The Middleby Corporation (MIDD)

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Middleby Corp. (MIDD)

Q4 2007 Earnings Call

February 28, 2008 11:00 am ET


Tim FitzGerald - CFO

Selim Bassoul - Chairman and CEO


Peter Lisnic - Robert W. Baird

Jamie Clement - Sidoti

Jones - RBC Capital Markets

Steve Profer - COE Capital Markets

Tony Brenner - Roth Capital Partners

Jason Rodgers - Great Lakes Review

Greg Halter - Great Lake Review



At this time, I would like to welcome everyone to The Middleby Corporation's fourth quarter earnings conference call. (Operator Instructions)

Thank you. Mr. Fitzgerald, you may begin your conference.

Tim FitzGerald

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 Selim Bassoul, our Chairman and CEO. I have some initial comments about company's fourth quarter and year-to-date results, and then we'll open up the call for questions and answers.

We're pleased to report our 24th consecutive quarter-over-quarter net earnings. The fourth quarter and full year results included the impact from our four acquisitions completed during the year, including Jade Range acquired on April 1; Carter-Hoffmann acquired on June 30; MP Equipment acquired on July 2; and Wells Bloomfield acquired on August 3. Fourth quarter and year-to-date results did not reflect the impact of Star International Holdings, which was completed on December 31, 2007 subsequent to the company's yearend.

Net sales in the fourth quarter increased 48.1% to $145.6 million as compared to $98.3 million in the fourth quarter of 2006. Sales from acquisitions amounted to $35.6 million and accounted for 36.2% of the sales growth in the quarter.

Excluding the impact of acquisitions, sales organically grew 11.9% as compared to the prior year fourth quarter. This included strong growth at both the Commercial Food Service Equipment Group, which rose 9.4%, and increased sales at the Food Processing Group, which rose 28.9%. The 9.4% growth in sales of the Commercial Food Service Equipment included a 3% increase in domestic sales and a 33% increase in international sales.

The rise in international sales reflects strong growth in emerging markets with the US and international restaurant chains, growth in new products, including the new combi-oven line from Houno, the positive effect of the weakening US dollar, and shipping of backlog for the international markets at the Middleby Marshall conveyor oven facility that was impacted in the second and third quarters by the work stoppage that occurred at the Elgin production facility.

Strong growth at the food processing group reflects increased sales of new products introduced during the year and a favorable comparison to a weaker fourth quarter of 2007, which was impacted by restructuring initiatives put in place to improve profit margins, including product line rationalization and increased controls over contract pricing. These initiatives have resulted in a significant improvement in the profitability at this division over the prior year, and EBIDTA margins at this business in 2007 were in excess of 20% as compared to margins of 5% at the time we acquired the business.

Gross profit increased from $39.1 million in the fourth quarter of 2006 to $55 million in 2007 on higher sales volumes, but the gross margin rate decreased from 39.7% to 37.8%. The gross margin rate reflects the impact of higher steel costs and the dilutive impact of the acquisitions completed in 2007. The four companies acquired in 2007 had a combined gross margin of approximately 29% in the fourth quarter of 2007, demonstrating an improvement from margins of 25% reported in the third quarter.

Excluding the impact of these recent acquisitions, gross margins would have been slightly over 40% during the quarter, showing improvement over the prior year. These recent acquisitions will continue to dilute margins during the first half of the 2008. However, we should see continued improvement in margins at those operations as integration initiatives implemented in 2007 are fully realized.

Selling expenses increased $4.7 million to $14.2 million, and general and administrative expenses increased $4.2 million to $13.3 million. Of the $8.9 million of increased selling, general and administrative expenses approximately $6 million was attributable to the recently acquired companies. The remaining increases also include the impact of higher selling costs and increased sales volumes.

Interest and deferred financing costs increased from $1.5 million in the fourth quarter of 2006 to $1.7 million in the fourth quarter of 2007 as a result of higher average debt balances associated with the acquisitions that were completed during the year.

Other non-operating expenses also included $481,000 of a write-off of deferred financing costs associated with the early retirement of the company's senior credit facility and $314,000 of losses on interest rate swaps that were closed out prior to their maturity, also in conjunction with the retirement of the credit facility. These fourth quarter expenses were largely offset by $643,000 of other non-operating income, largely related to foreign exchange gains resulting from the strengthening of foreign currencies against the US dollar.

The provision for income taxes of $10.4 million was reported at a 40.5% effective rate, as compared to a $7.8 million provision at a 41.3% effective rate in the prior year quarter. The increased tax rate reflects an increase in tax reserves of approximately $500,000 recorded during the quarter, in accordance with the newly adopted accounting standard FIN 48 for increased state tax exposures.

These increased reserve requirements are due in part to the growth of the company through acquisitions. We anticipate the tax rate will remain higher at a higher effective rate in 2008 as additional reserves are recorded due to the growth of the company.

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