Middleby Corp (MIDD) 2010 Q4 法說會逐字稿

Hello ladies and gentlemen, and welcome to the Middleby Corporation fourth quarter conference call. With us today from management are Selim Bassoul, Chairman and CEO; Tim Fitzgerald, CFO. We will open with comments and then open the call for Q&A. Mr. Fitzgerald, please go ahead with your comments.

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

Net sales in the 2010 fourth quarter of $207.2 million increased 35.9% from $152.5 million in the fourth quarter of 2009. The fourth quarter results included the impact from the PerfectFry and Cozzini acquisitions completed during the third quarter of this year and the Doyon acquisition completed in December of last year.

Sales growth from these acquisitions accounted for $21.2 million of the increase in the quarter. The acquisition of Cozzini accounted for a significant portion of these acquisition sales and reflects an unusually high sales volume in the fourth quarter due to some large orders to several food processing customers. Due to the nature of the food processing business sales can vary widely from quarter-to-quarter.

Excluding the impact of these acquisitions, sales increased 22% over the prior year quarter. This increase reflects a 19.1% (inaudible) (technical difficulty)increase in sales of our Commercial Foodservice Group, and the 40.1% increase in sales in our Food Processing Group.

The increase in sales at the Food Processing Group reflects the continuation of improved market conditions for this segment as compared to 2008 and 2009 periods in which our customers had significantly reduced capital spending. The fourth quarter in particular included the benefit of some large orders which can result in significant variability in revenues from quarter-to-quarter.

We continue to see strong global demand and continued investment activities in our customers with development of processing operations in emerging markets. However, the rate of growth is likely to moderate in 2011 as this business recovered to a higher revenue base in 2010 and also had the benefit from the capture of deferred orders from prior years.

At the Commercial Foodservice Group we saw continuing strength in order activity in the fourth quarter. The fourth quarter which was higher in growth than the second and third included the benefit of some customers purchasing ahead of first quarter price increases and the year-end push by certain of our customers to earn performance rebates.

We continued to realize strong sales growth in emerging markets resulting from higher demand levels and increased sales penetration as a result of investments made in our international selling organization over the past 12 months. International sales for the Commercial Foodservice segment in the quarter increased by approximately 20% with strong growth in Asia, Middle East and Latin America.

Domestically, although new restaurant openings continued to remain weak we continued to see improved demand for equipment to support new menu and equipment replacement. We have also further penetrated our chain restaurant customers resulting from the creation of our national accounts team and our expanded portfolio of innovative products. We believe the momentum we have realized will continue and should further benefit revenues as we progress into 2011.

Gross profit increased to $83 million from $58.5 million while gross margin rate was 40.1% as compared to 38.3% in the prior year quarter.

The gross margin rate increase reflects operating efficiencies on higher volumes and the benefit of integration issues completed during the year. Despite the improvement in margins, steel and other material costs have risen significantly late in the fourth quarter and in the first quarter of 2011, and we anticipate that we'll face continuing inflationary pressures throughout the year. Accordingly, we are implementing price increases which should offset the impact of rising costs in part. However, we anticipate that it will be difficult to offset these price increases in the near-term and we may experience some margin pressure in the upcoming quarters.

Selling and distribution expenses during the quarter amounted to $21.3 million as compared to $14.9 million in the prior year quarter. Selling expense in the fourth quarter included approximately $3.4 million from the recent acquisitions of Doyon, PerfectFry and Cozzini not reflected in the prior year fourth quarter. The remaining increase is largely due to increased commissions expense on higher sales volumes as well as increased investments made in our selling organization.

In comparison to the 2010 third quarter, selling and distribution expenses increased $3.6 million. This increase included $2.2 million attributable to the recently acquired Cozzini acquisition with the remaining increase largely due to higher commission expense on the increased sales.

General administrative expenses amounted to $27.1 million as compared to $15.2 million in the prior year fourth quarter. And $20.9 million in the 2010 third quarter.

The fourth quarter increase in comparison to both the third quarter and the prior year fourth quarter included $1.8 million attributable to plant consolidation initiatives, a $1.8 million increase in depreciation and amortization resulting from the recent acquisitions and $600,000 of G&A costs associated with the recent acquired Cozzini business. The fourth quarter also included legal and professional fees which were higher than normal related to acquisition and litigation related matters.

Additionally in comparison to the prior year fourth quarter, noncash share base compensation increased approximately $1.3 million and incentive compensation costs which had declined in fiscal 2009 were approximately $4 million higher.

Net interest expense and [deferred] financing costs amounted to $1.7 million in the fourth quarter as compared to $2.8 million in the prior year quarter reflecting lower average debt balances and reduced interest rates in comparison to the prior year.

The provisions for income taxes amounted to $12.4 million at a 37% effective rate in the fourth quarter and was at a 36% effective rate for the entire year as compared to an effective rate in 2008 and 2009 of approximately 39%. The current year tax rate reflects favorable adjustments for one time benefits related to deductions for prior year acquisition related costs and favorable reserve adjustments resulting from reduced state tax exposures which are not expected to recur in 2011.

During 2010 the Company realized a cash tax savings associated with the utilization of net operating losses acquired from TurboChef. This tax benefit which amounted to approximately $6.4 million in fiscal 2010 is not reflected in the tax provision. As it has been recorded as a utilization of an asset in the opening balance sheet of the TurboChef acquisition. The Company will continue to realize the benefit from these NOLs and that amount should be approximately the same in 2011.

Operating cash flows for the quarter amounted to $32 million and $98 million for the entire year. Cash flows were predictably strong in the second half of the year due to reduced working capital needs in comparison to the first half.

Noncash expenses added back and calculating operating cash flows for the quarter included depreciation and amortization of $5.4 million as compared to $4 million in the prior year fourth quarter. And noncash share base compensation costs of $3.6 million in the current year fourth quarter as compared to $2.5 million in the prior year period.

The increase in depreciation and amortization reflects $1.8 million of amortization associated with the recently acquired Cozzini business and should decline by over $1 million in future quarters as the fourth quarter included significant amortization of the value assigned to backlog that existed at the acquisition date.

For the full year, depreciation and amortization amounted to $17 million and noncash share-based compensation amounted to $14.7 million. Operating cash flows for the year were utilized to fund $25.7 million of acquisition related activities. Repurchased $9 million of Middleby shares of common stock and fund $3.2 million in capital expenditures.

After acquisition investing and share repurchasing activities, the Company repaid over $60 million of debt during fiscal 2011 and debt declined from $275.6 million at the end of 2009 to $214 million at the end of 2010.

We are pleased with the continuing progress made with our recent acquisitions. We completed the integration of the PerfectFry manufacturing operations within our frying platform and continue to focus on increasing sales of the ventless counter top unit through Middleby's expanded customer base.

At Doyon we've fully integrated the NU-VU and Doyon selling organizations and product offerings, realizing the strength of the combined baking platform, and we are now in the progress of completing the consolidation of the manufacturing operations of that business unit which should be completed in the first half of 2011.

That's all for our prepared commentary. If you could open up the call to questions-and-answers that would be great.

(Operator Instructions). Our first question is from Tony Brenner. Tony, you may proceed.

Thank you. Good morning.

Good morning, Tony.

Hi, Tony.

Good morning, Selim and Tim. Tim, can you quantify the price increase that you're taking in the first quarter percentage wise?

The first quarter price increase is in the 3% to 4% range.

Okay. And the G&A run rate looks like about $24 million to $25 million a quarter going forward. Is that assuming no acquisitions?

Yes. That's probably ball park. Yes, as I mentioned we had a step up from the third quarter. That's largely due to Cozzini, but there was some unusual costs in the fourth quarter. And some of the amortization related at Cozzini will lessen as we move forward.

Right. And Selim, you have mentioned in the past that you are working with at least a couple or several chains and redesigning their kitchens, shrinking the footprint. Some of those chains appear to be fairly large ones. I wonder if you can talk a little about just how big a program that will be as it plays out over the next year or two. I mean, is this going to really move the needle in terms of revenues? And maybe you can put some scale on that.

Yes, Tony, we have been working especially since I would say the beginning of 2010 with most of the casual dining segment where we've seen a significant emphasis on trying to increase ROI, return on investment for those casual dining restaurants. In most cases those restaurants in the past were relied on the opening of new shopping malls or new suburban house tracts where they would open up restaurants following the population.

In this case they are finding out that this is not happening anymore. There's not a lot of new shopping malls opening up in the United States. There's not a lot of new housing tracts or what I call subdivisions, huge thousand homes subdivision (audio technical difficulty) being opened around the country.

What they've done is come back and say, "Okay, let me refocus on trying to change my menu to compete more effectively in my existing stores. Let me try to figure out a way to reduce my kitchen expenses, specifically labor." And all the segments other than fine dining, (audio technical difficulty) all the chain segments I would say, the casual dining establishment or segment has not focused in the past on labor reduction and productivity.

We're starting to see significant emphasis on reducing kitchen expenses while maintaining the same menu items or I call them SKUs in the kitchen on their menu. So that's what we're seeing. A lot of people coming to us saying, "Okay, I would like to extend my hours. I would like to reduce one or two people out of the kitchen."

Literally, only now we are being able to put together the program due to the fact that our system of process between the induction, the automation that we've been at for a long time between CTX, Middleby Marshall and Carter-Hoffman cook and hold technology that we have, we've been able to win the testing of many of those chains. To get back to you and look at what this would be, I think in the next three years we are now testing with three major casual dining chains. And I would say this would be most probably a multimillion dollar initiative in revamping their kitchens. --

For which restaurants?

-- payback while reducing one or two people out of their kitchen in each store.

Multimillion dollars for each restaurant?

That's correct.

Okay.

Am I clear about that? Or is there something else you need to address on this?

Well, is this currently adding to your revenues? Are there kitchen redesigns and equipment sales for this now taking place for any of the chains you're talking about?

We have seen very little impact of this year to date because we are still testing the concept. Think of it. It's literally a complete revamping of that restaurant.

Not only it's acquired new equipment. This is not taking the same equipment and cutting people out. It's literally changing the complete concept of how they cook their food, number one. Number two, it's training their people. It's making sure that the wait staff can keep up with the kitchen staff now because we are going a lot faster in the kitchen.

So there are a lot of integration issues. This is why the barrier of [entry]. I can tell you that competitors are not being able to address what Middleby can address. And I can tell you in the case of one specific chain, they've gone to everybody, all the big players in foodservice, in cooking equipment, and literally, we are the only one with our technology that can get it done.

The reason it's not moving faster, and I think I keep on saying, this is a two to three-year program is the fact that it's going to take some time, not only in taking all the equipment out, putting new equipment in and making sure that we train not only the back of the house but the front of the house.

But it is working very well. The test units that we have now, and they are multiunit test units, have been superb. The reaction of the consumers on the food and in the speed of the food being served has been well received. So we know that we are on something very -- a winning formula going forward in the next 24 months.

Can you identify any of the chains that you're working with?

No. Because we basically would like to respect the [confidentiality] of our customers as we are installing those units. I think some of those customers are publicly traded companies and they have announced their initiatives. But I don't feel comfortable without their permission to list it at this moment. I think that --

Those chains that have announced that initiative, those are working with you?

Excuse me?

The one that is have announced that they're doing this, those are your customers?

That's correct.

Okay. Thank you.

Thank you.

Our next question is from Peter Lisnic. Peter, if you could state your company name and your question, please? Robert W Baird. Good morning, Tim and Selim.

Good day.

Good morning, Peter. I guess first question, Tim. I just want to go back to your G&A comment $24 million to $25 million if that indeed is the run rate. I guess there are two ways of asking it. One if I look at the number for the fourth quarter about $27 million, I take out the $1.8 million for plant costs. Then it sounded like there were legal costs that were one time and the D&A for Cozzini ought to come down because of the purchase accounting adjustment- so I guess I'm having a hard time reconciling how you get to $25 million again. . I would think it would be lower.

So Pete, if you take the $27 million slightly over that for the fourth quarter. And then you had one time costs of $1.8 and then the higher D&A with Cozzini. Now that caused a $1.8 million increase. That doesn't all go away. But it will come down by something around $1 million. So that gets you into something that's a little over $24 million.

And you're right. On top of that there are some I would say unusually higher legal and professional fee costs. So that number's kind of hard to quantify exactly what that is from quarter-to-quarter because a lot of it is a little bit less predictable or relates to some of the Company's acquisition activities.

But there's probably some number in there that will likely be $0.5 million or range from zero to $1 million that might be higher than we've experienced historically. It's hard to forecast exactly what that's going to be going forward. It depend on what those activities are. So if you kind of adjust for that then, yes, you're below the $25 million, but you're at some kind of band around $24 million.

Okay. And then just in terms of the creep I guess that's going on there. Historically that number has typically been around 10% or lower. The fourth quarter unadjusted is about 13%. And what you're saying sound like it might be around a 12%-ish maybe a little bit lower numbers percentage of sales? Should we expect as you get better volume to roll through, should we expect some leverage on that line to where the G&A number goes back to more numbers closer to the 10% historical average that you've run at?

Yes, I think that's right. You would get some additional leverage.

Okay. But probably not really in 2011 is what it sounds like. Or maybe you will.

Well, I mean relative to the fourth quarter if we have sales growth then, yes, relative to the fourth quarter we would get some leverage. In 2011. Yes.

Yes. Okay. I got you. And then in terms of the price increase of steel and demand, is there any way of guessing at how much demand was pulled forward in the fourth quarter ahead of the price increases and the performance rebates?

It's hard to put an exact number on it, Pete. I just think we had continuing increases in sales throughout the year if you look at the organic rate from the first to second to third to fourth, so continued decline. We were at something approaching 10% in the second, we were around 15% in the third and then we kind of jumped to this 22% number in the fourth.

So I think we think some of it, the increase that we saw from maybe the third quarter to the fourth quarter related to that. But we still think that we had significant double-digit sales growth in the fourth quarter even without the pull-ahead.

All right. Fair enough. In terms of the 3% or 4% you're putting through, is that enough to cover the inflation you've seen in the beginning part of this year?

I would say it's probably not. I mean, the increase that we're putting in doesn't all hit always effective on the first day of the quarter. It kind of rolls in many [parts of] our divisions, get it across at a different point in time.

So we're in a catch-up game because the costs have risen pretty significantly pretty quickly. So we're trying to adjust it with price increases and we'll continue to evaluate further price increases. And I think historically we've been able to offset that with not only price increases but other initiatives with material cost savings and efficiency gains.

But I think when you have a period that costs are going up as rapidly you're always trying to catch up a little bit. So there's a little bit of a lag. So we think that could put a little bit of pressure on margins in the near-term.

Okay. Understood. Thank you very much for your time.

(Operator Instructions). Our next question is from Jason Rodgers. Jason, if you could present your company name and your question.

Yes. Great Lakes Review. Hi, Tim and Selim.

Hi, Jason.

Hello, Jason.

I wondered if I could ask about, Selim we're seeing a lot of data late lately showing that the restaurant industry is improving. Just wondered if you're seeing increased inquiries from your customers for general maintenance replacement of equipment.

Yes, we are. I think there is a big demand that is taking place right now. I think for the last, I would say starting in the second half of 2008 through literally the first half of 2010, customers literally put the halt on replacing versus repairing. Everybody was repairing. And I think we're going to start seeing -- we are seeing right now a significant pent-up demand which will continue most probably throughout 2011 very strongly.

I will tell you what is interesting beyond that, Jason. I'm going to give you a few trends that we have not seen since most probably 2007.

According to a recent February 2011 Crane survey, business dining is coming back with 50% of the respondents eating out at least once a week. The survey is also showing that more expect to dine out even more in 2011. This is a trend that almost went away. Most of it in 2009 and part in the beginning of 2010, so the business dining is coming back.

NPD Group, it's a research company, predicts also that a lot of fine dining establishments are downscaling the menu and lowering the prices. Many of the high-end restaurants are taking away the white table cloth which is fantastic for us. Which means they are making themselves more affordable to literally a wider variety of customers. And all of this (audio technical difficulty) is [asking] new equipment.

In fact according to a recent NRA survey, which is the National Restaurant Association survey, restaurants are changing their menu to appeal to a wide range of diners and to accommodate a variety of expense accounts. We are seeing menu changes now quarterly in over 30% of restaurants.

So when you look at the trends, Jason, from a standpoint of what's going to happen looking back into 2011 to 2012, I would say that this bodes well for the total industry and it bodes extremely well for Middleby. So we are very, very enthusiastic about all those recent surveys that you see. All from Cranes, from NPD research, and from the NRA survey. All recent, all in this year that tend to talk about back to almost a normalized level of eating out.

That sounds great. Just a followup for Tim. For the year, Tim, do you have the internal sales growth and the R&D expense?

Well, the R&D expense we'll report in our 10-K that's going to get filed this evening. But that's traditionally run between 1% and 2%. And that's a fairly consistent number this year over last year. And the organic rate of growth for the year I believe is about 11%.

Okay. Thank you very much.

Our next question is from Jamie Sullivan. Jamie, if you could present your company name and your question.

Hi. RBC Capital Markets. Good morning, guys.

Hi, Jamie.

Selim, your industry comments were interesting. I'm wondering what your view is for this year on the overall industry growth for 2011.

I think if you look at the industry growth in normalized times, I think if you look beyond 2008, 2009 and even 2010, the industry growth in general normalized used to be between 4% to 4.5%. And I'm talking about equipment growth. And I believe that in 2011 we'll go back to somewhat similar to that growth rate in 2011.

Right.

And part of it is driven by the pent-up demand. I'm talking the US market and then we'll talk a little bit more internationally. I also believe that Middleby will -- we've always outpaced that.

We've always (audio technical difficulty) at least gone 50% to 100% more than the market. So if the market did 2% we used to do between 3% to 4%. If the market did 4% we would do between 7% to 9%. And I believe that will continue in foodservice in the US to continue doing most probably outpacing that segment most probably in the higher single-digit growth.

If you look internationally, I would say internationally especially in the emerging markets, we continue to see double-digit growth for Middleby and those emerging markets. And we've seen new markets emerge where Middleby is well positionedbeyond the traditional emerging market of BRIC which is Brazil, Russia, India and China. We're starting to see markets like the Philippines. We're starting to see markets for us like Peru in Latin America. We're starting to see Malaysia making growth in those markets. Turkey is another one where we are very well positioned to take market share and to continue to grow double-digit growth for the next few years internationally.

On the food processing side, I think we continue seeing a lot of activity, especially with the new depreciation rules, tax rules that was enacted by the government in December of 2010 where you can deduct all (audio technical difficulty) your (inaudible) (technical difficulty) capital expenditure 100% in one year. And that rule will have a major impact both on our foodservice customers and our food processing customers in 2011.

That's helpful. Thanks. And then there was a question for Tim. How much was international as part of the Commercial Foodservice in the fourth quarter? Do you have that?

You know what I don't have that number with me. But it's going to be probably slightly over 20%.

Okay. Great. And then were there any large chain orders that came through in the fourth quarter?

There was a number of chain orders, but none of them were individually material.

Okay.

But we did pick up some new customers that started to order, and there was a few orders that were more than one piece of equipment, let's put it that way.

Right. Okay. And then switching to the cost side, just thinking about this year. Is there any step up in share-based comp that we should think about?

At this point in time we don't have any forecast for that number to change.

Okay. All right. And then on the selling side. Will there be any one-time bump say in the first quarter from the NAFEM Show or anything like that that creates a little bit of volatility in those numbers?

The only thing I would say is because there was probably a little bit of pull-ahead with the price increase that may lighten things a little bit in January. Maybe customers tried to push them ahead of that increase. So that would probably be the only thing to plug into the thought process there.

Right. Okay. But nothing else on the cost side?

On the cost side?

Yes. That's what I was saying whether it's on SG&A, whether there's any kind of one-time bump from the NAFEM Show market.

We did have the NAFEM trade show and that was a higher selling expense for us. I would say that would have some nominal increase in the first quarter.

Right. Okay. That's helpful. Then just last one on the M&A. It sound like expenses in the quarter were higher. Can you just talk about your pipeline and how that looks?

Yes. The pipeline continues to remain strong. I think we've seen an increase in some of potential activity. So we feel good about the pipeline moving into 2011. I would say it's been fairly robust over the last four or five years, and that's evidenced by the number of deals that we've done. But I think last year was a period that was maybe a little bit more difficult because of gaps between buyer and seller expectation, and I think that the landscape moving into 2011 is better for getting transactions completed.

Okay. And is it weighted towards Food Processing versus Commercial Foodservice?

Jamie, we see both industries are fragmented. We see good opportunities in both. It's always hard to predict the shape, size and timing of when deals will hit on either side, but we see good opportunities in both.

Okay. Thanks a lot. That's all I had.

Okay. Great.

Our next question is from Gary Farber. Gary if you could state your company name and your question.

Yes, sure. Gary Farber, CL King. Good Morning. Just two questions. One is on the tax rate, how it's moved around a fair amount, how we should think about it for this year. And the other is just all the various initiatives you've put in national accounts and things like that. Is there anyway to quantify or to narrow down how much your [revenue] gains you think are coming from just taking market share?

Well, Gary, I'll hit the tax rate issue. I think if you look back in 2008 and 2009 we were averaging just under 39% effective rate. This year it dropped down a little bit more. I would characterize them as more one-time benefits in nature. Some of them were costs related to prior year acquisitions that we were able to deduct in the current year, and some improvement in some state exposures. So absent those we would be probably closer to the prior year rates. I'd look back at what that rate's been historically which has been around 39%.

Right. Okay. Thanks.

Our next question is from Greg [Falcon]. Greg, if you could state your company name and your question.

Sure, Greg Falcon with [Kalmar] Investments. Hi, Selim. Hi, Tim. How are you doing?

Fine. Hi, Greg.

Hi, Greg.

Good. Just a couple questions. I guess it's been about a year and a half now since you set up this national accounts team. I don't know if you could share any more recent success stories from that effort?

Greg, I would rather not specifically say any (inaudible) For competitive reasons I do not want to start mentioning customers. And I don't know if we have the permission to do that. But I can tell you that literally since we started the national accounts team which we started in 2009, we have gained several customers both in the quick serve and in the casual dining, in the fast casual. I think the success rate of that team has been very good for us.

Now, it's not only the team that makes it strong. I think the fact that we've had a great number of dedicated employees that are touching that customer at the concierge desk, let's call it. I called it two years ago when we established the national accounts as our concierge desk (audio technical difficulty) where they are also being able to help showcase the payback of all the new equipment that we had produced and engineered over the last three years.

For example, we were able to take the new panini of Star that was introduced a year and a half ago with the new hinges and take it to places like Chipotle, Cordoba and all of that. The reason I'm mentioning those names we have had acceptance from them to share the success we've had with those chains. You take the fact that we've taken our ENERGY STAR product and we were able to showcase them and show the audit (inaudible) (technical difficulty) the existing, an existing Fryer that's not ENERGY STAR to a Pitco Solstice fryer that has almost 45% to 50% efficiency.

I think that's where the national account has been very effective. It's taking the audit of the payback whether it's in energy or labor and be able to bring all those new products which by the way carry higher margins to the chain accounts.

Great. Thank you. Definitely wasn't looking for names. Was more just getting a sense of what you just described which is where it's paid off. And then I know you've been very excited about your PerfectFry acquisitionthat was completed recently. I don't know if you'd just give us an update in term of where that product is as to when it's quote-unquote live or ready to go live to sell to your customers.

The SpinFry and the PerfectFry. The PerfectFry is out. Available right now. Those are two different acquisitions. The PerfectFry is our ventless fryer contact which also uses the spin fryer concept in it.

But the PerfectFry is a ventless fryer which complements our total ventless kitchen. So now I can literally put in a complete ventless kitchen from griddle to charbroiler to ovens to ranges and to fryers.

The spin fryer which is probably the most exciting part of our acquisition of the technology, is the fact that I can take an existing fryer and reduce the oil by almost a third which translates into thousands of dollars per store per fryer, and I can reduce the calorie fat by almost a third from any fried food. And that will be online sometime in the second half of 2011. We're being tested right now.

Remember when we bought that technology that we licensed that technology and bought it. We basically now took it to our Pitco fry technology and we have to adapt it so it fits our regular fryer in terms of basically space, pounds of oil and controls. So it doesn't become a complete stranger to the way the people used fryers before.

Wonderful. And last question if I can. I guess this is for Tim. In terms of the gross margin you did note that there was, as we all know, increases in pricing for raw materials that did provide some headwind. Could you give us some sense of what impact, I should say, that had on the gross margin? I think we had about a -- call it mid to high teens increase in steel prices. So I don't know if you could help as you little bit in terms of how much that impacted the gross margin.

Yes. I mean, there's a lot of moving parts to that.

Historically we've been able to offset quite a bit so it's a function of kind of how a lot of these things net. But I think the way that we think about it in 2011 is that the share costs could go up several percent. So it's a matter of how much we can offset that.

So historically although I would expect that we'll see some pressure, we have had historically periods of significant steel increases. I think now it's a little bit different because it's not only steel, it's a lot of other commodity pricing as well. So I think that's where we're feeling pressure.

But historically we've been able to work through these periods without much of an adverse impact to the overall margins. We might see it tick down a little bit from quarter-to-quarter, but we haven't seen -- there's not huge drops in the gross margin.

You might see something that's 100 basis points. It's not moving down 3% or 5%, it's moving down 1%. I think that's kind of how I'd characterize it is that there's something probably less than a 2% gross margin at-risk, and we work hard to offset that exposure.

Well, I guess the thing I'm trying to understand, though, is you mentioned there was an impact this quarter. So I guess I'm trying to understand in terms of your steel purchasing, is a quarter lag, two quarter lag? I'm just trying to think, if for example, steel prices went up in Q4 again, call it mid to high teens, when would you start to feel that impact? Would it be already in Q4 or would it start hitting Q1 or later in the year?

You're probably going to get a quarter lag. I mean, we're buying steel a little bit in advance. And then you've got manufacturing process where it works its way through inventory. On average most of it's going to show up in the the following quarter.

Okay. Great. Thank you.

Our final question is a follow up question from Peter Lisnic. Peter, you may proceed.

Yes. Just a quick couple questions. Tim, if I look at your free cash flow you generated this year and then the outlook -- or actually last year and then this year, pretty significant deleveraging absent deals. I'm just wondering. It's been a little while since a large deal. Is there anything large in the pipeline? Or what's the appetite for larger acquisitions?

Pete, we don't comment on specific deals. And again, sometimes it's difficult to predict the shape, size and timing of when they come. But I think we're focused on a pretty wide range deal size.

And I think for us we're focused on acquiring leading brands and leading technologies. And that can be companies like the TurboChef acquisition at the beginning of 2009 which were larger for us or the recent PerfectFry acquisition which was much smaller, but in both cases they're leading brand technology. So it's really the brand technology and how it fits into our overall portfolio that drives our strategy.

That being said, we're not focused on kind of one size of a deal. We're definitely look at not only the tuck-ins that have been completed which have been more of the recent deals, but also we'll continue to consider larger opportunities. I think there are some sizeable opportunities that are out there.

Okay. Fine. And then I may have missed this. But in terms of the organic growth that you saw in the fourth quarter in the Commercial Foodservice business, some of it pulled forward, but my guess is through January/February you still are seeing strong comps and that carries through the first quarter into the first half of the year. Moderation off the fourth quarter but nonetheless very strong comps?

Yes. I think that's a fair way to think about it.

Okay. All right. And then Selim, if you look past this year and some of the things you're doing from an innovation perspective, what are the intermediate or longer term innovations you have in terms of new product and what you might be trying to bring to customers?

Well, the [three] -- one that I am very excited about, a complete automated kitchen for the casual dining restaurants. The totally ventless deli and convenience store setup, so we can go now completely ventless for the deli kitchen or a convenience store which is unique for us which I think convenience store and deli is going to be very, very big. And I think the universal ventless hoods where you can have a complete ventless kitchen. All of those three have become reality for Middleby.

And it's been something that in addition to our energy efficiency that we've given and led since the year 2000, I am very focused on taking kitchens ventless. I think one, it has significant payback. You don't have to clean the hood. You don't have to install the hood. You don't have to buy a hood. And you don't have to lose the air conditioning and heating that comes out of having a hood all the time. So I look at that.

I think convenience stores are [all] going into more and more food preparation, whether it's 7-Eleven, whether it's a QT or Quick Trip, and I will go back and say internationally the deli concept is a big thing for us especially in emerging markets. And now we can offer a complete ventless kitchen with no compromise on food preparation or food quality. So I'm very excited about this.

And of course what we're doing with casual dining is a complete innovative footprint in the kitchen. And I am very excited about all those three initiatives.

Okay. That was perfect. Thank you again for your time.

Thank you.

Thank you.

Gentlemen, we have no additional questions at this time.

Well, I would like to have my final prepared comments, please. I would like to start in re-emphasizing -- I would like to get to start at the top line and talk about the market starting to recover. While we've seen 2008 to be flat, 2009 was down 15% to 20% depending on the segment. 2010 became positive in Q3and the industry is now starting to see the placement demand. I talked about it early on.

We expect mid single-digit growth in 2011 in the industry, and Middleby will outpace that. I look at this and say, let me give you a color. Let me color each market a little bit.

We continue to see quick serve and fast casual continue to grow. The pizza business is doing extremely well. And I think that this business will continue doing well in 2011 and 2012. The casual dining is basically in transition as they try to rethink the way they strategy and what they need to do. And then international market, especially in emerging markets, continue to grow very, very fast.

Middleby is slightly different than the market given we are in higher growth end markets and have the strongest customer relationship and organizational and product advantages. We are currently taking significant market share based upon our national accounts program, our international sales force, our innovative product being built on internal investment and our green initiatives. We have more than 400 ENERGY STAR products, and I would urge everybody to -- if you have not signed up to our greenstainless.com to go and look at it.

We will also be shortly in the next week or two having an i-Pad application that features the Middleby green initiative and help literally a chef navigate his restaurant in terms of what type of equipment and how [tips] (audio technical difficulty) on trying to save on energy. Especially now with energy levels being at high levels again, we're going to see more people migrating to more energy efficiency equipment where we are the leaders.

So back to the Commercial Foodservice. (inaudible) customers with national accounting and various deal programs to harness our brand as the largest hot food equipment company. We have programs now on the casual dining to reduce kitchen expenses, specifically labor, taking one or two people out of every store from the kitchen and drive higher ROI for them directly from our national account program. On the international, we continue seeing new store openings both at the regional chains and local chains as well as the KFCs and the McDonalds and the Subway. And then of course energy efficiency and clearly how the payback is working well to our customers.

On the Food Processing, it's definitely a lumpier business. It's more cyclical. I think now with acquisition with Cozzini and the integration of Cozzini we have a very strong presence between Alkar, RapidPak, MP and Cozzini to continue increasing our penetration in the Food Processing business. I think as the market going forward this year, with the depreciation tax break that was given enacted in 2011 we're going to continue seeing a double-digit growth for Middleby in the Food Processing business.

On the gross margin level, steel costs are up obviously on which we are focused and a short-term challenge. We believe that we can offset price increases through operational efficiency. We can and will pass price increases onto our customers as we have in the past. There might be a quarter lag, but increased prices are not something that will significantly hamper cross margins in the long-term.

On the SG&A, Tim mentioned and alluded to the fact that you will expect to have more operating leverage in 2011 when the costs scale at a much lower growth rate. And we'll continue monitoring our SG&A levels as we move forward in 2011.

On the acquisition side, we are very focused on subject acquisition on specific technologies both in the Food Processing and in the Foodservice. We are also starting to look at more global acquisitions, and we have a very strong pipeline. We have become the buyer of choice both for niche companies and high-tech companies in both those fields to join Middleby. It has been proved by the fact that we've acquired some very unique companies whether it's CookTek, whether it's TurboChef, whether it's Doyon, whether it's Cozzini, whether it's Houno and I can keep on going, PerfectFry, SpinFry. And we will continue having a strong pipeline of acquisition.

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 our markets continue to recover in 2011, we think we are the best positioned as it relates to market position, innovative products and relationships.

Specifically the past three years, we have been as focused on R&D as everand we have the best product pipeline we have had in the Company's history. We have built our national account team when other firms in the industry have cut sales professionals, and we have strengthened our dealer and customer relationship. These factors have and will allow us to grow in excess of the market.

Importantly we did not use price to gain sales in the downturn, and our margins have sustained the downturn and will now expand as we experience higher sales growth. We see significant meaningful operating leverage in the coming quarters and years as we have successfully executed operational improvement in the business.

We continue to have a strong acquisition pipeline, a conservative capital structure that will allow us to continue to acquire top brands and technologies. We see ourselves as a better company that is closer to its customers than ever. With industry's best product, with the sales force and relationship and the best payback in cooking equipment. We continue to believe that you are well positioned to meet or beat our goal of growing our long-term earnings at 20% per year.

I'm going to give you a little bit more flair as we continueon that discussion today. I have to tell you that as I look at certain trends in the industry, the meat and seafood items on the menu items are on a rise on most menu items. Faster than salads. Desserts is having a huge comeback. Mostly home-made, high-quality pies and cakes baked on premise are again the trend.

Fine dining breakfast service in hotels and restaurants is also growing fast. All of these are great trends for Middleby in the short and long-term. I thank you, and that finishes my prepared comments for today.

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

Ladies and gentlemen, thank you for joining today's call. This call has been concluded.