Middleby Corp (MIDD) 2012 Q1 法說會逐字稿

Welcome to the Middleby Corporation 1st quarter conference call. With us today from management are Selim Bassoul, Chairman and CEO; and Tim FitzGerald, Chief Financial Officer. We will start the call with prepared comments from management and then open the call for questions and answers. Now I would like to turn the call over to Mr. Fitzgerald. Please go ahead.

Good morning, and thank you for attending today's conference call. I'm Tim Fitzgerald, CFO of Middleby Corporation and joining me today is Selim Bassoul, our Chairman and CEO. The 1st quarter results reflected the impact of acquisitions completed during fiscal 2011. Including a second-quarter acquisitions of Beech and Lincat, third-quarter acquisitions of Auto-Bake, Damfotech, and Maurer-Atmos. In the 4th quarter acquisition of Drake and Armor Inox. During the 1st quarter of 2012 we also completed the acquisition of Turkington USA. The Turkington acquisition was completed on March 13 and therefore was only partially reflected in the results of the quarter from the date of acquisition.

Net sales in the 2012 1st quarter of $228.8 million increased 25.3% from $182.6 million in the 1st quarter 2011. Sales growth from acquisitions accounted for $36.5 million, or 20%, of this increase in the quarter. Excluding the impact of acquisition, sales increased 5.4% over the prior-year quarter. This increase reflects a 6.2% increase in our sales at our Commercial Food Service Group and a 1.3% increase in sales in our Food Processing Group. At Commercial Food Service Group, we continued to realize growth in chain sales resulting from the adoption of new products and technologies with numerous restaurant chain customers. While international sales growth amounted to 2.2% in the 1st quarter, reflecting timing of large projects in the 1st half of last year, and slowed sales in Europe.

While we expect to see variability in sales in emerging markets, we anticipate that we will see continued momentum in the emerging markets during the year as restaurant chain customers continue to expand globally through increase sales penetration as a result of continuing investments made in our international selling organization, although we anticipate we may see continued softness in sales to European markets due to economic conditions. At the Food Processing Group we continue to see strong order rates in the 1st quarter, which has resulted in an increasing backlog. We realized the revenue growth in the 1st quarter as those orders began to translate in revenues. And we anticipate that revenue growth in the segment will increase in the 2nd quarter and the remainder of the year.

Gross profits for the quarter increased to $87.5 million from -- as compared to $71.8 million in the prior-year period, reflecting the impact of higher sales volumes. The gross margin rate declined from 39.3% in the 1st quarter of 2011, to 38.2% in the 1st quarter of 2012. Reflecting a higher mix of sales at the Food Processing Equipment Group, which has a comparatively lower margin, due in part to acquisitions completed in the past year, as we complete our efforts to ingrate those businesses. The gross margin at the Commercial Food Service Equipment Group was relatively consistent at 40%, as compared to 40.3% in the prior year. Our gross margin rate at the Food Processing Equipment Group declined to 33.5% as compared to 35.1% in the prior-year quarter, due to lower margins at the recently acquired companies.

In comparison to last year, we anticipate the gross margin rate will continue to reflect the impact of the lower margins at the Food Processing Group in future quarters. We expect those margins to improve as we complete initiatives to ingrate those recently acquired businesses. The selling and distribution expenses during the quarter increased $12.6 million to $25.2 million. Selling expenses in the quarter included approximately $4.4 million of additional expense from the acquisitions completed in the last 12 months, and that included in the prior year 1st quarter results. Excluding incremental expense of acquisitions, selling costs were relatively constant with the prior year. General and administrative expenses increased by $5.8 million to $25.6 million in the 1st quarter.

General expenses included additional expense related to the 2011 acquisitions which amounted to approximately $4.4 million. This includes $2.5 million of increased non-cash amortization expense related to intangibles from acquisitions. Remaining increase in general and administrative expense, in comparison to prior year, primarily relates to higher non-cash stock-based compensation. Provisions for income taxes amount to $11.2 million at a 33.7% effective rate in the quarter. In comparison to $11.6 million provision at a 39.5% effective rate in the prior-year quarter.

The 1st quarter tax provision reflects non-recurring reserve adjustments related to the reduction of state tax exposures, which favorably impacted rate by 3.9% in the 1st quarter in comparison of the prior year. The 1st quarter rate also compared favorably in the prior year due to lower effective rates on increased foreign earnings and increased deductions for US manufacturing activities which are expected to continue in future periods.

During the quarter the Company also continued to realize a cash tax savings associated with the utilization of net operating losses acquired from TurboChef. This tax benefit will amount to approximately $6.4 million for the fall 2012 year, and is not reflected in the tax provision as it has been recorded as a utilization of an asset in the opening balance sheet from the TurboChef acquisition.

Net cash from operating activities in the 1st quarter amounted to $10.8 million, as compared to net cash used in operating activities $9.5 million in the three-month period the 1st quarter last year. Consistent with prior years, 1st quarter cash flows are impacted by the payment of prior-year annual obligations related to customer rebate and incentive compensation programs. Additionally, we typically utilize cash in the 1st quarter as we build working capital levels moving into the peak 2nd and 3rd quarter periods. Non-cash expenses added back in calculating operating cash flow during the 1st quarter of 2012 amounted to $9.8 million, including $7.1 million in depreciation and amortization, and $2.7 million of non-cash share-based compensation.

In the 2011 comparative quarter non-cash expenses amounted to $6 million, including $4 million of depreciation and amortization and $2 million of non-cash stock-based compensation. Mid quarter the company utilized $10.3 million to fund the acquisition of Turkington USA and made investments of $1.6 million for capital expenditures related to production equipment and facility enhancements. The Company also utilized $11 million to repurchase shares of its common stock that were surrendered to the company by employees in lieu of cash payment for withholding taxes, related to restricted stock vestings and stock option exercises that occurred during the 1st quarter 2012. Total debt at the end of the quarter amounted to $317.3 million and total cash amounted to $40.2 million, as compared to debt balances at year end of $316.6 million and a cash balance of $28.7 million.

Cash balances declined from year end as cash held at recently acquired foreign entities were utilized to repay debt. We anticipate that we will continue to reduce cash balances in future periods as we access cash at our recently acquired international operations. The Company's debt is financed under a $600 million credit facility which matures in December of this year, and the Company is currently in discussions with its banking partner, and expects to enter into a similarly structured facility in the next several months.

Nick, that's all for the prepared commentary. Can you open up the caller questions?

Absolutely. (Operator Instructions) Our first question comes in from Tony Brenner from Roth Capital. Go ahead, Tony.

Thank you. Good morning. Two questions. First, I think you--Tim, I think you implied that international sales comparisons, organic international sales comparisons should improve as we go forward. Given the fact that, particularly in the food service sector, those comparisons were nominally up in the first quarter, unless you are assuming some improvement in the European economy. I wonder what gives you that confidence?

Well, Tony, I guess that we think we are going to continue to grow in emerging markets. Last year we grew double digits throughout the year. Clearly there is some softness in Europe and that detracted from our growth in the 1st quarter. I think that we'll probably likely see some continuing softness there during the year. But in the rest of the world--Latin America, Asia, Middle East, we are still seeing strength there. It was a little softer in the 1st quarter just due to comparisons, but we expected that those markets will grow at a very robust rate during the fall quarters of this year.

Okay. Second question, again looking at organic comparisons, gross margins in both divisions, appear to be kind of flat and given the fact that you are steel costs, I think, are down year-over-year, I am wondering why there wasn't at least some improvement in gross margins?

The gross margin in the first quarter was primarily affected by the mix between the Commercial Food Service Group and the Food Processing Group.

Gross margins just in the food service area were flat, and so were gross margins in the food processing area.

The Food Processing Group is affected by -- we did six acquisitions in the Food Processing sector in the last year and those businesses when we break them in, as historically has happened, tend to be at lower margins as we integrate (inaudible due to extra noise) there were some fraction in the gross margin in the food processing business because of the acquisitions that we've just completed, and we will spend a fair amount (inaudible due to noise) to integrate those businesses.

I think you broke out gross margins excluding the acquisitions, and those were flat. Were they not?

No, that includes the acquisitions. So, the gross margins were slightly down because of the acquisitions. And then food processing -- on the commercial side the margins were flattish at 40%, and that mix can change from quarter-to-quarter. So that wasn't necessarily a contraction in the margin. It was really just a natural quarter-to-quarter impact of product mix.

Tony, I would like to step in also to tell everybody that the cost -- our raw materials costs were not down as we expected it to be. We expected to have a much more reduction in field prices than we expected, but ultimately it did not reverse. So, our reduction in the first quarter were not as drastic as we expected them to be. The surcharge on steel continues to be challenging for us, and I think some of the other raw materials that we've done, we've seen this is not abatement as we expected it to be, in raw material pricing.

Okay. That's true. And Tim, lastly, is your effective tax rate going to be a point or two higher for the balance of the year than in the 1st quarter?

Yes, we anticipate that the normal run rate of the tax rate would be higher the first quarter. That did benefit from some reserve adjustments. Our effective rate continues to move down over time, but we did get some one-time benefits.

Thank you very much. (Operator Instructions)

And our next question comes in from Peter Lisnic from Robert W. Baird. Go ahead.

Good morning, gentlemen. The first question, if we could just talk about Turkington for a little bit. Tim, can you give us -- kind of what the revenue base of the business is and Selim if you could talk about, strategically, how that's in the portfolio and kind of what the leverage is from that business, that would be very helpful.

Yes Pet, historically that has been a $20 million to $30 million revenue business. It will probably be a little bit lower as we kind of -- it was an asset acquisition so we will be rebuilding of backlog and portfolio kind of as a new business, but that is historically a $20 million to $30 million revenue business.

Peter, what is the interest of that platform for us was the acquisition of Auto-Bake, and now with Turkington it become a real player in the Baked Goods business. Which puts us, most probably, in the number two or number three position globally in that business.

What I like about this platform is the fact that in baked goods is a trend, not only in the United States, but mostly in emerging markets where literally people are going from local bakeries with heavy labor to processed factories where they process baked goods at much lower price and better quality. As I look around that platform, I see that platform being a great introduction in growth in emerging markets. And I like the fact that this platform is being consolidated, and, today, through the small player in that platform it is hard for you to be able to go globally.

So, I like the fact that we now continue to consolidate that platform and come up with a number two or number three player in that platform. I like the gross future of it, I like the fact it is an international platform, I like the fact that people tend to invest in baked goods. It is not going away. We as human nature like sweets and we like baked goods. Whether it is taking to school or taking them for casual dining restaurants or quick serve, there's a lot of potential in that market.

Can you give us a feel as to what the potential market opportunity there is for you? How significant size - it might be?

I think that market could easily be, for us, literally a $100 million to $200 million market just with the companies we have today. So, we could grow from being a $40 million to $50 million player to almost tripling our revenue within the next four to five years in that business. It's a nice business for us, again, the issue with that business, similar to food processing is the fact that --the purchaser. The equipment is pretty large, so you talking about multi-million dollar purchase. But I see us looking at places like Saudi Arabia, Thailand, China, India where we are seeing a lot of activity in baked goods.

Okay. All right, and then Tim if we could just switch back to the Commercial business. Can you give us a sense as to what the pricing trends there look like anything of meaningful change, in terms of pricing and the ability to get price in that market?

We had a price increase generally to start the year that was in the 3% to 5% range, and generally believe that we are getting that across in the market.

And it is safe to say that your getting it across both domestic and international? Is that fair to say?

Yes. That's fair to say.

In the last question if I could, I think the dry powder on the buyback is basically gone at this point. Any thoughts about a new authorization? Share repurchase authorization?

Are you talking about from the credit facility or just the non- shares?

The share buyback. If my math is right your getting pretty close to having that fully exhausted. I was just wondering if there is a new -- plans for a new share authorization plan?

Yes, that would be something when that's exhausted that likely we would discuss at the board, and we are likely to reinstitute some ability to do that on a go forward basis.

Alright. That is very helpful. Thank you for your time.

Thanks Pete.

Our next question is from Jason Rogers at Great Lakes Review.

Hello. I wonder if you could talk about the current acquisition pipeline, if the focus is still mainly on the food and processing side or if you're seeing some opportunities now on the commercial side?

I would like to address that Jason. I think we continue to see activities in both. I think we're starting to see the pipeline to be active on both sides. The key is to make sure that it is something that suits us. We have been able to walk away from a couple of acquisitions because either the fit was not perfect when we did the two divisions or the pricing did not fit to be accretive for us. But, I think the acquisition pipeline is very active, and we start to see activity also on the Commercial side of the Business. And I think in 2012 we will most probably see activity both domestically and internationally, both on the Commercial side and on the Food Processing side.

Okay. Tim, do you have an estimate for CapEx and D & A for 2012?

CapEx has historically been 1% to 2% of up sale. We anticipate that will be roughly 2% or less of sales going forward. So that's pretty consistent to where we have been historically. We don't keep a forecast on depreciation and amortization and, I think, that in particular, that is effected by the amortization of acquisitions, which we still have numerous recent acquisitions that can still move somewhat from quarter-to-quarter.

Okay.

The first quarter we laid it out it was $7 million of amortization and depreciation. That did not include amortization from Turkington, which at this point we just completed that acquisition, so we don't have a forecast for that as we complete the valuation for that. It's $7 million that is there for prior acquisitions in existing companies would likely trend down over time as we fully amortized certain intangible classes.

Okay, that's fine. Finally, Selim, if you could talk about Spin Fresh. How the testing is going with customers, and then any other new products that were especially noteworthy in the quarter?

We're hoping that Spin Fresh continues to get a lot of attraction. This is the first quarter that it has gone into production. The first quarter was the first, I think. In January/February it was ready for literally to be sold. It is now being able to be mass-produced, we just came back from The National Restaurant Show this week and it was a hot topic of the Show.

People were standing around it, everybody is looking at calorie reduction and the fact that it can decrease oil consumption. So we had a lot from its concept. We sold a few units right now as we speak, and we have a couple of tests in existence right now, and we are monitoring it very carefully. I think that this product seems to have a lot of interest right now.

At the show, we had people looking at it, testing it, wanting to put the tester into their store concept. In addition, we came up with a countertop unit which comes at the heels of what we produced which allows people to basically take the countertop -- a lot cheaper/more of your value production. If you just bought fryers from us and you don't want to buy a new spin fryer we could use the countertop unit, which was also patented and was well received at the show. The biggest we had is, as you grew our Fryer business over the last five years, a lot of customers come back and say, wait a minute, I just bought all my fryers from Pitco in my chain and now you introduce this. What can I do, I don't want to throw away those fryers and end up buying a SpinFryer. So having putting in this counter top was very, very exciting to many of our existing customers.

The other products that was very well received is the TurboChef g5, which picks up literally going from a single shelf to a five shelf, so now we can go to batch cooking and it widens applications of TurboChef to a lot more applications. That was extremely well received. Of course, the CTX wall oven combination that is now being, [that was a news breaker at] was also the talk of the show. In fact, if you go on line, the Star Tribune put it on the front page of the business section on that date, it was on Tuesday, May 8 as being one of the hottest sellers. They've seen the people around it, they talked to many of the potential customers who were very interested in that platform. And, of course, our Hydrovection oven from Blodgett continues to be growing extremely fast.

If you remember this is an oven that was used by KFC three years ago to introduce the grilled chicken concept, and now it's become into the general market, has been very well received. And that our vent-less application we had a lot of new vent-less equipment both in terms of universal vent-less hoods, as well as countertop vent-less equipment. They were very well-received.

Again I repeat, the TurboChef g5, the SpinFryer, the CYX wall oven that is used by Brinker, the ventless application which is going extremely fast, and our Hydrovection ovens. Now on the kitchen innovation award, we have Lange introduce a non-demand burner, which was very well-received. And then we had the dipper dish that was introduced by Walle that also got a kitchen innovation award, that saves thousands of gallons of water, and this is being tested now by several chains.

Our next question is from Jamie Sullivan at RBC Capital Markets. Go ahead. Go ahead with the question Jamie.

Can you hear me? Good morning. My question was on the commercial food segment. The operating margin in the first quarter of 2012 was down 100 basis points versus last year. What were the major drivers there?

We would have had higher intangible amortization expense related to acquisitions, so that would have been one of the primary drivers.

Okay. Any updates on the casual dining rollout that kitchen you designed and any change with the current rate of rollouts -- any new projects?

At this moment we continue to rolling out our kitchen of the future, is what we call the kitchen (inaudible) with Brinker. We have done around 160 stores right now, and we continue rolling out a this new equipment package which automates the kitchen of the casual dining segment and we continue to work and spend a lot of time with Brinker. As we dedicate all our resources for Brinker, we are seeing a lot of interest from other casual dining chains. By I have been very, very focused on making sure that the Brinker tests works well. They are our number one partner right now, and we're committed to making sure that as we roll out more than the 150 that we have rolled out in the second quarter, in the second half of the year, we are spending a lot of energy on making sure that goes very well.

Okay. Coming to the food processing segment, can you provide us with a quarter or a book-to-build metrics for food processing?

Could you repeat the question?

For the food processing segment, can you provide what sort of orders did you see in the quarter, or a book-to-bill ratio for the quarter for Food Processing segment?

Okay. We don't disclose our exact orders but we did see double-digit order growth in the Food Processing segment. So, we did continue to get a pretty strong rate from the fourth quarter into the first, and then we saw continued build in the backlog.

Okay, that's all I have, thank you.

Thank you.

That was our final question. I will turn it back to Mr. Bassoul and Mr. FitzGerald for closing remarks.

It was nice to give you a little bit of a flare of what is going on in the industry as we came back from The National Restaurant Show, which was one of the best shows I've seen since the previous session. I think we've seen the biggest number of customers and operators coming through the show. We were mobbed literally. A lot of people were looking at our kitchen innovation award, and a lot of people are looking at energy. They are looking at waterless appliances, they are looking at ventless applications.

The interesting part that I've seen is, I've seen some five-star or Michelin starred chefs looking at introducing concepts that are a value proposition. So, we saw a lot of interesting people, for the first time in years I saw people looking at opening up new concepts. It was very, very exciting and optimistic. Then, I will tell you that what I have seen in general, now, most probably starting in spring to summer of 2011, for the first time I'm very optimistic about seeing new growth across many concepts accelerating. While we don't expect to go to back any time soon to the pre-2008 (inaudible) growth, we are seeing growth in 2012 across the board.

So I am seeing every concept now going back to the US and starting to open stores. Part of that is the fact that franchisees' bank funding is widely available and inexpensive. Lenders are actively, despite the fact lending environments, lenders are actively looking to lend money to franchisees. While back seen interest rates in the mid 4% to 5% range to many franchisees; like Dunkin' Donuts, Chick-fil-A, McDonald's, Burger King, Papa John's this is very encouraging for those people to start openening up stores again.

Now again, remodeling of stores definitely continues. Whether they are remodeling the front of the house, the back of the house, it's driving significantly equipment sales for us. We continue to see meaningful acceleration of same-store sales across our customer base. This acceleration is driven mostly by increased traffic versus just ticket sales. This is a result of new menu launches and advertising campaign. I think the fact that most concepts I've seen their same-store sales go up, and as you know, many of them inflict the percent of sales per store on their franchisee to go toward advertising budget.

As the percent of sales go up, the sales go up a percentage toward advertising goes up. It gets funded at a higher pace. In other positive news about our customer is the number of recent debt refinancing that corporations are having with annual interest rate being reduced substantially. We see this as meaningful, as the cash can be redeployed toward more productive uses such as restaurant remodels and kitchen upgrades. As environment got better many of those chains are refinancing their debt at lower cost of capital.

Food costs continue to be a challenge for many of our restaurant operators. Just recently, in the first quarter, the price of beef was way, way up. So many concepts are refocusing on reducing their labor costs, which works very well for Middleby. This is a sweet spot for us as we help replace our equipment to reduce cost of labor in the kitchen. One initiative we have had with casual dining is to reduce one or two people out of their kitchen, which has been a huge payback in reducing the operating costs. As we just mentioned, casual dining segment continues to perform better due to improvement in macroeconomic backdrop of the US.

Most casual dining stores are in shopping centers or malls, and malls lately, particularly, are sensitive to macroeconomic factors. We see this segment improving and looking for ways to drive traffic into lower operating expenses. Food quality and consistency is the main theme of this segment, and it is a big emphasis for us. This is been why Brinker has seen their food scores get better and drove more traffic to their stores as they redesign their concepts. So, we believe that 2012 is shaping up to be a solid year for Middleby with key earning drivers and organic growth. Our international growth in emerging markets will continue to be 20% and above.

As we continue seeing, in the past five years it was 20%, we continue seeing that. Our food processing platform will continue now as we integrate acquisitions we made. As Tim just mentioned we just did six in 2011. We will see that platform driving our earning growth as we integrate it in the next 12 to 18 months.

Finally, our new products that I just mentioned from TurboChef, to the SpinFryer, to the CTX, to the ventless from Welle and Cookdeck, to the Hydrovection, and Lange and Star will continue providing significant margin improvement as we look forward. Because the payback on those products are less than 18 months for each one of them.

While the food processing remains a smaller piece of our business, orders coming in the fourth quarter and first quarter revived organic growth in the 2nd half of the year. The simple question is, how do we compare versus the world market. So, we continue to seek significant rollout initiative and opportunity for us as we have seen the testing of our new products in 2011 driving sales for us in the second half of this year. Despite the fact that Europe will be disappointing and challenging for us, I think we will continue to see international decline in Europe, through Asia, Latin American, and the Middle East.

Even if the US slows down in the second half due to macroeconomic, which I do not forecast that to occur, Middleby will be able to drive its organic growth through rollouts that are already in process in the second quarter and the third quarter of this year. Field prices continue to be--and raw materials continue to be challenging. As the economy has performed better, the demand on field has improved. That puts pressure on us from a cost pressure from our raw materials. Fuel prices continue to be 12% of our sales, so we can most probably offset the increases so that doesn't impact our margins. This is all for my prepared comments. Thank you.

Okay thanks everyone for attending today's call. We look forward to speaking to everybody at the end of next quarter.

Thank you for joining that concludes today's conference call.