Middleby Corp (MIDD) 2009 Q3 法說會逐字稿

Good morning, thank you for joining us for the Middleby Corporation third quarter earnings conference call. As a reminder all lines will be on listen-only mode. (Operator Instructions) With us today from management are Chairman and CEO, Selim Bassoul and CFO, Tim FitzGerald. Management will comment on the quarter then we will open the call for questions and answers and we will give instructions at that time.

Mr FitzGerald please go ahead with the opening comments.

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

I have some initial comments about the Company's 2009 third quarter results then we will open the conference call for questions and answers. The third 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 third quarter of $154 million decreased 7.5% from $166.5 million in the third quarter of 2008. Sales growth from recent acquisitions accounted for $20.5 million in the third quarter. Excluding impact of these acquisitions, sales declined by 19.8%. This compared to the prior year quarter. This -- this sales decline included a sales reduction of 21%, at the Food Processing Group and the 19.6% decline in sales at the Commercial Food Service Group. Sales of both the Commercial Food Service Group and Food Processing Groups reflected the impact of difficult economic conditions. The gross profit decreased to $62 million in the third quarter of 2009. As compared to $64.7 million in the -- the 2008 third quarter. Resulting from reduced sales volumes. While the gross margin rate improved from 38.9%, to 40.3%. Favorable -- favorable steel prices and impact of strategic cost reduction initiatives more than offset the margin impact of the lower sales volumes.

Selling and distribution expense during the quarter amounted to $16.4 million as compared to $16.8 million in the prior year quarter. Selling and distribution expenses included $3.1 million of expense at the newly acquired businesses. The increased cost from acquisitions were offset by reduced commission expenses as a result of -- 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 administrative expenses amounted to $17.6 million, as compared to $17.0 million, in the prior year third quarter. General administrative expenses included $1.9 million, of additional expenses at the recently acquired businesses. And a $2.5 million, charge, of -- 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 to $2.8 million in the 2009 third quarter as compared to $3.2 million in the third quarter of -- of 2008. Reflecting lower interest rates offset in part by higher debt balances that result in the funding of 2009 acquisition activities. The provision for income taxes in the third quarter was $9.9 million at a 39% effective rate as compared to $10.6 million in the prior year at a 40% effective rate.

Third quarter cash provision reflects a favorable settlement of -- of -- a tax audit that was concluded during the third quarter, reducing the effective rate in the current quarter by approximately 1%. Net earnings for the 2009 third quarter decreased to $15.5 million or $0.83 per share from $16.3 million net earnings or $0.96 per share, in the -- in the prior year quarter. The -- the -- net changes in the balance sheet, from the year-end reflecting impact of the TurboChef, Anets and CookTek acquisitions. These acquisitions accounted for an increase in $8.8 million to accounts receivable, $12 million to inventory, $1.1 million of property plant and equipment, $7.2 million of accounts payable, and $12.3 million of crude liabilities. Additionally, we realized an increase of $94.9 million in goodwill, and $61.3 million of other intangible assets associated with these acquisitions. Other changes in the balance sheet include reductions in receivables, and inventories associated with lower sales volumes, inventory reductions resulting from plant consolidations, and lower working capital levels following the completion of the KFC oven rollout that took place in the first half of this year.

Cash flows provided from operating activities amounted to $32.7 million during the third quarter and $77.2 million in the first nine months. Operating cash flows, for the year, included the payment of approximately $10 million of transaction-related costs associated with the TurboChef acquisition. Noncash expenses, added back in calculating operating cash flows for the year included noncash share-based compensation costs of $8.2 million, depreciation of $4.6 million, and $6.7 million of intangible and deferred financing amortization. Investing activities included capital expenditures amounting to $1 million for the third quarter and $4.9 million for the first nine months. Capital expenditures, were utilized to upgrade manufacturing equipment and make facility enhancements related to production consolidation initiatives. Outstanding debt was reduced by $26.1 million during the third quarter. To $29.5 million from $321.1 million at the end of the second quarter of 2009. The Company borrowings are funded under $497.5 million revolving credit facility, that becomes due in December, 2012. The Company's debt to EBITDA ratio as computed under the senior debt agreement was approximately two times as compared to maximum, leverage covenant of 3.5 times and the Company remains in compliance with all covenants under its bank agreements.

During the third quarter, we completed the consolidation of two of our light duty cooking facilities and to one production location. This initiative, which was completed in August, is expected to provide for annualized savings, in excess of $6 million. We began to realize a savings from this initiative starting in the third quarter, and will recognize further gains in future quarters. We are pleased with the continuing progress made at the TurboChef and its CookTek acquisitions completed in this year. We remain on track with our profitability objectives at these businesses. These initiatives include the consolidation of the Anets fryer and griddle production facility within other existing Middleby facilities and we are on track to complete this consolidation late in the fourth quarter of this year. And anticipate annualized savings of $2 million associated with that initiative.

We also continued to invest in our selling organization, we have seen continued progress of our national sales team that was established in the first quarter to focus on our major chain customers. Although, it is still in its early stages, we have identified numerous cross-selling opportunities with our expanded portfolio of brands and technologies which should allow us to increase our penetration, within our existing customer base. Additionally we are now expanding our international sales team to increase penetration in coveraging key markets globally as we believe there is significant opportunities to increase our business with many of the brands that we have acquired over the last 36 months. And we are pleased with the initial progress of this initiative and expect it to continue to strengthen our international selling organization throughout next year. That's all for our prepared commentary. Nick, can you please now open the call for questions?

All right. (Operator Instructions) Give us a few moments to compile the queue. Okay our first question comes from Tony Brenner at Roth Capital Partners. Go ahead, please.

Thank you. First of all,. Regarding TurboChef, I am curious whether TurboChef was accretive to earnings, or in the third quarter, and where -- at a run rate it is at present?

Hi, Tony. It is Tim. It was accretive to earnings in the third quarter and we anticipate that it -- that it will be on a continuing basis.

My other question has to do with the stream of new product introductions that you have got. I am wondering whether these are having -- what kind of an impact they are having in this kind of economy, given that on many of those are discretionary rather than replacement or required replacements, and, whether there is some thought of slowing the pace of introductions in order to anticipate the impact of having so many at one time just kind of pileup.

Tony, Good morning, this is Selim. I am going to answer the question first by -- impact of the introduction on the -- I am going to share with you -- I am going to use the example of sharing with you what you have learned from our last recession which is almost 2000, 2001. What you have done then, we found that innovation pays off. And we decided to continue our innovation. If you remember, during that period, if any of you have followed the Company during that time, we had just taken both acquisition, acquisition of Blodgett and Pitco and MagiKitch'n. At the time, Maytag had stopped introducing new product. And we, then, started investigating very quickly, and Maytag at the time was owner of those companies. We started increasing the R&D of those companies. In -- not only we introduced our energy saving products, we introduced XCEL oven and the Solstice fryer platform and we introduced a unique MagiKitch'n griddle. Just at those brands. Here at Middleby we're working on the WOW! oven. So, we continue believing that innovation will cut it today despite the recession that we're seeing today, we introduced in 2008 -- I am counting them right now. One, two, three, four, five, six, seven. Seven products. In 2009 we introduced eight products. In 2010, we will introduce the same amount. There will be nine new product. And I'm talking about the (inaudible) technology. R&D continues to be very strong. And we're focusing on speed of cooking, ventless technology, and reducing the footprint of our customers. In terms of cooking.

And did you say --

And then we continue pushing to energy savings. We are the leader of energy savings and will continue as we are acquire companies and you will be surprised how many have not gotten on the band wagon of energy. And as we have acquired many of those companies in the last few years, almost 50% of the acquisition we have made, they did not even tackle energy. So we're now pushing those companies, to be required to go back and put the patented energy saving devices.

Has the Rocket frier been relaunched yet or is that still in test mode?

We're still in test mode and we continue working on this Rocket frier and it is something that we are continuing to work on. The question to you, it's not out there, it's test mode and we're tweaking -- continue to tweak this product. It has been a pretty challenging product for us as it is very innovative and it does a lot of things. Not only in energy. It cooks fries faster. It is self cleaning. Self tutoring. So a lot of things on that frier and we continue making sure that everything works on that frier before we launch it as a mass production.

Thank you.

Thank you, Tony.

Okay our next question comes from Peter Lisnic at Robert W Baird.

This is Josh Chan, filling in for Pete. In the press release you said Commercial Food Service sales decline 19.6% is that with acquisitions or without acquisitions?

That is without acquisition. That is an organic rate. With acquisition, we would have had growth.

Oh, okay. That's what I thought. Good. And then, for your market outlook you talked about your business being challenging in 2010. I was wondering what are some of the underlying drivers behind that expectations, based on conversations with customers or cash cycles or something like that?

Josh, I think the reason we continue to be -- to believe that the economy condition remains difficult is because, two things. One, unemployment continues to be a major factor for us. We continue to be concerned about unemployment. There is somewhat of a direct correlation between people worried about their job and going out to eat. So, I want to make sure that everybody understands. It is not a Middleby issue. This is a food service industry issue. And, that's number one. Number two, we believe also, that new store openings, credit -- tightening of the credit and financing continues to be very difficult for franchisees, to finance new store openings. That continues to be challenging at this moment. So you have unemployment and you have tight credit facilities that makes it very difficult to open new stores. So, we continue to feel that the markets will remain pretty challenging. However, however, one thing that I have to say, we have seen sales stabilize, which is better than what you seen in probably in the fourth quarter of last year and first quarter of this year. But we remain in a very challenging environment. So there are a lot of things we're doing to bring some optimism to this -- to this picture.

So, we are looking at a few things. One, we believe that we're going to benefit from our energy saving appliances. That is number one. We continue to see people upgrading to energy saving. Every dollar of saving, whether it is in utilities or in water consumption, helps our customers. So, we're seeing people moving toward more of our high-end margin product because of the energy savings. Number two, we believe that at one point the stimulus package is going to leak into our institutional markets. Which is the schools, the hospitals, the nursing home, and the correctional facilities. And we believe that we are well positioned to take advantage of those markets as they grow and so far, we have not taken much advantage of any of the stimulus package yet. I think it has been mostly at the transportation level but is starting to leak now into food service. So that's why I think that our reason for some cautious optimism as we look at 2010.

Okay. Thanks for that. And could you talk about your costs in fourth quarter and 2010. At what point is the benefit the largest and then at what point does it become unfavorable for you again.

Well, we did see a benefit in the second and third quarters of this year. Still prices are starting to creep up. So I think, we will -- we expect them to increase moving into next year. I think the benefit we see in the second and third quarters will shrink in the fourth quarter. And in the next year.

Okay. Great.

Our next question comes from Jamie Clement of Sidoti and Company.

Selim and Tim, Good morning,. Selim, you thought -- in past calls, you have made commentary about various segments of the restaurant industry. From a capital spending perspective, what segments do you think are kind of -- kind of lead on the way out of this recession?

Okay. I would say if we look at the domestic segment, if I look at the segment, give me a minute, Jamie to go back to our segment, so give me one second, please, to get back to -- okay. I think we believe that the number one segment that will most lead out will be the Food Processing. They were the first to get into recession. If you remember the last few quarters, our Food Processing businesses was down more than 20%. I think Tim, correct me, was it down -- 30%, 40% at one point?

Yes.

Yes, 30% to 40%. And I think we're starting to see the Food Processing business, and to come up -- to come back. I think it is going to be the first segment that will come up. Again, in the domestic market. Then I will talk a little bit about international. I think the institutional market will benefit -- I think within the next two quarters. I think we're going to se the stimulus package. And as we get talking to some of our school food service director, and institutional food service director, they anticipate that the stimulus package is going to start [earning to some] and they are all in needs of equipment and, so they are going to be pent up demand in the institutional segment. I believe, that the QSR will continue doing well as people trend down, and as they offer more menu changes. I think pizza business is going to be next year, will be a very strong -- we will see a very strong revenue coming from the pizza business as Dominos, Pizza Hut and Papa John and others now push the menu items and continue pushing their promotion. Very aggressive promotion going at the pizza stores and the franchises are all doing a lot good stuff, most in menu items and promotions.

I think the segment that is continue being very difficult will be the independent and fast casual will continue being under pressure. I think the fast casual will come back and start looking at reducing their-footprint and reducing their costs. And you're going to see a lot of push from the -- from the casual dining -- not the fast casual but the casual dining to go back and start looking at smaller footprint where an average casual dining store costs around $3 million today. They are looking at opening up stores, less than a million dollars. Especially as they are looking to go overseas. As we talked to our casual dining customers a lot of them are eyeing the emerging markets, but they can not go through the emerging markets with $3 million footprint stores. They are all looking at a million dollars or less per store. That's where we're seeing -- on the international market we continue to see the emerging markets to be very strong. Our penetration of China, where we have been in China now for 10 years, you look at our -- India, we have been in India and we have been a huge investment. And we look at those markets to be very strong for us on the international markets.

Okay. Thank you very much for your time.

Thanks Jamie.

Our next question is from Gregory Halter at Great Lakes review.

Yes, Good morning.

Hi, Greg.

Wonder if you could comment on -- you did slightly here just recently, but comment on the order trends you're seeing in the current quarter.

Well, it is going -- orders have stabilized at the lower level. And we -- so, we have about 20% down basically organically through the first nine months of this year, when that has been kind of the trend that it stabilized at. But now we're starting to overlap, we -- we went down in the fourth quarter of last year. We're -- we wouldn't expect to continue to be down 20%, we will start to have comparable order rates with -- with the -- the prior year if we were to stay at similar levels.

Okay. And relative to the -- to the tax benefits that you anticipated, gaining from TurboChef, wondered if you could elaborate on what you seen out of that versus your expectations when you initially did the transaction.

Well, they are -- the benefits receiving are what we expected. So there is about $5 million of cash benefit per year, from NOLs that -- were transferred over to us. So, we will realize about $5 million of cash savings. That did not run through the P&L. So a cash benefit that is not reflected in our tax provision. Just an asset that is built at our deferred tax asset on the balance sheet that will draw down over time.

Okay. And your SG&A level combined, has been running at a declining rate this year, I think from $38 million to $34 million to about $31 million adjusted for the charge here in the recent quarter. Do you expect that you can maintain at those levels, given where you see business, and then also, what you commented about the national account and international sales expansion, or do you see that number moving back up into the mid and high 30s?

I -- no, we think that a lot of the reductions that we made were permanent. They were tied to integration initiatives. As we have bought seven companies and in the last two years here, and as we have made -- those businesses have become more efficient. And also tied to plant consolidations where we have -- we have put -- in the last 12 months here we have consolidated two facilities and we're in the midst of a third. Some of those are permanent measures that will continue the national accounts team, and I mentioned the international organization, we are making investments there. Now some of that is already running through the P&L as we built the national account team in the first half of this year. Over time, we may continue to expand it. So there may be some reinvestment back but I would say some of the measures may be short term in nature but most of them are permanent. I would anticipate that we would remain at generally at lower levels.

Unless the top line comes -- comes booming back, or improves dramatically.

Yes, but if the top line comes booming back we should gain leverage in our business model. So that would -- if it comes booming back that would further reduce. Our dollars will go up but it is percentage of sales it should actually be better.

And the dollars going up due to incentive compensation and so forth I would presume would have a lot to do with that.

Yes, that would drive part of it, correct.

And one last one for you. I know in the past you have run through where the margins have moved to for these acquisitions. The recent acquisitions. If you could go through that same exercise I would appreciate it.

Well, I -- the big one is TurboChef. So, at least the most recent. So that continues to be at a 40% gross margin, in excess of 20% EBITDA margin. We have been very pleased with the profitability of that business. The sales were a little bit lighter in the third quarter. But that's -- it was not inconsistent with any of our other businesses. So we're very -- continue to be very excited about that company and the strength of the the brand and the technology. So, that is going well.

CookTek and Anets are the more recent, but much smaller acquisitions with the Anets integration within our Pitco, MagiKitch'n facility where we'll have -- where we have a competency around frier and griddle production, we will see the margins of that business come up to margins consistent with the Middleby portfolio, so in the 40% gross margin and 20% EBITDA. They are not there yet, but will be going into next year. But, again is a small business. And then CookTek is the other one which is really great technology that we're very excited about and the growth opportunities are significant and I think there we will see the margin improvement as we roll out new products at that division, which would take place over the course of the next 12 to 18 months.

Prior to that, last year we completed the acquisition of Star. At the time that was -- they were in the mid -- mid-to-low 30 -- or mid 30% gross margin, 20% EBITDA margin. So that we have improved to 40% type gross margin. And above a 20% EBITDA margin. With a consolidation of the wells business. Wells Bloomfield, within Star, we got one business that light duty and counter line cooking equipment. So that -- we're very pleased with the profitability there. As well. So, across all the acquisitions that we have -- we have completed, we're very happy with where we have been able to bring the gross margins and EBITDA margins to, so we have either completed the initiatives or we're on track to get to our objectives.

Okay, thank you.

Yes.

Our next question comes from Gary Farber at CL King.

Yes Good morning,. Just two questions. Can you talk about how you think about your gross margins going forward relative to the 40% number you put up in the quarter and then also, discuss your view of the acquisition environment, is it still pretty fertile ground or has it slowed down in the midterm as some companies wait for a recovery to sell their companies. Thanks.

Yes, hi, Gary. Well, the gross margin -- we have always had a target to get to a 40%-plus, gross margin. So that has not changed. We have just had some headwinds along the way. I think some of the improvement you seen, much like I just discussed, is based on the strategic initiatives that we have had related to integration activities or -- or plant consolidation. Some of that is permanent. We have had the short term benefit of steel, which had been a headwind for the last two or three years, and we have seen steel prices come down this year. Now that is starting to revert back. And we will see some of that reversion in the fourth quarter. And expect that to be you know, headwind, in next year, maybe not to the extent that we have had in prior years, but I think we will -- that may -- that will detract somewhat from -- from the margins in the -- in the fourth quarter, so it might make it a little more difficult to get to the 40% in the short term, but again in the fourth quarter, but that's still the -- that is still our target. And --

On the acquisition side, Gary, let me answer that question. Let me give you a historical -- at least one going back to 2007. In 2007 we made four acquisitions accounting $200 million in revenues. In 2008, we made three acquisitions accounting for $120 million in revenues. In 2009, he we made three acquisitions, TurboChef, CookTek and Anets, which account $100 million in revenues. Let me tell you what I look -- what we are seeing for 2010. We believe the acquisition pipeline remains extremely strong and we believe that we're seeing owners of small businesses stuck in acquisition by talking to us and they likely to sell -- as they see the benefits of being part of a Middleby corporation.

If you look at the companies we have acquired CookTek, Anets, Giga, even Star, you look at them being acquired from private owners, who remain running their businesses. And we see a lot of people, looking at our business model saying, well, it is not bad to be part of Middleby, as those owners like Bob Walters who is the Founder and President of CookTek, who remains with us and a who remains very enthusiastic under the Middleby banner, goes back and preaches to those people. He's one of our best testimonials of why to be part of Middleby. What can he accomplish alone and what can he accomplish with Middleby. Look at Giga internationally and talk to our partner, John [Palaregetie] who is owner of Giga. And he will tell you that being part of Middleby has been a great, great synergistic move for him. They have been our biggest proponents when we talk to small business owner why the benefit of being part of Middleby. Acquisition pipeline remains very, very strong and we continue to look at them as we go on -- there is no reason in 2010 not to see almost the same trend as we have seen in 2007, 2008.

Okay. Yes just one more if you don't mind. Can you also talk about what you're seeing from your competitors in the current environment and has it changed much from the second quarter at all?

In terms of what?

Well, pricing or just any actions that they are taking? Is it all sort of status quo?

Well, I think if you look at spending, we have so many competitors but when you look at some -- I think some of them have done what we have done -- what I have seen -- when I used to be VP of sales we have seen some comeback in reduced pricing. We're seeing a lot of price erosion among some of our competitors to fill up the distribution channels. So, we see that happening at some. We see others looking at consolidating and integrating as they made major acquisition and they are very focused on costs and on the cost basis and synergies. But I have to tell you one thing.

I'm going to go back to Middleby and give you some specific numbers. There are some studies that have been published, that say that the equipment industry business, declined between 26%, 27%. So, we have basically declined between 19% and 20%. So if you relate what you have done versus all, we believe you have had a slight market share gain that Middleby has done to compare our decline of 19%, 20% organic versus the industry of 26% to 27% we believe we must have picked up some market share. I also believe that compared to some of our competitor we remain very focused on the hot side. And we continue to be very innovative on the the hot side.

Internationally, the international competition becomes a lot -- very different. We see the dollar being very, very positive for us, versus our European competitor. So as we battle in the Middle East where it is a very dollar based economy, we seem to be gaining market share. We go to China and India, US made product seem to be winning. So, we have some benefits of the dollar being so low. We are starting to see winning some account that used to go to European companies given the weakness of the dollar and our innovation. So, combined with the US innovation of Middleby and the low dollar of manufacturing in the US , and selling in US dollars, we're seeing some benefits in emerging

Okay. Thank you.

Thank you.

Our last question comes from Joel Tiss at Buckingham Research.

How is it going?

Good. How are you Joel.

Can you give us any more granularity on the revenue pressure from lack of new store openings versus just delays, you know what I mean, trying to dig a little deeper into what is actually causing the weakness in the revenues.?

Let's go back and look at -- I'm going to answer that. Give me a minute to get to the study. We do have study and we look at those numbers. Today prior to the recession if you look at -- you break down in the US , the store opening versus menu changing versus replacement and maintenance they accounted to a third, a third, a third, and a third. The four opening where third menu replacing a third, repair and maintenance were a third. So if you go back and say five years ago store openings in the US used to be over 50% and menu changes were less than 20% and replacement business were around 30%, 35%. Today, store opening continue to dwindle. We believe that that is going to continue dwindling in the next three to four years in the US. And you will see menu changes and replacement of businesses growing much faster. I believe new store opening will account for 25% of the business and the other two will be menu change replacement, will be almost 75%.

What does that mean to Middleby versus its competitor. We are -- we have been very much driven by menu change and replacement. Look back at our installed base of age equipment, if you look at Blodgett, Pitco, Middleby Marshall, we have a significant amount of space and equipment that has aged in over 850,000 establishment. We believe we're going to gain as the pent up demand is very well positioned to replace that equipment with energy saving equipment, appliances. We also believe that a lot of people are looking at replacing equipment with more green equipment about and Middleby has been very much in the green space. And I'm going to talk about that. Because the legislation that is going to effect green. We're going to have climate change where legislation is going to effect European and US markets as it effects our customers. They are going to be required to basically adhere to certain btu, and kw ratings and usage, water consumption, as well as grease emission or smoke emission.

So if you look at our innovation they are totally focused on energy saving and ventless technology. We're the leader in ventless technology. As we continue replacing those equipment and legislation comes into green, Middleby is phenomenally well positioned to take advantage of that green movement. Now the legislation doesn't have to come in and be sending people to jail if they don't do that, but I tell you how it is coming into play. It is coming into play in consensus. If you're not green, you don't get energy star. If you're not green, the franchisee or the local store get penalized by health department, and health marshal -- health inspection marshal. The green movement is going to take place very strongly as we get out of this recession. And that's where we're investing our innovation.

On the menu changes, you're seeing, especially I talked about when I answered Jamie's question about where I see how people are going to get out of the casual dining establishment is under significant pressure. They have been even under pressure before the recession. They were under pressure by the QSR offering more fresh -- fresher product, like salads. And like other items. And the fast casual, that is almost blurred the line between a casual dining establishment and a fast casual. The casual dining establishment right now, have to change and adapt, in order to grow. And I am talking about biggest establishment. The casual dining establishment have to start looking at how to become smaller, or opening up stores that don't require $3 million to open up a store today. And they are looking at a smaller footprint. They want to also be introducing menu item and menu changes, a lot of faster, without having to redo all their kitchens.

And that's where, if you will -- I would like to invite everybody, all our share holders, all our analysts to come and visit our technology center here in Chicago, where we have demonstrated how we can change the game, for a store that today has the footprint of $3 million to become less than a million dollars footprint and be able to offer more menu items at faster speed. So I want you to come in and look at our technology center. It is an open invitation to come see here in Chicago at our [algen] facility, the concept of the footprint saving. And let me tell you, people say, well, we have done it in refrigeration. Customers don't need to come for the cold side. All they need to do is outsource more of their supplies to the supplier and then they will shrink the walk-in refrigerator or the refrigerator or the freezer. But when it comes to cooking, they have to still cook, and the pressure coming from the other type of end markets, forces on to introduce more menu items. So they still need to have the cooking line-up, to serve, a breakfast, lunch or dinner. And that's where Middleby has done some phenomenal innovation in footprint saving. And that's how, we're going to win and help the casual dining grow as they can compete

Thank you very much. I want to squeeze in one mechanical question for Tim.

Of course.

You have $6 million, and you're $2 million in cost savings. That you -- can you talk about how much was realized in the third quarter? And how much flows through the next couple of quarters and where it is going to show up, cost of goods or SG&A? Thank you.

Okay. Well, the -- the $2 million -- I will start the Anets consolidation. None of it was realized in the quarter. We just started that initiative really subsequent to the end of the quarter, so and it won't be completed until the end of the year so, we wouldn't start seeing any of the benefits of that until the first quarter of next year. The larger consolidation which is the -- was the counter line in light duty cooking facilities, that was completed midway through the third quarter, so if that's annualized savings of $6 million, you can assume that breaks down to about a million-and-a-half per quarter which we probably realize about half of that in the third quarter. And -- the -- I don't have the exact break down between costs of goods sold and SG&A, but you can assume it is probably somewhere in the range of 50,50.

Thank you very much.

Let me conclude with the following comments. I thought it would be very helpful to give you some perspective what we have seen in the past recession in this industry. In the early 90s, during that recession, as I was VP of sales in this industry, I saw that dropping price to generate sales permanently affect customer relationship and ended up removing pricing power and ultimately reversing margin. Most important it will hurt the service levels of the customers. I learned we did not need to do that. In 2001, 2002, at Middleby I saw need to be close to customer and provide increasingly high level of service to meet their changing needs which included developing product that were energy efficient and had proven pay backs. In fact, at that time we introduced our no quibble warranty where we have the no quibble warranty -- I like to say that -- in the environment here, Costco and Nordstrom are almost similar to what we offer as warranty. We're proud to say that over the last 10 years, we have offered our no quibble warranty which has been a fantastic weapon. In not only improving the quality, but making sure that our customers feel comfortable when they select a Middleby product.

In this downturn we stuck to the lessons of the past two recession and created significant structural improvements. We believe that our action will allow us to create value in any economic environment helping to reach operating margins significantly higher than Middleby has seen in the past. We believe we will see meaningful operating leverage when the market improve, but we are not relying on this. We have a lot of improvement like the benefits of our national accounting and the creation of our concierge desk for our top 45 accounts. We have created a concierge desk for our top 45 accounts. We have created an improvement in our supply chain and we have the saving from plant consolidation that was just mentioned by Joel as in his last question. We improved our distribution cost structure and we continue improving the acquired companies that we have acquired in the last few years.

While this quarter presented a continued challenging sales environment, we believe that our focus on creating value in any economic environment was evident. We believe that Middleby is extremely well positioned on the sales and operation side in the coming quarters and years. Importantly, we see the ability to create significant value as we end up in a full economic recovery or a slower growth environment. That brought to our begging to control our own destiny so we can deliver any environment. This is why when one of the question talked about the R&D, we will not cap our R&D. That is why we continue focusing on green, and we continue helping our customers save on their footprint. We will also continue creating both in our international sales organization and our domestic national account and our ability to get closer to our customers. I am proud to say that we have not lost a single customer and we have not dropped price to gain market share in this environment. To this, I thank you for being with us and please, you are again, my open invitation to come see our technology center here in Chicago is open to all of you. Thank you.

Okay, thanks for attending today's conference call. We appreciate everybody for joining us. And we look forward to speaking with you next quarter.

Ladies and gentlemen thank you for joining. This conference is concluded.