Middleby Corp (MIDD) 2011 Q1 法說會逐字稿

Good morning and thank you for joining us for the Middleby Corporation first quarter conference call. With us today from management are Chairman and Chief Executive, Selim Bassoul; and Chief Executive Officer, Tim FitzGerald. Management will give opening comments on the quarter, and then we will open up the call to questions and answers Instructions on how to get into the queue will be provided at that time.

Right now I'd like to turn the call back over to Mr. FitzGerald. Please go ahead with your opening comments.

Thank you, Amanda. Good morning and thank you for attending today's conference call.

Our first quarter results; net sales in the 2011 first quarter were $182.6 million, which increased 13.6% from $168.7 million in the first quarter of 2010. The first quarter results included the impacts from the Perfect Fry and Cozzini acquisitions completed during the third quarter of 2010. Sales gross from these acquisitions accounted for approximately $10.2 million of the increase in the first quarter. Excluding the impact of these acquisitions, sales increased 7.3% over the prior year quarter. This increase reflects an 8.8% increase in sales at our Commercial Foodservice Group, and a 2.9% decline in sales at our Food Processing Group.

The decline in sales at the Food Processing Group reflects the anticipated slowing in sales after a record 2010 year of 35% growth, which reflected the realization of orders that were deferred in the 2008 and 2009 periods. Despite this, we believe capital spending in the segment will continue to remain strong due to continuing growth in the global demand, and investment activities in our customers with the development of processing operations in emerging international markets. However, we anticipate comparisons will continue to reflect variability due to the timing of large orders on a quarter over quarter basis.

At the Commercial Foodservice Group, we saw continuing strength in order activity in the first quarter. The first quarter was modestly impacted by some pull ahead of orders as customers bought ahead of the first quarter price increases. As a result, order activity was stronger in the second half of the quarter as compared to the first. 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. International sales for the Commercial Food Service segment in the quarter continued to grow above 20% organically with growth in all regions.

Domestically, although new restaurant openings continue to remain week, we continue to see momentum with accounts as they retrofit their kitchens to drive operating efficiency and support new menu initiatives.

Gross profit increased to $71.8 million from $63.5 million, while the gross margin rate was 39.3% as compared to 39.5%. The gross margin rate was affected by higher material costs, which continue to rise throughout the first quarter into the second. These material cost increases were partially offset by the first quarter price increases and efficiency gains from consolidations in production process improvements. Additionally gross margin was favorably impacted by a more favorable mix of sales in the first quarter. We continue to make efforts to continue to offset rise of cost of materials which we think will affect the second quarter. We anticipate taking further price increases to offset the impact of rising material costs.

Selling and distribution expenses during the quarter amounted to $20.6 million as compared to $17.6 million in the prior year first quarter. The selling expenses in the first quarter included approximately $1.6 million from the recent acquisitions of Perfect Fry and Cozzini not reflected in the prior year first quarter. The remaining increase is due largely to increased commission expense and higher sales volumes as well as increased costs related to a significant trade show for the commercial foodservice industry that occurs every other year.

General administrative expenses amounted to $19.9 million as compared to $19.4 million in the prior year first quarter and $27.1 million in the 2010 fourth quarter. The first quarter expenses, in comparison to the first quarter of 2010, included $1.1 million attributable to the recent acquisitions of Cozzini and Perfect Fry, offset by a $1.2 million reduction in non-cash stock compensation costs. The first quarter also included higher professional fees associated with the acquisition-related activities, including Lincat and Beech Ovens. In comparison to the fourth quarter of 2010, G&A expenses declined by a $7.2 million.

The fourth quarter included approximately $1.8 million of nonrecurring charges associated with plant consolidations, and amortization associated with the acquisition of Cozzini that was a $1.4 million higher in the initial fourth quarter of the acquisition. Non-cash stock compensation also declined by $1.7 million as compared to the fourth quarter. We anticipate G&A expenses will return to a higher level and stock compensation will increase by approximately $3.5 million in future quarters.

Net interest expense for financing costs amounted to $2.1 million in the first quarter as compared to $2.5 million in the prior year quarter, reflecting lower average debt balances and reduced interest rates in comparison to the prior year quarter. The provisions for income taxes amounted to $11.6 million at a 39.5% effective rate in the first quarter. This compared to 41.7% for the first quarter last year. The reduced effective rate reflects reduced state tax exposures as compared to the prior year. During 2011, the Company will continue to also realize a cash tax savings associated with the utilization of net operating losses acquired from TurboChef. This tax benefit, which will amount to approximately $6.4 million for entire fiscal 2011 period is not reflected in the tax provision, as its been recorded as an asset in the opening balance sheet of TurboChef.

Cash flows for operating activities in the first quarter amounted to $9.5 million. Cash flows in the first quarter are typically less due to the payment of the year-end rebate obligations and payments of annual incentive obligations for the prior year. Additionally we experienced a working capital build moving into the seasonally stronger second and third quarters of the year. We anticipate strong cash flows for the remaining three quarters of the year, consistent with the prior years. Non-cash expenses added back and calculating operating cash flows for the quarter included depreciation and amortization of $4.1 million as compared to $3.9 million the prior year quarter, and non-cash share based compensation costs of $2 million in the current year quarters compared to $3.2 million in the prior year period. The Company also utilized $1.7 million to fund capital expenditures related to production equipment and facilities, and also utilized $3 million to fund deferred payments related to prior acquisitions.

We are pleased with the continuing progress made with our recent acquisitions. During the first quarter, we completed the consolidation of the recently acquired Doyon business with our Nu-Vu operation to complete a combined baking oven division. In addition to improving the cost structure enhancing the production efficiencies, we're in the process of expanding the products offered under our expanded baking line, including the introduction of our roll and rack ovens, which will be introduced in upcoming quarters.

We are also pleased to announce recent acquisitions of Beech Ovens and the Lincat Group. Beech is the leading manufacturer of stone hearth ovens, tandoor ovens and specialty ovens with approximately $10 million in annualized sales. This acquisition compliments Middleby's existing portfolio of oven technologies and brands; Beech has a very strong market position in the emerging markets such as China, the Middle East and India. We believe we can further introduce Beech into other key markets through our international selling organization, as well as introduce the product into North America, where they have not focused or developed a presence.

We are also pleased to have announced the pending acquisition of Lincat Group. Lincat Group is a leading manufacturer in the UK of ranges, ovens and counter line cooking equipment under the Lincat brand name, and food processing equipment under the IMC brand name. This company will be acquired for approximately GBP58 million, or $94 million. Recent revenues in US dollars have been in excess of $50 million, and EBITDA in excess of $10 million. The Lincat transaction is scheduled to close in several weeks, and Lincat continues to remain a public company until that time, so as a result, we are unable to further comment on this transaction until after the closing date, due to regulatory restrictions in the UK. Any further information on the transaction at this time can be found on our Web site at middleby.com or at the Lincat website at lincatgroup.co.uk.

Amanda, that's all for our initial commentary. If you could open the call to questions, that would be great.

(Operator Instructions)

Peter Lisnic .

Hello, Robert W Baird, this is [Josh Hansen] filling in for Pete. On the commercial foodservice side, you talked about the pull forward impact on the quarter. I was just wondering, how much different were the order comparisons between the first half and the second half? And if you have any color on how things looked into April, that would be helpful as well.

You're looking on the foodservice side, correct, Josh?

Yes, commercial foodservice.

I mean, Josh, we had -- there was a fairly strong dip down in January as we -- as expected based on the strong order rate in the fourth quarter that we mentioned and that kind of, you know, jumped back up, not significantly, higher than what our -- you know, our reported sales were, but it -- you know, it was slightly higher than our reported sales.

But let me give you color as we move forward in the foodservice arena. It continues to be strong. I think if you look at all the rest in comparisons, they are up; most of our chains are reporting positive comp sales, from the [pdot] chain, to the fast casual, to the casual dining. So it continues to be strong and I think it will lead to new equipment purchases. I think, also, specifically, new products delivered on throughput, energy efficiency and labor savings, much in demand right now because we've been testing for the last 18 months with many, many chains and we're starting to see results and they are placing orders. In addition, the casual dining segment seems to be literally one that much in trying to change their kitchen process, and we're seeing a lot of movement in the casual dining as we look at the second half of this year.

Okay. Great. And I think on the -- I guess on the food processing side, I think we were talking about continual organic growth for the business, I guess, for the year. Was the first quarter somewhat surprising or do you anticipate some sort of recovery in the comparisons going forward?

Well, in the food processing business, food is very strong. I think you have to look at those type of orders. The orders in the food processing -- we need to remind everybody on the call and those that are going to listen later, is that those are large capital expenditures, the food processors. The average price point of a piece of equipment is over a million dollars compared to $5,000 to $10,000 for commercial equipment like a fryer battery. So you have to think that you're talking about $1 million, $2 million, maybe $5 million or $6 million. So we are not surprised because literally the timing of those people placing the orders can affect one quarter to another. So our feeling is the timing is what affected the first quarter. Now, we have literally orders that we know are going to be coming through and they got delayed due to timing and not to the economy. (inaudible) to the order pushed into second quarter, third quarter. So we believe that the food processing plan remains strong.

Okay. And then finally; you did announce the acquisition in the UK. I was just wondering given your focus on international growth, what potentially is your appetite for acquisitions in some of the more emerging markets of the world?

I think we will continue looking at any acquisition that fits our strategy. We continue to be very committed in the emerging markets. We continue to be committed to the US. I think the US market continues to be strong, too. I think we have a lot of voids in our offering still.

Now, when you look at the acquisitions we've done, we continue to have need for products that our customers could use, or parts of products that we could use, to strengthen our pipeline. We continue to be very excited about the pipeline, both in the US and in emerging markets, and we'll continue looking. We just did one in Australia and one in the UK. A few years ago we did Denmark, we did Italy, we have our plant in the Philippines, we have our plant in China, and we have also been looking at Brazil where we have a factory in Brazil and we have a sales and service; we've extended our sales and service operation in Brazil this year. So we are very committed to the emerging markets.

Yes. I think you'll see probably more acquisitions over time come internationally, at least the percentage of them where they've been more focused in North America, but I think it will be -- we'll have probably a broader base of acquisitions going forward. In the emerging market, our focus is leading brands and technologies. There tends to be, because of the newness of the markets, there tends to be less developed brands in some of those emerging markets, so they won't necessarily be in the emerging markets, but I think we'll have more of a global focus.

Okay. Wonderful. Thanks, Selim, thanks, Tim.

(Operator Instructions) Jamie Sullivan.

RBC Capital Market. You talked about some favorable mix, I think in commercial foodservice. Could you elaborate on that a little bit?

The mix between the fryers, ovens, ranges; that can move from quarter to quarter for no particular reason, other than just kind of a quarter to quarter changes that occur in the business, and certain products, while they're all high margin, some are higher than others, so just depending on mix from quarter to quarter, that can have a impact to the margin of maybe up to 1%. So that probably helped us slightly in the first quarter, which helped offset some of the material cost increases we saw.

Okay. And then on the food processing side; I understand lumpy business, but I guess based on kind of the pipeline of opportunities, et cetera, you still expect sort of double digit organic growth in 2011?

In the food processing business?

In the food processing business, yes.

Jamie, I think that -- I would say I can tell you what -- I want to remind everybody that we have a tailwind that should help us definitely this year, which is accelerated depreciation that is in effect this year. So I know that, that accelerated depreciation will help 2011 in food processing. I know every year, whether it's [Othellolee], or Kraft or Tyson, it wants to basically place that order this year to take advantage of that accelerated depreciation. So I believe that's going to happen. As I stated in my previous comment to Josh, I feel strongly that the food processing continues to be pretty strong. The economy is good in terms of food processing placing orders, not only here, but also in emerging markets.

So the question is the timing; is it going to come in? Literally, if we saw a lot of orders where people want to take advantage of the accelerated depreciation, and happen to occur in, let's say, November, while we get all the orders, we might have a phenomenal order rate in the fourth quarter, but we might not be able to ship it and that's the key that we need to think about. They place the order and now finally -- it's all about timing in that business. Unfortunately, they are big CapEx, we've been used to it. We bought that business long time ago and we've been used to it. We feel very committed to that business and we feel it's going to be a good year for us.

Okay. And then just on the margin side, near term with some of the moving parts of -- you have raw materials, you have leverage, you have some of the acquisition expenses, et cetera, G&A picking up. How should we think about the margin trend near term here?

We're committed to continuing to expand margin. We think in the -- just in the short-term we'll continue to have a little bit of head wind on the materials. We are taking initiatives to offset it, which we did largely offset quite a bit of the material in the first quarter, and do anticipate taking some price increases in the second quarter, so we should be able to mitigate that. On the positive side, in the new products that are coming out with higher margins, some of the plant consolidation and efficiencies initiatives that we continue to implement, while we might have some pressure in the second quarter, we think we can still expand margins in the upcoming quarters after that.

Let me answer that a little bit more specifically. I think that as we move specifically in this year, toward the second half, I think the integration benefits from our acquired businesses and the new products -- we have phenomenal products now that are getting rewarded by this year 2011 kitchen innovation award from the national restaurant organization, they are higher margin products, because the pay back on those product are lot faster. Our EnergyStar rated products also are going to carry higher margins for us. They also provide a significant return and pay back to our customers, plus still this year we have rebates still in effect driven by the government when you buy an EnergyStar rated appliance. So we are very -- I think that the issue of improving margin will continue and we'll see it in the second half being stronger than the first half.

Okay. Great. Thanks a lot.

Jamie Clement.

Jamie Clement, Sidoti & Company. Selim, curious for your thoughts on this. In talking with some restaurant operators, it seems like one of the themes they are discussing, in terms of existing restaurants and also, you know, plans for a year or 2, 3 down the road with respect to new store openings, is making their kitchen layouts more efficient to drive profitability and efficiency and that sort of thing. Is that -- have you all recognized that theme? Is that something that your research and development in new product people are kind of working on?

Jamie, we're starting to see, I'll tell you -- let me break that question into segments of the foodservice restaurant business. If you look at the big operators, they've gone back most probably 20-years ago, 15-years ago, those people are experts on looking at every dollar they can save; they've done it extremely well. You look at them offering a $10 pizza and be able to make money on a $10 pizza, and they look back to us as the equipment manufacturer to look at energy savings, less labor, faster throughput.

So in that segment we've done extremely well. We're a dominant player, we have relationship with Domino's, Pizza Hut, Papa John's, Little Caesar's; I can keep on going through the chains of pizza. You go back to quick serve, fast food, those people, whether it's McDonald's and Burger King, and the KFC, Taco Bell; [are old now] they continue to increase menu offering and increase throughput. So we're seeing some interesting equipment-driven toward energy saving, so we're seeing that more driven by energy, more than a lot of things, but they are looking now at energy savings specifically in that segment. The segment that has not done much over the years is the casual dining. In general, that segment has been literally lacking what the other segments have done, in terms of kitchen layout, labor efficiency; they've been focused on food quality, and they've been focusing on buying the best placement in [the world], but they (inaudible) operating as a real estate.

Today, that segment, which is a very large segment, is looking at catching up to what the other operators have done, which is; let me look at throughput, let me look at labor efficiency, let me look at energy. And this is where Middleby's opportunity, this year and the next 2 years, is going to be very big in the casual dining, what I call the casual dining revolution. Middleby is in the middle of it with innovative products, and literally in the next few weeks, there will be an announcement that will most probably drive that to be going -- what I like about the casual dining, is they already have the food quality already there, so now, we fit in, we're saying, let us make you more efficient. Let's keep the quality of your food, but let's make you more efficient. So the casual dining revolution is what's going to carry Middleby for the next 2, 3 years.

Can I ask just a follow-up question, if I may? Over the last 10 years, we've had periods of time of energy cost spikes, obviously we've seen it recently. Food costs a lot higher now. Is the easiest way for an operator to save through energy, or has food cooking yield become a question that some operators are starting to ask you about how you might be able to help them on?

Okay. Jamie, that's a great question. The number one objective of every chain, because we're talking about chains here, it is to provide quality food. So there will never be a compromise where somebody is going to come in and say; well, let me save $300 a month in utilities and offer lousy food. This is not going to happen. So number one is -- the reason I'm saying that is the fact that anybody who can come in and say I have an energy saving appliance is going to be accepted and it's going to be replaced because they don't want to compromise on the food quality to save on utilities.

So what's happening, the big players, which is us, [Minitoa], ITW, aren't going to be able to take over the smaller player in that segment because you have labs, you have the ability to offer unique testing, that a small company cannot, and that's why you're going to see the acquisition pipeline become a lot bigger. They don't have the scale, they don't have the leverage to come to a chain, and the chain CEO is not going to come in and say, okay, I want to work with that company, I know -- I understand that energy savings, but did you test the product, does it have [allow], does it have chef on premises, can they replicate our restaurant on their premise? So what Middleby is unique in this, is now we're ahead of everybody in cooking, is the fact that cooking affects food more than a freezer or a dishwasher. That's where the CEO is going to be concerned of the big chain, saying; make sure that I'm not serving lower quality food to save a few bucks. And this is where we're seeing a lot of people coming to our testing kitchen and have been talking about it for the last probably 24-months. I said as the recession came through, our kitchen, our test kitchen, was full. Still people were coming in saying; can you save me money? Can you provide me with better throughput? Can you save me on utility?

So to answer your question about food yield, maybe in food processing it is. In foodservice, it is, number one, is to be able to reduce cost in terms of the kitchen. It's about labor and energy and, of course, cost savings. Labor and energy.

Okay. Thank you very much for your time as always.

Thank you. Tony Brenner.

ROTH Capital Parthners. Selim, you've said previously that you're working with at least 3 casual dining chains in the redesign of their kitchen, so I'm wondering if that business kicked in, in any meaningful way in the first quarter and, if not, when you expect to see that business commence.

Okay. That business has not kicked in, in the first quarter and we are still in tests. As I just told Jamie, Tony, we have proven that we can save labor, we can save energy, we can do the job. We are basically going to test place to place because, as I say, it's a revolution. What you're doing with those 3 casual dining chains is a revolution, it's not an evolution. We are basically disrupting the whole process of the kitchen, and what's happening right now is, of course, if I was a CEO of that chain, I want to make sure that while I change my total kitchen, I am not affecting the food quality of what I serve. So we are been tests, we've increased the number of tests with each one of those chains, and we should start seeing the impact in the next few weeks. We they are committed to us, we are committed to them; nobody's going back, I can tell you that. On both sides, we're making head ways, it's just making sure that we're not -- we're crossing all the Ts and dotting all the Is on both sides.

Do you mean that this will -- the testing is proving successful and it will begin being installed in -- on a chain wide basis?

Yes. And to that extent we'll see an announcement coming in the next few weeks.

Very good. And one other question, if I may. I'm wondering in the first quarter what part of the commercial foodservice gain was represented by new products, and whether you think that particularly with the launch of SpinFry fryers in the second half that contribution might accelerate during the year?

Tony, the number is fairly consistent with the past, about 20%, a little bit greater than 20%, is from new products. We're very excited about the Spin Fresh fryer. That product, like a lot of the more advanced products, takes a while for the product to be seen in particular with the chains, particularly what Selim was talking about the casual dining is the chains will rigorously test the equipment. So I would expect that while there would be some impact this year, it really won't be meaningful until perhaps the year following or the couple of years after that.

So, Tony, let me reemphasize to everybody; we want to make sure that we do it right. We want to make sure that we win that first account in casual dining and we can successfully implement it in every store as they change their menu in a year or 2. So I think everybody needs to understand why people are cautious. It is not because they don't believe in the concept, but I understand. I understand the VP of operations, I understand the CEOs being cautious to make sure that you are doing that. On the spin side, I have good news to let you know, we were on the Jamie Oliver show. I don't know if you're familiar with Jamie Oliver. They showed the product, [amathames] people saw the product and they loved it. They loved the fact that, still people are going to eat fried foods. Period. Fried food is not going away. It doesn't matter. It does not go away. It comes back every time even stronger. What happened right now is what he likes about it is the fact that it has [44%] decrease in fat. So we are featured on Jamie Oliver just a few weeks ago, and we feel strong by endorsements like this, and I think SpinFry will be a -- have a strong momentum for us, but it's not going to happen in the second half of this year. I think it's most probably the impact will be somewhere in 2012.

Sure enough. Thank you very much.

Greg Halter.

Tim, question for you relative to receivables and inventory. Obviously both up quite a bit year-over-year. I presume some of that is due to the acquisitions. Just wondering if you had how much those acquisitions may have contributed to each one of those line items?

We did have the acquisitions included in the fourth quarter, so year over year, if you were looking compared to the end of the first quarter, it would have added somewhere around $10 million. So --

And that's for both --

The inventory also, as we were completing some of the consolidations on production, we did do some inventory builds just to insure that we minimized any customer delays as we were shifting production from one plant to another. And lastly, we did buy ahead a little bit on steel in the first quarter, so those are some of the things that kind of were the moving pieces in inventory in the first quarter.

Okay. And did I hear correct that there was a charge or an unusual item, special item included in the G&A expense?

No, that -- I was referring to the fourth quarter of last year, just kind of bridging the fourth quarter of last year, the first quarter of this year. There's a step-down in expense and some of that is because we had some nonrecurring items in the fourth quarter that didn't repeat in the first quarter. That included $1.8 million related to plant consolidation initiatives, as well as where the Cozzini acquisition; we had much higher amortization in that first quarter which is fairly typical with a complete -- an acquisition, usually there's some short-term amortization that occurs in that first quarter and that was about $1.4 million. So those items didn't recur in the first quarter.

Okay. Thank you very much.

(Operator Instructions) Joel Tiss

Buckingham Research. Two things; one, can you talk a little bit about pent-up demand? I know you talked -- you gave us some color on what the end markets looked like, but is there any sense that the equipment in the field is wearing out at all, or is it all just about, you know, expansion and building inefficiencies and everything else?

Joel, I think I started talking about pent-up demand almost in -- if you remember, in the third quarter of 2010, I started saying that there will be -- the industry would be influenced by pint up demand and I was right on. If you look at all of us, the whole industry got lifted pretty well in the fourth quarter, some of it the first quarter. I think we're starting -- we'll continue to see a pent-up demand continuing through this year. I think a lot of people who repaired, did not replace, are now looking at pent-up demand, but I think we've seen a lot of it happen in the fourth quarter of last year, some of it this quarter. There will be some going on this year. I think that what's going to happen, the biggest driver in my opinion right now, is the fact that as people replace equipment they are replacing with EnergyStar appliances. So that is good for Middleby, because we have over 400 now, I think 500 cooking products that are EnergyStar rated. So we're getting a lot of -- a nice share of the replacement business because it happens to be the EnergyStar; one, because it saves a lot of money, second, because they get a rebate on it in most states, not in every place, but in most states it is still a rebate when you purchase a EnergyStar appliance. So we are going to continue seeing that.

Now, the other thing that I like is the fact that we're starting to see the comp sales get a lot better with the chain. My perspective is; if you are an appraiser and you've weathered the storm of the third quarter of 2008, fourth quarter 2008 through 2009, and the beginning of 2010, you're in business. Just to give you a statistic; I believe 70,000 restaurants in the last 3 years have gone out of business, which is around 10% to 15% of the restaurant business is out. And literally, if you be in business today, you're in business.

So those people are re-looking at their kitchen, they are looking at their menu, they are looking at their customer satisfaction, they are looking at how do I grow again. So I think we are going to start seeing a phase, and starting in late 2011, 2012, where people are going to start rethinking, saying; where can I grow again, where can I build. So I am very optimistic about the restaurant business. The bad operators are out. I'm talking even about chains. There have been chains who have basically gone out of business; Bennigan's is one of them, others, smaller chains have gone out of business. But think; 70,000 cross sections in the last 3 years have gone out of business. So if you're still successful, you're no longer trying to repair; you're now looking back and saying; okay, the economy is going to start getting better, I'm in business, I'm open, I'm going to start doing my operation to start thriving again. And this is good for Middleby.

Okay. And then last, can you just talk a little bit about like holes in your product line; where are you focusing in terms of acquisitions, and where do you feel comfortable taking your balance sheet? I think you're probably $100 million in absolute terms below where you've peaked in debt and the Company's bigger, so I'm just trying to gauge where your mind is and where your wallet is, basically. Thank you.

Well, Joel, one, I can't discuss with you exactly where we're going with -- literally for the sake of the others. I think our competitive edge, I'm not going to be able to tell you exactly what I'm buying, but I can tell you in gross model, in a big picture, I can tell you that we are looking for specialty items that fits emerging markets; we're looking for leading brands around the world that help us; we're looking at cooking platform that are [offensive] to us. We understand cooking. Literally we want to have a cooking platform that fits us.

When we acquired the food processing business, a lot of people questioned how could we make money in that business. In fact, when we bought that business, the industry in general, if you look at many of the suppliers in that industry, they are less than 5% EBITDA to sale ratio. When we bought RapidPak, they were literally less than 5%, and we've been able to move that business to almost to the Middleby numbers in a very short period of time. So my opinion is, we've got to remain committed to cooking and the food platform; it could be more in food processing, or committed to commercial foodservice. I think the pipeline is pretty nice. The current pipeline is pretty open.

Now, how we're going to fund this; you know that our cash flow remains extremely solid. We carried over $100 million of cash flow a year, of free cash flow a year, and I think we can continue doing a lot of acquisition as we go. I think we just -- we still have a credit line, a senior credit line, that allows us to do those acquisitions. And so we're feeling very good about what we do. I think our acquisition pipeline should be very accretive. Just to mention that both Beech and Lincat should be accretive to us almost immediately.

Okay. All right. Thank you very much.

Gary Farber.

CL King. In the press release you mentioned the opening of the Brazil office. I was just wondering is there some targeted level of new offices that you're looking to open each year, and how are you prioritizing them, how are you coming up with the territories you want and what things, what criteria is there to sort of determine that?

Well, the first criteria is where our customers are, and literally we're starting to see customers coming in to markets like Brazil. It's a vibrant market. It has become very hard in the last, I would say -- for us, for our business, it might have been hard for other business, but I'm talking for our business, it's starting to be hard now. We are right -- well positioned for it for two reasons. One, we have -- in 2012 they have the world cup football, and in 2016 they have the Olympics. So they have become a major player and with the acquisition of Cuizzni, where they had a factory there, it was an easy entry for us into that market.

Where do we go from here? I think we continue adding people to our international organization. Just to give you a perspective; Middleby has gone from today almost less than 100 people in our international organization, when I became CEO, to a third of our people. Today we are a company with almost 2,000 employees; a third of our employees are almost working in the international markets.

So we've gone a long way. We continue investing in people, services, brick and mortar around emerging markets. I'll just give you history for all of that you haven't been with us throughout. We started in the Philippines in the mid-'90s; we opened China in the late '90s; we opened India in the early 2000s; we improved our Mexican operation, Latin American significantly in the early 2000s; we have our Spanish office that has been there also in the '90s; we opened our infrastructure in the Middle East in 2005; and in Southeast Asia, where we are pretty dominant player, we have had an organization there now since early 2000; and now our recent addition of our own sales and service in Brazil is 2011.

So if you look at 10 year, what we've done, it is pretty strong. Of course, in the UK, where we have Frialator when we acquired [Blodgett] and Pitco in 2001, where we are a major player. I'd like to mention also in Russia where we have our sales and service office, our people, covering the Russian market and retail territories from Russia, from the Soviet Union. So we're pretty global when you think about it. And we'll continue to be global.

Okay. But, are there any -- do you have a set -- like a 2 to 3 markets you want to do a year, or it's sort of just more been opportunistic?

Well, I would say we will remain opportunistic, but literally now with the acquisition of Beech in Australia, opens a complete new market for us, we have a factory in Australia and the operation in the UK; now we become a dominant player in the UK. We came from a sales and service and kitchen in the UK have one of the leading players in the UK. So there will be a lot of synergies there between Frialator and Lincat. At the end of the day we'll continue looking at markets like China, we'll continue looking at literally -- at one point northern Africa was a great market until what happened in Tunisia, but I would say those markets were really ripe for a lot of products, especially from Italy where Giga was able to position in northern Africa. I don't know what's going to happen in those markets as the settling of the political crisis takes place, but I think that we're going to continue to be opportunistic around the world.

Just one last one; when you look out, sort of outside the US, do you see more opportunity in that, or more opportunity in acquisitions over the next 2 to 3 years, and opening more offices or just consolidating more companies?

Well, I can tell you -- I can answer that question easily. One, internationally, we have literally -- we have maintained now a material exposure to international markets, 1% of our 2010 sales are there. Some of our companies are almost 40% of the sales come from international. The number is 20% is actually continuing to acquire companies, smaller companies, they have never had exposure to going internationally and have been frozen in our pipeline, they're going to grow. We bought companies like let's say Doyon, Canada, overseas, they have very little presence. Now our NWW takes them there. TurboChef, they focus on the US, chains in the US, now we've taken them internationally. So my feeling is Middleby's ability to serve leading global restaurant chains is literally enhanced by the Company's extensive international service center. We will continue adding people to that metric. In fact, this year we've added additional people to the network to sales and service and the acquisitions will continue. So my feeling, so answer your question, I think we're going to be continuing to lead with organic, with acquisitions. So organic will be most probably in that market will be stronger than acquisition. Why, because network chains continue to open stores in those markets. Now, we find a great acquisition that is a larger acquisition and now that changes, I do not know, but today, our focus is coming from our organic growth in international.

Okay. Thanks for that answer.

Thank you. And at this time I'd like to turn the call back over to management for closing comments.

Okay. I would like to reemphasize everything that was said, so I'm sure the question is why is food processing slow, is the commercial segment still strong, what are gross margin and commodities and what is the pipeline M&A. So on sales, we continue to see a market which is very strong growth in the commercial side and the food processing side. My thought on the market is the fact that the chains will continue to grow, the casual dining in the US will be a continue -- continued complete change in the kitchen and then our international markets will continue seeing store opening in emerging markets and will see some of it in Europe.

Our ability to grow above the market will continue given the fact that we deliver great products of top quality, as well as a great service. So the performance of the chain business, I think, is that those chains that have survived this huge recession are now positioned extremely well and I am pleased to announce that most of our customers are reporting positive comp sales, they are focused on new products that have energy savings, they have better throughput.

On the food processing side, I would like to again remind people what I said earlier in my presentation, that those are large CapEx. The food processor, the average of over $1 million is compared to $10,000 for commercial equipment. 1 of 2 orders delayed due to timing, not the economy impacted our first quarter and the orders being pushed into Q2 or Q3. I also see companies in food processing looking to take advantage of actually depreciation. Middleby is slightly different than the market given higher growth end markets and have stronger customer relationship and organizational and product advantages.

We are currently taking significant shares based upon our national account program, our international sales force, our dealer relationships, our innovative product on return on investment to our customer, our green initiative, particularly it was energy costs, especially at the level they are today, where energy is at the highest level possible. On the gross margin side, we are united and focused in a short-term challenge. We believe that we can offset price increases, ultimately by having the leverage we have and the scale and by other initiatives. However, it still remains a short-term challenge and we hope that we can and will pass the price increase on to customers as we have in the past. It's always a lag 1 or 2 quarters. So we'll expect some short-term pressure, but ultimately see this as a near term issue.

On our SG&A, it would be helpful to talk about how literally in 2010 we added back certain expenses that were removed in 2009. Some of them would be structure and compensation and those have gone back to be in place in 2011. We will also expect to have more operating leverage in 2011 when the cost scale is a much lower gross rate. On the acquisitions, the pipeline is pretty alive.

We see a lot of people wanting to be a part of Middleby and I had mentioned earlier in my presentation it's tough to be a small operator today in foodservice, in commercial foodservice, even in food processing. Customers expect to be able to test their product. They are outsourcing their testing to us. They are bringing their operation people to be literally able to replicate or duplicate their operation in our own facilities, which brings back the fact that smaller operators will sell to bigger ones. So obviously I would like to come back and talk about a little bit how we've grown in size and scale as our G&A remains the same. We treat our customers the same way. We are one of the least hassled company to do business with. We are proved our service and our lead times to deepen our customer relationship and penetration. We rarely lose customers. We are focused on throughput for our customers. We are one of the few companies that provide real pay back to our customers in less than 2 months -- 2 years.

On our -- literally on our side, our supply chain, we continue to exhibit great purchasing power and leverage on the acquisition we make. We tend to look at every decision first through the customer lens, then through the actual operator lens, people actually using our equipment in the field and finally through the cost line. We have a one to one marketing approach to our national accounts and our engineering team has worked closely with our national accounts where we are not centralized, decentralized, where we are very qualified in what we do and like many others in our industry, create a personalized interaction with our chain customers leading to specific products for them and the ability to exclusively train the chef and operators of the new equipment that they will buy from Middleby.

We were the first equipment manufacturer to tell our customers how much energy savings they will save back to the dollar. For example, if you look at greensavors.com, we say exactly to a number how much energy efficiency the get from us. For example, we will say it's 34% energy efficient, it's 17% energy efficient, versus what most people say, we are the most energy efficient. Why we've done that; we wanted to build a customer's trust that we wouldn't promise something to our customer; we deliver it. We don't hype; we don't exaggerate; we have built our energy savings and efficiency in energy consumption on 2 numbers. With the price average greater than most of our competitors, we deliver higher quality product and equipment, not only here, but around the world. We deliver a great after sales service and a unique experience. We remain 1 of the 2 companies to offer a no-quibble warranty; you buy a product for us, for any reason you don't like it, we take it back.

For this, I want to thank you, and that, I think, finishes our presentation for today. Thank you.

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

Ladies and gentlemen, thank you for your time and attendance today. This conference is now concluded.