Middleby Corp (MIDD) 2012 Q3 法說會逐字稿

Hello and welcome to the Middleby Corporation third-quarter earnings call. On the line with us today we have Mr. Salim Bassoul, Chairman and CEO, and Mr. Tim Fitzgerald, CFO of the Middleby Corporation. Please note that all phone lines are in listen-only mode and there will be a question-and-answer session at the end of the presentation. (Operator Instructions). Now to start off our conference I would like to welcome and turn the call over to Mr. Tim Fitzgerald. Please go ahead.

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 Salim Bassoul, our Chairman and CEO. Net sales in the 2012 third-quarter of $257.7 million increased 17.8% from $218.7 million in the third quarter of 2011.

The third-quarter sales reflect the impact of acquisitions completed during the past 12 months including Auto-Bake, Danfotech, Mauer Atmos, Drake, Armor Inox, Baker Thermal Solutions and Stewart Systems and therefore are not fully reflected in the prior-year results. Sales growth from these acquisitions accounted for $39 million of the increase during the quarter.

Excluding the impact of these acquisitions sales increased 9.8% over the prior year quarter. This reflects a 5% increase in sales at our Commercial Foodservice Group and a 40.2% increase in sales in our Food Processing Group. Sales growth in the quarter was adversely impacted by foreign currency exchange rates which impacted sales as reported in US dollars by approximately 1.5%.

At the Commercial Foodservice Group we continue to realize growth driven by increased sales to restaurant chains looking to upgrade equipment and adopt new technologies to improve the efficiency of store operations. Sales in emerging markets also remained strong with growth of approximately 18% in Asia and Latin America offset by reduced sales in Europe which declined by approximately 15% reflecting difficult economic conditions which we anticipate will continue in the near term.

Sales at the Food Processing Group realized significant growth in the quarter reflecting sales on several large projects. While sales growth will moderate in upcoming quarters as compared to the third-quarter, order rates continue to remain strong and we continue to see growing demand by Food Processing customers looking to modernize existing production operations and new customers developing operations in emerging markets.

Gross profit increased to $100.4 million from $87.3 million and the gross margin rate was 39% as compared to 39.9% in the prior year quarter. The gross margin rate reflects a higher mix of sales from the Food Processing segment with a comparatively lower margin. Sales at the Food Processing Equipment Group comprised approximately 23% of total sales in the quarter as compared to 13.5% in the prior year quarter.

Within the individual segments the Commercial Foodservice segment remained relatively consistent in gross margin as compared to the prior year at 40.5% during the quarter while the Food Processing segment reported an increase of approximately 1.5% to 34.4% reflecting improvement in operating efficiencies offset in part by lower margin at the newly acquired companies.

In upcoming quarters we anticipate the Food Processing business will continue to represent a comparatively higher portion of sales due to the recent acquisitions which will impact the overall gross margin. However, we anticipate continued long-term improvement in the margins at the segment as we realize the benefit of business integration initiatives.

Selling and distribution expenses during the quarter increased $1.4 million to $26 million as compared to $24.6 million in the prior year quarter. Selling expenses in the quarter included approximately $2.5 million of additional expense from acquisitions not included in the prior year results. Excluding the incremental expense of acquisition selling costs decreased approximately $1.1 million due to lower costs associated with timing of various trade show and marketing programs.

General and administrative expenses increased by $1.5 million to $27.1 million as compared to $25.6 million in the prior year quarter. General expenses included approximately $3.1 million of additional expense related to acquisitions not included in the prior year quarter offset in part by lower stock compensation and leverage of general and administrative expenses over the greater combined company.

Other non-operating expenses amounted to $2.8 million in the quarter and were higher than normal during the period. These expenses related primarily to foreign exchange losses. During the quarter we realized losses on current period foreign exchange positions while offsetting gains on longer-term balance sheet positions were realized as an increase directly to equity through the currency translation account.

As the scope over international operations has increased we anticipate the P&L impact of exchange exposures may be more significant than in prior years. However, we also anticipate they will be less than in the current period and gains and losses will naturally offset in the financial statements to a greater extent.

The provision for income taxes amounted to $11.9 million at a 28.6% effective rate as compared to the prior-year provision of $11.8 million at a 33.5% effective rate. The current year tax provision reflects lower taxes on earnings in foreign jurisdictions which have increased due to the foreign acquisitions completed in 2011.

The tax provision also reflects nonrecurring favorable reserve adjustments associated with reduced state tax exposures which favorably benefited the effective rate in the quarter.

Cash flows generated from operating activities amounted to $39.1 million in the quarter and for the first nine months cash flow from operations increased by $27.7 million to $93.4 million. And we continue to expect continuing strong cash flow for the remainder of the year as working capital is reduced from its mid-year peak.

Non-cash expenses added back in calculating operating cash flows amounted to $9.3 million for the quarter and $27.8 million for the first nine months. Non-cash expenses for the quarter were comprised of $6.2 million of depreciation and amortization and $3.1 million of non-cash share-based compensation.

In the first nine months of 2012 the Company utilized $38 million to fund acquisition activities and made $6 million of capital expenditures related to production equipment and facilities enhancements. Total debt at the end of the quarter amounted to $269.3 million and was reduced by $48 million from $317.3 million at the beginning of the year.

During the quarter we were pleased to announce the recent acquisitions of Stewart Systems and Nieco. With these acquisitions we continue to add to our portfolio of leading brands both in the Food Processing Equipment Group and the Commercial Foodservice Group.

Stewart is the leading manufacturer of automated banking systems. This acquisition, along with our other recent acquisitions of Auto-Bake and Baker Thermal Solutions position Middleby as a leading solution provider to the baking industry with a complement of comprehensive unique technologies.

And Nieco is a leading manufacturer of automated broilers for the Commercial Foodservice industry. The Nieco conveyerized broiler is highly complementary to Middleby's platform of automated cooking solutions and allows us to continue to provide our customers with solutions to improve their operating efficiencies and lower their cost in their restaurant operations.

That is all for our preferred commentary. Lisa, can you please open the call to questions now?

(Operator Instructions). Josh Chan, Robert W. Baird.

I was wondering if you could talk about order rates within the Commercial Foodservice business, how that trended through the quarter and maybe into October.

We continue to see kind of a consistent trend that we saw in the third quarter with growth in chains in the emerging markets. Europe continues to be a struggle, but generally things remain positive there.

Is there any difference between the different months of the quarter or was growth pretty consistent across the quarter and in the last three months?

It is relatively consistent.

Okay. And then on the comment that your chain accounts continue to grow, at what point do you think the comparison becomes more difficult because, as you have these national accounts roll out, in order to grow you would have to have incremental additional rollouts. At what point do you believe that the comparison will become more difficult to lap?

Josh, I would think that as we continue most probably in the second half of 2013 we have to most probably start looking at new tests that we are having with customers to come through. I think we are quite booked through the first half of 2013. And I think as we look at the second half of 2013 is where we tend to see most probably more challenging comparisons unless we close some of those test units.

And I think so far we have several test units that are very promising to our customers. But I think we don't have visibility in the second half of 2013 while we have very strong visibility in the first half of 2013.

Okay, great. And then last question, it's certainly encouraging that acquisitions are continuing. Can you talk about -- a little bit about the pipeline, the number of potential targets out there as well as their sizes if you could?

Josh, we don't like to talk about any specifics related to things that we have in the pipeline I mean other than we can reconfirm that the pipeline remains strong. The level of opportunities we are working on is as significant, if not more so, than it has been in the past. So we feel pretty good about the opportunities there.

Okay, great. Thanks for your time and congrats on a good quarter.

Tony Brenner, ROTH Capital Partners.

Tim, you gave the change in Commercial Foodservice sales for Asia, Latin America and Europe. I wonder if you could do the same for that business for US and total international sales change.

US we were up high-single-digits, so it was in excess of 8% in the US. And then overall international, it was down about 1% as Europe was a larger percentage of international in the quarter. So although we grew faster in the emerging markets the weighting of it was that Europe brought down the international number by about 1%.

Okay. And second, it sounds like Nieco, which is conveyer broilers, fits pretty neatly into Middleby's kitchen retrofit initiative. I wonder if that is going to be part of that package for a number of chains that you are working with on that program. And I wonder if you can just update on who might be in that pipeline that is already committed that will be in there through the first half of 2013. Thank you.

Tony, good morning, this is Salim. I am going to address the Nieco acquisition first. The new acquisition reminds me very much on a much smaller scale to TurboChef. When we bought TurboChef it had literally what I call three major customers.

And you look at acquisition from TurboChef into Middleby to where those three customers at the time represented around 80% of the business, today all three customers represent 25% of the business.

We feel that Nieco has almost the same characteristic of three customers most probably driving in that case 80% of the business. And I think into Middleby our hope is to take it and expand it beyond those limited QSRs where they have done a fantastic job. The product of Nieco is highly, highly technologically advanced in terms of dealing with some smoke, with some meat, fat and grease and with automation which fits with us.

I think a couple things we can do to that product line is to take it internationally in emerging markets where they've had a lot of appeal because it fits very nicely in smaller type of places where they don't have a huge kitchen, where they have to put a griddle, HR broiler and they can do a lot with this unit.

The other interesting thing that we can combine together, we have the patented technology in our broilers that has a self-cleaning unit that would like to most probably take and integrate with Nieco products. And I think between the two combinations between CTX and Nieco, I think we have a lot of synergies to grow that business.

On the aspect of what you have commented in terms of visibility, we continue to see the rollout with Baker continuing through the second half of the year. We continue seeing the rollout with Panda Express continuing through the first half of the year. I think between those two as well as we have smaller rollouts that have come in in the end of the third quarter will continue through the first quarter of 2013.

You said four new rollouts, is that right?

No, I'm saying smaller -- smaller rollouts that have remained from customers. They are not as big as the Panda and the Baker rollout. But in the third quarter we've had a strong rollout of smaller units in fast casual and QSR that basically will continue filling in that void into the first half. But when you add (multiple speakers) you have Panda and you add those rollouts from smaller chains I think we might have -- we will have a good first half in 2013.

Thank you.

Jamie Clement, Sidoti & Company.

Tim, I'm not sure if I heard it real well, but the magnitude of the expense below the operating line, what was that attributable to?

Well, it is foreign exchange losses.

Okay, okay, got it. And nothing else in there, just normal run of the mill foreign-exchange stuff?

Yes. I mean, well, that was -- it is primarily foreign-exchange; I mean that is the bulk of it. It was larger than normal, as I kind of mentioned, during the quarter. I think you probably -- I wouldn't expect it to be as large going forward.

If you look on the balance sheet and the details are we had gains in our CTA account which runs directly through equity, so we kind of had some mismatch of gains and losses in terms of what went through the P&L and balance sheet. So I think that will offset to a greater extent in the future periods too. So I would expect to have less of a P&L impact there. But we do have larger foreign operations now so it probably will be larger than what we have seen in prior years.

Okay, all right. Thank you very much. And Salim, if I could just change gears a little bit. The processing business, I think there are some differences in terms of trends between the protein side and the baking side. Can you talk a little bit about what you are seeing in the marketplace now that the book of business is kind of rebuilding again and ideas for new technologies over the next year or two or three where you all are going after those markets?

Yes, very good question, Jamie. What we are seeing in terms of the trends in Food Processing is continues to be emphasis on safety, on yield, on automation. I think we continue to see automation especially in emerging markets which is amazing where we are leaders in that system including the (inaudible) from ALKAR and you look at Auto-Bake from the bakery.

So one, across the bakery, whether it is bakery or meat or chicken protein, we see automation as a big, big aspect of the business. And not only in the US but in places like Thailand, in places like Saudi Arabia, in places like China. And we are seeing a significant amount of interest in our (inaudible) where there is less handling by a human being, safety is a big issue to a lot of those customers.

Number two, the interesting part that has been similar to what we have done in foodservice -- I think when you came to realize what made Middleby unique, (technical difficulty) repeat in 2000, for some of you who have not been involved with us as far as 2000, [I bet] the company, me and my management team we unanimously said, we are going to be the most energy-efficient company in terms of appliances to the restaurant business.

And at the time energy was not even on anybody's radar screen. In fact, I always tell the anecdote that when I launched, I launched energy saving appliances and I went to see Papa John and went to see Pizza Hut at the time, Domino's David Brandon as CEO of Domino's, Hummer had just introduced the most gas using car ever which is HQ.

So interesting enough us and Toyota, which is the car manufacturer, were talking about Prius and we were introducing energy-saving. Today, as you would say, the biggest trend that has propelled Middleby forward in food service is that we are literally known as an energy-saving company. And we are talking about payback of 30% to 45% savings on our equipment. We have the most Energy Star cooking equipment than any other platform in the industry.

Now, when we bought the Food Processing business, my interest has been to say, what is -- how do we break the code in that business and we have been focusing on yield. How to increase the yield whether it is in chicken, whether it is in sausages, in hotdogs and in bakery. How do we get the yield to take place?

And yield is a big issue in protein, in bakery it is production, how do I get more cupcakes going through our system so that they can meet the demands of somebody like Starbucks if you are a regional bakery, like there is one here in Chicago that just got a contract from Starbucks.

And one of the reason they got the contract is literally being able to get equipment from us that allows them to get three things -- one, being able to provide the production that Starbucks would need regionally.

Number two, they need to make sure that there is very little human interaction so there is no concept of ever, ever having any type of contamination or safety issues.

And number three, making sure that they can deliver on time because Starbucks is not going to -- let's say Starbucks is not going to store three days of goods, they want them to deliver twice a day or three times a day to each one of those stores.

So what we focused on has been yield, safety with automation and speed. Very similar to what you have done in foodservice. So our success in Food Processing as we became a dominant player has been breaking the code the same way we have done in foodservice.

Okay, that's very helpful. Thank you very much for your time.

(Operator Instructions). Jamie Sullivan, RBC Capital Markets.

Height, this is [Sid Vander] standing in for Jamie Sullivan. The first question I had was on the G&A expense. That was sort of at the lowest level since like the fourth quarter of 2009. So is this a structural change and should we be thinking about this expense at that level going forward? And is it sustainable?

Well, it's -- I would say this is not necessarily a structural change, although we continue to make improvements as we are integrating some of the companies that we have acquired over the last several years. So I think it's -- it might be a little bit more favorable in the third quarter than some of the prior quarters. But I would say it is a relatively consistent number of what we would expect moving forward.

Okay. The second question was regarding the kitchen rollouts, I think you did mention Brinker and Panda Express. I wonder once Brinker I suppose I think said in their call that they would be expected to complete all the kitchen rollouts in the first quarter, first calendar quarter. So do you have something of a similar magnitude in the pipeline in terms of the number of [stores] and revenue opportunities once this is complete?

Yes, we've had other companies that have been interested in a very similar solution to their needs in terms of looking at what Brinker has done, because literally in addition to as you go back and listen to the Brinker conference call, the modeling of their kitchen has been a huge success.

If you look at their food scores and the quality of their concept as much as labor saving and the speed, it has been all commented on by the CEO on how well they have done with their kitchen remodel of which we are a very important part of that.

And we have seen we have several tests going on from other restaurant concepts that are looking at the same thing. They might not be looking exactly at the same execution because they might have different menu items, but they are looking at almost the same results in terms of trying to be able to provide better quality and more consistent food.

So we are starting to see -- we are basically -- not trying to see, we are working in tests with several of those restaurant chains at this moment that we believe will come to fruition sometime in the latter part of 2013.

Thank you. And I guess your success with Brinker was based around the (inaudible) as you call it. So all of the other discussions and tests that you are going on, is it based on around the same product offering or are there more product offerings that could be coming into the picture?

No, it's based on very similar product offering. It is basically a combination of several pieces of equipment that we have put together, they are all highly patented. It is not only the equipment but it is a process that we have generated that has been very, very instrumental for making sure that from a training standpoint that make sure from an implementation standpoint makes it easy.

We did not throw in pieces of equipment just say, okay, let's put five pieces of equipment altogether into the kitchen. I think the process in addition to the equipment -- so it was a combination of hardware and software that made it unique for Middleby to implement what we have implemented at Brinker.

Thank you. And the final question I had was regarding the tax rate. For two successive quarters your tax rate has been in the 29% range. Is that going to be the new normal in terms of tax rate for the final quarter in 2013 and beyond?

Well, as I mentioned I think there is some nonrecurring benefits in there related to some state tax exposures that have been closed out or settled. So I think we have guided more in the 33% to 35% range. The tax rate will be somewhat impacted by the mix of US versus international earnings moving forward.

Okay, thank you.

Gary Farber, C.L. King.

Just got a couple of questions. One is the past couple of years you've been very successful sort of having strategic initiatives, one was a National Account program for your international build out. And I'm just wondering, when you put aside your new product rollouts and excluding them, when you look out into next year is there some major significant strategic initiatives you have, is it still the international build out or is it something else?

I think you talked right, I think we have three initiatives that are now going into 2013. Our number one initiative is literally continuing to look at all our product portfolio and we are very proud to say that when you look at what I consider outdated products, which means our products that have no Energy Star, they are not -- they don't have features and benefits in payback that is less than two years, today account for less than 15% of our overall portfolio compared to over 50% in 2009.

So between 2009 and 2000 -- end of 2012 our outdated product, that means product that have not been refreshed with features and benefits with Energy Star now represent 15%. So our initiative between now and 2013 to target those 15% of our outdated product and get some refreshed. So by the time 2013 comes along we should have over 95% of all our products to be totally updated with energy savings, with features and benefits that allows a payback of less than two years.

The next initiative that you have has been reflected in our quality. We have put into place a quality control process across all of our division. One of the major reasons that we have done that is we continue to be one of the only companies offering a (inaudible) warranty. Similar to a Costco product when -- Costco, you buy from Costco, you can return that product, we have had that forever.

As you keep on adding features and benefits to our product we have to make sure that the technology that is being implemented in our product is not at the expense of quality. So we put together a very unique quality control process and it has been reflected in our warranty rate that continues to drop.

And the third initiative is our lead times. We continue to work on making sure that our delivery continues to go down this year and we will complete -- we have a lead time standard that we have most probably decreased our lead-time to our dealer and distributor. In most divisions -- we have a few divisions where we still have to implement and institute this lead delivery schedule and that is going to be done in the first half of 2013.

Okay. Just a couple other ones if you don't mind. Just on the gross margins, it sound like the mix should improve in the fourth quarter, is that right? That the margins, gross margins should go up?

No, I mean I think we are expecting that the Food Processing is going to continue to be a greater percentage of the sales mix and that is at a lower margin today. So I think the overall margin is going to continue to be affected by greater Food Processing equipment sales as we focus on improving the margin on that segment.

So you think it would stay in the same range as the third quarter then or less?

Well, I mean we are not guiding towards a specific margin, but I think similarly we will probably see -- we had a gap of about 1% in this quarter and I would say that's the type of effect that will continue through the remainder of the year.

Right, okay. And then just lastly on this -- the Commercial Foodservice business (multiple speakers).

Gary, I will just mention one other thing too. We just completed two other acquisitions, so those -- the two most recent acquisitions will also have some impact in the fourth quarter as well.

Right. And then on the Commercial Foodservice business, just your organic growth rate. It sounded like October was pretty consistent. That is sort of the organic level you think you will be growing at in the near term?

Yes. I mean, October was consistent. We felt good about the order rate in October and see that continuing in the fourth quarter. We feel pretty good about the trends right now.

Okay and then just one last one on the acquisitions. Is there any change that you are seeing in that rationale behind people wanting to put their businesses on the market at all or is it pretty consistent, the rationale behind the sellers? And have multiples changed much?

No, I mean I think the multiples have been fairly consistent over the last 12 to 24 months, they obviously were much different during the downturn in coming out of it. The rationale for most companies selling is strategic in nature. The tax law on the edges has an impact of maybe trying to put something in one period versus the other. But really the overall pipeline is really driven by the strategy behind wanting to sell.

Great, okay. Thanks.

Greg Halter, Great Lakes Review.

I didn't hear specifically a calling out of the business in Latin America whether or not that was up or down in the quarter, year over year.

Both Latin America and Asia were up double-digit year over year.

All right. And any representative examples of customers in the food processing area that are buying currently? I think you had mentioned some in the past like Nestle and Sara Lee and so forth. Is that still the case or have you attracted new folks as well?

We have attracted -- yes we have attracted a lot of new folks as we have continued to buy companies in bakery, so this is a new field for us. So we have attracted a complete new set of customers. We have also attracted customers that are pretty diverse in terms of our customer base.

I don't want to be specific in terms of who they are; some of our customers, maybe they don't want to release what they are doing to their competitors, so I'm going to have to be very discreet on that. But I have to tell you the interesting part is the normal customers we've had continue to be with us.

The normal large conglomerates of Food Processing worldwide continues to be very much in our company doing business with us whether it is in meat, protein, chicken and bakery. But what is fascinating, we are seeing a significant increase of a regional player in emerging markets. I mentioned Thailand early on in my discussion.

I am looking at businesses in Latin America, Chile, where we have seen some completely new players coming through. Look at Mexico where we have had some interesting good -- very good relationship there with large food processors.

So in the US we've seen the major player, the usual suspects, the big players, the Nestle, Sara Lee come through in North America, Maple Leaf Foods, whatever, and then we have seen smaller players starting to come into niche play. I just mentioned for example this customer who just bought an Auto-Bake system from us to service to be able to go after Starbucks regionally.

And we are seeing a lot of those type of players who are trying to go after niche customers. And we are seeing a lot of those coming through in the pipeline.

I would just also mention that while we are selling to a lot of the same customers now that the portfolio has broadened we are having opportunities to introduce more brands into existing customers, so we believe we are getting greater penetration.

Okay. And any thought of not just being on the hot side but also on the cold side as well?

I don't want to comment on that because I have been asked this question both from shareholders, analysts and customers saying why don't you go to the cold side. So far we have not; I don't rule it out, I don't want to rule anything out and then regret it and say never say never. But at this moment we have not, we have not, we have been sticking to what we have and what we got and we are doing pretty well.

So unless there is something compelling that we know about and get brought to our attention we will not ignore it, we will be foolish to close our mindset to anything. But it has to be accretive, it has to make sense strategically. We are not -- one of the things that makes Middleby unique, we are not going to buy a "me too" company, we are not going to buy a commodity product, that is something that we are not going to be able to do.

One of the major reasons Middleby has been very, very successful is that we remain very, very disciplined to our core. And the core is not only the outside, the core is literally how do we integrate an acquisition, how do I bring value to our customers.

If there are 10 other companies that is going to bring the same value to my customers, they don't need me, they can go and bid it. I want to be able to bring solution, whether it is in the cold side or the hot side that literally bring something to the customer where they go back and say, I want to be able to use Middleby because I know that Middleby can guide me through that process.

The way we have done -- we've done it 20 years ago when we automated or 25 years ago when we automated the pizza business. We automated the pizza business. We automated the pizza business, we basically took the speed cooking today into many places with TurboChef. We created the energy-saving platform that allowed us today save a lot of energy in terms of structure to our customer.

We are the people who took -- take Brinker where we allow them now to automate their kitchen. You take our product that allows Subway to bake on premise bread where today there are 37,000 stores and they bake bread on premise without our oven they cannot do it.

So in many, many ways we have been able to be instrumental in bringing added value to that customer at a payback that allows them to be competitive. And I think if there is something compelling out there that allows me to take refrigeration let's say, and I can change that on a dime and take it to the customer and say, I am bringing you some new idea. I will be more than happy to look at it.

So I don't want to close any refrigeration or any cold side, otherwise you would not want me to be a CEO close minded if I don't look at those opportunities. However, they have to be changing -- they have to be disruptive otherwise there are many, many other companies that continue to sell commodity products and "me too" products, that is not who we are.

Okay. And I also notice that your debt to total capitalization at 31% and about 28% excluding the cash is the lowest I think it has been since 2001, which obviously is a good testament to your cash flow generating capabilities despite the acquisitions. Just wonder how you look at the capital allocation of Middleby going forward?

Well, Greg, we continue to be focused on acquisition and that is our primary use of capital. So the leveraged multiples, or if you want to look at it, is debt to capitalization is it is moved up and down over time and, you are right, we are at a lower point right now.

So I think we, as in the past, expect that we will have periods that will move up and move down. So we just happen to be one in one of those lower points right now. That is a function of the capitalization going up and the cash flow continuing to be strong.

And any comment on the two segments' margins in the quarter versus last year?

Well, as I mentioned earlier, the Commercial Foodservice continued to be strong, it was just over 40%. And we expect that we will continue to maintain strong margins there and with some of the new products we expect those to be continuing to help us maintain or push margins on that side of the business.

And then with Food Processing there is a lot of new companies that we acquired just over the last 18 months so we are in early stages. I mean we did see some margin expansion in the third quarter here. But we are in the, again, the early innings and we expect those to expand over time and kind of close the gap between the two segments over the next couple of years.

Okay, great. And one last one. Salim, any comment on recent successes with new products or things you may be looking at or working on bringing out?

Yes, I am very excited about many, many initiatives we have. I think I would look at three mainstream one. Our ventless technology continues to be well, well accepted and adopted. I think we are making inroads there. At this I'm talking about foodservice and I'll talk a little bit about Food Processing.

I look at number two is of course what I call our kitchen revolution casual dining is extremely well expected. I think (inaudible) probably have two other customers right after Brinker that will adopt that system in 2013 through 2014 and I am very excited about that. So that has been a very big one for us.

I think the new technology at TurboChef, Encore technology has been highly accepted also. It has been a fantastic platform for TurboChef. I look at that and then induction, I think induction has been one of the most -- I have not spoken as much on it; I kept on talking about all our core product, but I have not focused the lack year, year and a half to literally tell you about how induction has become a big, big part of our business.

Today induction is a multimillion dollar platform for us and I think it continues to grow very, very well. All the innovations out there which basically (inaudible) water in terms of steaming, in terms of buffet in terms of the School District, in terms of quick serve.

I think the rollout with Panda is literally a tribute to what induction at (inaudible) has done in terms of patented technology to eliminate steam tables the way they use a lot of water and a lot of cleaning and a lot of energy.

So I am very excited about those products as I move forward, particularly -- I kept on talking about the traditional spin fresh, we talked about [wall] ovens. I am very excited what we have come up and new technology has come through.

On the Food Processing side I am very excited about our bakery product which are still our technology I'm very excited about the integration that we have done between Drake, Cozzini and ALKAR. I'm very excited about our packaging technology under RapidPak.

And I think the biggest thing that we have done over the last two years has been to be able to take our automation, our (inaudible) system and make them compact so that we can put some smaller factories around the world.

It's been fantastic because, one, not only we changed the layout and as well as the pricing, so while retaining our margins. And this has been a great, great accomplishment by our Food Processing engineers. So I am very delighted to see how we've been able to go and take a system that used to cost let's say $4 million and now we can do it for less than $1 million in a smaller footprint and still make the margins and even higher margins and have a lot of customers excited about that product.

Thank you very much.

Joel Tiss, Bank of Montreal.

Just can you talk a little bit about the industry backdrop, you know how much pent-up demand is out there? And I think you have pretty much covered what your customers are really focused on. Just give us a little more color around some of that.

I can give you a lot of color because I have been spending a lot of time with customers, been out visiting a lot of them, I have been looking at their releases the way you have. I look at the restaurant business as being extremely strong. I would say 2013 will remain very strong for our customers.

Just to give you a little bit of same-store sales at gross increases in an example. Starbucks reported 7% same-store sale in the US, 30% growth in Asia, Chili's is around 3% same-store sale in the US, Chipotle is around 5% with a 12% unit growth, Domino's and I can add to it Pizza Hut and Papa John's, they are almost in the same realm, around 3% to 4% same-store sale in the US, 5% same-store sale internationally.

Domino's is expected to open in 2013 [450] new stores. You talk to Papa John I think they expected to do maybe 300, Yum Brands, Pizza Hut, Taco Bell, KFC, showing 6% same-store sale in US, 4% same-store sale internationally. Bloomin' Brands which is Outback, Bonefish, Carraba's, 4% same-store sale in the US.

Those are just a sample of restaurants that have reported. I have to tell you those are phenomenal numbers. When you look back at -- as far back as 2010, those were negative territories for many of those customers maybe except Chipotle and Starbucks. But Domino's was not supporting 3% to 4% same-store sales. Yum was not reporting 6%, Bloomin' Brands was nowhere pleased to report 4% they were flat or maybe at best 1%.

So if you look at what is happening in our restaurant business and our customers they are really finding the formula to attract people coming in. I have to continue saying that the chains have figured out a way whether through advertising, through kitchen remodel, through new menu items to literally bringing in what I call new customers. And I think that this has come at the expense of two things.

One, if you are a mom-and-pop and you are not able to leverage your capital to change your kitchen you are out. If you are a badly managed company then I think through the last few years I have mentioned, between 2009 and 2010, 125,000 restaurants closed in United States. Huge number, around 15%. So the bad operators are out.

So from a Middleby standpoint, so every one of those customers I've mentioned we do business with. We are well -- very strongly into those chains. And I look at this, I can add Dunkin' Donuts, I can take -- I can add a lot of other customers where they have figured out a way to say, okay, I'm not going to grow because the market is going to grow.

I am not going to go out -- I have to go and figure out a way to make sure that those people are going and spending the money here and not spending it eating at home. And I think they've done a great job, I'm very, very impressed by what they have done.

I could give you a great example. I was stunned when the pizza chain offered a $10 pizza. People say, how could they do it, $10 large pizza. And I have tell you it has been very successful for them because they figured out a way to offer a $10 pizza and make money offering a $10 pizza by selling up, but offering other things.

So I think our operators, if you look at the restaurant business I think the next few years, it is a great business, it is a great investment for us as suppliers. It is a great investment to look at because the good running an operation (inaudible) management (inaudible) know how to run a business today.

They are going to more spend the money, they're going to force their franchisees to be consistent, they're going to basically even if the franchisee can't afford it because they can't get bank loans. The smart ones are going out, saying, I will fund -- I will banker funded the kitchen remodel.

I think Papa John did the same thing when they introduced (inaudible). I think they are coming back saying, I don't care, if you can't afford it, I'm going to basically fond that the kitchen remodel. I am going to help you be successful. I think that has been very, very good thing for us.

That's excellent. Can you just add on to that a little bit about the competitive landscape as well? Some of your competitors are highly levered and some other ones are part of bigger companies and I think the string of acquisitions maybe indicates that some of the competitors are getting a little like maybe they don't have enough in their arsenal to be able to compete against you so they are selling out. So can you just give us what you are seeing on that? Thank you very much.

I would say I think the competitors -- I want to respect them because at the end they work hard and they do a very good job. I think that some of them have great brands and they work very, very hard. But I think the difference between our business model and our competitor is simple.

We are totally focused on the hot side. In many ways we are a smaller -- still smaller entity, so we can navigate a little bit better. We are not part of other things. I think that makes it is we get up every morning knowing that if we do not sell to our restaurant business we don't have any other thing that will offset it.

So I can't -- some of our competitors are so large that, okay, foodservice support them but is it critical to them? No. It sets a very big mindset.

So if you are a company that is $20 billion or $25 billion and you have a food-service division that is almost $2 billion of less, your 10% of the business, their CEO doesn't get up every morning and say, okay, how is foodservice doing. I get up every morning and say, how connected I am to my customers. If my customers don't like us I can't -- I am not diversified enough to go back and say, well, I can go and do other mixes.

Number two, I think innovation has been a bigger part of our business versus bundling. So many of our competitors have more than just hot side, they have dishwashers, they have refrigerators, they have mixers so they can offer a total solution, which is a very good thing if you're looking for a price discount.

In my case I can't come to somebody and say, listen, you don't need to go somewhere else. You are going to have -- I can only sell bookings. I have to be so good at what I do that they are willing to break up the package and tell my competitors, listen, I will buy the dishwasher from you but I'm going to buy the cooking from Middleby because they have such an innovative technology that I am willing to pay extra for Middleby.

The other situation we do is we have walked away from pricing discounts. We do not do price discounting. We are most probably -- and if there are customers listening to this, I hate to say it, we are more expensive than our competitors in many of our platforms. And the reason is, we provide payback.

It is one thing to be more competitive, but at the end if you look at our payback we guarantee pay back. This is why we have been working on all those outdated product to say for me it is important. Price becomes irrelevant if the cost of ownership is less than my competitor, and we can validate it, we can demonstrate it.

In addition, I have an [operable] warranty. I am very connected to my customer in terms of sitting with them and providing solutions. The CEO of Brinker didn't come to us say I want a price discount. He said, I want to take people out of my kitchen so I can reallocate it somewhere else. I want to get speed and consistency and he went to everybody. And we were the people who came up with a solution.

And I think I come back and I say, every day that our difference is we live and die by our focus and I have no luxury, I don't have any fallback position. If we upset our customer, if we turn around and not have the loyalty that we provide and the innovation, I can't sell something else. I can't go and sell automotive or construction equipment to them. And that is the biggest difference.

And, I hate to take up so much time, but in the past you have talked about areas of opportunity like in beverages and you used to talk about steam tables before you got the induction business. Can you give us some highlights of what some of the areas of opportunity you think are out there for you?

Yes, we are looking at four areas of opportunity for us that continues to be very, very strong. I look at, number one, the area of what I call steamers. The steamer is a big category that Middleby is almost a non-player. And we wanted to (inaudible) that technology. So one thing we have done is we have come in with a waterless steamer that allows to basically steam with minimal water.

So we are in tests now with one out the chains where they are spending 350 million gallons of water a year across their system. And with ours that gets eliminated. And the product quality and the consistency is the same. So that is a highly patented technology that allows us now to target the steamer market aggressively.

And that is a technology that we have been working on and I have mentioned many, many times that I like the steamer business because steaming is in every -- almost in every -- in casual dining, in fast casual and something that is very large market. And we (inaudible) it.

Number two, our ventless technology where it is in embryonic. We started the ventless technology in around 2006. Today we see that to grow double-digit growth for us for the next five to six years as we continue investing in it.

Number three, our fryer technology where between the low volume oil fryer and the Spin Fresh is getting some traction and we see that platform to be a multimillion dollar platform for me.

Finally is our Hydrovection initiative which is a -- our Combioven initiative which is very different than a traditional Combioven. I see this to be fast growing for us. I think that we have not been a major player in the Combioven business and now we are a serious contender in that business.

And finally of course is the casual dining revolution which was started with Chili's and Brinker and they made us a better company literally. Over two years of working with them we got to tweak everything we could tweak in terms of installation, in terms of implementation, in terms of training, in terms of adding menu items, in terms of consistency.

So I have literally -- I said four initiatives, I have five initiatives from a product innovation that looks very good for us. And we are very excited about that.

And on the Food Processing we continue seeing the following. I like to continue seeing three things that help us get there. One is to continue extending our protein offering, that is number one. I see that as a very major thing for us as you continue offering an integrated solution that comprises automation.

So we can integrate the back of our equipment because we used to be only in the oven, now with Cozzini we are basically sitting before the oven and I would like to continue seeing that. I am very excited about taking our robotic technology and -- that we have at Auto-Bake and start taking it into some of our other Food Processing technology. And those are the types of things I'm looking at right now.

Thank you, I appreciate all the time and the insight. Thank you.

We have no further questions in queue.

Well, I would like to finish to say that I look forward to our -- to what we have done for the last few years. And as we look forward to a 2013 we are very excited about our domestic Commercial Foodservice business as well as our emerging markets. I would say that Europe will continue to be challenging for us as well as the foreign exchange that will most probably continue to be a challenge in the near future.

On the Food Processing we continue to see sales growth to continue going up and we continue seeing also the chain rollout that we talked about increasing. We also see sales internationally, other than Europe, I think we will continue being challenged in Europe in 2013 and maybe part of 2014. But other than that emerging market, Latin America, China, India, Middle East, we see our business continue growing double-digit growth.

So overall as you look at our organic growth we continue to see literally somewhere between 5% to 8% to 9% organic growth despite the European softness. In addition, as we look at our margins, our Food Processing margin will continue going up as we consolidate some of our operations.

Our new products, as they continue to be seeded, today they are around 25% of our business. As we continue putting new products that carries 5% to 10% higher margin we will drive our gross margin higher. We continue to see the chain rollout, which allows us to also provide higher margin for us since most of those chains are going direct with our (inaudible).

So from that perspective we continue to see our margin getting better in the next two to three years. As we near 2016 we see incremental improvement every year in our margins.

Our investment in national accounts -- when the recession occurred in 2009 everybody cut back. Despite the fact that our sales organically went down significantly we continue investing in our National Account at the level of multimillion dollar investment.

In people, in travel, in training, in test kitchen, we expanded and our people in emerging markets and we opened test kitchens around the world. We also instituted training -- global training called Middleby Universities around the world.

Our loyal customers' strategy has been a huge success where we have built a special relationship between our dealers and our customers using our equipment. Our R&D program into innovation has been so well received by our chain customers where we are focused on application technology, where we customize that technology specifically suited to a specific problem -- Chili's, Panda Express, Dunkin' Donuts and I can name many.

We have refreshed our outdated product that was in our portfolio. Now our outdated products account for around less than 15% of our overall portfolio compared to over 50% in 2009. We have invested significantly in engineering and working with our suppliers and in features and benefits to make sure that those products generate value proposition to our customers whether it is in energy, in speed and consistency and most importantly in payback.

Our integration of our acquisition has been making sure that it is accretive and making sure that the integration goes smoothly so we can reach the margins that we expect from Middleby that we have incurred over the last 10 years.

On the Food Processing side we see increases in margin to close the gap to foodservice. Our quality across our total portfolio has improved as reflected in our warranty rates. We have put in place a unique quality control process across all of our division. Since 2009 we have added features and benefits on our product, but we have kept our eyes on quality.

In 2013 we have still a few products and a few divisions that will -- are going through this rigorous quality control initiative that will be completed somewhat by July of 2013. Our lead times and our delivery have gone down this year.

We have had a few divisions still left that have to go through a certain lead time initiative in order to be able to meet our standards of delivery and lead time not only in the US but across the world, and that will be completed also by July 2013. I thank you for being with us today, that completes my remarks.

Thank you, ladies and gentlemen, this conference has concluded.