MIDD

The Middleby Corporation (MIDD)

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Middleby (MIDD)

Q4 2012 Earnings Call

February 27, 2013 11:00 am ET

Executives

Timothy J. FitzGerald - Chief Financial Officer, Principal Accounting Officer, Vice President, Chief Financial Officer of Middleby Marshall Inc and Vice President of Middleby Marshall Inc

Selim A. Bassoul - Chairman of the Board, Chief Executive Officer, President, Chairman of Middleby Marshall Inc, Chief Executive Officer of Middleby Marshall Inc and President of Middleby Marshall Inc

Analysts

Joshua K. Chan - Robert W. Baird & Co. Incorporated, Research Division

Anton Brenner - Roth Capital Partners, LLC, Research Division

James Clement - Sidoti & Company, LLC

Jamie Sullivan - RBC Capital Markets, LLC, Research Division

Christopher Schon Williams - BB&T Capital Markets, Research Division

Gregory W. Halter - LJR Great Lakes Review

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Middleby Corporation Fourth Quarter Earnings Call. [Operator Instructions] With us today from management are Chairman and CEO, Mr. Selim Bassoul; and CFO, Tim FitzGerald. We will begin the call with opening comments from management, then open the call up for questions. Mr. FitzGerald, please go ahead.

Timothy J. FitzGerald

Thank you, and good morning, everybody. We have some initial comments about the company's 2012 fourth quarter results, and then we'll open the call for questions and answers.

The net sales in the 2012 fourth quarter of $291.6 million increased 19.6% from $243.8 million in the fourth quarter of 2011. The fourth quarter sales reflect the impact of acquisitions completed in the past 12 months, including Drake and Armor Inox, which were acquired in the fourth quarter of 2011, Baker Thermal Solutions, Stewart Systems, and Nieco acquired in 2012. These acquisitions are not fully reflected in the prior year comparative results and accounted for approximately $27.6 million of the sales growth in the quarter. The fourth quarter results did not include the impact of the acquisition of Viking Range Corporation, as this acquisition was completed subsequent to the fiscal 2012 year end.

Excluding the impact of acquisitions, sales increased 8.3% over the prior year quarter. This increase reflects the 3.9% increase in sales at our Commercial Foodservice Group and a 29.6% increase in sales at our Food Processing Group. At 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 efficiency at store operations. The sales in emerging markets also remained strong with growth of approximately 13% in Asia and Latin America. However, sales in Europe continued to decline due to challenging market conditions and impacted the overall growth at the Foodservice division by approximately 2% in the quarter.

The sales at the Food Processing Group continued to realize significant growth, both domestically and internationally, reflecting demand by food processing customers looking to modernize existing production operations, and new customers developing operations in emerging markets. While we anticipate continuing sales growth as we enter 2013, this growth will likely moderate from the growth rates we saw in the second half of 2012, which included revenues related to several large customer projects.

The gross profit for the fourth quarter increased to $113.2 million from $99.7 million in the prior year. The gross margin rate was 38.8% as compared to 40.9% in the prior year quarter. The gross margin rate reflects a higher mix of sales from the Food Processing segment, with comparatively lower margin. The sales at the Food Processing Equipment Group comprised approximately 27% of total sales in the quarter as compared to 17% of the sales in the prior year quarter.

Within the individual segments, the Food Processing segment reported an increase in the gross margin of approximately 1.5%, increasing from 33.1% to 34.6%, reflecting improvement in operating efficiencies, offset in part by lower margins at the newly acquired companies. While the gross margin at the Commercial Foodservice segment was 41.3% as compared to 42% in the prior year, reflecting changes in the mix of product sales.

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

In upcoming quarters, we also have the impact of the Viking Range acquisition, which currently has lower gross margins that will likely dilute the gross margin by approximately 1% to 2% over the next few quarters.

The selling and distribution expenses during the quarter increased $2.3 million to $26.7 million. Selling expenses in the quarter included approximately $2.6 million of additional expense from the acquisitions not included in the prior year results. Excluding the incremental expense of the acquisitions, the selling costs were slightly less than the prior year due to lower costs associated with the timing of various trade shows and marketing programs.

General administrative expenses declined by $2.4 million to $27.9 million. G&A expenses in the quarter included approximately $1.3 million of additional expense related to acquisitions not included in the prior year quarter. The decline in expense in the fourth quarter reflected reductions related to business integration initiative and lower stock compensation costs incurred relative to the prior year quarter.

The provision for income taxes for the quarter amounted to $17.9 million at a 32.1% effective rate was compared to a prior year provision of $9.6 million at a 21.8% effective rate. The prior year fourth quarter provision reflected a nonrecurring benefit related to reserve adjustments, related to reduced state income tax exposures. While the current quarter effective rate reflects the benefit of lower taxes on earnings and foreign jurisdictions, which have increased in the past year due to the foreign acquisitions completed during 2011 favorably affecting the effective tax rate.

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