MIDD

The Middleby Corporation (MIDD)

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Middleby (MIDD)

Q3 2012 Earnings Call

November 07, 2012 9:30 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

Sid Panda - RBC Capital Markets, LLC, Research Division

Gary Farber - CL King & Associates, Inc., Research Division

Gregory W. Halter - LJR Great Lakes Review

Joel Gifford Tiss - BMO Capital Markets U.S.

Presentation

Operator

Hello, and welcome to the Middleby Corporation Third Quarter Earnings Call. On the line with us today we have Mr. Selim Bassoul, Chairman and CEO; and Mr. Tim FitzGerald, CFO of the Middleby Corporation. [Operator Instructions]

Now to start off our conference, I would like to welcome and turn the call over to Mr. Tim FitzGerald.

Timothy J. FitzGerald

Okay. Good morning, and thank you for attending today's conference call. I'm Tim FitzGerald, CFO of the Middleby Corporation and joining me today is Selim 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. Third quarter sales reflect the impact of acquisitions completed during the past 12 months, including Auto-Bake, Danfotech, Maurer-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 at our Food Processing group. Sales growth in the quarter was adversely impacted by foreign currency exchange rates, which impacted sales as reported in U.S. dollars by approximately 1.5%. In the Commercial Foodservice group, we continue to realize growth driven by increased sales to restaurant chains looking to upgrade equipment, adapt new technologies to improve the efficiency of store operations.

Sales in emerging markets also remained strong, with the 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. Our 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 at 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 recorded 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 the 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 acquisitions, selling cost 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 include 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 nonoperating 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 of our 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.

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