Middleby Corp (MIDD) 2010 Q2 法說會逐字稿

Good morning and welcome to Middleby Corporation second quarter 2010 earnings conference call. Management will begin the call with opening comments and then we will open the call for questions. Instructions to ask a question will be given later in the call. With us today from management are Chairman and Chief Executive Officer, Selim Bassoul, and CFO, Tim FitzGerald. Mr. FitzGerald, please go ahead with your opening comments.

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

Net sales in the 2010 second quarter of $173.4 million increased 9.3% from $158.6 million in the second quarter of 2009. The first quarter results included the impact from the Doyon acquisition which was completed in December of last year. Sales growth from this acquisition accounted for $3.7 million in the quarter.

Excluding the impact of the acquisition, sales increased 7% over the prior year quarter, and this reflects a 5% increase in the sales at our Commercial Foodservice Group, and a 26.6% increase in sales at our Food Processing Group. The increased sales at the Food Processing group reflect the improvement in market conditions for this segment. We have seen the placement of orders which had been deferred for several quarters, and continuing increased investment activities at our customers, which had significantly reduced the capital spending activities in 2008 and 2009. Although the rate of growth may have slowed from the first half of the year, in which we realized a surge of deferred orders, we still anticipate we will continue to have double-digit growth for the remainder of the year in this segment.

At the Commercial Foodservice Group, we have seen strong improvement in international sales as demand in emerging markets has increased, and we realized sales penetration. Also as a result of investments made in our international selling organization late in 2009. Domestically although new store openings remain soft, and financing for restaurants is limited, we have continued to see consistent demand for equipment to support new menu initiatives, and have seen some improvement in demand driven by our placement of equipment. We believe the investment in our selling organization throughout 2009 and in the first half of 2010, which included the creation of the national accounts team, and further expansion of our international selling organization, will continue to benefit revenues as we progress through the remainder of this year and into 2011.

Gross profit increased to $69.4 million from $61.3 million, while the gross margin rate improved to 40% from 38.7%. 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, increased volumes, and benefits from material cost savings initiatives we began in the fourth quarter of last year.

These improvements to margin were offset in part by rising steel costs which had increased approximately 30% in comparison to the second quarter of 2009, and a somewhat less favorable sales mix as sales of the Food Processing segment, which represented a larger portion of our sales in the second quarter were lower than that of the Commercial Foodservice segment.

Selling and distribution expenses during the quarter amounted to $19 million, as compared to $16.7 million in the prior year. Selling and distribution expenses were higher largely due to increased commissions on higher sales volumes. Additionally in comparison to the prior year, higher selling costs reflect the investments made in our international sales organization, and in the national accounts team. Selling expenses also included approximately $0.5 million of expense from recent acquisitions, which was not reflected in the prior year quarter.

General and administrative expenses amounted to $20.7 million as compared to $17.7 million in the prior year second quarter. This increase reflects a $1 million increase in depreciation and amortization associated with the acquisitions completed during that 2009, as well as a $1.4 million increase in noncash stock-based compensation. General and administrative expenses also included the cost of the recent acquisitions, and higher profit sharing and incentive compensations which had declined in 2009. In comparison to the first quarter general and administrative expenses increased primarily due to $900,000 of higher noncash stock-based compensation and increased professional fees associated with acquisition activities.

Net interest expense and deferred financing costs amounted to $2.2 million in the second quarter, as compared to $2.9 million in the prior year, reflecting the lower average debt balances during the quarter, and lower interest rates also in comparison to the prior year quarter. Provisions for income taxes amounted to $9.8 million at a 36% effective rate in the second quarter, as compared to $9.9 million at a 42% effective rate in the prior year quarter, and the second quarter tax provision reflects approximately a $1 million benefit related to the closure of tax periods previously open to audit, and that is a benefit not expected to recur in the third or fourth quarter of this year.

During 2010 the Company will also realize an annual cash tax savings associated with the utilization of net operating losses acquired from TurboChef. This tax benefit which will amount to approximately $6 million in fiscal 2009 is not reflected in the tax provision, as it has been recorded as a utilization of an asset that was established in the opening balance sheet for the TurboChef acquisition.

As it relates to cash flows, operating cash flows amounted to $25.3 million in the second quarter, and $32.1 million year-to-date. Cash flows are typically stronger in the second half of the year, due to seasonal working capital trends, and the payment of year-end annual rebate and incentive obligations. Non-cash expenses added back in calculating operating cash flows for the first six months included depreciation and amortization of $7.8 million, and noncash share-based compensation costs of $7.4 million.

The operating cash flows for the year were utilized to fund deferred acquisition payments of $2.6 million, capital expenditures of $2.4 million, and repurchase shares of Middleby stock which we completed in the second quarter of $3 million, which were repurchased at an average price of $53.81. The Company also utilized the operating cash flows to pay down debt, which was reduced to $249 million as compared to $271 million at the end of the first quarter of 2010. And the Company debt is largely financed under its senior revolving credit facility, which is a $497.8 million facility that matures in December of 2012.

And as it relates to coverage ratios, there are two debt covenants, and our leveraged ratio was 1.8 times debt to EBITDA, as compared to a requirement of no more than $3.5 million of fixed charged ratio that was approximately 10 times, as compared to a minimum coverage ratio of 1.25 times. The Company remains in compliance with all of its bank agreements.

And as it relates to acquisitions we continue to make progress in improving the profitability of the recent acquisitions, TurboChef which was completed at the beginning of last year, continued to realize margin improvement in the second quarter, and we have achieved EBITDA margins which are sustainable at 25% or better, and that is in comparison to margins which were historically negative prior to the acquisition by Middleby. We also continue to make progress at the Anets and CookTek and Doyon business units, which were also acquired in 2009. We have consolidated the manufacturing operations of Anets into our fryer production facility in New Hampshire, and have now introduced several new products under this brand in the second quarter.

At CookTek we have begun to realize cost savings through engineering and design and sourcing initiatives to reduce the cost of this technology, and are very excited about the growth potential for the product category, which has now begun to generate significant interest with several of our restaurant chain customers, due to its significant energy savings, safety, and speed of cooking. At Doyon we have completed steps to consolidate the selling organization of our new baking oven division with combined with the NU-VU brand in our implementing purchasing and manufacturing initiatives to enhance profitability at this business unit, which should benefit future periods.

And more recently we completed the acquisition of PerfectFry. PerfectFry is a leader in ventless countertop frying solutions, and we have taken initial steps to integrate this business within our frying platform, and consolidate those manufacturing operations. This initiative we anticipate should be completed in the second half of the year, and should realize savings from this initiative in 2011. And we are very excited about the opportunity to introduce this technology to our chain customers, which has been initially received very well, and are excited to introduce PerfectFry to our expanded customer base through Middleby.

That is all for prepared commentary. Could you please open the call for questions at this time?

Sure. (Operator Instructions). Our first question comes from Tony Brenner with Roth Capital Partners. Please go ahead.

Thank you. First of all, relating to the sales increase in the Food Processing segment, were the bulk of those orders that had been deferred that are now being shipped widespread, or is that primarily coming from one or two customers with particularly large orders?

Well I would say generally that business is made up of customers with large orders, but that being said, I mean we are seeing increased demand across the customer base, so it is not, the increased revenues that we are seeing is not kind of an anomaly with one or two customers. I would say that industry as a whole is doing very well right now. Initially we got a surge from kind of pent-up demand but the quoting activity and incoming order rate continues to remain strong. We have also had some new products in that business segment that also have been pretty well received, and are gaining traction fairly quickly.

Okay. Assuming positive sales leverage, what sort of further improvement from these various consolidations and cost efficiencies might be reasonably expected in terms of gross margins? Could there be more than another 100 basis points over the next 12 months, and assuming a comparable sales increase to what you saw this quarter?

Well we have completed a large portion of our manufacturing integration initiatives, so I think some of the benefit that we saw in the second quarter of this year related to actions we took last year, which start to roll off from a quarter-over-quarter standpoint. So we don't have some of that built in benefit. But we are realizing continuing improvement from some of the recent acquisitions. They are smaller in nature, so that the savings aren't as great. I would say we do have a target to get to improvement, along the lines of what you are speaking of, over time as we move into next year,with those smaller acquisitions, and the continuing improvement with other initiatives including material cost savings. I think that is really, at this point the two biggest, the larger drivers are the material cost savings initiatives as well as some of the consolidations with the smaller acquisitions.

Is the 10-Q going to be filed today?

It is.

Thank you.

Okay. Next up is Peter Lisnic with Robert W. Baird. Please go ahead.

Good morning, this is Josh Chan filling in for Pete. I was just wondering if you could talk a little bit about demand as you saw at the end of the second quarter and into July and August?Did you see customers become more cautious again, given what is going on in the macro economics?

Josh, our organic growth has remained almost pretty consistent throughout the second quarter, and as we see it through August. So at this moment we are feeling pretty comfortable that the growth especially on the Commercial Foodservice level has remained literally. We have not had a lot of major ups and down from one month to another, so we continue to be pretty optimistic in the near future that the organic growth will remain.

We are seeing also some very nice traffic at our customer in the casual dining, which has been severely hit, almost more than anything else in the economy, both independent restaurants and casual dining were hit pretty hard, and I think we are starting to see that segment recover a little faster in the third quarter right now, we are seeing Red Lobster, Olive Garden, TGI Friday, Brinker, Cracker Barrel, start, literally an example of casual dining starting to see new signs of life, that we have not seen in the last 24 months.

Great. That is really helpful. And then with respect to your international markets, could you talk a little bit about what you are seeing in terms of demand, and how you are exactly penetrating those markets?

We have been growing, our international markets represent 20% of our total sales. It has been growing double-digit, and we remain very bullish on our international growth for two reasons. One, the emerging markets continue to grow because the growth of dual income and middle class in those markets. People are eating out the more and more in emerging markets. Where we are a dominant player, and a big player in those markets, whether it is China or India, or Latin America or southeast Asia.

The second part of it is the fact that our infrastructure we have invested significantly in the last many, many years, but specifically during the downturn we have added a significant amount of sales people and service technicians to service the needs of our customers internationally. It is paying off for us. So again, without giving, we are not going to give guidance and I want to make sure that we don't start providing guidance on this call, we continue seeing our international segment grow double-digit, and continue growing double-digit in the next few quarters.

And that is for the Commercial Foodservice side of the business?

Yes, from the Commercial Foodservice side.

And it has been growing on both sides of the business.

Okay. And then finally, on SG&A, have if you combine selling and distribution and selling and general administrative, it is running about 23% of sales for the last two quarters. Is this a rate that we should expect to continue into the future as we model it out?

I mean I think obviously there is factors that can impact it, one way or another. In we continue to see volumes grow we should get some leverage on that. I would say there were some things that also caused it to be a little bit higher in the second quarter.

Some expenses around acquisitions, including that of PerfectFry, which prior to 2009 we hadn't expensed, and then also the stock compensation which the way that it gets layered in and amortized peaks in the second quarter of this year. So some of that will come back down a little bit. But there is a variable component to our costs, and we also had higher costs in there, with some of the investments that we made in the selling organization coming into the year.

Okay, great. Thanks for your help.

Thank you.

(Operator Instructions). Next up we have Jason Rodgers of Great Lakes Review. Please go ahead.

Hello.

Hello.

Wondering if you could talk a little bit about steel costs, if you are seeing any shortages in supply, and if you have increased your prices any to account for higher costs, or plan to?

We have not seen any shortages in supply. We have taken some mid-year or second quarter price increases, they have not been across the board, but that is something that we are evaluating as we monitor steel. Steel rose pretty significantly in the second quarter. It started to moderate a little bit in the third quarter, so it is something that we are monitoring closely.

Okay. And your Receivables were up about 17% versus a year ago. I was wondering the reason for that?

Well our DSOs have been consistent, so that is really just a function of the higher sales volumes and the timing of when some of these orders have come in.

Looking at share repurchases you made some this quarter,just wondered on your outlook for further repurchases?

I think we will remain opportunistic, Josh. Whenever we, or Jason, whenever we get position I think that we do not divulge what we do on that structure, but we have been very opportunistic in buying back on the market when we can. And I think it is one of the things as we generate so much cash, and it is one of the options to look at it as we see that our stock is undervalued, and so we are always evaluating the acquisition strategy versus investing in our businesses or buying back shares, and we felt this year that it was a good opportunity for us to buy shares. It will remain an option that we will consider as we move forward in the next few quarters.

And how many are still authorized under Board authorization?

I don't know that that is a meaningful number. I mean the Board can change the amount that is authorized at any given point in time.

Okay. Thank you.

Thanks.

Okay next up is Jamie Clement with Sidoti & Company. Please go ahead.

Good morning.

Good morning.

Good morning, Jamie.

Tim, Selim, can you in looking back at the last year and a half and then looking forward, Selim, did you all look at new product introductions during the recession differently than in better times? Like in other words, I mean you typically if you have a disruptive technology you want to make sure you get compensated for it, so did you hold back some launches to a certain extent? And if that is the case, are you building a little bit of a backlog here that you are going to take advantage of over the next 12 to 24 months?.

Jamie, I am going to answer that question. We did not skimp on our R&D. On our research and development during the crisis we did not skimp at all. In fact, the products coming out in the next three quarters are the best pipeline of the destructive technologies we have ever had.

I would say by the time of NAFEM, which is a big show being held every other year in Orlando in February, we will most probably have the largest amount of disruptive technologies ever. I am talking around the corner. And we feel very strongly about that. I think what has happened in the last two years is change, especially the last year we are looking at specifically payback. They were looking at energy saving equipment that could bring savings, can they reduce their footprint, can they save people out of the kitchen. Menu changes. And I will think we were in the heart of delivering and testing those products. And we feel very comfortable that we did not skimp on our R&D during that.

Now what is going to happen in the next I would say in the next two years, a lot of the tests that we were testing with chains, are going to come through in 2011 and 2012. We have a lot of innovative technology that are literally saving a lot of money for our customers. The chains right now we are working with a chain where we are taking, with two pieces of equipment that would cost them per store, just buying those two pieces around $10,000 to buy the two pieces. They will take two people out of the kitchen. The payback of the two pieces are humongous. The payback is less than a year. We are seeing things like this currently that are going to come through in 2011 and 2012 for us.

Selim, just to kind of refine my question. By no means was I suggesting you were skimping on R&D. It just seems like the pipeline you have now is strong, and stronger than what you have had over the last 12 to 18 months. I was curious if that was by design, and whether you were kind of waiting to see the light at the end of the recessionary tunnel, if you will,to get to kind of pick up the pace on those releases?

I can tell you what happened, Jamie, in this environment. That is a great question. What happened is not driven by us, but I would say all chains got hit pretty hard. This industry got the hardest part of the economy, the housing and this industry got hit hard, very hard right after the fourth quarter of 2008. And many of the chains just basically stopped testing anything. They did not let their people travel anywhere, because they were trying to restructure their businesses.

And I think it took most probably six months, the first six months of 2009, we had many chains literally not doing anything, and that was probably why you are seeing now the pipeline and the organic growth goes back to almost normal times. We reported organic growth on the Commercial Foodservice around 5%, which is back in line with what we have done in the previous years. And I think we are seeing back, our customers going back to normal, because chains like to test. And without testing it is not only with us, with every competitors, they need to test, and I have always said testing within the chain takes between 18 to 24 months before they basically roll-out the product.

And when they basically were on a hiatus over the first two quarters of 2009, that is why we started now feeling very comfortable and optimistic, and as we go forward the next few quarters, we are going to continue seeing a very nice organic growth remaining to the level to what we have seen in the second quarter. So we are very optimistic. And I think now the pipeline is going to come through on two levels.

The pipeline we are going to see continuing on what you call the energy efficiency which were our leaders. We have today more than 360 products that are Energy Star rated. I would say we have most probably one of the most Energy Star rated appliances, cooking appliances in the restaurant business. Second, we are continuing looking at products that cook faster, and that is taking all, not only in delis and fast casual, it is now going into casual dining, which is seeing signs of recovery,which accounts for 10% of our business. And then operating benefits in non-traditional outlets, where we are seeing a lot of interest in our advanced technology.

Thank you very much for your time.

Thank you.

Thanks, Jamie.

Next up we have Jamie Sullivan of RBC Capital. Please go ahead.

Hey, good morning, Tim and Selim.

Hi, Jamie.

Good morning.

To recap some of your comments sounds like what you are seeing is some of the CapEx in the chains is starting to loosen a bit here in the back half of the year, and you expect next year should be even a little bit better given your new products, and what you are seeing in your test kitchens, is that fair?

Correct.

Okay, great. And I wonder if you could give us a little bit more detail on some of the replacement orders you are seeing?Any particular customer, whether pizza, convenience stores, et cetera, that is doing particularly well, or it looks like there is some more replacement strength coming?

Let me give you, Jamie, let me gave everybody a flavor of our end markets. Our Food Processing business which accounts for around 15% of our business is doing extremely well. Our international business which accounts for around 20%, I just alluded to before, will continue to do extremely well in double-digit growth. Our pizza business which is around 10% of our business is doing very, very well. The QSR which is around also less than 10% of our business is doing very, very strongly for us. Our fast casual and convenience store, which is around 20% continues to do extremely well.

I think the two segments which continue to be challenged is the Institutional market, which includes hotels, schools, nursing homes, government contracts, which accounts for around 10% to 15% of our business is being challenged. And the independent market which is Mom and Pop restaurants and country clubs, golf courses, catering, is challenged, and that is 10% of our business. So we continue to see 20% of our business to be challenged, and that is a major improvement in what we have seen almost a year ago, where literally pizza was struggling, the commodity prices on cheese and sausages all was going very high, and they are not making any margins, so they had very little promotion. Commodity prices for our pizza chains have gone down, now they are back on promotion doing extremely well. The casual dining, 10% of our business was almost dead, there was nothing there. And I would say even the Food Processing a year ago was not doing as well.

Now literally out of those segments, which is one, two, three, four, five, six, seven eight that I alluded to, now six are back, almost back to normal, and we have two challenged markets, which is the Institutional market and the Independent market that continues to be very challenged, and that has given you a big flavor to where we are. What I want to leave you is definitely better than we have seen and we are very comfortable, and I think it will be a steady recovery. Slow but steady recovery, and I would have to say that by the first quarter of 2011, the institutional market will start recovering, because I think the school markets and the college and university market, and the nursing home market will start breathing life again.

That is really helpful. Just a follow-on to some of your comments there with, you see wheat prices are up. Any concern there, and are there input costs for the restaurants, as you see where things stand today?

I think the biggest problem that the restaurant is seeing right now is literally, I think food costs had abated across the segment. I think commodity prices for all the restaurants, whether it is tomatoes, whether it is seafood, or others have gone back to, not normal, but they have gone down in the last 12 months. I think the two issues they are going see is fuel costs continue to be up.

I think everybody is concerned about utility costs in the restaurant, and we are having a lot of studies and analysis on placing energy efficient appliances, and we are seeing a huge stride, where people even where four or five years a combo equipment that is not Energy Star rated, are switching that equipment for Energy Star. For two reasons.

One, they want to be able to take advantage of reducing their utility costs, but second, the government has instituted a rebate structure on Energy Star, so in many instances when you go and buy an Energy Star appliance, you can almost get up to $1,500 from the government in rebates, and that is being paid through the utility companies, and it is being paid within 30 days of you installing an Energy Star rated appliances, and we are a major player now. We put a lot of energy in R&D, because we have to go and test every piece of equipment in front of a special lab that the EPA has put together, and to be able to be Energy Star rated, and now we have more than 360 literally products that are Energy Star rated, so we are seeing a lot of replacements toward Energy Star rated. And that is number one.

Number two, we are seeing a significant amount of customers saying can you help me take cost of my labor out of the restaurant, out of the kitchen. And we are starting to see specifically on the casual dining looking at automation, conveyor cooking, speed cooking, ventless cooking, where they can take labor. And labor doesn't have to be chefs and cooks, remember labors can come in this contract labor that come in to clean hoods, they come in to clean kitchens, they come in to clean appliances after the thing is done, when the kitchen is closed, and we are working with many of the fast casual and casual dining to take away labor from those stores. Similar to what we have done in the pizza chain. Between 2000 and 2006, able to take literally 20% to 30% of the labor in a pizza chain, and now we are being asked by casual dining and fast casual to do the same.

Okay. Great. And then if I can just ask one more. How much was international up in 2Q?

International was up about 35%.

Okay.

And if you break that down, it was about 25% on the Commercial Foodservice, and then on the Food Processing is up multiples. So like 3 times. So that gives you a perspective.

Okay. Thanks very much.

Okay. Thanks, Jamie.

(Operator Instructions). It appears we have no further questions at this time. You may continue with any closing remarks.

I would like to take time to thank everybody on the call, and give you a few remarks. So we thought about our end market from a foodservice equipment, our international, to our casual dining, to our replacement business, we are seeing the markets recover at a fairly slow growth, but our growth has been driven more by market share gains. The initiatives that we have taken the past 24 months have paid off.

There are three drivers that are helping us take market share, the first driver is our innovative products and technology, and as I mentioned before on the call, we did not skimp on R&D during the crisis. In fact, the products coming up in the next three quarters are the best pipeline technology of the disruptive technology we have ever had, and you can go to greenstainless.com and see all the type of savings you can have. We have convection ovens, where we have 44% energy efficiency savings. We have steamers that are saving $5.10 of water per day, and requires no plumbing. We have industrial ranges consuming $0.85 per hour versus $3 to $4 per hour of gas or electric ranges. We have a baking oven that is 50% faster baking oven than any standard baking oven in the industry. So I keep on going. We look at fryers. We have fryers right now that are 24% more energy efficient than any other fryer, and fryers with self-cleaning burners,.

And then our number two initiative driver that helped us take market share is our national account program. Getting closer to the customer to meet their needs. When we create our national account desk and our concierge desk, most probably in the heart of the crisis we stuck with it, and now it is paying off dividends.

Our number three initiative is our improved dealer relationship. Our distribution channel, we invested significantly in training and incentivizing our dealers and distributors for growth, and we instituted a cross-selling program called PKM, Populate Kitchen with Middleby program, that has started to take traction in the marketplace among our distribution channels, where if they sell more than one product from Middleby, there is an incentive both to the end users as well as the dealer.

Finally, I have to talk about literally what you have learned, a new perspective of what you have seen in the past recession. In the early 1990s and 2001/2002, we saw the importance of planning for the next part of the cycle. In this downturn, we have basically stuck to the lessons from the past two recessions. We have positioned ourselves well for the recovery after the recession.

We are planning for a slow recovery and as always we are expecting to control our own destiny. We believe that the investment we have made in sales people, research and development, and incenting our customer and dealer relationships, coupled with the structural improvement we have made in our business, both in the domestic and international, will position us well to drive significant earning growth in the coming quarters and years.

So this concludes my comments, and thank you very much.

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

Thank you ladies and gentlemen. This conference is now concluded. You may disconnect.