Middleby Executive Insights: Organic Intl Sales Comparisons, Turkington

On Friday, Middleby Corporation (NASDAQ:MIDD) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Organic International Sales Comparisons

Tony Brenner – Roth Capital: Two questions. First I think, Selim I think you implied that organic international sales comparisons improved question-and-answer session we go forward. But given the fact that particularly in the Foodservice sectors those comparisons were normally up in the first quarter unless you’re assuming some improvement in the European economy. I wonder what gives you that confidence.

Selim A. Bassoul – Chairman and CEO: Well, Tony, we think that we’re going to continue to grow in emerging markets. Last year we grew double digits throughout the year. Clearly there is some softness in Europe and that’s detracted from our growth in the first quarter. I think that we’ll probably likely see some continuing softness there during the year. But in the rest of the world Latin America, Asia and Middle East, we’re still seeing strength there. It was a little bit softer in the first quarter just due to comparisons that we expect those markets will grow at a robust rate during the four quarters of this year.

Tony Brenner – Roth Capital: Second question, again looking at organic comparisons gross margins in both divisions appear to be kind of flat and given the fact that your steel costs can flicker down year-over-year. I’m wondering why there wasn’t (maybe) some improvement in gross margin.

Timothy Fitzgerald – VP and CFO: Well, the gross margin in the first quarter was primarily affected by the mix between the Commercial Foodservice Group and the Food Processing Group.

Tony Brenner – Roth Capital: But procurement in gross margins just in the Foodservice area was flat and so were gross margins in the Food Processing?

Timothy Fitzgerald – VP and CFO: The Food Processing Group is affected by these – we did six acquisitions in the Food Processing sector in the last year and those businesses when we’ll break then as historically has happened tend to be at lower margin and then as we integrate in that (sector). There were some distraction in the gross margin on the Food Processing business, because of the acquisitions that we’ve just completed and we’ll spend a fair amount of that to secure integrate those businesses.

Tony Brenner – Roth Capital: I think you broke out gross margins excluding the acquisitions and those were flat, were they not?

Timothy Fitzgerald – VP and CFO: No, that includes the acquisition. So, the gross margins were slightly down because of the acquisition. Then Food Processing — on the Commercial side, the margins were flattish at 40% and that mix can change from quarter-to-quarter. So, that wasn’t necessarily the contraction in the margins it was really just the natural quarter-to-quarter impact of product mix.

Selim A. Bassoul – Chairman and CEO: Tony, I would like to step in also to tell everybody that the cost – our raw material costs were not down, as we expected it to be. We expected to have a much more reduction in fuel prices than we expected, but ultimately it did not – so our reduction in the first quarter were not as drastic as we expected them to be. I think the surcharge on fuel continues to be challenging for us and I think some of the other raw materials that we have done we’ve seen this is not abatement as we expected it to be in raw material pricing.

Tony Brenner – Roth Capital: Lastly, is your incentive tax rate going to be a point or two higher for the balance of the year than in the first quarter?

Timothy Fitzgerald – VP and CFO: Yeah, we anticipate that kind of the normal run rate of tax rate would be higher. The first quarter did benefit from some reserve adjustments. And then our effective rate continues to move down over time but we did get some more time benefits.

Turkington

Peter Lisnic – Robert W. Baird: The first question, if you can just talk about Turkington for a little bit. Tim, can you give us the kind of what the revenue base of the business is and then Selim, if you could talk about strategically how that fits into the portfolio, and kind of what the leverage is from that business, that would be very helpful?

Timothy Fitzgerald – VP and CFO: Historically, that’s been a $20 million to $30 million revenue business. It will probably be a little bit lower as we – it was an asset acquisition, so we’ll be rebuilding a backlog and portfolio kind of as a new business, but that’s historically a point of $30 million revenue business.

Selim A. Bassoul – Chairman and CEO: Peter, what is the interest of that platform for us, which is acquisition of Auto-Bake and now Turkington will become a lead player in the baked goods business, which puts us in most probably a number two or number three position globally in that business. What I like about this platform is the fact that baked goods is a trend not only in the United States but mostly in emerging markets where literally people are going from local bakeries with heavy labor to processed factories with processed baked goods at much lower price and better quality. So, as I look around that platform, I feel that platform being a great introduction and growth in emerging markets, and I like the fact that this platform has been consolidated, and today, if you’re a small player in that platform, it’s hard for you to be able to grow globally. So, I like the fact that we now continue to consolidate that platform and come up to be a number two or number three player in that platform. I like the growth future of it, I like the fact it’s an international platform, I like the fact that people tend to invest in baked goods, it’s not going away. We as human nature like sweets and we like baked goods, so whether it’s taking them to school or taking them for casual dining restaurants or quick-serve there are lot of potential in that market.

Peter Lisnic – Robert W. Baird: Can you give us a feel as to what the potential market opportunity there is for you, how significant size wise that might be?

Selim A. Bassoul – Chairman and CEO: I think that market could easily be for us literally $100 million to $200 million market just with the companies we have today. So, we could move out from being a $40 million to $50 million player to almost tripling our revenue within the next four to five years in that business. It’s a nice business for us. Again the issue with that business similar to Food Processing is the fact that the purchase equipment is pretty large. So, you’re talking about multi-million purchase. But I see us looking at places like Saudi Arabia, Thailand, China, India where we’re seeing a lot of activity in baked good.

Peter Lisnic – Robert W. Baird: Then Tim if we could just switch back to over to the commercial business. Can you give us a sense as to what the pricing trends there look like anything of meaningful change in terms of pricing and your ability to get price in that market?

Timothy Fitzgerald – VP and CFO: We had a price increase generally at the start of the year that was in the 3% to 5% range. Generally believe that we’re getting there across to the market and that’s safe to say that you’re getting it across both domestic and international, is that fair to say?

Selim A. Bassoul – Chairman and CEO: Yeah, that’s very fair.

Peter Lisnic – Robert W. Baird: Then the last question if I could. I think the dry powder on the buyback is basically gone at this point, any thoughts about a new authorization – share repurchase authorization?

Selim A. Bassoul – Chairman and CEO: Are you talking about from the credit facility or just being on shares that’s…

Peter Lisnic – Robert W. Baird: No, a share buyback. If my math is right, you’re getting pretty close to having that fully exhausted so I was wondering if there is a new plans or new share authorization plan?

Selim A. Bassoul – Chairman and CEO: Yeah. I think that would be something well that’s exhausted that likely we would discuss at the Board and that would likely reinstitute some ability to do that on a go forward basis.