Middleby Corp (MIDD) 2009 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Middleby Corporation's second-quarter conference call. As a reminder, all lines will be on listen-only mode and there will be time for questions and answers at the end of the call. (Operator Instructions). With us today from management are Chairman and Chief Executive, Selim Bassoul and Chief Financial Officer, Tim Fitzgerald. Mr. Fitzgerald, please go ahead with your opening remarks.

Good morning. Thank you for attending today's conference call. I am 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 2009 second-quarter results and then we will open the conference call up for questions and answers.

The second-quarter results included the impact from three acquisitions completed during 2009, including TurboChef Technologies on January 5, Anets on April 26 and CookTek on April 30.

Net sales in the 2009 second quarter of $158.6 million decreased 8.6% from $173.5 million in the second quarter of 2008. Sales growth from recent acquisitions accounted for $21.9 million in the second quarter. Excluding the impact of acquisitions, sales declined by 21.2% as compared to the prior year quarter. This decline included a sales reduction of 26.5% at the food processing group and a 20.4% decline in sales at the commercial food service group. Sales at both the commercial and food processing groups reflect the impact of current economic conditions, which resulted in customers deferring purchases of new equipment.

Gross profit decreased from $67 million in the second quarter of 2008 to $61.3 million in 2009 resulting from reduced sales volumes, while the gross margin rate improved from 38.6% to 38.7%. Favorable steel prices and the impact of cost-reduction initiatives more than offset the impact of lower sales volumes on the gross margin rate.

Selling and distribution expenses during the quarter remained consistent with the prior year at $16.7 million. Selling and distribution expenses included $2.9 million of expense at the newly acquired businesses. The increased costs from acquisitions were offset by a $1.6 million in reduced commission expense as the result of lower commissionable sales and lower average commission rates. Additionally, marketing and other discretionary spend were reduced in an effort to offset the lower sales volumes.

General and administrative expenses decreased from $17.8 million to $17.7 million. General and administrative expenses included $2.1 million of additional expenses at the recently acquired businesses and $500,000 of costs associated with plant consolidation initiatives. These increased costs were offset by lower incentive compensation costs and other expense reduction initiatives.

Interest and deferred financing costs decreased from $3 million in the second quarter of 2008 to $2.9 million in the second quarter of 2009, reflecting lower interest rates offset in part by higher debt balances as a result of funding of the TurboChef, Anets and CookTek acquisitions.

The provision for income taxes in the second quarter was $9.9 million at a 42% effective rate as compared to $11.8 million in the prior year at a 41% effective rate. The second-quarter effective rate reflects $1 million of non-cash reserves associated with state tax exposures due in part to recent acquisition activities, which have impacted the effective rate by approximately 4%. And it is anticipated that the effective rate will continue to be impacted by the increased reserve levels for the remainder of the year.

Net earnings for the 2009 second quarter decreased to $13.7 million, or $0.74 per share from $17.1 million in net earnings or $0.99 per share in the prior year quarter.

Now turning to the balance sheet and cash flows. Net changes in the balance sheet from the prior year reflect the impact of the TurboChef, Anets and CookTek acquisitions. The acquisitions accounted for an increase of $11.9 million through accounts receivable, $11.8 million in inventory, $1.2 million of property, plant and equipment, $6.9 million of accounts payable and $17.5 million of accrued liabilities. Additionally, we recorded $114.4 million of goodwill and $65.9 million of intangible assets associated with these acquisitions.

Other changes in the balance sheet also include a reduction in receivables and inventory associated with the completion of production and collection of receivables associated with the oven rollout to KFC, which occurred in the fourth quarter of 2008 and the first quarter of 2009.

Cash flows provided from operating activities in the first six months amounted to $47.2 million as compared to $43 million in the prior year. Operating cash flows in the first half 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 non-share-based compensation costs of $5.5 million, depreciation of $3.1 million and $4 million of intangible and deferred financing amortization.

Cash flows from operating activities and $86.3 million of net borrowings under the Company's debt facilities were utilized in the first half of the year to fund the acquisitions of TurboChef, CookTek and Anets. These acquisitions were completed for $127.5 million in cash. Additionally, we issued [1.540] million shares of Middleby common stock associated with the TurboChef acquisition.

Investing activities also included capital expenditures amounting to approximately $1.9 million during the quarter and $3.9 million for the first six months, which were utilized to upgrade the manufacturing equipment and make facility enhancements related to production consolidation initiatives.

Total debt at the end of the second quarter amounted to $321.1 million as compared to $346.1 million at the end of the first quarter of 2009 and $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 computed under its senior debt agreement was approximately 2.1 times as compared to a maximum leverage covenant of 3.5 times and the fixed charge ratio was 11.2 times as compared to a minimum coverage ratio of 1.25 times. And the Company remains in compliance with all covenants under its bank agreements.

We were pleased with the continuing 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 to approximately 40%, up from approximately 35% at the time of acquisition and additionally, EBITDA margins, which were historically negative at this business, improved to over 20% in the second quarter.

As previously mentioned, we also completed the acquisitions of Anets and CookTek during the quarter. These acquisitions will allow Middleby to continue to strengthen its leadership position in cooking and warming and add to our portfolio of leading brands and technologies. These companies had combined revenues of approximately $15 million to $20 million with a combined EBITDA margin approaching 5%. 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 complete integration and realize synergies from these transactions from the sales, purchasing and production areas.

These acquisition initiatives include the closure of the Anets production facility and the consolidation of the production of the fryers and grills into other existing Middleby facilities producing similar productlines. This initiative is anticipated to be completed by the end of the year and result in annual savings in excess of $2 million annually.

During the quarter, we also made significant progress towards consolidating two of our counterline cooking facilities into one production location. 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 $6 million annually. We will begin to realize the savings from this initiative starting in the fourth quarter and we also anticipate non-cash charges of $2 million to $3 million associated with the writedown of plant and production equipment associated with this initiative, which we anticipate would be recorded in the third quarter. Rena, that is all for prepared commentary. If you can now open up the call for questions.

(Operator Instructions). Peter Lisnic. Go ahead, please.

Good morning, Tim. Good morning, Selim.

Good morning, Peter.

I guess, Tim, first question, if you look at the second quarter, revenue down around $15 million or so and then the decremental margin on that was 40-ish plus percent. So I am wondering if you could talk about volume, price and mix and what that meant to margin. I would've expected maybe a bit of a better decremental with some benefit from steel costs. So if you could kind of work that in and then give us the benefit from steel and kind of why margins shook out where they shook out.

Well, there are a lot of moving pieces in there, but I guess 10,000 foot view, I mean we were able to hold pricing relatively stable. So we have been fairly disciplined on that front. The volume impact was, order of magnitude, probably 2%-ish to margins and then that was offset by cost-reduction initiatives and steel, which probably, in each of those fronts, you added back a point to margin.

Okay. And then if you look at your comment on pricing and holding the discipline there, no out-of-the-ordinary promotional activity or really no erosion in the competitive landscape either. Is that the readthrough on that?

Yes, we were fairly disciplined. We have had some small promotions here or there, but order of magnitude, we have been pretty consistent with our pricing. I think, in some cases, we do have competitors that are being more aggressive in pricing, but I would say we are committed to maintaining the margins for the products that we have, which have features and benefits that bring value. So they have historically sold at a premium and that will continue to be the case now.

Okay. And then if we could switch gears just to the top line and the organic down 21, I am wondering if there is any impact from I guess what I will call some of these all-encompassing or pretty significant changes in the way that you are going to market or changes to the distribution channel, whether or not that is having any impact on your sales or your share. Any comments along those lines?

Yes, I would say, in the short term, it probably has had some impact. I think we expected it to have some on the margins when we came into the year because of some of the changes as we have tried to improve the efficiency and partner with distributors in that area. So I think on the margins, we have probably had some business switch there, but that was anticipated coming into the year.

I would also say last year, on the second quarter, we did have some rollouts with some chains, which just -- we are having continuing rollouts this year, but the timing of last year matching up to this year -- we had less rollout activity in the second quarter than we did in the second quarter of last year.

Okay. And can you ballpark that distribution impact and what it might mean to the organic number?

No, I don't think that is something that I can give a number to right now.

All right. I will jump back in queue. Thank you for your help.

Great Halter.

Yes, good morning. A few questions here that I wanted to discuss. I think on your inventories, Tim, you discussed the $11.8 million from the M&A impact. Is that the primary reason for your inventories being up 4% on a year-over-year basis for the quarter?

Yes, yes, that is the primary reason.

Okay. And on the other hand, you mentioned the receivables adding, acquisitions adding $11.9 million, but your receivables were down $21 million. I presume that is from the KFC being collected in the quarter?

Yes, right. We had significant receivables that started to build at the end of last year and into the first quarter. So those were collected in the second quarter. So that is correct. It brought it down. That and the fact that sales were lower. Overall, DSOs remain constant in the second quarter relative to prior periods when you back out kind of the movement of acquisitions in that large order.

Okay. And have you changed your allowance for doubtful accounts at all one way or the other in this environment?

No, I mean we continue to apply the same criteria, we continue to monitor the credit portfolio pretty carefully. We don't have any significant credit concentrations and at this point, really haven't seen any deterioration in the portfolio. But we've continued to maintain appropriate reserve levels.

Okay. On the -- I think you had mentioned there was $500,000 in G&A related to cost-consolidation initiatives. Other than that, were there any other one type, one-time costs in the quarter, including possibly transaction-related costs for acquisitions?

No, I mean we have always got kind of costs related to acquisitions going through the P&L, but because that is really the nature of the Company and one of our strategic initiatives, that is kind of a constant one-time item that is always coming through the P&L. So I don't bother to pull that out because there is transactions that occur and transactions that don't occur. So almost on a quarterly basis, we have got costs that are coming through.

And in the past, were those included as part of the acquisition price or shown as --?

Yes, that is actually a good point. So starting in 2009, there is new accounting under FAS 141(R) where historically transaction costs were capitalized on the balance sheet as part of the transaction. But in this year, you are right, those are now expensed. So for example with the Anets and CookTek acquisitions, the costs with that transaction did come through in the second quarter and perhaps some of it even in the first, which, in the past, a portion of that -- the majority of it would have been capitalized as part of the investment. So figure order of magnitude, the costs of those two transactions were probably approaching another $500,000 between all the different diligence, legal, environmental, etc. type work that was done.

Okay. So about $500,000 combined for the two of them?

Yes, so if you are looking on a quarter-over-quarter year or prior year, that is correct.

Okay. And one last one for you. I see on your website that you have a Buy Middleby Brands, Get Free Freight offer that is going on through September 30, started July 15. Any comment there on what that may do in terms of either increased sales or increased costs I guess and impact on the margin?

Well, I could answer that. The reason we did that is twofold. One, in this [stage] environment, we felt that some of our dealers are reducing their inventory levels. They don't want to go and buy five to 10 pieces or a container and keep it in inventory. And what you want to do is you want to become a little bit easier to do business with. If they bought one piece from us, we could deliver a free freight during that period, which is a heavy period usually in the summer because of schools and institutions, what they have the budget to spend and we felt that it should be a good driver.

As we mentioned before, we have been very disciplined on the price points, but we felt that that would be a good way for our dealers to stimulate business in terms of making it easier here. So during that period, we have generated that. I know it has been very well received in the marketplace; however, the impact is still too early to tell. It will have some impact on our business in the third quarter just because we are giving away something, we are giving away free freight on a piece. And depending on what the piece is, if you are shipping a countertop equipment, the impact is you can ship that by UPS. You are shipping an oven, you might have to take out a little bit more freight cost.

So I would say if I had have to put an impact to this, it could be during that quarter around 1% to 1.5% of sales roughly.

Okay. And I think to follow up on that, last quarter, you had mentioned that inventory in the channel was very low. Any changes there or any hints that you're seeing things improving?

Yes, we are starting to see stabilization into the marketplace, so a little bit. We are starting to see some type of stabilization. We are still cautiously optimistic. We are not going to come back and say the environment has totally changed, but we are seeing stabilization. We are seeing our big dealers starting to replenish some of their inventory. We are starting to see some of our chains going and opening up some of their CapEx. But this is literally in the last -- it's a reflection on the last five weeks that we have seen in the quarter. So it is too early to tell. The environment remains challenging.

Okay, thank you.

Tony Brenner.

Thank you. A couple things. First of all, Selim, I know that you have introduced a number of new features for TurboChef equipment -- microwave capability, multiple shelf capability, working on a lot of (inaudible) applications. Have these had any sales traction as yet or is that in the future?

Literally, we haven't done any -- those products haven't yet been released or introduced in the marketplace at all. We don't -- so those products haven't been out. I'll tell you what we've have done with TurboChef that made a big difference is we focused TurboChef internationally. We have taken them into our own structure internationally and we are seeing some traction there.

We have also -- they have worked, as part of the Middleby culture, through our national account team, which has been created earlier this year. We have taken them into some of our mainstream customers. So there are a lot of steps going on right now on the I-Series, which was introduced early on in the year, which has been extremely well received by our customers. New controls, faster, more energy saving, much more user-friendly and we continue to work with (inaudible) customers that they have got early on this year. So they picked up a number of customers in the mainstream side of the business, which we expected to be. So we are starting to see TurboChef moving very much mainstream.

On another new product, I would say the Hydrovection that was introduced at Blodgett, maybe that is a little bit misleading. That is where we have put a lot of innovation on the Hydrovection. In the Hydrovection, since the Kentucky grilled chicken was introduced, we have had a rush of interest on that oven. And not only for chicken, in fact, for a lot of other applications because it has a self-cleaning feature, it is a very fast oven and it has the fact that it basically will be able to cook protein a lot faster in a much smaller configuration. So that is where we are seeing a lot of interest since the Kentucky grilled chicken introduction.

Is TurboChef's organic growth rate less than your continuing business overall? Less than that 21% in other words?

They were down less than the other divisions, but I think they are experiencing the same thing. They are down, but at the same point in time, they added a lot of new customers as we have moved through the first half of the year. So we still very much believe in the story that they are expanding the customer base. And we think we are incrementally helping them do that. So that still remains very exciting.

And remember also, as we took TurboChef, and we have had a lot of permutation on TurboChef during the first six months, we literally went to that company from a major loss to switching the culture to being a profit center, a profit division. We eliminated a lot of layers in the residential business. We have taken a lot of their way of doing business and changed it, integrated it into the Middleby culture.

So when you look at TurboChef, we focus a lot on the margin to make it -- a year ago, exactly this time, TurboChef was bleeding significantly both in cash and in earnings. So our major approach was to turn it into a profitable company, which we have done in such a short quick time.

Number two, as we take it mainstream, there is testing that takes place. TurboChef has been mostly focusing on literally the Starbucks and the Dunkin and the Subway. Now we are taking it more into other -- faster into our other businesses, whether it is casual dining, whether it is mainstream customers. I don't want to name them because we would like to retain the confidentiality. But right now, we are testing with a very full-fledged chain of restaurants to expand their menu. And we are seeing some fascinating results within some mainstream restaurants, high-end restaurants that are looking at the TurboChef.

(technical difficulty) status of the Rocket Fryer. Is this back in field tests and if so, how is it performing now?

Well, it has always performed extremely well. Let me make sure, the Rocket Fryer has always performed well. It does exactly what it says it is going to do. The problem is the competition of that product, it has many, many patents and it is pretty complicated. Because not only it reduces basically the cook cooking time, it has huge energy saving, it is self-filtering and in a way almost self-cleaning, if I want to say that, without going 100%. The definition of -- if you are a fryer operator, you understand what I am saying by that. It has the convection power to it in terms of the way it circulates the oil. It has a lot of technology packed into a small cabinet.

Some of the things we have seen when we have done the initial testing is some of those components did not state what we believe should be the test of longevity. So what happened is we put in the towel. We are working with our supply around to make sure the longevity of those tests, not whether the concept worked, whether it delivers what it says is making sure that those small parts, and we are focusing now on three specific parts to make sure that they do not fail within a year, because as we have the demand, everybody is looking for that fryer. We have a lot of interest in that fryer. I don't want to put the fryer out there and (inaudible) have a recall, multimillion dollar recall, which loses the credibility. Suddenly people say the Rocket Fryer doesn't work because we had a part failing.

So we are being very disciplined in working with our engineering department who is doing a fabulous job in working with our suppliers to make sure that we get that fryer launched extremely strongly.

Let me just share with you what Middleby does, which makes it very unique. If you remember, if you take the history of all the products we have introduced, we have been extremely, extremely disciplined on having no recalls. And that is something, a discipline that you have not seen with respect to our competitors or even some companies that we have acquired. Where they have had major recalls and they spent probably millions of dollars in tests and (inaudible), and that is why we do not want to do that. We are very focused on making sure that -- and it is coming from me. This is a discipline that I have basically asked all our R&D department to make sure that we will forgo some sales and the excitement of launching a product to the expense of not launching it and having to recall it within a year later. I think we like the Japanese model of Lexus. They have very few recalls compared to GM or Saturn or Ford and we would like to stay using the Lexus model.

Whatever longevity problems or filter problems that did exist have now been fixed, is that what you are --?

We are in the middle of that. I talked in my last conference call that we are looking at the fourth quarter of this year to have a lot of those fixed. And we continue adding additional tests out there and continue making sure that as we test those products -- there is a time. Tony, we need the time. I cannot tell you -- I need to have supplier look at the problem and come back. I am not going to say rely on the suppliers' wording. We want to put it in testing. We need at least 90 days. For some of them, we need 120 days to make sure that what we fix works and you don't take our word for it or the suppliers' word for it. That is why taking the time is the testing and making sure that it goes through those lab testing where we can force them where we can accelerate a little bit. But as much as we accelerate the 5.4 hours testing, we have to take that nine day testing in our lab to make sure that piece is not failing again.

Fair enough. Last point, Tim, is the second-quarter run rate for G&A expense, can that be extrapolated or will it be higher than that?

We anticipate it might be slightly higher than that in the back half of the year, less than what we saw in the first quarter though. The one thing that also, which I mentioned in the commentary, kind of incremental to that is we will have a non-cash charge of $2 million to $3 million, which would run through G&A most likely in the third quarter related to the writedown of the plant and fixed assets at one of the facilities that we expect to be completed, to be closed in the third quarter. So you'd add that on top.

Thank you very much.

Jamie Clement.

Good morning. Can you -- could you touch on the food processing equipment market? Obviously pretty big decline this quarter. Last year this quarter also a fairly big decline. So that market over the last two years has been hit pretty hard. Any signs of recovery there? What signs in the market are you guys looking for there?

The food processing business has been very hard hit from the beginning of the recession. It is definitely multimillion dollar purchases for our customers. And when the recession started, they were the first to come down on those type of purchases. So we started to see orders pick up. And truly, what I would like to emphasize in that segment is our clients are quite healthy. It is just a much lumpier business given the size of the equipment. But in the process, the first thing we need to say that we haven't lost any major end-user in this segment in this market and that is the way we measure it. We haven't been seeing business going away to somebody else, we haven't lost business. We have seen some referrals. We are seeing some cancellations a year ago. But literally right now, we are starting to see a pickup. And once the economy starts getting better, we believe that it will be a lot of pent-up demand into that segment.

And correct me if I am wrong, and I may have my timing a little off, didn't you all introduce some pretty exciting new products right before the market kind of fell apart in food processing?

Yes, we did. In fact, I can tell you we introduced a lot of things. We introduced a conveyor fryer we have never had. We introduced a co-extrusion, we introduced new forming equipment. We introduced an intelligent water cover. We introduced bone scanners and all our patents are highly well-received.

The problem is the timing of the introduction of those products has been the fact that literally our customers were not willing. Those are all multimillion dollars. It is not a range or a Hydrovection that costs $6,000. These are multimillion dollar products that people just put a halt on it and we understood that and we are [patented]. So those products will continue coming in. They have a lot of great savings for our customers. They have great payback. But it was tough to talk to any buyer in those businesses or BPO of a corporation and the CEO and the CFO is saying we are preserving cash and literally we are starting to see orders pick up.

So to answer your initial question, are we starting to see a turnaround? I think we are. We are very cautious because we are being stung like everybody else. We're watching the news and we are afraid to indicate that the last five months have been very good for us and for the food service business. The five weeks, I'm sorry, not five months. The last five weeks in this quarter have been very good on both sides.

The (inaudible), very cautious because the environment remains very challenging. Looking at (inaudible) indicators, we don't want to extrapolate five weeks and say, wow, they are going to be -- wow, we want to start seeing literally -- somebody asked me a simple question. Selim, when would you start being able to say that the economy has turned? I would say literally for us when every is segment in our world starts picking up. I would like to see casual dining doing a lot better. I would like to see the high-end segment doing better and then I will feel more comfortable.

On that topic, leaving processing out of it, as you look back at the last month or two, is it the QSRs in pizza that are starting to do a little bit better or fast casual and sort of casual and luxury doing worse? What is the trend there?

Well, I would say we picked up fast casual a bit better, pizza a bit better. Fast casual did better. But remember, we still had international, which was running at double-digit growth a year from now and those markets have slowed down. So that is -- we had -- the casual dining literally went to a halt because so many people weren't eating out as much and they were concerned about their sales comp. I am not telling you anything new. All this is public information.

So literally, now we are seeing -- we are waiting to see what is going to happen. Institutions, a summer ago, institutions -- schools, nursing homes -- everybody wanted (inaudible). The budgets were decimated, counties and municipalities were not dishing out money. Finally, with the stimulus package taking place right now, we are starting to see a rebound.

So we are very cautiously optimistic and we feel good about staying close to our customers and we did not drop price to gain marketshare, which is a true, true congratulation to my team because BPO sales, we are highly decentralized, is always under pressure to go and bring the top line at the expense of dropping pricing. And from my own personal experience in 1991, remember I was VP of sales, I was instructed to drop prices and we did and at the time, instead of being down 20%, we were down 7%. And you know what it did, it created so many problems when we cut prices for our company when the economy came back. So learning from 1991 when I was VP of sales in another company, I felt very strongly that we did not want to drop price (multiple speakers).

That's understandable. Thank you very much for your time.

Gary Farber, CL King.

Yes, good morning. Thanks. I just had two questions. Can you comment on how you see the acquisition pipeline or the market for acquisitions? Are valuations getting more attractive to purchase companies? And also what is your outlook for raw materials in the back half of the year?

Well, certainly, the raw materials first. I mean I think we have seen the favorable steel pricing in the second quarter and we think that will continue in the third quarter. But we do see prices rising late in the year and they have started to tick up a little bit. So I think some of the savings that we saw in the second quarter and we we'll see in the third quarter will start to be reduced kind of as we leave the year. So that is kind of what we see through the end of the year. So we won't have as much of a pickup in the fourth quarter.

The pipeline of acquisitions remains consistent with where it has been in prior years. So there is -- we don't talk about any specific acquisitions, but that continues to be a strategy for us is to grow through acquiring leading brands and technologies and there is a pipeline I would say. While maybe some of the valuations where they were had reached crazy type levels a few years back have been reeled back in. The value of four companies that are leading brands and leading technologies are still priced at decent levels. They are not selling at fire sale discounts let's put it that way.

Right. Okay, thanks.

Jamie Sullivan, RBC Capital Markets.

Hi, good morning, guys. You mentioned that there has been a little bit of uptick in activity over the last five weeks. And I was just wondering if you could provide a little bit more detail on your thoughts on what is driving that. You mentioned stimulus. Anything else that is going on? Is it your ability with the promotions to drive some of that restocking? Just some additional commentary there would be helpful.

Well, I would say -- I'd characterize it as we have been less down as we have gone into the third quarter. I don't want to characterize it as a pickup. But this time a year ago, we saw rates fall off in the August to September timeframe because everybody remembers that's when the financial markets went through the shock and Lehman went under I believe in September of last year. So we are less down now, but as we move through the end of the quarter, we saw order rates fall off. So we are -- we are going to come up against some quarters here or some months here that have lower order rates. So I think we are hopeful that we will see better comps. But it is not necessarily -- orders, they are less down. They are not up across the business, but we do feel that there is some positive signs out there.

As Selim mentioned, the stimulus package, which there is some dollars behind the institutional and schools. Those orders were helped in the second quarter, waiting for the funds to be released in the third. So we are seeing some holding of orders being released. And then I think there are just some general improvements in confidence levels where people are spending a little -- the purse strings are opening a little bit to spend some dollars on CapEx.

The food processing business, which went down sooner and has been down longer, I mean I think that is where -- as Selim mentioned, that is where we are seeing the initial signs there being stronger where there has been projects that have been in the works for quarters and in some cases, over a year, which those are -- we see them starting to come through.

Okay. And does that segment typically start to come back first or is it hard to tell?

I would say it is hard to tell. In this environment, I cannot -- nobody has a crystal ball of what is going on. We are like you watching what unfolds. I can tell you, in my -- this would be my third or fourth recession, if you want to call it, in this industry because I have been at it for a long time. I have to tell you that this segment usually is one of the first bellwethers of how things pick up. We are the first to go into recession because people cannot cut back on their rent, they cannot cut back on their car payment, but they can cut back on going out.

So when people feel good, they are the first to start going out because it's easy. And we are the first to feel the recession when people cut back. To them, they say, you know what, I am not going to go out tonight. Yes, we had a reservation to go to dinner this coming Friday. I am not so sure, my company is cutting back people. They go back home and say let's cancel our reservation. It is a phone call to the restaurant.

So I think we will be the first to indicate if we are out of a recession. This segment, which is both food service and I think food processing is the same way. They will be the first to indicate whether we are out of the recession. So we are watching very carefully to see what the rest of this year will look like.

So we are cautiously optimistic, now seeing literally five weeks out of what you are seeing in quarters now in months that have been pretty ugly. So I think when we go back to the next conference call in the fall, we will be able to give you a good indication of what we see as an economy, not only for this segment, but I think we are an indicator for the rest of the economy. I truly believe that.

Okay, great. And I am wondering too if you can also update us on the pipeline of programs and larger orders with large customers. I think you mentioned you had -- you were in discussions with two or three customers last quarter. If you could just update us there.

Yes, well, let me update you a different way. I would like to update you about what we have done in program. I have to tell you that while we have -- I would like to stress that a number of the cost-reduction efforts have taken place. They have not been at the expense of diminishing the Company's competitiveness or revenue-generating capability.

To the contrary, the sales team has been strengthened and engineering R&D and new product development continues very strongly. I would like to stress that the number of the cost-reduction efforts are permanent. Restructuring at TurboChef is one. I think that we are going to save millions of dollars and we have starting from our position.

I think the consolidation of our facilities at several divisions or locations have also been successful and permanently cut overhead costs. Tim talked about starting in the fourth quarter a run rate of $8 million.

I would like to also emphasize some of those cost -- some costs will probably go up. Steel being one of the most notable examples. I think once the demand and the economy picks up again, I think we're going to start seeing steel start picking up.

I think the cash flow generation, the debt reduction and the compliance of all debt covenants have to be commended about Middleby. We have generated free cash flow. We continue to generate free cash flow, we will continue to reduce debt.

I think I would like to note that we have been an industry leader and we have delivered in the past and we have the financial flexibility and management team to do so again as the industry regains footing and I think it will regain footing as soon as 2010. I think we have a lot of new products. We talked about the Hydrovection. We talked about the I-Series at TurboChef. We talked about the Rocket Fryer. We talked about all the new introductions that we introduced right before the recession hit at the food processing. We continue to drive our energy savings and energy efficient. We continue to look at ventless hood. It will continue to drive some innovation in our Combi operations (inaudible).

And talking about new customers, I would like to emphasize what we have done literally in our sales organization. We believe that we have strengthened our customer relationships and we will gain marketshare in both the short and long term. What we have done in our national strategic account or national team, sales team, not only we created a sales team now that calls on our top customers. We created a call center, which is unique, which is built starting this year, which is similar to a concierge desk, which is targeting our top 100 customers. When they call a concierge desk, they call a call center to navigate all our brands. This has never been done at this company. I don't think there is anything similar to it in the industry.

We have not cut back on our No Quibble Warranty. We continue to be very driven by our No Quibble Warranty, which is the most liberal warranty in the industry. We say we are like Nordstrom, we are like Costco. We have a liberal warranty. If you don't like our product and it has been in place now for many years, we have never cut back on that. So we continue to position what makes us unique in addition to our innovation. We have continued to outcast and we are now working with (inaudible) and we are coming closer to our national sales team to generate multimillion dollars this year in incremental business within the next few months as the tests have been very successful and our national sales team continue to work and the creation of that call center.

We are now, also without naming that chain, we are working a chain, which will generate in 2010 multimillion dollar at the rate of, annually, of $5 million to $6 million. That is totally new to our customers and it will be generated significantly from the national -- the work of the national team. So we are feeling comfortable that, in 2010, all the tests that were generated, whether there is a recession or there is a slowdown, those chains have given us an initial sign that they are willing to switch to us. So we feel very comfortable that will pick up in 2010 some major incremental business.

This is all the time we have today for questions and answers. I would now like to turn the call back over to management for final comments.

I think literally when I look back, while the environment remains challenging, we made sure to stay close to our customers. We have not lost a major customer, we have not dropped price to gain marketshare. As we have told, as I mentioned before from my own personal experience, we have seen the problem of cutting prices that has created for the company when the economy comes back. We have increased our national sales team at a time when many companies are cutting back. We have strengthened our customer relation and provided us with marketshare gains in both short term and long term.

We have created this call center similar to a concierge desk. We haven't cut back on our No Quibble Warranty. We have seen our sales stabilize in the last five weeks. We are also hesitant to read a lot into a short period of time. So I remain mentioning the cautiously optimistic. We continue to manage our business assuming a challenging environment, so we expect some improvement going forward from what we are seeing.

I believe that the second quarter will likely be our worst quarter. We feel that we have made significant improvement in the business this year, which we will start to see in this year and in 2010. The benefit on the top line of the national accounting, of the new products, we have done improvement in our supply chain. I think we are going to continue seeing some improved steel pricing in the short period and the $8 million from plant consolidations have been completed.

On the SG&A side, we have improved our distribution cost structure. And on the acquisition that we have made, there is room to improve the cost structure and the margin of our acquired companies. While the quarter presented a challenging sales environment, we believe our focus on operation and definitely our free cash flow generation were extremely important. We believe that we are well-positioned on the sale corporation side in the coming quarters and years. We see the ability to create significant value. Whether we end up in a full economic recovery or a slower growth environment, it doesn't matter. Starting 2010, this company is well-positioned to take control of our own destiny and make significant structural improvements to move Middleby to come out of this downturn stronger than we entered. It reminded me of our 2001 and 2002 environment where we came out a lot stronger.

Our progress on TurboChef has proved to us that we can manage very quickly our acquisition. Our debt levels continue to go down and we will continue paying down. I think we continue to see that our customers continue to be very close to us and we have started to see some demand from our food processing.

So we have been an industry leader and I continue to talk about financial flexibility in the management team we have. So I would say that we are very optimistic about the future of what we have done and I would like to thank you, as investors, who have stayed with us for long term. I want to thank the analysts who covered us through this period and before and even the recent analysts that joined us. I would like to thank our customers who stuck with us as we continue to evolve our business. I would like to thank our reps and our sales team. I would like to thank every one of my employees who have stuck with us during this time as we rechanged our business. Thank you and I hope you have a good summer.

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

Thank you, ladies and gentlemen, this call has concluded.