MIDD

The Middleby Corporation (MIDD)

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Middleby (MIDD)

Q3 2013 Earnings Call

November 06, 2013 10:00 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, 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

Richard Carlson

Gregory W. Halter - LJR Great Lakes Review

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

Presentation

Operator

Welcome to the Middleby Third Quarter Conference Call. Management will open with remarks, then we'll turn the call over for a question-and-answer session. [Operator Instructions] Please note that today's conference is being recorded.

With us today from management are Selim Bassoul, Chairman and CEO; and Tim FitzGerald, CFO. Mr. FitzGerald, please go ahead with your opening remarks.

Timothy J. FitzGerald

Okay. Good morning, and thank you for joining us today on our Third Quarter Conference Call.

Net sales in the 2013 third quarter of $360 million increased 39.7% from $257.7 million in the third quarter of 2012. The third quarter sales reflect the impact of acquisitions completed in the past 12 months, including Viking, Nieco and Stewart Systems. These acquisitions are not fully reflected in the prior-year comparative results and accounted for $71.8 million in sales or 27.9% of the sales growth in the quarter. Excluding the impact of these acquisitions, sales increased 11.8% over the prior-year quarter. This increase reflects an organic sales increase of 11.7% at our Commercial Foodservice Group and 12.2% at our Food Processing Group.

At the Commercial Foodservice Group, we continued to realize growth driven by increased sales to restaurant chains looking to upgrade equipment and adopt new technologies to improve efficiency of store operations. Sales in international markets remained strong, with overall growth approaching 10%. A strong sales in Latin America, Middle East and Europe continued to be offset by slower sales in Asia, impacted by a temporary slowdown in store openings with a major restaurant chain customer in China.

We expect continued growth in the Commercial Foodservice segment for the fourth quarter, although the growth rate likely will moderate from the third quarter, as the third quarter was particularly strong with chain rollout activities.

Sales in the Food Processing Group continued to also realize strong growth, reflecting demand by Food Processing customers looking to modernize existing production operations and new customers developing operations in international markets. While we anticipate continuing strength in demand and the outlook at this segment, we anticipate a decline in the fourth quarter in comparison to a very strong quarter in the 2012 prior year, which had grown 30% and included several large customer projects.

Sales at Viking amounted to $58 million during the third quarter, reflecting a general improvement in industry conditions. We expect that revenues will continue in the fourth quarter in the $55 million to $60 million range. However, it will continue to be difficult to predict due to the impact of distribution changes that we continue to implement.

Gross margin for the second quarter increased to $141.4 million from $100.4 million in the prior year, and the gross margin rate was 39.3%, as compared to 39% in the prior-year quarter. The gross margin rate reflects the impact of lower margins at the recent acquisitions in the Food Processing Group and Viking. However, the dilutive effect of Viking significantly lessened during the quarter, as the gross margin at that business improved to 37.9%, as compared to 28.5% in the first quarter and 30.7% in the second quarter. The improvement in the gross margin rate at Viking reflects the benefits of purchasing savings, SKU simplification actions and restructuring of distribution channels. We anticipate the gross margin will continue to remain above 35% for the remainder of the year, but may not necessarily be as strong as the third quarter due to impact -- the continuing impact of distribution changes in the fourth quarter.

Selling and distribution expenses during the quarter increased $15.8 million to $41.8 million. $13.2 million of the increase was attributable to expense from the recent acquisitions, with the remaining increase associated with direct costs and higher sales volumes.

General and administrative expenses increased by $5.1 million to $32.2 million. The increase in G&A expenses for the quarter was primarily attributable to incremental cost from the acquisitions.

The tax provision in the third quarter amounted to $20.9 million at a 33.9% effective rate as compared to the prior-year provision of $11.9 million at a 28.6% effective rate. The prior-year third quarter provision reflected favorable reserve adjustments for reduced state tax exposures, and as a result, the third quarter provision in the current year increased in comparison. And we -- however, we estimate that the effective tax rate will continue to be below 35% for the remainder of this year.

Cash flows for the third quarter from operating activities were $59.6 million, as compared to $39.7 million in the prior-year quarter and reflect the strength in the third quarter earnings.

During -- noncash expenses added back in calculating, operating cash flow has amounted to $11.9 million for the quarter, including $4.7 million of intangible amortization, $4.2 million of depreciation and $3 million of noncash stock-based compensation.

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