Middleby Corp (MIDD) 2010 Q3 法說會逐字稿

Good morning. Welcome to the Middleby Corporation third quarter investor conference call. This call will have opening remarks from management and a time for questions and answers. With us from Middleby are the CEO Mr. Selim Bassoul, and CFO Mr. Timothy FitzGerald. We will give instructions on how to ask a question after the opening remarks. Mr. FitzGerald, please go ahead.

Good morning. 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've got some initial comments about the Company's third quarter results and then we will open up the call for questions and answers. Net sales in the 2010 third quarter of $177.8 million increased 15.5% from $154 million in the third quarter of 2009. The third quarter results included the impact from the Doyon acquisition completed in December of last year as well as the acquisitions of Cozzini and PerfectFry included, completed in the third quarter of this year. Sales growth from these acquisitions accounted for $5.8 million in the quarter. Excluding impact of these acquisitions, sales increased 11.7% over the prior-year quarter, reflecting a 10.7% increase in sales at our Commercial Foodservice Group, and a 19.3% increase in sales of our Food Processing Group.

The increase in sales at the Food Processing Group reflect the continuation of the improved market conditions for this segment. We continue to see strong global demand and increased investment activities at our customers which has significantly reduced capital spending in 2008 and 2009. At the Commercial Foodservice Group, we saw a continuing improvement in order activity in the third quarter. We realized strong sales growth in emerging markets resulting from higher demand levels and increased sales penetration as a result of investments made in our international sales organization over the past 12 months.

International sales for this Commercial Foodservice segment in the quarter increased 20% organically, with double-digit increases in Asia, Latin America, and Europe. Domestically, although new store openings remain weak, we continue to see consistent demand for equipment to support new menu initiatives and we have seen some improvement in demand driven by replacement of existing equipment. We have also begun to see the initial benefits from the creation of our National Council Team in the sales results which should further benefit revenues as we progress into 2011.

Our gross profit increased to $70.7 million from $62 million, while the gross margin rate was 39.8%, as compared to 40.3%. The gross margin rate declined slightly, reflecting higher costs of steel which impacted margins by approximately 0.005%. Additionally, the recent acquisitions which are operating below Company averages as we complete integration initiatives reduced the gross margin for the quarter. We anticipate that steel will remain higher throughout the remainder of the year with a lessened effect in the fourth quarter and we're implementing price increases which will be instituted in the first quarter which we anticipate will offset the higher cost as we answer 2011.

Selling and distribution expenses during the quarter amounted to $17.8 million, as compared to $16.4 million in the prior year. Selling expenses included approximately $700,000 from recent acquisitions not reflected in the prior year quarter. Selling and distribution expenses also reflect higher commission expense on the increased sales volumes, as well as the increased investments made in our international selling organization. General and administrative expenses amounted to $20.9 million as compared to $17.6 million in the prior year third quarter. General and administrative expenses included $840,000 of severance costs associated with cost savings initiatives, implemented in the third quarter. General and administrative expenses also include the cost of recent acquisitions, which added $600,000 as compared to the prior year quarter.

Additionally, as compared to the prior year quarter, non-cash share-based compensation increased approximately $1 million in incentive compensation costs which had declined in fiscal 2009, were approximately $4 million higher than the prior year quarter. Interest expense declined to approximately $2.2 million in the third quarter as compared to $2.7 million in the prior year period, reflecting lower average debt balances and lower interest rates in comparison to the prior year. Provisions for income taxes amounted to $9.4 million, a 31% effective rate in the third quarter, as compared to $9.9 million at a 39% effective rate in the prior year.

The third quarter tax provision reflects a nonrecurring $1.2 million benefit related to transaction costs deducted, associated with the TurboChef acquisition. Additionally the Company realized reduction to its tax reserves and accrued liabilities from reduced state tax exposures, and higher than estimated benefits for certain deductions related to the 2009 tax return filed in the third quarter. Adjusted for these items, the Company's effective rate would have been approximately 38% in the third quarter. During 2010, the Company will also realize an annual cash tax savings associated with utilization of net operating losses acquired from TurboChef. 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 established in the opening balance sheet for the TurboChef acquisition.

Operating cash flows for the quarter amounted to $34.1 million, and $66.2 million for the year. Cash flows are typically stronger in the third and fourth quarters due to seasonal working capital trends that occur with the Company. Non-cash expenses added back in calculating operating cash flows for the first nine months included depreciation and amortization of $11.7 million, and non-cash share-based compensation costs of $11.1 million. Operating cash flows for the year were utilized to fund $28.8 million in investment activities, including deferred acquisition payments of $3.7 million from previous years' acquisitions, $22.1 million acquisitions related to the third quarter acquisitions of PerfectFry and Cozzini and year-to-date capital expenditures of $3 million. The Company also repurchased 161,000 shares of Middleby stock in the amount of $8.9 million, over the course of the second and third quarters of this year.

After investing in share repurchase activities the Company has repaid $32.1 million of debt. The total debt at the end of the third quarter amounted to $243.6 million as compared to $249 million at the end of the second quarter and $275.7 million at the end of last year. We were pleased to complete the PerfectFry and Cozzini acquisitions in the third quarter. PerfectFry is a leader in ventless countertop frying solutions. This business, which has approximately $5 million in annual revenues, was acquired for $4.6 million. We're in the process of integrating this business within our fryer platform and we will consolidate the manufacturing operations.

This initiative completed in the fourth quarter of this year and we should realize savings from this initiative as we enter 2011. We have seen the interest in this product from a number of our existing chain and convenience store customers and are excited to -- about the opportunity to introduce this technology to an expanded customer base through Middleby. As -- we are also excited about our latest acquisition Cozzini which significantly adds to our growing Food Processing platform. This business, which has approximately $30 million in revenue, was acquired for $18 million in cash, $2 million in stock, with an additional $2 million in earn-out potential.

The Cozzini leading brand and its broad line of slicing, blending, grinding and mixing equipment is highly complementary to our existing brands and the products in this platform. The business has historically generated 5% to 10% EBITDA margins and we believe there are significant sales and cost synergies associated with this acquisition which we should begin to realize in 2011. Matt, that's all for our prepared commentary. If you could open up the call now for questions.

Sure. (Operator Instructions) First up we have Mr. Tony Brenner with ROTH Capital Partners. Please go ahead.

Thank you. Selim, over the past two years you have accumulated a handful of ventless technologies. I wonder if you could talk about how much this equipment is contributing to sales currently, what the growth rate is, what the demand currently for these products is, what the competitive picture looks like in ventless?

Tony, good morning, and yes, ventless is our -- definitely our next frontier for us. For Middleby, we have been now, since 2005, working on ventless technology, and we can say that this year in 2010, we have now a full ventless kitchen, which means every piece of equipment today and a hood can be duplicated using the same menu item. No changes to any menu item, we can do it now on appliances from Middleby that are ventless and we are definitely unique in this category. We have ventless fryer, we have ventless oven, we have ventless rangers, we have ventless griddle and charbroiler. We can duplicate the same menu using ventless.

We're starting to see significant demand and test of our equipment on ventless. We are seeing specifically in the US, we are working now with several casual dining companies that are looking at fast casual that are looking to install to go green and install ventless. The payback on ventless equipment is less than a year. You have to assume that the cost of the hood and the cost of maintaining a hood is almost $2,000 per square foot. So, sitting above our equipment. So, in essence, we could almost pay back a complete cooking line in less than a year by going ventless.

We are also seeing ventless now being in demand in internationally, because they have non-traditional outlets and the cost of energy and vents cost a lot of money to maintain. They suck the air out of the kitchen. They suck the heat and air conditioning and of course, you have to clean them every night, which almost takes an hour, an hour-and-a-half to clean a hood above our equipment. So, we are going to see that ventless is going to be a huge opportunity for us. The hood industry is around $3.5 billion, and I think we can increase our margins and start putting kitchens that have -- requires no hood. So we see that as a huge opportunity in the next three to five years.

As a percentage of your sales now, what --

Today would be almost around -- I would say probably --

Probably be around 10%, Tony.

Zero. We had zero sales in ventless and now we're around 10%.

Okay. Could you indicate what percentage the international business contributed in the quarter, what the percentage increase was internationally?

Yes, organically, we saw international increase 23% during the quarter. If you broke it out between the segments, Commercial Foodservice increased about 20%. The Food Processing business increased roughly 90% but that was on a very low base from last year.

Tony, I'm going to ask -- I'm going to almost address your question even more. What is unique about ventless, it is all patented technology. This is the [disruptive] technology for Middleby and we're literally the only Company that can offer a full ventless kitchen now, today, worldwide.

Okay, thank you. Tim, will the Q be out today?

No, the Q will be out on Thursday.

Thank you very much.

Thank you.

Okay, next up we have Mr. Peter Lisnic of Robert W. Baird. Please go ahead.

good morning. This is Josh [Chan] filling in for Pete. Selim or Tim, could you talk about the different verticals within the food equipment industry and where you saw the greatest strength this quarter?

Okay, I think we're seeing -- I can address that. I think we're seeing literally, the industry is not -- it is still growing slowly, and not seeing a big rebound yet. So if you think about that, we have been -- the majority of our organic growth came from market share gains and it came specifically in the following areas. It came from casual dining where we have been working with several chains on programs to reduce kitchen expenses, labor, and drive higher ROI directly from our national accounts program. We are also seeing internationally, regional change which is amazing that we're seeing significant of regional change in addition to US change mostly coming from store openings.

And then, we're starting to see new equipment and new product to support new menu items. Almost 33% of our organic growth came from adding new equipment to support new menu items across the whole market. So Middleby has been, whether it is energy efficient to cut labor, or introducing a new menu item, whether it is a breakfast item or a new fried food item that we have seen and we have seen a lot of new equipment to support our new menu item. So just to give you a perspective, I think that if you break up our organic growth and could break it up, replacement came up around 30% to 40%, renovation and expansion, believe it or not, has been in the US is around 10%. Adding new equipment support and new menu items around another 30% to 40%.

Okay, great. And then so given just a modest market improvement and share gains initiatives that you guys are having, did you have pretty strong momentum throughout the whole quarter or were there a couple of lumpy orders that benefited this quarter?

No, there is no -- on the Commercial Foodservice side there is no large orders so, we had seen pretty good order flow throughout the quarter both internationally and domestically.

Okay, great. Thanks for your help and -- thank you.

Yes thank you, Josh.

Okay. Next up we have Jamie Sullivan with RBC. Please go ahead.

Hi, good morning.

Hi, Jamie.

Question on the margin side. The selling expense going down sequentially looks like $1.2 million, while sales were up a little over $4 million, just wondering what was driving that?

The second quarter included some marketing initiatives that weren't repeatable and we also did some fine-tuning of some of our sales costs in the third quarter. But there was also some impact of just mix as well with which divisions where the growth was amongst the business units.

Okay. And is that 10% of sales, is that a good barometer, or level to assume going forward?

It might slightly lower in the third quarter than maybe some of the past and future quarters but I would say it is not far off the mark.

Okay. The severance expense in the quarter, was that related to acquisitions? Or was that other cost-saving measures --

No, it was just other cost saving measure. We're just continually trying to improve the efficiencies of the business. So actually none of it was related to acquisitions. It was all related to our historical businesses and we just went throughout the divisions in where we have made efficiency gains -- made a concerted effort to focus on that in the third quarter.

Okay. Then on the acquisition side, long-term, Cozzini a pretty large deal, wondering if long term the mix of the business if you would expect a little bit more of a balance between Food Processing and Commercial Foodservice, just your thoughts there?

Well I think we continue to grow both platforms. So we expect that we're going to have acquisitions on both sides so it is hard to tell exactly how that's going to balance out as a percentage of our time. But we do see a lot of growth opportunities in the Food Processing platform and we think with Cozzini, this was a big step in filling out the line and it would become a meaningful player in that segment right now.

Jamie, we like both segment platforms, they tend to be fantastic platform for us, and they happen to be very deceptive in nature where on the Food Processing, we are now a leader in energy savings, in packaging, in automation, the same on the Commercial Foodservice part. So, we tend to like the number of patents that Middleby has acquired and discovered and invented in the last five to six years on both platforms is amazing.

Great and then just one quick last one. On the -- in the activity that you're seeing in the chain landscape, at this point, there has been a lot of activity in the test kitchens, et cetera, this year. Is there anything that you see happening in that market that could potentially slow investment from those customers as we head into next year?

No, in fact, Jamie, I'm going to answer that question. In fact, the growth that we have seen in this year at Middleby has really not been from the market. The market is still growing very, very slowly, almost flat. But we have basically been able to grow despite literally no growth in the industry. And we continue to see our customers coming in asking for what I call, reengineering their kitchens, especially the casual dining. I see that segment to most probably accelerate in the next two or three years. I would say starting 2011, we will see significant growth in the casual dining as they reengineer that kitchen and Middleby is now working with several casual dining chains right now to redo their whole kitchen. And the part of the engineering of the casual dining is literally some of them come from different [reasons]. Some of them could be let me take labor out of the kitchen. Number two, let me become green.

So we're working with a kitchen or with an Asian casual dining chain that is looking to go all green, and we're putting in a complete ventless kitchen in them. The third one is, I have a big footprint, which most casual dining chains have, and stores, and they want to be able to reduce the kitchen size and offer the same menu or even more menu items but extend the bar area where the margins are higher. So we're seeing a lot of reengineering in the casual dining and I think it will be significant in the next 2011 to 2012, and I think Middleby is very well positioned for that.

Okay, thank you.

Thank you.

Thanks Jamie.

Before we ask a following question, I would like to interrupt a little bit and ask everybody who is on the call to go to greenstainless.com. I think it gives you a little bit of a flair of where Middleby is leading. I think it gives you where Middleby is now heading, starting in the -- since 2009, we have invested a lot in innovation, and I think if you go to www.greenstainless.com and you push the button of testimonials, then you can see some of the few testimonials that have been written about Middleby and our technology in terms of efficiency, in terms of ventless. That is again www.greenstainless.com. Thank you, let's go back to questions please.

Okay. (Operator Instructions) Next up, we have a question from Greg Halter with the Great Lakes Review. Please go ahead.

Yes, good morning, guys.

Hi, Greg.

Hello. Relative to the balance sheet, I didn't hear any discussion about receivables. Looks like they are up about 30% year-over-year. Just wondered if you could break that out on an internal basis excluding the acquisitions and same with inventory?

Yes, well, the recent acquisitions and I'm just talking about the ones we completed in the third quarter, added about $6 million into receivables and $11 million to inventory. So in particular, with Cozzini, you have got very little sales in the quarter, but you have got most of the balance sheet. So it skews the numbers. And then if you're comparing to the year-end or third quarter of last year, obviously volumes are up significantly as well.

So our DSO and inventory turns at the end of the third quarter when we back that out, we're relatively consistent with where we were last year. I would say receivables may be the only impact there that might tick things up a little bit. As international sales become higher, they tend to have longer terms so that brings it up a few days but other than that, it was fairly in line.

Okay, that's helpful. And back on the ventless technology side, I think you had indicated that it is about 10% of your sales now. Would that equate to around $65 million or so?

Well, it -- I would say yes, if you consider the TurboChef. Part of the TurboChef or all the TurboChef technology is ventless but we're talking about the technology that is going into places that are ventless [chefs]. If you consider TurboChef, I think it will be even more than 10%. But we're talking about those applications that literally are acquisitions where people came to us, saying I want a ventless platform and that is where it's become 10%. So I'm trying to define where literally 2005, before that they wanted a ventless technology and they didn't -- they couldn't get it. Today we're offering that and we're seeing a lot of people demanding it and we're seeing it in chains and now we're seeing it also in general market. Before it was mostly in non-traditional outlets or even now, we just shipped this year, several ventless installations to the military. So we're starting to see applications which we didn't even think of.

Okay. More difficult question, there was a point -- I don't know if it was 2009 or 2010 where there was a repricing of the options, Middleby's options on the management side and with the stock back at $78, $79 a share, just wondered if there's any thoughts on doing something there that would revert that to where it had been? Just want to get your comments on that.

Well Greg, the modification that was made, that's not really reversible decision and many of the share prices were in excess of $100 that we were looking at but it is not something -- it would actually be a negative effect to reverse that because it would actually increase the expense for stock options.

Greg, I'm going to answer this a lot better. I think the shares that we're given at the time are supposed to be motivation to people, that are all performance based. When we issued those shares we did not expect a huge recession that occurred, and I tell you, our people have delivered, they worked very hard and I have to say the numbers, despite the fact that you are almost 25% down organically in 2009, our people have trimmed their businesses, our president and our vice president did a great job at all the divisions. We've gone through a consolidation of many factories, we have gone back with continuous investing, and I think that we felt very strongly that the shares are always to be motivational. They are not given and granted for free. They have [bogeys] they have to get.

They are difficult [bogeys] and I think like me, sitting like you as every shareholder, remember, I tend to be a substantial, me and my family, substantial shareholder of this Company. We are always -- I am very sensitive to dilution. But I think that at Middleby, our people have to reengineer the Company, and I felt very strongly that we needed to set realistic targets and reset those targets so that people feel that they are still connected and they are going to basically benefit from some of those [stock] (inaudible) and they are not for free. They are still [bogeys] and they are meant to be retention so they are not -- they can't walk away and resign tomorrow and say I'm going to cash out those shares and move on. And I think that as shareholders and as analysts, we have done a great job in motivating people in an environment like this.

We just cut almost close to 100 people out of our Company, and we're asking people to do more with less. And they continue to do extremely great job. So, I have to tell you, I sit on the side of every shareholder because listen, when it dilutes you it dilutes me as one of the major shareholders of this Company and I think that I feel very strongly that we need to keep our people motivated and connected. In addition, the expense of those grants were also still hitting our P&L, irrespective of where the bogeys are, so we need to do that.

We will continue making sure -- working together in making sure that our team is in place. And if you look at our retention rate compared to our competitors, we have had the least amount of turnover. And I have to tell you, and I will tell you bluntly, I am a very tough manager to work for. And they have delivered. They stayed with us. Our targets are difficult. And I push them as hard as anybody pushes our people. But I think at the same time, the incentives have to be there so that they can benefit from the growth and the wealth they have created for this Company and there is a lot of growth -- shareholder value that has been created for all our shareholder including me. Thank You.

Great I appreciate the reply and obviously something has worked because the stock is up about [four-fold] off the low and you're still doing better margin wide than your other competitors, at least the ones we can see visibly. Thank you for that reply.

Thank you very much, thank you.

Okay and our last question comes from Jamie Clement with Sidoti and Company. Please go ahead.

Tim, Selim, good morning. Selim, I'm curious just to bring up this steel issue which is something that was emphasized an awful lot in 2006, 2007, and 2008. Compared to some other industrial metals since May it is not up that much compared to, let's say, copper. This is around the time of the year where you guys are thinking about price increases, Tim, I believe you mentioned that in your prepared remarks. Are you -- do you have a contingency plan in place as we go into 2011, where with the QE2 Fed policy from a week ago, a lot of countries around the world trying to devalue their currencies. If steel goes -- if we see a precipitous rise in steel after your price increases are announced, how do you handle something like that?

That is a very good question. In fact, steel costs are obviously an item on which we are focused and it's a short-term challenge. There is no doubt that steel remains a short-term challenge, not for Middleby only but for every company in our industry --

And a lot of other industries.

Yes, and we build it in stainless steel, us and our competitors. We believe that we can offset price increases by basically, some of them are operational efficiencies. So, we have seen a few operational efficiency would be better at managing scrap, we would be better at literally also, working in terms of working our suppliers and changing some steel components from 304 to 401, but I have to tell you ultimately, we can and our competitors have passed price increases on to our customers. We have done it in the past. I think that has become something that our customers expect.

I think that at the end of the day, we still are less than 1% of the total cost of the kitchen when you think about replacement of a piece of equipment. But most piece of equipments in the case of Middleby are paying back in less than a year. So I don't think that we have had a resistance to passing on price increase. The only thing, Jamie, that I think we have to take into account, that there might be a quarter lag between the time we basically would receive an order or we have committed in passing that price increase. But I think increased prices are nothing something that will significantly hamper gross margin from a stainless steel issue. So we're not as concerned as --

Yes Jamie, if you look at 2006, 2007, 2008, we had very significant increases in all three of those years and we were in those periods passing on two price increases per year. As Selim mentioned we, about quarter-to-quarter, might have had a lag but over several quarters put together we were able to pass that on to the customer.

Yes, and Tim, obviously you know I'm aware of that history. It is just, I -- it -- what concerned me a little bit and what I really wanted to ask you guys about was the end market strength -- while the end markets appear to be a little bit stronger, we're certainly not in the vibrant growth environment as we were during that period of time. I mean, would you agree with that?

I agree, that Jamie, but I have to tell you, if you think about a CEO today of a chain, which today I am having a discussion with a chain right now, we're going to reengineer that kitchen. Literally the payback on our equipment is not whether the CEO is coming back and saying Selim I'm worried about another 8% increase on your piece of equipment. The average on our remodeling of that kitchen will be between $20,000 to $30,000. The payback is literally we're cutting two people out of this kitchen. We're basically cutting the size of the kitchen down by almost 20%, and they are going to be able to extend the bar area.

I don't think -- if you look at Middleby specifically, all things are the ROE and the payback of most of our technologies are literally in less than 18 months. So I think we have room for us to pass increases. And when you look at the P&L of the restaurants, buying a piece of equipment that saves them on its energy. I'll give you a great example in the pizza business. You can go ask John Schneider the CEO of Papa John. He will tell you specifically when we worked with him in 2006 and 2007 to roll out the WOW oven, literally the WOW oven was most probably $10,000 more expensive on average than the $500,000 series that they would used to buy. But the payback in energy when we sat down and we looked at the energy saving was almost between $500 to a $1,000 per store per month.

When you look at that it was almost, the payback was literally less than a year. Plus they got faster speed oven. The oven was tied up to their POS system. They had better bake on the quality. I think if you look at what people on the restaurant side are smart. They are not buying or replacing a piece of equipment to be a (inaudible). Chains are looking at every impact to their bottom line. How can you make me money? And that's why Middleby has kept the margin that we have kept, is people are coming back and saying I am not buying what I bought ten years ago.

A fryer of ten years ago. I want a fryer that can help me on reducing my oil usage. I want it to reduce fat. I want it basically to have less maintenance. So they are looking at lifetime of the product and literally Middleby has made -- the inroads we have made have been phenomenal. That's why I think, Jamie, you and everybody on this call have been with us for a long time. You've seen the margins, and I -- and it took a long time to explain to people why we are not literally bending steel.

Right.

We are very innovative in what we do. And I always say and some people laugh and I don't want to be arrogant and -- but we are literally the apple of the cooking equipment. We deliver smart cooking appliances that make money for our customers.

Okay. Thank you all as always. Thank you for your time.

Well, thank you. Jamie I would like to -- unless there is another question, I would like to make my final remarks. I would like to say the following. First, I would like to commend our team, and I have to tell you, we resisted doing two things. We resisted cutting back on investment. It was easy to cut back during hard times when -- in the first quarter of 2008 and going to 2009, we sat together around the room and said, let's continue investing in our business despite the fact that we knew after the Lehman collapse that the economy was going to go in a spiraling down, we kept on investing.

We created a national account team that almost cost us around $3 million to $4 million a year. We did not back away from it. It too took some time for national account team to get in place and start bringing in results. We did not cut back on our international people. We almost invested heavily in training our dealers. We had extensive training on all our new equipment. We ended up investing in more technology and disruptive new products than we have ever seen. In fact, I'm sitting today going to Investor Conference right after this call and I feel the best I have ever felt about our new product and our technology. So literally, we did not cut back on our investment in people, in processes, and in technology. We also did not go back and discount.

The first nature of a CEO, to keep a short-term thinking is let's go back and discount. And we did not discount because once you discount, literally you can't service your customer well because the margins aren't there suddenly when they want to test and train and they want to be able to look at new prototype, you have not enough margin to support them. Second, it is a habit where you can not trace prices again. Say you discounted 20%. Now when you needed me, I gave you the order at 20% down. Now when you don't need me now you're raising my price. It is a bad habit of doing it and we did not do that. So while the market was still growing slowly and not seeing a big rebound there, a majority of our organic growth came from market share gains.

On the Commercial Foodservice part, we had the casual dining and we talked about that. We are working with several of them to reengineer their kitchen, reduce their expenses, and drive the higher ROI. We're trying to make some money. On the international we continue to see new store openings and regional chains growing extremely fast especially in emerging markets. Then we continue to look at new products and new platform like ventless and the new Spin Fry that reduces fat contents and calories and reduces oil consumption. On the Food Processing side, we're very excited about our new product whether it is LaXser Bone Scanner, whether a new packaging equipment, they all have had huge ROI, and we're starting to see the demand for those products accelerate. We will continue to see growing at those rates, we have not yet seen the pent--up demand in the market that we sense will be coming based on our discussion with customer.

We see this demand coming in 2011, around the second quarter of 2011, the whole industry will see the pent-up demand I have been talking about and I think it will be going on through the second, third and fourth quarter and will lift the whole industry up. Our gross margins, the steel costs are an obsolete item on which we are focused and a short-term challenge as Jamie asked the question, we believe that we can offset price increases by -- of steel by operational efficiencies. And ultimately, we'll pass those stainless steel price increase and those surcharges on to our customers as we have in the past. There might be a quarterly lag, but increased price is not something that will significantly hamper our gross margin.

On the SG&A, it will be helpful to talk about how in 2010 we had to add back certain expenses that basically were not the case in 2009. You would expect literally more operating leverage in 2011 when the cost scale at a much slower growth rate but remember the difference between 2010 and 2009 is some of those bonuses did not occur for all of us in 2009, because we were paid for on performance and our 2010 performance reconfigured the fact that many of our people are making the bonuses that they deserve. On the acquisition, we are focused on specific acquisition for certain technologies and emerging markets. We have basically have the economic and expect the synergy related to timing of Cozzini which will occur in literally in the first quarter, and mostly in the earlier part of 2011.

I thought it would be helpful to give you a sense for how Middleby has changed in the past three years. While we have performed quite well in the downturn, we think what is most important is how we have transformed the Company to become the clear market leader. As the food equipment market start to recover, somewhat in the second half of 2011, we think we're in the best position as it relates to market position and relationships. Specifically we have invested in product, in people, and relationship. We have been focused on R&D more than ever and we have the best product type plan we have had in the Company's history whether it is the SpinFry, or the ventless technology or the Hydrovection or the PerfectFry or the Doyon product, on the Food Processing, it is the -- new MP equipment, it is a Cozzini product. And we have added a significant sales team on the national accounts side, when others have laid off sales professionals. And we have gotten closer to our dealer and customer, helping them as a value-added partner.

We have extensively done training, significant training with our dealer, with our sales force, and with several of our customers. We also have today several test kitchens around the world where our customer has used significantly, coming to our kitchen to not only test our equipment but to introduce new menu items. These factors have and will allow us to grow organically and accessible to market. Importantly, we did not lower prices to gain market share in the downturn so our margins have held up and will now expand as we experience higher sales growth in 2011 and 2012.

We see significant operating leverage in the coming quarters and years as we have successfully executed operational improvement to the business. Importantly, we continue to be the acquirer of choice in the industry, as we can add the most value to acquired companies. We have also seen privately held companies decide to join us, whether it is a Doyon family or the Cozzini family who opted to be part of Middleby because they believe that being part of Middleby adds value to them and to their customers and employees.

Overall, we see ourselves as a bigger, stronger Company that is closer to its customer than ever with the industry's best products, sales force, and relationship. We continue to believe we are well-positioned to meet or beat our goal of growing our long-term earning growth at 20% per year. I want to thank you for being with me and Tim today, and for many of you, if I don't talk to you, happy holiday season coming up, to you and to your families. Thank you.

Thank you, ladies and gentlemen. This conference is now concluded. Have a wonderful day.