Middleby Corp (MIDD) 2010 Q1 法說會逐字稿

Good morning, and thank you for joining The Middleby Corporation first-quarter conference call. With us from management is Selim Bassoul, Company Chairman and CEO, and Tim FitzGerald, Middleby Chief Financial Officer. Management will have opening remarks, then we turn the call over for question and answer. Instructions will be given at that time. Mr. Fitzgerald, please go ahead with your opening remarks.

Good morning, and thank you for attending today's conference call. I am Tim FitzGerald, CFO of The Middleby Corporation. Joining me today is Selim Bassoul, our Chairman and CEO. I have some initial comments about the Company's 2010 first-quarter results, and then we will open the call to questions and answers.

Net sales in 2010 first quarter of $160.7 million decreased $11.5 million from $181.5 million in the first quarter of 2009. The first-quarter results included the impact from three acquisitions completed during 2009, including Anets and CookTek in Q2 of 2009 and Doyon in Q4 of last year.

Sales growth from these acquisitions accounted for $7.1 million in the quarter. Excluding the impact of these acquisitions, sales declined by 15.4% as compared to the prior-year quarter. This reduction in sales reflects the impact of a large oven rollout with KFC in the prior-year quarter to support their grilled chicken program. Excluding this order from prior-year revenues, total sales would have increased organically 4.5%. This net increase reflects flat organic sales of the Commercial Foodservice Group and a 56% increase in the Food Processing Group.

Increased sales at the Food Processing Group reflect the placement of orders which have been deferred for several quarters. The 2010 first quarter likely reflects an initial surge of order resulting from this deferral and, as a result, we anticipate the rate of growth will decline in future quarters. However, quoting activities and order rates remain strong throughout the first quarter and into the second and we anticipate double-digit revenue growth at this business unit for the remainder of the year.

At the Commercial Foodservice Group, we realized a decline in sales and orders early in the quarter. However, the order rate, excluding the impact of the KFC oven rollout, turned positive in the second half of the quarter and continued to trend positive into the second quarter. As a result, we anticipate modest growth at this business unit in the second quarter.

While the market remains difficult to predict, we are optimistic that we will continue to see an increase in the growth rates over the next several quarters, as our customers appear to be realizing improvement in their business volumes and are increasing their capital spending plans.

Additionally, we believe the investments we have made in our selling organization throughout 2009, including the creation of the national accounts team and further expansion of our international selling organization will benefit revenues as we progress throughout the year.

Gross profit decreased to $63.5 million from $68.8 million, while the gross margin rate improved to 39.5% from 37.9%. Margin improvement was realized at both the Commercial Foodservice Group and the Food Processing Group. The improvement in the gross margin rate reflects efficiency gains from the consolidation of production facilities and the benefits of material cost savings initiatives we began in the fourth quarter of last year.

These improvements to margins were offset in part by lower sales volumes and a less favorable sales mix at sales at the Food Processing segment, which represented a larger portion of the first-quarter sales, are lower than that of the Commercial Foodservice segment.

Steel costs throughout the first quarter continued to climb and will likely have more significant effect on margins in the second quarter as compared to the first quarter. While steel prices may pressure margins in Q2, we anticipate that we will more than offset rising steel costs in the second half of the year through price increases and growing savings from ongoing supply chain initiatives, as these initiatives which benefited Q1 are expected to increase in realization through the remainder of the year.

Selling and distribution expenses during the quarter amounted to $17.6 million as compared to $16.3 million in the prior year. Selling and distribution expenses included $1.7 million of expense at the newly acquired businesses of Anets, CookTek and Doyon, which were not reflected in the prior-year quarter.

Additionally, while sales were lower in the quarter, variable commission expense was comparable to the prior year and increased as a percentage of sales due to the nature of the sales mix, as the prior-year order to KFC did not carry a commission expense.

In comparison to the fourth quarter of 2009, selling and distribution expenses were -- also were higher, primarily due to incremental selling costs from the acquired Doyon business and investments made to the international selling organization, which were primarily made in the fourth quarter of 2009, as well as trade show costs, which are typically higher in the first half of the year due to the timing of these shows.

General and administrative expenses amounted to $19.4 million as compared to $24.4 million in the prior-year first quarter. General and administrative expenses included approximately $800,000 of additional expense at the recently acquired businesses. This increase in costs was offset by reduction in nonrecurring charges from the prior-year quarter of $2.3 million associated with facility closures, $1.2 million of reduced depreciation and amortization and $2.3 million primarily from cost reduction initiatives implemented in 2009.

In comparison to the fourth quarter, general and administrative expenses increased primarily due to higher profit sharing and incentive compensation costs, which had declined in fiscal 2009 and sequentially each quarter during the 2009 year as a result of the decline in sales and earnings last year.

All employees of the company are under profit sharing or incentive compensation plans tied to the profits of the Company. The Company records these costs ratably over the course of the year based on estimated costs for the year and reassesses and adjusts these cost each quarter as measurements are made against performance targets. These costs are comparative to the first quarter of 2009 in total, but higher than the 2009 fourth quarter.

Additionally, the 2010 first quarter and subsequent quarters will include increased non-cash stock compensation costs resulting from share wars that were modified in 2009, which in total will amount to approximately $4 million of additional expense for the fiscal 2010 year.

In comparison to the fourth quarter, the first-quarter general and administrative expenses also included the additional previously mentioned cost of Doyon, which was acquired in December of last year, as well as expenses for acquisition activities which the Company began to expense in 2009 in accordance with new accounting pronouncements. And these expenses can be lumpy in nature due to the nature of these activities.

Net interest expense and deferred financing costs amounted to $2,475,000 in the first quarter as compared to $3,146,000 in the prior year, reflecting lower average debt balances in comparison to the prior-year quarter.

Provisions for income taxes amounted to $9.8 million at a 42% effective rate in the first quarter as compared to $10.6 million at a 43% effective rate in the prior-year first quarter. The Company will continue to realize annual cash tax savings associated with the utilization of net operating losses from the TurboChef acquisition. This tax benefit, which will amount to approximately $6 million in fiscal 2010, is not reflected in the tax provision, as it has been recorded as utilization of an asset that was established in the opening balance sheet for the TurboChef acquisition.

Net earnings for the 2010 first quarter were $13.8 million or $0.74 per share as compared to $14.1 million or $0.77 per share in the prior-year quarter.

Operating cash flows amounted to $6.8 million in the first quarter. The operating cash flows are typically at their cyclical low in the first quarter due to seasonal work capital trends and the payment of year-end annual rebate and incentive obligations.

Non-cash expenses added back in calculating operating cash flows included depreciation and amortization of $3.9 million and non-cash share-based compensation costs of $3.2 million.

Operating cash flows for the first quarter were utilized to fund deferred acquisition payments of $1.6 million and capital expenditures of $1.4 million. And total debt at the end of the 2010 first quarter amounted to $270,976,000 as compared to $346,089,000 at the end of the 2009 first quarter and $275,641,000 at the end of fiscal 2010.

The Company's debt is largely financed under a $497 million senior revolving credit facility that matures in December of 2012. The Company's debt to EBITDA ratio, as computed under its senior debt agreement, was approximately 2 times as compared to a maximum covenant of 3.5 times, and it's fixed charge ratio was 10 times as compared to a minimum coverage ratio of 1.25%. And the Company remains in compliance with covenants under its bank agreements.

We continued to make progress in improving the profitability of recent acquisitions. TurboChef, which was acquired on January 5, 2009, has realized significant margin improvement, and we have achieved EBITDA margins of 25% in the first quarter of 2010, which reflects an improvement from 2009 and favorably compares to EBITDA margins which were historically negative prior to the acquisition by Middleby.

We remain very excited about the opportunities in the speed-cook arena and believe this will be one of the fastest-growing segments in the food service industry for the upcoming three to five years, and TurboChef is well-positioned as the leader in this category.

We also continue to make progress at the Anets and CookTek businesses acquired in the second quarter of 2009. We have consolidated the manufacturing operations of Anets into our prior production facility in New Hampshire and are now focusing on the development of new products.

At CookTek we expect to realize cost savings through engineering design and sourcing initiatives to reduce the costs of this technology, which we will begin to realize in the second quarter. We continue to believe there are significant revenue growth opportunities with CookTek as market acceptance of induction cooking increases. Since the acquisition of CookTek in April, we have generated interest with several of our restaurant chain customers in this unique technology, which provides for significant energy savings, safety and speed of cooking.

We were pleased to announce the acquisition of Doyon late in the fourth quarter of 2009. This acquisition complements our Nu-Vu baking division and provides Middleby with a more complete product line in the baking oven category. We have taken initial steps to reorganize the combined selling organization of the newly combined division and are implementing purchasing and manufacturing initiatives to enhance the profitability of this business, which should benefit the second half of the year.

During the quarter, we also continued to execute on our acquisition strategy, strengthening the portfolio of our brands by entering into an agreement to acquire PerfectFry. PerfectFry is a leader in ventless countertop frying solutions, and with this acquisition, Middleby continues to expand upon our leadership in ventless cooking solutions.

Matt, that is all for our prepared commentary. Could you please now open up the call to questions?

(Operator Instructions) Peter Lisnic.

Tim, I just want to go back to your -- I guess the selling expense comment. If you take out what happened with YUM! in last year's first quarter, is it safe to say if you look at those selling expense as a percentage of sales it is pretty consistent year-over-year? Is that the right way to think about it?

Yes, that is right way to think about it.

Okay. So the big stepup in the SG&A number is really just a function of that abnormal YUM! number last year?

Yes, that is correct. From a percentage standpoint, that is a good way to look at it. Obviously, there has been some additional costs that were layered on that wouldn't materially affect the percentages. But we -- some -- in pure dollars there is some additional costs because of the acquisitions, as well as some of the investments that we made in the national accounts team and the international selling organization.

Yes. And I guess if I look at the first quarter 2010, you ran at 11% selling as a percent of sales, and absent YUM! in last year's first quarter, the number would've been around the same, or around 11% --

Right.

-- is the way to think about it. Okay. All right. Fair enough. And then you talked about the $4 million of incremental incentive comp expense. I'm not sure that I caught whether or not there was an increase in the first quarter. I assume that would be disclosed in the Q. But just wondering if there is a number in the first quarter that kind of hit the income statement year-over-year.

I guess -- circling back, there are two pieces. One, stock compensation expense of $4 million, that I indicated is in annualized number, not a one-quarter number. And that increased non-cash stock compensation expense is related to the share modification that was done in December of 2009.

And then in addition to that, there is just higher profit- sharing and incentive costs relative to the fourth quarter -- not so much relative to the first quarter of last year. But last year, the amount of expense that we were accruing ratably through the year declined just as the results of 2009 were not as a strong, due to the market conditions.

So if you are looking comparative quarter-over-quarter, there is not much of a change in the first quarter. But if you're looking relative to the latter part of the year, there would have been a stepup in incentive compensation costs.

Yes, so I think last year, you booked around $11 million. You are saying this year, it is more like $15 million. Is that --?

Yes.

Okay, all right. And then, I guess, just Tim or Selim, if you could maybe talk about one -- of the things you are obviously pointing out is the rising steel costs. Can you talk about the industry pricing environment and how -- what the dynamics there are like in terms of competitiveness, your ability to get price and your ability to kind of push through new products to realize some of the price that you need to get?

Well, Peter, I'm going to jump in and first say that we have never -- and we repeat that we have never -- been a price discounting company from the get-go. We have built this company on innovation.

And our response to the price discounting that we see in the marketplace -- and there is quite a few of it -- we have basically managed our business to our customers and our R&D is all focused on payback to the customer. So at the end of the day, we come back to you and say if you buy, let's say, the Solstice Fryer from us from Pitco versus any other fryers, we will guarantee between the self-cleaning burner and the filters and there is an oil light, that payback at the price we charge is basically measured in months.

So many of our customers have been conditioned to understand payback. And it took us several years to regear internally our R&D toward payback. There is no project right now that passes through our basically test internally unless it has a payback that is less than 2.5 years.

Okay, that's good for me.

Tony Brenner, Roth Capital Partners.

Could you indicate what international sales trends were in the quarter? And I suspect that Food Processing orders played a part in that comparison, so maybe you could indicate both the total international sales trend and what the Food Service component of it was.

International sales were up significantly, both Food Processing and Commercial -- there was double-digit growth that was realized at both units. The Food Processing seg grew a lot more because some of the orders that I referred to that came in in the first quarter were international in nature, so you would see the Food Processing jump very significantly -- I mean, up to like 50% international, because some of these were large orders internationally. But we saw double-digit increases in both businesses.

Is TurboChef a factor in that growth rate as yet?

TurboChef was up -- I mean, it was one of the components. But really, if you looked across almost all of our businesses, they all had international growth in the first quarter.

Is the first-quarter G&A expense and your tax rate a reasonable run rate for the balance of the year, Tim?

Yes, it is. There is always some impact to, I guess, the cycle, with the second quarter and third quarter tend to be the peak from a volume standpoint. So typically, the dollars go up slightly, but the percentage comes down as we get some leverage on the SG&A.

Okay. Fair enough. And my last question is to what degree are newly-introduced products playing in the sales acceleration that you are now seeing?

Tony, I will answer that. When we measure for -- what we measure as newly introduced product is three years the day it has been sold. Any product launch within the last three years is considered new products, and when we measure that, right now, between 25% to 30% of our total sales are coming from new product.

We have started seeing significant acceleration on what I call energy-rated product. As the government has stepped up in almost all states with a rebate of up to $1500 per piece of -- almost per piece of equipment, if you buy energy-rated piece of equipment versus non-energy-rated piece of equipment. So we are starting to see a significant amount of purchases going towards energy-saving equipment.

And we are the leader in that. We have the most energy-rated ovens and fryers in the industry right now. Energy Star rated in the fryers, that on one hand.

We continue also to see the introduction of the hydrovection that was launched for KFC now having some traction in the general market. And we are seeing the introduction of the TurboChef. I see this oven that now takes sheet metal inside the oven being well-received in the marketplace.

So to repeat, our products today account for around 25% to 30% of our total sales, and we see that accelerating. And they carry higher margins -- between 5% to 10% higher margins.

Thank you, Selim.

Jamie Clement, Sidoti & Company.

A couple questions, Tim. First off, just I was having a little trouble reconciling some of the sales figures data I think you had in your prepared remarks, but also in the press release.

If we back out the hydrovection sale to KFC from the first quarter of last year and we back out acquisitions, Commercial Foodservice Group sales would have been what? Is the 4.1% in the press release, is that the right organic number or does that have acquisitions in it?

No, the 4% number -- okay, as I mentioned in the prepared commentary, organically, we would have been up about 4.5%, if you back out acquisition and you back out KFC. And then if you break down the 4.5%, it is basically flat revenues in the Commercial Foodservice and an increase of over 50% on the Food Processing business.

Got it. That is very helpful. So it sounds like down a little bit in the first half of the quarter, up a little bit in the second half of the quarter. Is that what we are supposed to assume?

On the Commercial side of the business, we continued to be down in January, and then basically we flattened out and then have seen increasingly positive sales trends throughout the remainder of the first quarter and into the second.

Okay. And then the follow-up question, just on the -- not on the stock comp expense, but on the way you all accrue incentive comp in the G&A line -- last year you had declines in your G&A expense as the year went by, even though your results in the second half of 2009 were better than in the first half of 2009.

So do you tend to accrue more early on, or -- because I'm just curious why there would have been a big -- I'm just trying to understand the trend a little bit better.

I think -- we accrue based on targets that are set for the year. And in a perfect world, if you thought you were going to hit the targets, you would accrue ratably basically during the course of the year.

But as the year goes on, you have a better visibility of where you are relative to those targets, and I think as we moved through the year and realized that we were further away from those targets or had less of a chance of making them, so the incentive compensation declined.

The targets aren't based on how the first half is relative to the second half. It's based on an annualized target number. And I think the early part of last year, we had the KFC order to start the year, so we had a good boost to start the year. And if you remember, in the first quarter of last year, things were highly volatile and we were uncertain how the year would unfold. And as it did, the market continued to be challenging, and because of that, we didn't reach the targets.

There is also a lot of dynamics, because the incentive plans are across multiple divisions; each division has their own targets. And there can be dynamics of how each one of those individual divisions -- how the results come in during the course of the year relative to those targets.

But generally, as we went through the year, realized that we either would not achieve them or would not achieve the higher level of those targets. That's why it came down during the course of the year.

That makes perfect sense. Thank you very much for your time.

Jamie Sullivan, RBC Capital Markets.

Good morning, gentlemen. It is Mike Salinsky filling in for Jamie this morning. I was wondering if you can tell us a few details about your plans for integrating the PerfectFry business. Doesn't look like they were too profitable the last few years, and I wanted to know how high you thought you can bring EBITDA margins, as well as can you sell their product in the US through your current existing fryer team?

Well, we haven't closed the transaction yet, so I want to limit -- I mean, I think we saw there is a lot of work to do, which we'll look at the integration activities post. But historically with all the acquisitions that we have done, we have had a strong track record of taking profit margins up to -- from wherever they start, whether it is zero, negative 5% up to the 20% type range. So we are confident we can do the same here.

And obviously, right now, PerfectFry is not that large of a company, so the bigger opportunity is really what can we grow the revenues. And it is a unique technology. The ventless cooking platform is one that we think is going to expand overall and it complements what we do with TurboChef and some of our other product lines.

And we do believe that company and the products will benefit from the relationships that we have with major chain customers, as well as some of our distribution relationships, both domestically and internationally.

Okay. Thanks for that. Then going on to your tax rate, I was wondering if you can tell us if the first-quarter tax rate that you did realize, if that was in line with your current expectations for the full year, and if it was in line with your expectations for the first quarter, as of last quarter.

I'm not sure I understood the second part of it, but, yes, I think you know historically we have been in that 40%, 42% range, kind of excluding one-time items, which will -- which come from time to time as we get benefits related to tax -- or detriments related to tax audits or other kind of nonrecurring impact.

So last year, we were at about a 40% tax rate, excluding a one-time benefit that we realized in the fourth quarter of last year, which brought the effective rate down. But I think historically, we have kind of guided towards a 40% to 42% effective rate.

But I'd just mention again, our P&L effective rate is much higher than what we pay in cash taxes for two reasons. One is the NOLs that we get the benefit from TurboChef which don't run through the P&L. And then secondly, we tend to establish tax reserves better -- a result of FIN 48, which is a particular accounting pronouncement. And as the Company has grown over the last several years, those tax reserves have grown, but they tend to be non-cash in nature.

Got it, great. And just to clarify the second part of my last question there, so there were no major one-time items in your first-quarter taxes?

No, there was not.

Okay, great. Thanks very much.

(Operator Instructions) Joel Tiss, Buckingham Research.

You touched a little bit on the competitive landscape. Can you give us a little more sense of what is going on out there, just some color about the market? We've had two down years in a row of CapEx by the restaurant companies. Where do they stand now? Are they coming back? And how aggressive are the competitors on price? And just give us a little flavor.

Let me start with the industry, Joel. We have started to see restaurant sales improve. In fact, in the first quarter, restaurant sales were up half of 1%, which is a published trend. They are expecting this year to go up 2.5%. So we've started to see some pent-up demand from an equipment standpoint.

Let's talk about the Food Processing, which has started having an earlier run than the Foodservice. The Food Processing started almost five months ago, taking hold and taking traction, with a lot of orders, million-plus dollar orders with our Food Processing customers. And then now we are starting to see the Foodservice; as you've seen, we've gone from negative territory to somewhat of a flat territory in the first quarter.

We are not yet back to normal yet. So we are starting to see some of our dealers starting to stock up again. So we started seeing our distribution channel restocking their shelves. And we believe that somewhat towards the latter part of the year, we'll start to see the chains starting to increase their capital expenditure.

So the momentum seems positive at this moment, but we don't take anything for granted right now. You know, we've had, as you mentioned, two years of tough economy. But we are hopeful that people are going back to eat in restaurants. We are starting to see positive comp sales as chains reported their first-quarter numbers.

We started to see the pizza business, as I've stated in my previous -- in my last two conference calls, starting to see a major uptick in the pizza business. And I think we will continue to see the fast, casual and the quick-serve restaurants continue to grow.

Let's talk about the pricing that we see out there in the marketplace. I think raising prices has become more difficult today, as customers are under pressure. But they are all looking at ways to save money. And one of it is moving into Energy Star rated equipment, because you can get immediate rebate from the government. So we are seeing a lot of customers saying, I am interested in Energy Star rated equipment.

We are also seeing people saying, I am interested in your ventless technology because it saves money -- I don't have to put a vent -- especially in nontraditional outlet and convenience stores.

We are also seeing literally -- also a lot of the chains saying, I want to introduce new menu items to be able to compete, whether it is additional luncheon items or whether more dinner items, especially in the casual dining chain. And they are looking at equipment that requires less labor and higher speed of cooking.

So we are starting to see that innovation, whether it is in energy or speed or ventless, is paying back for us. And that takes [back] some of our market share that we see starting to taking hold as we look back at the last few weeks of our orders coming in.

Is there any way to tell if you guys are gaining market share? And can you also just talk about what's going on with acquisitions? Do you see a lot of deals out there? Do you feel like you have enough room on your balance sheet to keep going?

Let's talk about the revenue growth. As you know, we have created a national sales team that caters to our 50 top customers. We strengthened our distribution relationship; we are now with more dealers than we have ever been.

And our product pipeline, talking about ventless, speed, labor, whether it is automation or speed of cooking or Energy Star, should allow us to grow at organic rates well in excess over the market over the next three years.

On the acquisition front, we continue to be the home of choice for tuck-in companies, more companies who realize the benefits of being on the Middleby platform. And you've seen the numbers of companies we have acquired, family-owned companies or smaller companies, both in the US as well as internationally, who have decided to join the Middleby platform. And it has been [productive for us], as recent as the Doyon acquisition. A few years ago, it started with Houno and the Giga internationally and the frifri. And continue to see a lot of pipeline where family-owned businesses and strong leadership would like to join us.

One, we are a very entrepreneurial company. We continue to be nimble. They like that. They tend to see us as letting them run their business independently and entrepreneurially. But they take advantage of our international infrastructure and distribution. They take advantage of our supply chain initiatives. And we give them a Middleby halo effect from the fact that we have great relationship with the top 100 chain -- largest chains around the world.

Okay, all right. Thank you.

Gary Farber, C.L. King.

Just given what you discussed on the price increases, your cost initiatives, but the trends with steel, is Q1 -- is the gross margin there sort of -- do you think that is the peak or would you expect in the back half of the year it could get better?

I don't think it's the peak. I think moving into the back half of the year, we've got some continuing initiatives around material costs that are favorable. We would expect just because of the seasonality, you would have higher volumes that are favorable.

Steel will present an increasing pressure, particularly in the second quarter, as we saw surcharges rise in the first quarter. But we feel that we'll be able to more than offset that in the back half of the year. So we don't think it is a peak for the year.

So you would say sequentially the gross margin should probably get better?

Well, I think there is some pluses and some minuses, but I think that is what we are working towards. I think we feel pretty good that relative to last year, that we could see higher margins. And as it relates to the first quarter, I think in the back half of the year, we feel that perhaps we can improve on those. We are -- maybe not so much in the second quarter, but in the back half of the year.

Right. And I'm not sure if I missed this, but did you discuss at all if you need to raise prices, do you have a sense of is everybody else sort of in the same boat, that they are all doing the same stuff basically?

Well, we are in an environment that is pretty difficult, I want to say. Every customer today would like to get value. There is no doubt that everybody would like to see a price decrease or would like to see the ability to get value.

But value can be defined in many ways. Some of our competitors tend to set value on discounting. They take the price and give heavier discounts. In our case, we have been able to be successful by innovation. And as I mentioned earlier on in this conference call, our payback has been something that we focused on.

In addition, we have been able to show customers by buying a piece of equipment which is Energy Star rated, you could get more than what a competitive piece of equipment. Let's take in that case -- let's take an oven that is not Energy Star rated versus an oven which -- from Middleby which is Energy Star rated. Yes, the competitor might give you an extra 5% discount. That 5% could translate into $250. You could end up getting -- literally paying $250 more, but ending up getting up to $1500 in rebates from the government.

And those rebates are coming in -- flowing very fast. So once you go on the Internet and you show an invoice that it is Energy Star rated, which is rated by the government, that is a savings. So we've done a lot of that.

But as far as the price increase, coming back and saying well, we're going to go up 5% a year are difficult. The way the industry used to operate, the way automatic price increase of 1% to 5%, is now in a difficult environment. So we see price increases to be difficult to digest by our customers.

So we have to manage our costs a lot better. So we have to make sure we go back and work with our suppliers to make them understand that we cannot pass on those price increases in this environment to our customer. As they started coming out of the recession and tough times, we cannot come back and hit them with a 5%, 10% price increase.

Right, and would you say -- have prior recessions sort of had the same dynamic going on?

Well, the price recessions, they have had the same dynamic. The difference in this recession versus the prior recession, I can tell you what the differences. The differences in this recession for us is twofold.

One, we've seen consolidation in the industry. That is number one. This consolidation has helped stabilize the margins a little bit. There are fewer players in the industry as far as in the past.

Number two, a big impact of what is happening now is -- versus let's say 10 years ago -- is the international global market. Today, international sales are a nice part of our business and they are growing pretty fast. So emerging markets for us are a big driver.

So for a company like Middleby, you look at China, India, Philippines, Latin America, Middle East, all those markets are growing pretty fast. And we see our customers opening more stores in those markets. So we've seen more diversification on the top line than 10 years ago, for example.

10 years ago, literally, we started in China in 1999, and we were among the first to penetrate China. We were in the Philippines in 1996, and we were the only ones in the Philippines with a plant in the Philippines at that time. But at the time, we were literally avant-garde. Today, it is finally we are getting turbocharged off the international infrastructure we built for the last I would say 15 years.

And that is what makes this recession a little bit -- coming out of it a little bit more interesting because of the diversification in the global market.

Right, okay. Thank you.

Greg Halter, Great Lakes Review.

I know you've got the show coming up, the NRA show. Anything there of significance that you would want to discuss at this point?

Yes, I think I will invite every one of you to be part of the NRA show. We have a lot of exciting products. We have -- for the first time now we are able to fit the complete ventless kitchen. And that ventless kitchen will be in exhibition there.

We have the Spin Fresh fryer, which -- just to give you a perspective, this patented technology will basically deliver 50% less oil consumed during the cooking, 50%; 14% reduction in gas consumption; and 34% decrease in calories from fat. That will be there, and that's patented technology; we are very excited about it.

Our CookTek technology, which is induction, where we can boil water in [45] seconds versus five or six minutes in a gas or electric stove. We have our Sota, TurboChef Sota oven, which is brand-new, which is now allows us to cook [protein] in 90 seconds versus 10 minutes on a grill. So phenomenal technology, both in ventless and in speed.

We also have our totally energy-rated equipment being all listed and presented there. We have also -- positioned now also the convenience store package, which now is completed. Between the acquisition of Star and the ventless technology now that we have from CookTek and TurboChef, now we have the complete package in convenience stores, which allows us now to exhibit a full package of convenience stores that we have not been able to do before.

I have to tell you, our pipeline is the strongest that we've ever had at the Company, and we are very [slow] to be going to NRA as long as we have been. We took advantage of the restructuring and the crisis and we've invested significantly in R&D. We did not cut back our R&D at all.

So I invite you all to come at our booth at the show, which is taking place, I think --

May 22 through 25.

Yes, in Chicago. And if you need badges, please let us know. We will accommodate you. We will make it easy for you to access the show. And you can call me, call Tim or Darcy, and we will host you and have a badge set up for you to come and be with us.

Okay, that sounds good. And relative to your -- the credit facility, any change on the rate there? I think you were talking about a 1.6% average rate on the debt, plus the commitment fee. Does that vary at all from that level?

We pay 1.25 over LIBOR, plus a commitment fee. But that is -- it fluctuates, obviously. with LIBOR, although we've hedged about half of our debt, so we have fixed about half of it. But no significant changes in the cost of debt.

Okay. And I think your capital spending is generally less than 2% of your sales, or has been historically. Do you envision any sort of change there this year or next?

No, we do not.

All right. Thank you.

Okay. That is all the time we have for questions today, ladies and gentlemen. I would now like to turn it back over to management for closing remarks.

Yes, I would like to do closing remarks and talk about -- literally recap what we've done. I think in the last two years, while the recession was taking hold, at Middleby, we did not cut back our investment. We created a national sales force, fully dedicated to our top -- 50 top customers with a concierge desk. We increased our international infrastructure in the Middle East, in China, in India and in Europe.

We created the Energy Star rated ovens and fryers. We are now able to fit a complete kitchen with ventless technology. We consolidated two of our manufacturing facilities.

We acquired companies with patented platforms and number one brands, such as TurboChef in speed cooking, CookTek in induction, Spin Fresh, which changed the way we fry foods, and Doyon in bakery ovens. We strengthened our position in convenience stores and nontraditional outlets.

Overseas, we have continued to grow in emerging markets such as China, India, Philippines, Latin America and the Middle East.

While the food equipment industry looks to be stabilizing, we do not take anything for granted at Middleby. I thought it would be helpful to give you a sense for how we have positioned the Company to come out of the downturn. We are positioned to do well if we remain in an environment of limited industry growth.

At Middleby, we have increased our market-leading position, have the strongest pipeline in our Company's history, have strengthened our customer and dealer relationships and achieved a variety of initiatives that have permanently improved our operating structure.

I would like to tell you that today, we want to boil down our metrics to four items we are focused on. Top line or revenue growth. Our national sales team, our strengthened distribution relationship and product pipeline, should allow us to grow at organic rates well in excess over the market over the next three years. On the acquisition front, we continue to be the home of choice for companies who realize the benefits of being on the Middleby platform.

Our number two metric is our operating margins. We continue to focus on increasing operating margins. Taking market share will only come in a way that increases our profitability. The structural changes we have made should allow us for higher margin in the coming years.

Cash flow. Middleby continued to generate significant amount of cash flow, as shown by our debt paydown over the past two years. And we are talking about our operating free cash flow, and Tim just alluded to a final question we got that our CapEx will not change as we continue acquiring companies and doing our R&D.

Finally, the most important metric is our customer relationship. Our relationships with our customers are Middleby's biggest assets. We will continue to work closely with our customers to help them service and align customer and become more efficient. We will continue helping them through ventless technology, through energy-rated ovens and fryers, through speed of cooking, but most importantly, we will continue our tradition of No Quibble Warranty.

No Quibble Warranty is unique. We will never basically sell a product that underperformed at our customers. Whether it is a large chain or a single (inaudible) customer, we have a stated, written No Quibble Warranty, which has not been matched in the industry, which takes care of our customers after they buy our equipment. And that is why the return ratio and retention of our customers is so high.

While the environment remains challenging and we will operate with a cautious view [on the mid-term], we are seeing the benefit of our actions over the past two years start to paid dividends, and expect these to become more evident over the next two or three years. For this, I thank you. Thank you very much.

Thank you for joining us today on the call, and we look forward to speaking with you next quarter.

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