduced commissions as a result of lower commissionable 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 $7.7 million to $24.4 million. The increase in G&A expenses included $4 million of additional expenses at the recently acquired businesses. The first-quarter general and administrative expenses also included $2.3 million of charges associated with the closure of a manufacturing facility and consolidation of production with another Middleby facility.

Interest and deferred financing costs decreased from $3.7 million in the first quarter of 2008 to $3.1 million in the first quarter of 2009, reflecting lower interest rates, offset in part by higher debt balances as a result of the funding of the TurboChef acquisition.

The provision for income tax in the fourth [sic - see press release] quarter was $10.6 million at a 43% effective rate. This is compared to $8.7 million in the prior-year quarter at a 39.9% effective rate. The increase in the first-quarter effective rate reflects an increase in tax reserves associated with state tax exposures associated with increased business from recent acquisitions.

Net earnings for the 2009 first quarter increased 7% to $14.1 million or $0.77 per share from $13.2 million in net earnings or $0.77 per share in the prior-year quarter.

Excluding the first-quarter restructuring expense of $2.3 million and the $1.7 million non-cash purchase accounting adjustment associated with TurboChef, net earnings on a pro forma basis would have increased by approximately 24% to $16.4 million or $0.90 per share.

Now turning to the balance sheet and cash flows, net changes in the balance sheet from year end reflect the impact of the TurboChef acquisition. The TurboChef acquisition accounted for an $11.9 million increase to Accounts Receivable, $10.4 million to inventory, $3.8 million of property, plant and equipment, $9.2 million of accounts payable and $15.1 million of accrued liabilities. Additionally, we recorded $66.8 million of goodwill and $72.5 million of other intangible assets associated with this acquisition.

Other changes to the balance sheet include an increase in receivables associated with the hydrovection rollout to KFC, which occurred in the quarter, as well as other normal variations in working capital requirements.

Cash flows provided from operating activities for the first quarter amounted to $9.9 million as compared to $12.6 million in the prior year. Operating cash flows in the first quarter included the payment of approximately $10 million of transaction-related costs associated with the TurboChef acquisition. Non-cash expenses added back in calculating operating cash flows included $2.7 million of non-cash share-based compensation, depreciation of $1.7 million and $3.5 million of intangible and deferred financing amortization.

Operating cash flows and $111.7 million of our borrowings under existing debt facilities were utilized to fund the acquisition of TurboChef, which was acquired for $116.1 million of cash and 1.5 million shares of Middleby common stock.

Investing activities also included capital expenditures amounting to approximately $1.9 million during the quarter, which were utilized to upgrade manufacturing equipment and make facility enhancements related to production consolidation initiatives.

Total debt at the end of the 2009 first quarter amounted to $346.1 million as compared to $234.7 million at the end of 2008. The Company's borrowings are funded under a $497.5 million revolving credit facility that becomes due in December 2012.

The Company's debt to EBITDA ratio as computed under its senior debt agreement was approximately 2.1 times as compared to a maximum leverage covenant of 3.5 times. And its fixed charge ratio was 11.2 times as compared to a minimum coverage ratio of 1.25 times. The Company remains in compliance with all other covenants under its bank agreements.

As it relates to acquisitions, we were very pleased with the progress made at the TurboChef acquisition, which was completed on January 5, and we remain on track with our profitability objectives at this business. We have largely completed our integration initiatives associated with this acquisition, including the elimination of redundant corporate overhead expenses, reorganization of the residential business and implementation of profitability enhancements at the commercial oven business.

Gross margins have improved at this business to approximately 40%, up from approximately 35% at the time of acquisition. Additional EBITDA margins which were historically negative at this business improved to approximately 20% in the first quarter. While we have completed the majority of integration initiatives, we anticipate gradual improvement in operating margins at this Company over the remainder of the year, as benefits from implemented initiatives are fully realized.

We also continue to focus on the integration of Giga and frifri operations, which were acquired in the second quarter of 2008. In the first quarter, we completed the consolidation of those two manufacturing facilities. This consolidation will result in annual savings of approximately $2 million per year, which we begin to realize in the first quarter.

During the first quarter, we also began an initiative to consolidate one of our US manufacturing facilities to another existing facility. This initiative, which is anticipated to be completed by the end of the third quarter, is expected to provide for annual savings in excess of $5 million annually. We will begin to realize the savings from this initiative starting in the fourth quarter.

The first-quarter results included a $2.3 million charge, as previously mentioned, associated with these initiatives, and additional costs will be incurred associated with the physical move of this production facility in the second and third quarter as well. As we recently announced subsequent to the end of the quarter, we completed the acquisitions of CookTek and Anets. The combined purchase price for these acquisitions was $13 million. These companies had combined revenues of approximately $20 million with a combined EBITDA margin of approximately 5%. These acquisitions allow Middleby to continue to strengthen its leadership position in cooking and warming and to add to our portfolio of leading brands and technologies. These acquisitions likely will not have a meaningful impact to net earnings in 2009, although we anticipate they will be accretive to earnings in 2010 as we realize synergies from these transactions in the sales, purchasing and production areas.

Eric, that's all for our prepared commentary, if you could now please open up the call for questions.

(Operator Instructions). Peter Lisnic, Robert Baird.

Good morning, everyone. I guess first question, if we could talk about the environment. If we take out the sales to Yum! for KFC and you look at the organic growth comp and commercial food service down around 20%, I think, is the number -- is that the environment that you are dealing with in terms of the second, third and fourth quarter? Maybe give us a sense as to how demand has trended from the fourth quarter into the first and give us some color on that down 20-ish kind of comp?

You know, well, as I mentioned, we see the order rate continues to be down consistent with the first quarter. So, as you mentioned, Pete, if you exclude KFC, we would have been down in the 20% range. So it's hard to say what's going to happen for the third and fourth quarter. We're going to start overlapping -- the end of the year we are going to the overlapping numbers that were down, as the fourth quarter, we had already been in decline in a difficult environment. But the current economic environment that we saw in the fourth quarter and the first quarter, that is continuing into the first half of the second quarter here.

Okay. All right. Fair enough on that. But it looks like the fourth quarter may have been a little bit better actually and the first quarter was worse. And I'm just wondering, can you maybe comment on that? And then also comment on whether or not that is sort of reflective of industry or are you gaining, losing share? What sort of insight do you have on that front?

I can answer that. I just visited -- I was at several of our buying groups and I was -- I did it once probably close to 40 or 50 customers in the last quarter. I can tell you that we do not feel that our market share is at any stake. If you look at some of the companies that report in our industry, they are reporting a lot lower numbers than we are in terms of declines. So we believe that we are retaining greatly the customers. We also believe that we have done a lot of good things in terms of revenue drivers.

And one, we got new accounts based on our technologies. A lot of people continue looking at green technology and energy-saving technology, and we are the leader in those technologies at this moment. We also believe that menu additions continue to be a big driver. Similar to KFC, despite being in one of the worst environments ever, KFC came about and spent the money to upgrade and introduce a new menu item. We are right now, we have in our pipeline, several tests which changed similar to the type of KFC menu. It's not anything of this magnitude; do not misunderstand me. But we have several multimillion dollar initiatives right now that are being tested, and they could fall into place as we continue working with those chains to get those tests validated and help them with their menu changes. So the activities on menu additions have not slowed down at all.

As I mentioned, several quarters ago, when we started seeing the recession, I told you that our new product and our innovation would carry this Company through during the tough times, and it has. And I think and I'm very optimistic that we will most probably hit a couple of those rollouts in the next few quarters. Again, we are not talking $70 million rollout. But I think there are multimillion dollar rollout that we're working on right now.

Okay. That is very helpful. And then, Tim, I guess just one last question. If I look at the warranty expense that you booked in the first quarter, it -- at least double what it was last year and triple kind of the run rate you were running at in the third and fourth quarters of '08? So can you give us a sense as to what happened there?

Well, a couple things. With the hydrovection oven rollout that's a new product as well as some of the other new products that we launched in the first quarter, we typically have a higher warranty rate that's put on that just based on experience with new products when they first roll out. You might have higher warranty experience. So we've recorded that and also with TurboChef, which is new to the portfolio. So those factors, new products and TurboChef impacted the warranty rate.

Okay. And have you had any sort of warranty experience yet on the hydrovection? Have any come back, any sort of operating issues with them?

No, at this point, it has performed extremely well.

All right. I will jump back in queue. Thank you for the info.

Tony Brenner, Roth Capital Partners.

Thank you. Wonder if -- it looks like the revenue number for TurboChef was fairly solid. I wonder what kind of progress you are making on expanding TurboChef's customer base at this early date?

Well, Tony, one, I think that TurboChef continues to perform extremely well; you are totally correct. We are also taking TurboChef into new international markets. And that's a strength and a synergy that we see between TurboChef and Middleby Worldwide. We have -- they have base low patterns in emerging markets where Middleby Worldwide is extremely strong. So we are at this moment working through the integration of TurboChef in our international organization.

Number two, we continue to work with the introduction of the I-Series. They are doing great penetration with new chains. In fact, publicly announced they were able to get late last year the 7-Eleven account, and, in the first quarter they were able to also generate new accounts in their ownership of Middleby. So we continue to be very excited about the revenue enhancer that TurboChef will provide. And we continue to take them into more mainstream. We're working with them right now through our national account division to take them into different accounts that are very close to Middleby that they have not had penetration in. So we are very, very comfortable with the TurboChef revenue forecast for next year, for '09.

And secondly, the Food Processing business continues to be very slow. I know for several quarters now, some large orders have been postponed or delayed. Is there any visibility in terms of when some of your customers are going to take delivery of those postponed orders?

No. You know, Tony, the quoting activity on large projects continues to be there, but the timing of customers committing to their CapEx spending is still uncertain right now. So we feel good about the new products that are out there. They've gotten a lot of interest, and there are a few large projects that potentially could come through. But it's just -- it's difficult to tell at these times when the customers are going to commit to the spending.

Okay. Lastly, you've alluded to another plant consolidation during the year. What exactly will that be?

We acquired the Wells Bloomfield company about two years ago, and we are consolidating that with our Star manufacturing facility. The products are -- there's some overlap and they're highly complementary and so as far as the one of the premier manufacturing facilities that we had. So strategically, it made sense and provided for cost savings.

The model of decentralized manufacturing is still the model that we have with unique plants focused on product lines, but here where we had some light duty counter line equipment, there was a good fit. Plus we didn't own the manufacturing facility for the Wells Bloomfield, so from a long-term perspective, where we own the Star, we thought we were willing to make greater investments into that facility.

Isn't that the one that you recorded in the first quarter, Tim?

Yes. That's the one -- if you're talking about the charge, that's the charge that we recorded in the first quarter for that plant consolidation.

But, I thought that you've said there would be an additional --?

No. Well, let me, just so it's clear, we have consolidated the Giga and frifri facilities, which were in Europe, so that started in the fourth quarter and was completed in the first quarter. And then we started the Wells initiative to move to Star in the first quarter, which will be completed in the third quarter. So those were the two initiatives. And we took the charge in the first quarter related to the consolidation of the Wells facility.

Thank you.

Thank you, Tony.

Will Hamilton, SMH Capital.

Good morning. You mentioned the order rates and I guess the second quarter being similar to Q1. I was wondering if you could talk about the pricing environment, whether you are seeing possibly more discounting from competitors? And then also maybe if customers are kind of trading down to cheaper options just to fix or replace any equipment?

Well, we have not seen literally pricing pressure on us right now. I think, one, customers are not looking to -- I haven't seen much trading down. I think what customers are looking at are solutions right now. They're looking at ways to increase revenues. They are looking at ways of saying okay, what can we do? And the two things they are looking for right now, in fact if nothing else, the large players are benefiting versus the small players in this industry, is people are coming in, and in order to invest in CapEx, they want to make sure that out of the get go, they work with a company that has a great test kitchen and they're going to be able to outsource [to them] so quickly, the food so that they can give them the menu. I give you perspective.

In addition to the KFC, we're working with three other chains -- I'm sure we're working with many of them -- but this is the one I'm familiar of, which are a multimillion dollar rollout. They worked with us, and the reason they came to us, and one of them is a completely new chain to us, they came to us because they knew that we could get them, they are trying to introduce a new menu item, and they want us to do all the work in our test kitchen, so they brought all their ingredients, they brought their suppliers here, and we're working with them to put out a menu item.

Now, I asked them why did they come to Middleby. They said well, you know what? Let me tell you and that's an exact quote I got from the customer. And I'm going to read it to all of you. It says, "great companies like Middleby excel in tough times. And in tough times, customers like us turn to great companies." And that's what he told me.

And he said I know you can get up there with noted speed and we don't want to stumble. He said, if we have a little bit of cash on our balance sheet and we're going to give it to you, we want to make sure that that is successful. We don't want to make sure once we roll it out to our franchisees, suddenly we ask our franchisees to spend $10,000 on a piece of equipment between the cost of the equipment, the installation, the new menu item that we are going to ask them to put the marketing, first store, and then you say well, we can't ship or we can't service or you do whatever. So again, I thought that quote was very relevant.

So I will tell you that during a recession, great companies excel. And it rang in my ears and I wrote it down, and I bet you the top players in this industry are going to come out of this very, very strongly, the ones well positioned.

So we are seeing more and more quotations. We are seeing chains that have not been talking to us that come to us and working with us in our test kitchen. So we are seeing a lot of menu additions taking place where people are looking for speed of execution and the success rate of that.

Okay, great. It seems like you are doing well with the chain markets, particularly from new menu changes. But can you talk a little bit about the independent market and what are some of the trends you're seeing there? Has that stabilized? Any color on that market for you?

I think the independent market consists of two markets. What I call the replacement market at the dealer level continues to be extremely weak. So if you talk to dealers, they are not seeing much replacement of single pieces. That's what I call the mom-and-pop business. The project business continues to be very solid, which is surprising to me. The people who have the money, who've got the money are continuing with their project or if they are, three quarters done with the project they are being able to finalize the deal. And either they are being able to get the money or they are being able to recapitalize that project. So we are seeing project continues to be working. And that could be a good impact in the third and fourth quarter.

So when they come and talk to our distribution channels, they look at the project business, say it's tough out there and it could be institutions; it could be school project. It could be a college university remodeling their cafeteria. It could be hospitals; they are seeing a lot of that. They are even seeing business and industry cafeterias continuing to update. So the project business continues to be strong.

It's the mom-and-pop replacement business continues to be very weak. And we are also seeing some of those dealers doing what we are doing, managing their working capital better and bleeding some of their inventory down. So we are seeing very little stocking orders coming in from our distribution channel.

And we believe that once that economy turns, there's going to be a huge pent-up demand because the inventory level at the distribution level will be the lowest I've seen in most probably 20 years in my industry experience.

All right, thanks. That was helpful.

Lastly, I was wondering with the commissions and the selling expense line, you definitely realized some savings from that from the changes you've made with commissions I guess to your buying groups and such, independent reps. Can you talk about what the annual savings might be from that? And also, whether you've seen any pushback from some of those distributors or reps regarding what they're getting now versus before?

Well, let me address that. One, we do not know exactly savings but it's all built on volume, so we need to understand the volume to tell you what it is, one. But let me make it clear. Our cutback on our reps and dealers has nothing to do with cutting back permanently what you've done.

The way it works is we've basically installed a compensation or a commission structure or a rebate structure based on performance. So I don't want to mislead anybody. This is not a cost-cutting measure. So it is very important that everybody understands we don't take it to the bank and say well, what you've done is you've said if you are done, it is similar to the way our bonus structure works at our Company. It's the way our investors work. If we don't perform, the stock price goes down. The minute we perform, you're going to be all rewarded. So what we've told the dealer if you perform, we are going to more than offset the cuts that you've taken when you don't perform.

So at one point, a dealer who outperforms their quota and grow will most probably wipe out more than savings. We give them a significant incentive to grow both at the rep level as well as at the dealer level. So while if the business is down, the specific distributor or dealer, and they're going to share in the pain with us, but there are dealers who once they start stocking and working, they are going to most probably make up more. They will make a lot more money.

So it's going to be a mixed bag because we are going to have some dealers where as the menu additions are taking place where they are going to most probably make more money and offset some of those savings. So we are not running away from telling you specifically what the savings are because it is not a savings account. It's not like a solitary place, where we took it for a year and it's set. This is truly an incentive program where we shifted the commission toward growth.

We're going to have a mixed bag. We're going to have some markets where the distributor's are going to say well, in the third quarter I'm going to replenish. I'm going to start ordering more to replenish my inventory. And they're going to be awarded.

All right, thanks for the color.

Greg Halter, Great Lakes Review.

Good morning, I guess it still is there. I wondered if you could give us some commentary on the launch of the Rocket Fryer and how that's going.

Well the Rocket Fryer I should have mentioned that we've put it in test right now. It is I think in 50 or 100 places, and we are doing exhaustive testing to make sure it meets requirements. And as I told you, it is a very complicated product. It has many, many patents. It has not only energy savings, it has oil savings and sub filtering, which has never been done in this industry in the fryer business. It's a unique fryer. We are debugging the system.

We don't want it to end up putting thousands of them -- it is doing what it's supposed to do. Customers are happy with it, but technically, we have some issues with it, and we are resolving it. So we are making sure that before we get thousands of those in the field -- and I can tell you, Greg, we're having so much demand for that. We're having people asking for it, but we are basically pushing them back. In fact I've got a chain here in Chicago who is very interested in the Rocket Fryer, and I told them that I will not be able, testing with them until I finish the testing with all 50 to 100 stores. Until I get, I make sure -- that we make sure -- I don't want to put thousands of those. We want to do what we did with the hydrovection. We spent a year and a half testing with KFC's hydrovection, making sure that the self-cleaning works, making sure that the grease management works, making sure that it works under different altitudes, what are the different environments. So we're going to go through exhaustive testing so we don't end up with major recalls.

And we learned from an acquisition with just on, which is TurboChef when they went to the Subway rollout and they did -- they learned a lot with a hefty price when you rollout too soon a product. And they spent millions of dollars after that doing that.

So we are very conscious that we will not be pushed to generate revenue at the expense. So I think we are most probably nine months away to finishing up all of that. Now that it's in test, this is all field bucks; this is not prototyping in the lab or whatever. It's field bugs if we're going to get it out. And I think by 2010, we will have debugged all those issues.

Okay. And I know the NRA show is coming up I think this weekend. Can you provide any comments on what you would expect to come out of that and not only from attendance wise, but also what kind of products or reaction you may be seeing from that show?

Well, I can tell you first of all it's not fair for me to talk about the NRA and what's going to happen because it's not apples to apples. For the first year ever, their [Napa] show, which usually happens every two years in September got shifted to February. So what happens is early this year, literally, usually they didn't even wait until September, so they came up and did the show in Orlando in February, I think it will have an impact on the NRA show. And it's not the NRA fault.

Once it goes back to a two-year schedule, the National Restaurant Show will have more. But having come off the heels of Napa in February to the one in May, we're going to most probably have a lot of dealers and chains that just saw us a few months ago in Orlando, will most probably will not show up at the show.

However, there are going to be other chains that are coming in, that are coming to look at specifically the flavor of the show is going to be in our booth about being green, energy-saving, and speed. And I think we're getting a lot of people coming to look at those three within our booth. And that's the theme of our booth is green because we are ventless between CookTek, TurboChef and Wells; energy-saving, we've gone a long way toward energy-saving; and speed.

In addition, it's interesting to tell you that we have many chains coming to look at the hydrovection because a $30 million rollout in the first quarter at KFC got a lot of buzz in the industry. Everybody wants to know what did you do. Who is willing to invest $30 plus million on a piece of equipment in the worst economic downturn, so everybody is coming to look at our hydrovection. And we are having a lot of interesting chains coming up to look at the hydrovection as we speak.

Okay. And a couple for Tim. What would you expect your interest rate to be going forward or what was it in the current quarter?

Well, the interest rate, we are floating about 50% of our debt and about 40% of it is fixed. And what is fixed we are paying just under 4% and then the other 60% that's floating is LIBOR plus a margin on top of that. Or so LIBOR has been in the 0.5% range. And then the spread on top of that, it started the year at 1% and that spread moves up to 1.25% in the second quarter to reflect the additional borrowings from TurboChef because it's based on leverage, so.

Okay. It's still quite a low rate though.

Yes.

And on the SG&A side, if you were to look at that figure on a combined basis, I think it was about $30 million; is that a number that -- and obviously it's volume dependent; I realize that. But is that a number that you would look at as staying stable, increasing or decreasing throughout 2009 in dollars?

Well, you know, it is -- obviously it is dependent on volume, so it's you know. But included in the first quarter we had the $2.3 million charge. That's nonrecurring in nature, although we may have some additional amounts in the second and third quarter as we complete the consolidation, albeit I wouldn't expect them to be larger than that number. So I would say when you back out that charge and then I would say you'd be looking at a G&A number that I would be relatively constant with that first quarter. Barring the fact that we did just complete two acquisitions, so much like TurboChef, when we layer those on, we're going to layer on their existing G&A. And we have not given any indication to this point what that's going to be.

So the variable component is going to be that sales number. It is correlated to what our sales are and also the mix of sales. So some sales are commissionable; some are not. So I can't tell you in strict dollars if you should expect that number to be up or down.

Okay. And one last one on your tax rate, what would be your expectations for the full year '09's tax rate?

I would say it's going to -- it would be in that 40% range.

Okay. Thank you.

Jamie Clement, Sidoti.

Selim, Tim, good morning. Two questions. Tim, first, with TurboChef's tax loss carry forwards, how exactly are those going to be manifesting themselves in your reported numbers over the next couple of quarters?

That's a good question, Jamie. So with TurboChef, we have a tax in a well which will not -- the benefit of that does not run through the P&L. So the provision that we just discussed would not reflect the cash benefit that we get from the NOL. That gets set up as an asset in purchase accounting, which we did set up in the first quarter and was reflected as a deferred tax asset. And as we utilize that, it will just be a reduction of the assets, so we don't get any benefit in our effective rate. And that amount in the first several years is going to be a bout $5 million per year of a cash benefit.

Okay. So in other words, all else being equal, and I know it never is, your book -- the dollar value of your book taxes from a cash basis will likely be about $5 million less?

Yes.

Okay, okay. Selim, next question. Candidly, I still don't fully understand the hydrovection oven's technology. And to kind of make it simpler for people like me, can you give us a sense of what other cooking applications, what kind of products this oven would ideally suit?

Okay. It will be -- it's basically a very fast-roasting oven. In a sense that it's not a single TurboChef being more of a speed oven for toasting, warming, and doing some more basic food.

The hydrovection takes greasy roasted products and cooks them at a high speed. In addition, it manages the grease of generated from that oven. Chicken and ribs and pork loins and any type of what I call grease, fat, fat-producing products -- proteins.

Proteins, okay.

Yes. Tend to be, first of all, they generate a lot of grease. Managing of grease when you are doing high volume, that's high volume. You are loading up the oven with five racks, a lot of chicken, a lot of ribs, a lot of shrimp, what happens is the walls of that oven become extremely dirty. And with time, the cleaning of that oven becomes very, very difficult.

What this oven does, which is unique and patented, is the fact that it has a unique cleaning mechanism for that grease management. That's number one, in addition to speed. In addition to energy-saving.

In addition to that, cooking some of those proteins, especially chicken -- and that's why KFC was enamored with that oven. Grilling chicken -- and by the way, we worked with them on that technology so there are some proprietary technologies that are only relevant to KFC. I want to make that very unique, that we are partnering with them and we continue to be with them. So this is -- some of that oven technology is not available to other people.

When it comes to this is the fact that chicken is very difficult to cook in terms of when you put a bone in chicken and you need to cook it very fast and not when you cut it. While it's nutritionally healthy and safe, when you cut it, it looks pink. The problem with chicken is you want to make sure that when you cook it, you look at the color and it is fully cooked. And the way to do that, people use rotisseries.

And the problem with rotisseries is it takes a long time. Labor management of rotisseries and skewering the chicken is a lot and the space of a rotisserie. So we basically took the rotisserie concept and put it in a convection oven, and that's the key. We are basically obsoleting the rotisserie business. If you think about it, what the hydrovection did is obsoleting in a simple way -- we obsoleted the rotisserie business.

So instead of twirling the protein, the heat is being twirled around the fixed protein.

That's correct.

Okay. And Selim, how did -- the charred -- the pretty chargrilled marks that you see on some of these items, is your oven responsible for those or are they coming on there from somewhere else?

I think they could be using certain plates; I do not know. I am not -- I do not know. This is a technical question I would refer a lot of people to KFC. I think you're asking me some technical questions that (multiple speakers)

I will adjourn and just (multiple speakers)

You got me on this one.

Yes, I just want to make one comment. The TurboChef oven can do proteins very well too, so I don't want to make it an either or. It's just that the hydrovection oven can do a much larger capacity because it's got multiple racks, where TurboChef will do a great job but it does it one at a time, and then the added feature of the hydrovection oven, as Selim mentioned, was the self-cleaning function.

Okay. Guys, thank you very much for your time. I'm getting hungry.

Gary Farber, CL King.

Just had a few questions. Can you just talk about potentially the acquisition pipeline? Is there still a lot of properties out there potentially for sale? The credit involvement environment for some of your smaller customers? And then what kind of trends you are seeing on repair and maintenance for new customers as well.

The acquisition -- we are continuing to be driven by acquisition, and we continue to see acquisitions and a strategic reason for us to be. And we are very disciplined. And there are a lot of businesses out there that are available in the pipeline, but we need to make sure that they strategically fit with us, and we have to be disciplined in what we pay for.

That is something that if you look at the history of Middleby, we always want to pay a fair value if the synergies are there. And we look at synergies literally in six months or less.

I want to have accretion. I've always said that accretion is very important to us in the first year of acquisition.

Number two, answering a question about is the pipeline -- there are lot of companies that are out there looking to be acquired. And not because they are in trouble but they think that the fit between Middleby or being part of a strategic company like Middleby makes sense.

Number two, you are asking about the second question about what is the credit availability for. Well we all know that banks are becoming a lot more tight with credit. And in our case, we have a credit facility that's public and we know what it is. And we have money to be able to go out and acquire; it's in place. But I know that other companies will most probably have difficulties in the normal course of business to go to a bank today, especially if you are marginally profitable, to go and acquire new equipment or invest in new technology and protect your patent.

And that's why we're seeing a lot more companies saying you know what, I have a great technology. I can't get credit, and I can't get investors to capitalize on my protection of my IP or buying new equipment so they're coming to Middleby.

Number three about repair versus replacement, I go back to my message before is that at the mom-and-pop level, we're seeing a lot more repairs than replace. At the chain level it is all driven by menu additions and our look at most probably at the dealer level they are mostly working on the project business, which are those large-scale projects that they are designing or working with a consultant and working on the project. So on the mom-and-pop level, we're seeing a lot of repair versus replacement.

Great. Just one other question. Just on the credit side again, I guess I was trying to identify was the credit impact on your smaller customers. And when you look at your demand rate, the order rate you talked about, is some of that creeping into why there is a decline in the order rate at all, the fact that maybe some of your customers are having trouble financing their own businesses.

I think what it relates to is the replacement. That's more of an operating expense rather than CapEx. And their funding it -- if they've got an existing business and they need to upgrade and replace it, they are able to fund that out of existing cash flows. So the new menu items are usually their major initiatives driven by the chain. The chains can help support financing in that situation. So where you really get impacted would be the new store openings, which has become less and less of our business. But clearly in this environment, you're going to have somebody who is making a big investment in a new store with credit being tight. And even if, in this environment just generally that's where you're going to see less investment occurring.

Right. Okay, thanks.

Jamie Sullivan, RBC Capital Markets.

Hi, this is actually Michael Salinsky in for Jamie today. Just got two questions for you. Sounds like the hydrovection oven is going to be a pretty revolutionary product. Just wondering if you expect any lost sales among your other older products like rotisseries or other kinds of products?

Well I'm glad you asked that question. That's fabulous. First of all we do not do rotisserie, so we will be taking business share, market share from somebody else. So and that's a nice category because there are several players in the rotisserie business, and that's number one.

Number two, I do not see the hydrovection fully taking away from some of our -- it might cannibalize a little bit of our other convection oven business, but it's a higher margin, it's a higher priced item. So from a price point and margin standpoint, it's a much higher because it's highly patented, it has a lot of technology. The payback on the hydrovection is less than a year between the cleaning and the energy savings just in those two features. Forget the fact that it cooks better and it can do a lot more things. So the margin will offset the loss we're going to be cannibalizing.

I believe some of our older convection ovens will most probably -- will start and go away and will be replaced by this new technology, and we are very happy to do that because the margin on the hydrovection are a lot higher for us because the payback for our customer is much faster.

Got it, got it. Thank you. And then my other question is just about your plant closures. I know that the warranty you've got going on right now, they were very select and based on overlap of products. As you look across your product portfolio, do you see any additional potential consolidations going forward either very late in '09 or into 2010?

Yes. We don't want to come in and say we are not. I think we are evaluating each factory with the capacity but we continue looking at all our manufacturing right now. And the timing is perfect. It's really -- what I believe is that you should never waste a crisis, and that's what we are doing right now.

We're taking opportunity of the crisis to say we have lower capacity in most of our places. This is a great time if we want to switch to do it within the next 18 months. So we need to evaluate it.

The difficulty for us is we want to continue being totally committed to our decentralized culture. So we don't want to start to save a couple of million dollars here, we kill a brand. And we have been very, very determined compared to all our competitors who have been much more aggressive in consolidating plants and centralizing their operations. I can think of two of our largest competitors who have done that.

We have been very, very disciplined on not losing the brand and not losing the people and the technology. We are a technology company. We're not a manufacturing company. We are a technology company. And I need to make sure as we start looking at manufacturing, we do not touch our marketing, our customer-centric organization that scores with our customer service and technical service and our engineers. We would like those engineers to remain decentralized and our test kitchen to remain decentralized.

Okay, got it. Thanks, guys. Great quarter.

Ladies and gentlemen, we have reached our allotted time for questions. I will now turn it back to management for closing remarks. Please go ahead.

I would like to welcome you all to this conference call and thank you for being with us.

One, I would like to open a new way of thinking about Middleby. I would like to spend a lot of time thinking about looking at our balance sheet strength, looking at our cash flow generation. This is important in this environment to look at the bulk of our cash flows that is available to pay down debt or and/or make acquisition. I think this Company has a phenomenal cash flow per share that continues to be generated. That's number one.

I would like to also look at, make sure that you understand what makes Middleby unique -- the diversity of our product mix, the diversity of our geographic reach, the technology of where we've taken our products and our innovation, whether it's the game changing technology of TurboChef CookTek, Rocket Fryer, hydrovection, and I keep on going; our ability to introduce new products to the world; our ability to look at increasing our competitiveness. We are spending money wisely.

We have increased the feet on the street by adding a significant amount of sales force and rain makers and we've created a national account team and call centers. So many of our chains right now call one place and they can be able to -- that call center now then handles all the issues within all our variants, and it's being very well received by our companies.

I continue to be pleased by how our team is managing through these tough times. And I have to tell you that Steve continues to help us, and we are highly preparing for 2010.

So let's go back and as an investor, looking at Middleby, what do you do? One, we continue to look at profitability enhancers between the lower commodity costs, the initiative of the conservation that we've done, and some of the new products that have carried higher margins, we continue to feel very strongly that our profitability and our gross profit margin will continue to be retained or increased.

From revenue drivers, while we continue to see the fact that our business might be down, we have a couple of things we believe that if you roll out will take place to offset some of that decline. We believe that the acquisition of TurboChef will be highly -- will increase our top line.

We believe also that the fact that between the TurboChef, the CookTek and the Anets acquisition will have some revenue generation that should be taken into consideration and to offset some of the shortfall that we will have.

And finally, I will have to tell you that we have put some cost containment measures that continues to drive the profitability into our business. Yes it's a tough environment, and we're managing it. We're trying to take full advantage of it so when it turns around we become very, very well-positioned.

And I'm going to finish up reminding you about what this customer told me. He said great companies excel in tough times and in tough times, fabulous companies turn to great companies like Middleby. On this, I thank you, and I wish you a great weekend. Thank you. Bye bye.

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