Middleby Corp. Conference Call Notes
Board: Middleby Corp.
Cross post from RB Middleby board.
Middleby returned in Q1 to revenue growth rates like those that came before the Viking acquisition, the largest in its history.
The market seemed a bit confused as to how to respond. The shares opened this morning down as much as 6 percent, apparently because of an earnings "miss" compared to the consensus estimate. At some point, Mr. Market apparently did the math and realized that the estimate was for more than 40 percent year-over-year profit growth -- perhaps a vestige of the first-year Viking comps -- and that the "miss" still represented 28 percent profit growth. The loss quickly evaporated. As I type, the shares are up a little more than 1 percent on a flat day in the market.
Net sales were up 13.8 percent in the quarter, or half as much as profits, to $372 million, and yet this revenue number exceeded analysts' expectations, so perhaps it's best to ignore the analyst expectations altogether.
The exuberance that followed last quarter's results -- a 13 percent spike in the shares that day -- was not sustainable, as we discussed at the time, and it was not sustained. The multiple the market is willing to pay for Middleby's earnings has fallen by seven points since then to about 29 times trailing earnings as of today, still higher than the historical average, but not nearly as high as the 36 times Mr. Market was offering three months ago. More on this in a minute.
Three main news items from the conference call earlier today:
1. Sixteen casual dining chains are currently field testing Middleby's automated kitchen of the future in about 200 stores. "We are sitting on more tests than we've ever seen," said CEO Selim Bassoul. This reminds him of 2012, the previous high for field tests, which led to strong 2013 results in the commercial food service equipment segment. Selim believes the level of testing now augurs well for 2015 and 2016 sales. A prominent fast food chain is also field testing a redesigned kitchen by Middleby.
2. Two more Viking distributors were acquired in Q1 and two others were canceled. This completes the process of bringing all Viking distribution for the U.S., Canada and Mexico in-house. Viking revenue growth has been slowed by this process, and margins have been impacted by selling existing inventory with no manufacturing markup in order to clear the decks for 50 new Viking products now in production. There will continue to be some negative impact of reorganization in Q2. Increases in revenue and margins should start to materialize in the back half of the year.
3. The proposal to increase the number of authorized shares passed and both Selim and CFO Tim FitzGerald said they anticipate a 3-for-1 stock split. From the current price, that would bring the shares down into the high double digits, or about $83 per if it happened from a pre-split price of $250.
Organic growth in Q1 was 8 percent, most of it in the commercial food service equipment group, which continues to get a lot of attention from restaurant chains looking to cut kitchen footprint, labor and energy costs. Ed Rensi, acting CEO of Famous Dave's, the barbecue chain, offered some insight into how restaurant operators look at this on his own conference call last month:
There's a company in Chicago called Middleby Corporation which has some of the best restaurant technology in the world, and they are partnering with us to do a complete analysis of our kitchen as to new cooking techniques, new cooking systems, with the objective of reducing labor, making our products more consistent and delivered to the consumer with a higher level of quality, reducing utility costs, eliminating the use of natural gas to the extent we do today and so on and so forth. So kitchen efficiency becomes very important because the more efficient our kitchens are, the less square footage we need in those kitchens. And with our occupancy costs being what they are, a smaller kitchen really improves our store-level economics going forward.
In addition to the 8 percent organic growth, the company saw 5.8 percent year-over-year revenue growth from acquisitions since Q1 2013, including Celfrost, Automatic Bar Controls (Wunder-bar) and Market Forge Industries.
Organic growth in the food processing equipment segment was 5.9 percent against a tough comp from 2013 powered by a large order. Q1 2013 saw 18 percent organic growth over Q1 2012.
Organic growth at Viking was 7 percent, to $62.8 million in sales. The Viking reorganization looks to be about an 18-month process with the company expecting growth based on a new line of products to begin in Q3. In addition to bringing distribution in-house, Selim said Middleby intends to cut the number of Viking dealers roughly in half, from 1700 to 800-900. Dealers will no longer be able to sell outside their geographic areas and they will be responsible for providing the first line of service within those areas. The company is already receiving orders for new Viking products displayed at the recent Kitchen Bath Industry Show for delivery later in the year.
Selling and distribution expenses increased $10.8 million to $47 million, including $9.3 million associated with Viking distribution operations not reflected in the prior-year results. The other $1.6 million was attributable to Celfrost, Wunder-Bar and Market Forge. Excluding the impact of these acquisition-related activities, selling costs were consistent with the prior year.
General and administrative expenses were down $2.8 million to $40.1 million. There was an increase of $4.6 million from acquisitions offset by a $3.5 million decline in non-cash and tangible amortization expense and a $4.2 million decline in restructuring charges as compared to the first quarter of 2013. G&A expenses this quarter included $2.6 million of non-recurring costs associated with the Viking distribution reorganization, much of it severance payments.
Selim said he's not happy with SG&A costs and intends to effect initiatives within the next 60 days to bring them down.
Asked about initiatives on the kitchen's cold side, Selim said refrigeration remains a negligible part of the business, but that Viking's residential refrigeration products, now a $20 million annual business, could easily grow into a $100 million or $150 million annual business. He also said Middleby technology is taking market share in the combi-oven sector.
In other words, it's full steam ahead, no pun intended. The commercial food service equipment segment remains the lion's share of the business, accounting for 63 percent of revenues in Q1. Food processing represented 20 percent and residential 17 percent. Commercial food service is poised to continue growing organically based on the needs of restaurant chains for the efficiencies offered by the automated kitchen of the future. The residential segment is poised to begin growing in the second half of the year as Viking's new products hit the market.
Internationally, FitzGerald did not provide the numerical breakdown he usually does but said growth in Europe and the Middle East was about 10 percent while Asia and Latin America were flat to down owing to the issues they've previously discussed in China and Brazil. They expect growth to resume in both later this year.
So let's talk value. Net income for the past 12 months is now $8.58, giving the shares a trailing price-earnings ratio of 29 at $250 a share. Considering that profit growth was 28 percent this quarter, it's not an unreasonable multiple. As previously mentioned, it has come down from a 36 just three months ago.
As Middleby shares have corrected, so has the overall market. Both may have further to go, but that's a guessing game. It's possible that the stock split will give the shares a bump; that sometimes happens. But the effect of the past three months was to bring down the P/E's numerator, the price, from nearly $300 to around $250, while increasing the denominator, TTM earnings, from $8.21 to $8.58. This offers new investors a better entry point and long-term holders a more solid base from which to see future growth reflected in the share price.
Between the general market correction, the Viking reorganization and the widespread field testing of the kitchen of the future, it looks as if the first half of 2014 may represent a slowing of the train to take on new passengers before it powers up again for the next leg of the journey. Middleby remains a great American growth story with a plenty of room to run.