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Executives

Tim FitzGerald - CFO

Selim Bassoul - Chairman and CEO

Analysts

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

Middleby Corp. (MIDD) Q4 2007 Earnings Call February 28, 2008 11:00 AM ET

Operator

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.

Net earnings for the 2007 fourth quarter increased 38% to $15.3 million from $11.1 million in the prior year quarter. Diluted earnings per share increased 32.8% to $0.89 per share from $0.67 per share in the prior year quarter. We were pleased to report that the impact of the acquisitions completed in 2007 added approximately $0.12 to earnings per share in the fourth quarter.

Now turning to the balance sheet and fourth quarter cash flows, net changes in the balance sheet during the year reflect the impact of the 2007 acquisitions. The acquisitions of Jade, Carter-Hoffmann, MP Equipment, and Wells Bloomfield added $17.2 million to accounts receivable, $20.7 million to inventory, $8.3 million of property, plant, and equipment, $7 million of accounts payable and $15.7 million of crude expenses.

Additionally, we recorded $7.7 million of goodwill and $18 million of other intangible assets associated with these acquisitions. Other changes in the balance sheet accounts primarily reflect normal variations driven by working capital requirements.

Cash flows provided by operating activities amount to $13.5 million during the fourth quarter and $59.5 million for the year. Operating cash flows included depreciation and amortization of $1.5 million for the quarter and $6.4 million for the year, and also included non-cash share based compensation costs of $2.2 million for the quarter and $7.8 million for the year.

Operating cash flows for the year were utilized to fund the acquisitions of Jade, Carter-Hoffmann, MP Equipment, and Wells Bloomfield, which in aggregate amounted to $68.2 million. The company also had capital expenditures amounting to approximately $1.6 million during the fourth quarter and $3.3 million for the year, primarily associated with the replacement and upgrade of manufacturing equipment and facilities improvements.

Total debt at end of the year prior to the Star acquisition amounted to $96.2 million. This was a decrease of $11.6 million from $107.8 million at the end of the third quarter and an increase of $14 million from $82.2 million at the beginning of the year. The increase in debt during the year reflects the $68.2 million of acquisition funding net of repayments from operating cash flows.

On December 28, 2007, the company entered into a new senior debt facility and repaid and retired its previous debt facility. The new senior debt agreement consists of a $450 million revolving credit facility that extends for a five-year period. The new facility was put in place to fund the acquisition of Star International Holdings for $188.4 million, which was completed on December 31st, and provide for additional borrowing capacity to fund potential future acquisitions. On December 31, the company, inclusive of the Star transaction, had approximately $285 million of borrowings outstanding.

As previously reported, Star, at the time of acquisition, had approximately $100 million of revenues and was generating $20 million of EBIDTA. As with other acquisitions, we anticipate there will be some initial reduction in sales as we rationalize lower margin or unprofitable SKUs, which could result in a reduction of sales in the short-term.

We do anticipate an improvement in EBIDTA margins as we realize synergies and complete integration initiatives. We are pleased with the progress made during the first quarter at this acquisition and believe we can improve EBIDTA margins at this operation to 25% or better over a 24-month period.

Depreciation and amortization costs associated with the Star acquisition are projected to be $7.5 million annually, including $6 million of amortization associated with intangible assets recorded in conjunction with the acquisition.

Additionally, in accordance with GAAP, the company will write-up the acquired inventory at the time of the acquisition to reflect fair market value. This adjustment will result in an increase of approximately $3 million to inventory and a reduction of $3 million in profits during the first quarter of 2008.

This is a one-time accounting related adjustment associated with accounting for the acquisition, which will only affect the first quarter. As a result of this adjustment, we anticipate the transaction will be dilutive to net earnings and earnings per share in the first quarter. We do anticipate, however, the acquisition will be accretive in the second half of 2008 as we realize synergies associated with the transaction.

We are very pleased with the progress made at the four other acquisitions completed during 2007, and we are on or ahead of target with our profitability objectives at these companies. As I previously mentioned, these companies in aggregate reported gross margins of 29% in the fourth quarter, operating margins in excess of 10% and added $0.12 per share to the quarter.

Initial reorganization initiatives have been completed at these business units, and we anticipate continued improvement in 2008, and anticipate that these companies will improve to operating margins in excess of 15% as we move into 2008.

Jessica, that's all for the prepared commentary. Could you please open the call for questions?

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Peter Lisnic of Robert W. Baird.

Peter Lisnic - Robert W. Baird

Good morning, Tim. Good morning, Selim.

Tim FitzGerald

Good morning.

Selim Bassoul

Good morning, Pete.

Peter Lisnic - Robert W. Baird

Tim, I guess if I could start with you, on the topline growth that you saw in the quarter, the 12% organic, can you help us understand how your organic growth accelerated? I'm sure part of it was impacted by the work stoppage at Elgin, any sense as to how much that added? And can you maybe give us a better sense as to what maybe a core organic growth number was for the quarter?

Tim FitzGerald

Well, as I mentioned, if you breakdown the two pieces, 9.4% was the growth at the Commercial Food Service, but that was largely driven by international. So domestically we had growth of 3%, internationally it was 33%. So the domestic growth didn't have any impact of the kind of catch-up from the work stoppage. But internationally, there was some impact there. But even excluding that, we would have had international growth in excess of 20% for the quarter.

The Food Processing side of the business, I mean the growth was very strong, obviously, up 28%. We don't except that type of growth going forward. But during the course of end of '06 and the first half of '07, we had negative growth at that business unit because we had increased pricing and streamlined some of the lower margin products. So, we've kind of moved out of that negative comparison and saw a strong pickup in the fourth quarter because we were comparing to a weaker fourth quarter. But even beyond that, we had strong sales in the fourth quarter. So it would have been double-digit growth for that Food Processing Group in the fourth quarter.

Peter Lisnic - Robert W. Baird

Okay. And then I guess on the international side, is that essentially a function of the chains sort of growing overseas, or is it more just that your product is more price competitive because of what's happening with currency? How do we kind of break apart or decipher the growth that you're generating internationally?

Tim FitzGerald

I wouldn't say one was a whole lot stronger than the other. I think it's a combination. I mean really it's the three factors that I mentioned. The emerging markets, we had strong growth in China and some of the other expanding markets. So that added quite a bit. We've seen sales growth in Europe. I would say that the growth that we've had in Europe is driven by the competitiveness of our product on pricing. Then I also mentioned that with Houno, which is lumped into the international sales there, we had very strong growth out of that business unit as well. And that was due in part to the new product line that we introduced in the fourth quarter.

Peter Lisnic - Robert W. Baird

Okay. And I assume it's probably safe to say that that international growth outlook, it probably looks pretty good for 2008, is that a safe statement?

Tim FitzGerald

Yes. We feel pretty good about the international outlook moving into '08.

Peter Lisnic - Robert W. Baird

Okay. And then just last question. On the steel costs, any sort of sense as to what the impact was in the fourth quarter or what it might be for '08, either on gross margin or profitability?

Tim FitzGerald

It probably costs us about 1% in gross margins. Steel flattened out in the second half of the year for us and perhaps even softened a little bit relative to where we were in the second and third quarters. But it's still substantially higher to where it was in the fourth quarter and first quarters of this year, because we saw such a ramp-up in steel in the first and second quarters of this year. So it remains at a higher level. It's hard to predict where it's going to go in '08. But we have seen some benefit with the acquisitions, as we've increased our purchasing leverage with the larger amount of steel that we purchase.

Peter Lisnic - Robert W. Baird

Okay. Thank you. I'll jump back in queue.

Tim FitzGerald

Okay. Thank you.

Selim Bassoul

Thank you, Pete.

Operator

Your next question comes from Jamie Clement with Sidoti.

Jamie Clement - Sidoti

Tim, Selim, good morning.

Tim FitzGerald

Good morning.

Jamie Clement - Sidoti

Tim, let me just ask you about the credit facility. I may not have caught everything, but looking at your 10-Q, I think you were like LIBOR plus 125 basis points for the credit facility. And then at December 29, I think you were talking about your average rate being about 7.25%. The new Star deal and the indebtedness that you have to take on for that, has that pushed up your effective rate on that facility or is that still the right ballpark to think about?

Tim FitzGerald

Okay. I would say it's actually a little bit lower than the 7.25% you mentioned. The 7.25% was because we rolled the facility literally on the last day of the year.

Jamie Clement - Sidoti

Right.

Tim FitzGerald

We had probably not efficiently placed all our borrowings in LIBOR base.

Jamie Clement - Sidoti

Okay. Okay.

Tim FitzGerald

So we had some kind of very short-term rate in there. So the LIBOR plus 1.25% is the right rate to look at it. There's some other credit facility fees that you probably want to add on that, if you're thinking --

Jamie Clement - Sidoti

I think you guys have like a 0.25% commitment fee or something like that?

Tim FitzGerald

Right.

Jamie Clement - Sidoti

Right.

Tim FitzGerald

Right. And there's a line of credit or LC fees.

Jamie Clement - Sidoti

Okay.

Tim FitzGerald

So you might want to add 1.50% on top of LIBOR.

Jamie Clement - Sidoti

Okay.

Tim FitzGerald

And then that would be kind of how you think about the interest cost.

Jamie Clement - Sidoti

Okay. I appreciate that. Last question. Selim, can you take us through what the new Star deal brings to you guys? What you've seen over the last couple of months? This is, I think, maybe a little bit of a different customer base they might have in certain regards than you might have had. So can you sort of give us a little bit of a snapshot of what you've seen in the brief time since you've owned the company?

Selim Bassoul

Well, since we've owned the company, I think Star continues to do well. We bought the number one leading brand in what I call the countertop equipment and they are very strong in (inaudible) business. They are very strong in the convenience and concession business, which in a recession should do well.

So what is unique about Star is we bought a more profitable company, which is different from what we've done in the past. And you're wondering why. People say well, usually we tend to buy turnaround companies, and this is not a turnaround. It's a company which is doing very well, performing extremely well. But we see specifically four reasons why we bought that company.

We see significant synergies between Star, Toastmaster and Wells. We see basically buying the leading countertop company in the world, which gets us more entrenched in the fast casual and the convenience store business. So we bought the number one in that segment. Three, strategically we wanted to penetrate the convenience store market. We believe that today, there's no way that the American consumer is going to be accepting a hot dog that sits for four hours on a grill and sold for $0.99. I don't care. You know what I'm talking about. You can imagine the picture of that hot dog sitting there for hours. I think it doesn't matter if you give it away. People aren't going to buy it.

So finally, the convenience store markets are realizing that they need to upgrade their equipment and their food offering, because they can make a lot of money in that segment. And because there is a slowdown, a lot of people will start opting to purchase food from a convenience store or because of speed reasons.

Number four, we can improve the operating margin. Basically, we can grow it. We can grow Star from the 20% where they are today to the mid 20s, while in the past it's not to the extent of what you've done in the past where we've taken a 5% operating margin and grown it to the mid 20s. But there is room still at Star to grow that business from their existing 20% operating margin to a 25% operating margin in the next 24 months.

Jamie Clement - Sidoti

Okay. Thank you very much for your time.

Selim Bassoul

Thank you, Jamie.

Operator

Your next question comes from Russ Jones with RBC Capital Markets.

Russ Jones - RBC Capital Markets

Hi. Good morning, guys.

Selim Bassoul

Good morning.

Tim FitzGerald

Hi. How are you?

Russ Jones - RBC Capital Markets

Good. I wanted to talk a little bit about inventory levels and distributors, and if you have a sense of kind of where they sit right now, going into Q1?

Selim Bassoul

I think truly we do not have visibility to our distributor. Our backlog, it is very small, it's very quick. We have a three-week, we deliver. So I assume that our distributors are not sitting on a lot of inventory if I have to speculate. The reason is if you look at our product in many of our companies, we have quick ship programs where a distributor can easily come back, get an order from the customers, come back to us, and we can ship it.

And like Pitco, Blodgett, Southbend are all quick-ship programs in place so that they can ship almost 50% to 60% of their product within two days, so my feeling would be that we do not have a lot of inventory in the pipeline. If I was a smart distributor, I would be cutting back my inventory, and I believe many of our dealers have been managing their inventory very effectively.

Russ Jones - RBC Capital Markets

Okay.

Selim Bassoul

At least from the equipment side. What I call tabletop or supply side, they might have to stock more because if somebody wants a case of plates or glasses, they need to have it fast. But on the equipment side, they've been relying more on Middleby with their quick ship program.

Russ Jones - RBC Capital Markets

Great. That's helpful. Another question, you've consistently brought down selling, distribution, general and administrative expenses to now under 19%, and you've consistently brought it down over the last four quarters. Kind of what do you expect for '08 in terms of continuing to strip out costs from those line items.

Tim FitzGerald

What do we expect for '08 for SG&A as a percentage of sales, is that the question?

Russ Jones - RBC Capital Markets

Yes.

Tim FitzGerald

Well, I mean, we are not going to give a projection of that, but I think we think that as the acquisitions are integrated, we would expect that we would be able to further leverage the SG&A line over time.

Russ Jones - RBC Capital Markets

Okay. That's all I have.

Tim FitzGerald

Thank you very much.

Selim Bassoul

Thank you.

Operator

(Operator Instructions)

Your next question comes from [Steve Profer with COE Capital Markets.]

Steve Profer - COE Capital Markets

Hi, guys.

Selim Bassoul

Hi, Steve.

Tim FitzGerald

Hi, Steve.

Steve Profer - COE Capital Markets

Hi. Congratulations on the quarter. I was just wondering what you think the market grows and what Middleby grows in '08, considering the economy?

Selim Bassoul

Okay. A very good question. I think it's on the minds of many people, on what is the outlook, when everybody talks about a slowdown, a recession. We have historically demonstrated that we exceed the industry growth. And while we've never given guidance and we always say that if the industry grows, let's say 2% to 4%, we'll be double that growth rate. And I'm going to tell you, we expect to still grow in '08. So despite all the fears of -- you're building a business model, we still are going to grow in '08, and I don't see us changing.

But I would like to talk more. I can talk more on what has been a commitment that Middleby has done year after year. And I imagine as shareholders that you're more interested in the bottomline. Middleby has been consistent, despite all the headwinds, and we can talk about those headwinds one after the other, but despite the headwinds that we've had year after year, this is another challenge we're facing this year. Every year we've had challenges and I can go back into that maybe later during my presentation.

But in the bottomline, we're still talking about '08 of an increase of earnings per share. What I've always said, we're going to be growing between the 20% to 25% earnings per share every year for the next five years. So if you look at the next five years and you want to project, we'll be 20% to 25% earnings per share growth, irrespective of what the topline growth will be. So we're reinforcing our commitment to growing the next five years, 20% to 25% earnings per share growth every year, including '08.

Steve Profer - COE Capital Markets

Okay, great. All right. That's really all I had. Thanks again and congratulations on the quarter.

Selim Bassoul

Thanks.

Operator

Your next question comes from Tony Brenner with Roth Capital Partners.

Selim Bassoul

Hi, Tony.

Tony Brenner - Roth Capital Partners

Good morning. Thank you. A couple of things. Number one, given the inventory write-up of new Star, do you expect that that acquisition still will be accretive to earnings per share this year?

Tim FitzGerald

To 2008? Well, we expect it's going to be accretive in the second half of the year. It's going to be dilutive, as I mentioned, in the first quarter.

Tony Brenner - Roth Capital Partners

And for the full year?

Selim Bassoul

I'm going to answer it. I think in the full year we'll have a small accretion, not by much. Just because of the impact of the inventory in the first quarter, which we should take into account, and in the fact that we're going to be integrating Toastmaster and Wells with Star. And there should be some -- how it goes, synergies, there might be a little bit of disruption there. But I'm looking at some integration there. Yes. So we're talking about a slight accretion, not a lot, in '08.

Tony Brenner - Roth Capital Partners

Okay. And your comment raises another question. Several quarters ago you indicated that Middleby had excess capacity and that you planned to consolidate or eliminate some of your existing facilities. And since then you've made four additional acquisitions and acquired a lot more facilities. So I'm wondering what sort of consolidation opportunities there are and how quickly they might be implemented?

Tim FitzGerald

Well, the one thing we're working on right now, Tony, is with the Star acquisition, they actually had two manufacturing facilities. So there's a production facility in St. Louis that right now we're working to consolidate with their larger facility in Nashville.

Selim Bassoul

Also, we're consolidating the MP plant in Atlanta into Alkar. It's a very tiny plant, so the synergies there will be very small. So I don't to raise the expectation, a lot of money there. So it's very small. But I think it's a great year for us, Tony, at this moment. Remember, we've been busy.

And you've been the first to follow us and we want to thank you for that. I want to take a minute to say that you were first to put us on the map or you were the first analyst to cover us early on. You were exactly the first. And since you've started covering us, we have worked very hard in innovating and producing new products. And one of the things I did not want to do and the management team did not want to do is try to get a one-time gain of closing a plant at the expense of innovation. And we wanted to get innovation going.

It might be this is the year, maybe, to start looking at consolidating more of our factories. And we haven't given it significant plan yet at this moment. We have, as Tim mentioned, a few factories we're going to consolidate. We might have one or two more in the process.

Tony Brenner - Roth Capital Partners

Okay. My last question, the four recently acquired businesses, to what extent do they ship to international markets? Your international sales for the fourth quarter were up pretty strongly and apparently only a portion of that was organic growth. Is the rest as a result of those recent acquisitions?

Tim FitzGerald

No. I would say very little of that growth came from those acquisitions. We're just starting to bring some of those products through our distribution channels right now. So we think that's an opportunity, but that's been very little of the growth this year.

Tony Brenner - Roth Capital Partners

Okay. That's it for me. Thank you.

Selim Bassoul

Thank you, Tony.

Operator

(Operator Instructions)

Your next question comes from Jason Rodgers with Great Lakes Review.

Jason Rodgers - Great Lakes Review

Hello.

Tim FitzGerald

Hello.

Selim Bassoul

Hi, Jason

Jason Rodgers - Great Lakes Review

I was wondering if you could give the estimates for Cap Ex and D&A for '08.

Tim FitzGerald

With Cap Ex, we generally guide towards roughly 1% of revenues, is kind of where we've historically been over time and we think we'll continue to be roughly at that as a percentage of sales. With amortization, as I mentioned, Star's going to add about $6 million in 2008, and with the other acquisitions that we had during the year, they were at a run rate of about I think $2.2 million. So we're somewhere in the $8.5 million for amortization.

Jason Rodgers - Great Lakes Review

Okay. And do you have the breakdown in the quarter for the segments, the Commercial Food Service, Food Processing, and the international?

Selim Bassoul

We can break it out. Jason, we tend to break our sales in 20% as Food Processing, 80% is Food Service, roughly. Is this correct, Tim?

Tim FitzGerald

The Food Processing and Food Service, yes, that's about right. It's between 15% and 20% is Food Processing and the remainder is Food Service.

Jason Rodgers - Great Lakes Review

Okay. And then finally, has the Rocket Fryer been introduced to the market?

Selim Bassoul

The Rocket Fryer is on tests right now in one store. And it will be launched in the fourth quarter of '08. And it's out there, it's visible. We're tweaking it. We're working with this chain where we had it in one store, and we're working very, very diligently on it. Yes. It's out on test right now.

It's a product that's outside the prototype. It's no longer a prototype. It's ready to be manufactured and we're looking at feedback from that customer to give us the feedback of whatever they see in terms of payback and measuring values and whatever we need to do from an economics standpoint. But we're committed to launching that product in the fourth quarter of '08.

Jason Rodgers - Great Lakes Review

Okay. Thank you.

Selim Bassoul

Thank you, Jason.

Operator

Your next question comes from Peter Lisnic with Robert W. Baird.

Peter Lisnic - Robert W. Baird

I'll try to be quick. Tim, on the 12% organic, do you have a price versus volume breakout of that?

Tim FitzGerald

No. That's not something that we can really measure efficiently.

Peter Lisnic - Robert W. Baird

Okay.

Tim FitzGerald

Now one of the reasons is because we've got so many new products and they're replacing existing products, so it's hard to measure if that's price or volume.

Peter Lisnic - Robert W. Baird

Okay. All right. Fair enough. And the on the SKU rationalizations that you might do at Star, can you give us a sense as to what that might do to the revenue base there?

Tim FitzGerald

I think we're still looking through that. I mean, I don't think it's a significant number, meaning it wouldn't be more than 5%.

Peter Lisnic - Robert W. Baird

Okay. All right. And then Selim, I guess, and if this is in your prepared commentary, you can just tell me to wait. But you mentioned a little bit about the Rocket Fryer, but I hear you talking a lot more about the ventless hood. Can you give us a sense as to what, or a better sense as to what the opportunity there is in terms of where exactly that product's going to go? How big of an opportunity it might be, those sorts of things?

Selim Bassoul

Peter, I think this is also a great question because this is a great technology for us. It's one of the products that we acquired. It's very patented. We're highly patented on this. It's a technology that we acquired from United Technology when we bought Wells.

And two things we did to that technology. One, it used to be locked. That means that technology was only available on Wells products. That means unless you bought a Wells product, that that technology only worked for those products only. And we opened that. It's like taking your phone and opening it up. I had spoken about that when we bought Wells. So we're very excited. We were able to do some engineering work, a lot of work, since the acquisition of Wells to take that ventless hood and make it universal. That means you can buy any piece of equipment, and then you can incorporate that ventless technology with your appliance.

We see that growing very fast. We're working on trying to get a ventless. Today, this ventless technology is only applicable to electric equipment. We are taking that technology and trying to develop something for gas, which is a much bigger market. So we're working to take that technology, which was shelved during the United Technology (inaudible). There was not a lot of interest on it. There was not a lot of R&D into it. Now we're putting a lot of R&D money behind it to bring a gas technology in ventless. So once we get the gas and electric, we see that market to be a multi-million dollar rollout. And that could be, I would say, starting in 2009 and 2010, because we will be working very diligently in '08 and partly in '09 to take that technology into gas.

Peter Lisnic - Robert W. Baird

Are there any sorts of codes or restrictions that would prevent you from being able to that? I'd imagine that vents are required in some form or fashion in the restaurant industry by whatever the codes might be. Is there that sort of hurdle there that you have to get past before you can actually introduce the product on a larger scale?

Selim Bassoul

I'm sure there's always somewhere in some part of California, that somebody will probably make a deal out of it. I understand. But I would say, in general, that if you look across the country, that technology has been very well-proven. It's very proven, it's very valid, it works. It acts as a vent. Let's make it clear. It's a vent, but it's ventless. That means you don't have to go through a building structure to go out. So it traps the gas, it traps the CO2, it traps the grease, it traps all of that within that technology.

It will be highly applicable. I don't think the code is an issue. I think for us, it's being able to take that technology, promote it effectively and make it more economic. We need to make it better looking than the way it is today. And then take it into gas. I think those are the hurdles, more than the code.

Tim FitzGerald

Yes. As an aside, we have it in electric, which is available across the country. So we've been able to satisfy code requirements with the electric. So it's a matter of meeting the same specifications when we come up with the gas unit.

Peter Lisnic - Robert W. Baird

Okay. That's all I had. Thank you again for your time.

Selim Bassoul

Thank you.

Tim FitzGerald

Thanks, Pete.

Operator

Your next question comes from Greg Halter with Great Lakes Review.

Selim Bassoul

Hi, Greg.

Tim FitzGerald

Hi, Greg.

Greg Halter - Great Lake Review

Hi, guys. How are you?

Tim FitzGerald

Good. How about you?

Greg Halter - Great Lake Review

So far, so good. A question for you on the M&A outlook, I know you've done five here in the last 12 months or so, and just if you could provide your thoughts whether or not you'll be integrating or still looking, and if pricing has changed at all for you?

Tim FitzGerald

Well, acquisition is still one of the strategic growth areas of the company. So we're looking to continue to build our businesses, both on the food processing and the commercial side. So that will continue to be a focus as we move through '08. And we think the environment in '08 is going to be similar to what we saw in '07.

Greg Halter - Great Lake Review

Okay, great. Also I wondered if you could comment on the competitive environment, whether or not you're seeing any changes there, or whether or not you think you're gaining share, losing share, or whatever?

Selim Bassoul

I think one of the things you will see is you will see many of our competitors putting releases where they one this and one that and one this. I think what makes Middleby unique, Greg, and you've been around with us now for a few years, as well as many of the analysts who've been covering us, I've always reinforced the fact that we are not a market share driven company. We are not going out and seeking market share to get a press release. We're not desperate for business. Let's put it this way. And I'm going to address that. We're not going cocky. We're not being arrogant.

I want to make a statement right now that the number of tests that we have with many, many change is at its all-time high. We're testing so much of our technology today with so many changes. So we're not out there looking for market share gains. It's never been an objective for Middleby to go out and be desperate and look at that account there we make no money. And there are a lot of accounts that act like Wal-Mart in our business, where you sell them a lot and you make no money.

So we're not desperate to be looking at those accounts. What we've been very interested in is making sure that we work with our customers on applications, where they are willing to pay us for that technology. We are also willing to show them the fact that we deliver payback value. We've always talked about what makes Middleby unique, and why we continue to see.

If you go and ask many of our customers why they like Middleby and why it takes us so long to introduce a product. I'm sure many of you have been frustrated sometimes when I talk about the wall oven or I talk about the Rocket Fryer, and you say, well, he's been talking about it, why? Because we want to make sure we work with our customers so that we can validate the payback. Once you get a payback of 12 months or less, customers are willing to pay you very much for that, handsomely for that technology. So we work very closely with our customer to make sure that we validate the payback.

You go out at a trade show and you look at all the people talking about energy saving. Everybody now has energy saving appliances. Let me tell you what makes Middleby unique versus everybody else. We basically, in our own ads, and when we tell customers, we don't say our equipment will save you energy. We come back and say, let me tell you how much and we're willing to stand behind it. For example, you look at our wall oven; we didn't say it saves energy. We said it saves 35% in energy over Model "X," Model "B," Model "A." And that makes us unique, highly differentiated than everybody else.

So going back to market share, I'm going to tell you we have a lot of tests right now on our new products out there. We're very excited about it. We see a lot of opportunities and we have a lot of customers working with us on many of our new products. So we don't measure market share. We measure the ability to satisfy our customer, measure our payback and validate it, and make sure that we get the margin we want, working with that customer on a specific payback for them.

Greg Halter - Great Lake Review

Okay. That's great. Keep up what you're doing in that regard.

Selim Bassoul

Thank you very much.

Greg Halter - Great Lake Review

Relative to the steel side, we've heard about some potential increases in steel coming down the road, and just wondered if you could share your outlook for 2008.

Selim Bassoul

I wish I could predict steel. I think the last three years steel has been a major issue for us. And we've managed it extremely well. I think steel is, at this moment, we heard some softness on the steel market. We seem to be winning on that thing. We seem to have our suppliers giving us some break on steel. I think we're locked in right now with steel prices in the first half that are slightly better than what we've seen in the fourth quarter of '07. But my concern is it's still much higher than it was in the first quarter of '07.

So compared year-to-year, we're still way above what we used to be a year ago. We're slightly better than the fourth quarter of '07. I think it's going to depend on what's going to happen to the chromium and nickel prices as we go forward in the second half. We're locked in the first half, and we have a slight advantage going into the first half.

Tim FitzGerald

Yes, but just to follow-up on that, Greg. We lock in on base pricing. So there are the surcharges which are tied to nickel and chromium we cannot lock in. And that's a surcharge that comes through as the market moves up or down. So as Selim mentioned, it's difficult to predict where those are going. Chromium has been increasing as of late. Nickel we had seen softening a little bit, so there's a mixed bag there.

Selim Bassoul

But I think, Greg, I don't want to come back and say as I've always said; no excuses. We're not going to use steel. I am not going to surprise anybody by saying steel. When steel went up 300% over the last two years, we managed it. We're going to manage it again this year. I reinforce my commitment to a 25% earnings per share growth despite all those headwinds.

Greg Halter - Great Lake Review

Okay. And obviously, a lot of talk about new products, and there's all kinds of new ones that you referenced in the release. Do you measure the company's percent of sales of new products introduced in the last 12 months or 24 months or whatever the period may be?

Tim FitzGerald

Yes. We usually measure new product sales as a rolling three-year period. And our objective is to have that number be about 20% of our total sales, and roughly has been around that number over the last couple of years, and continues to be.

Greg Halter - Great Lake Review

So it continues for '07 as well, or did for '07?

Tim FitzGerald

Yes.

Greg Halter - Great Lake Review

Okay. And one last one. I think on the last call, you had talked about a new residential wall oven that was going to be introduced, or was introduced in January of '08. Just wondering if you could comment on that?

Selim Bassoul

Yes. We introduced a new oven that is more commercial looking for residential. And at this moment, our distributors who had a chance to see it were very excited about it. They are very, very excited about it. It's a unique product. There is nothing like it in the residential market. It's ergonomically a lot more friendly. It uses all the technology we have in the commercial side, where we've learned from a Blodgett and Southbend convection oven, we've incorporated a lot of the technology in that to make it easy.

In the commercial setting, convection ovens are a very difficult product to use because you have to open and close the door all the time. So we've found out some unique technology in door mechanisms, in air flow, in air curtain and controls. And we've taken those and applied them into the residential. Unfortunately, the residential market is not a great market right now. Thank God we're not in the housing business. So our business in residential is irrelevant to our story today.

And at this moment, we continue spending some money till the day when the residential market goes back and starts growing. So for us, we'll most probably see a few unit sales this year on our residential business from Jade, but it's not big now. Any of it. It will be upside, whatever we do there. It's not baked in any of our assumptions.

Greg Halter - Great Lake Review

Okay, great. Thank you and congratulations on the fine results.

Selim Bassoul

Thank you very much, Greg.

Tim FitzGerald

Thanks, Greg.

Operator

At this time, there are no further questions. Mr. FitzGerald, are there any closing remarks?

Selim Bassoul

Yes. I would like to talk a little bit about Middleby. And I'm sure for many of you and for many people who are going to listen to that call, after playback, whether they are investors or shareholders or analysts who haven't been able to come to be on this conference call, I would like to reinforce the fact that, one, this environment is not different than we've seen for Middleby. Middleby has had many challenges in the last few years.

I'm going to come back and say the challenges we've had, we were in a recession in 2001 and 2002. We were not as strong internationally as we are today, and we managed that very effectively. We then got hit by hurricanes in our largest markets in the southeast, by Hurricane Katrina and Wilma that hit our largest market in the southeast in the United States in '05, '06, that timeframe. And we managed that.

Number three, we got hit by 300% stainless steel price increases in the last two years, or year and a half, and we didn't go back and say we couldn't make our numbers. And as of '07, in one of our largest and most profitable companies, we had a lockout and a strike of almost three months, and we did not go back and say we could not make the year. So the challenge that we're facing today, while we can call it slowdown or recession, is not new to Middleby. It's a different form of a challenge. And I will tell you that Middleby will go back and say, there will be no excuses on delivering the bottom line.

We have also put in place some contingency planning to make sure that we can overcome this difficult and turbulent market, and we will deliver. I think the new consumer mindset is about value. This is where the bulk of our customers are today, the pizza chains, the fast casual, the quick serve, and the new value equation should be good to our customer base. So I look at it and I'm very excited and we're going to manage.

I'm going to finish by saying actions speak louder than words. To this, I want to thank you. Bye-bye.

Operator

This concludes today's Middleby Corporation fourth quarter earnings conference call. You may now disconnect.

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Source: The Middleby Corporation Q4 2007 Earnings Call Transcript
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