Aug 9, 2012
Operator
Welcome to The Middleby Corporation Second Quarter Conference Call. With us today from management are Selim Bassoul, Chief Executive Officer; and Tim FitzGerald, CFO.
We will start the call with prepared comments and then open it up for questions. Directions will be given at that time on how to enter the queue and ask a question.
Operator
Now I’d like to turn the call over to Mr. FitzGerald for opening remarks.
Please go ahead sir.
Timothy FitzGerald
Good morning and thank you. Net sales in the 2012 second quarter of 260 million increased 23.3% from 210.9 million in the second quarter of 2012.
Sales growth from acquisitions accounted for 38.8 million of this increase in the quarter. Excluding the effect of these acquisitions, sales increased 4.9% over the prior year quarter; this increase reflects the 5.4% increase in sales of our commercial foodservice group and a 2.1% increase in sales of our food processing group.
Timothy FitzGerald
The sales growth in the quarter was adversely impacted by foreign currency exchange rates which impacted sales as reported in the U.S dollar by approximately 1%. At the commercial foodservice group we continue to realize sales growth driven by sales to restaurant chains looking to upgrade equipment and adopt new technologies to improve the efficiency of store operations.
Timothy FitzGerald
Sales in emerging markets also remain strong with the growth in excess of 20% in both Asia and Latin America offset by reduced sales in Europe reflecting difficult economic conditions which we anticipate to continue in the near-term.
Timothy FitzGerald
A modest increase in sales at the food processing group reflects growing demand by food processing customers looking to modernize existing production operations and new customers developing operations in emerging markets as demand for pre-cooked and pre-processed foods increases. Sales in the segment moderated in the first half of the year rebounding from the decline in the prior year and are expected to continue to improve over the course of the second half of this year.
Timothy FitzGerald
Gross profit increased to 101.8 million from 85.3 million and the gross margin rate was 39.2% as compared to 40.5% in the prior year. The gross margin rate reflects a higher mix of sales from the food processing segment at a comparatively lower margin.
Within the individual segments, the commercial foodservice segment remained in excess of 40% and consistent with prior year, while the food processing segment reported slight decline reflecting lower margins at the nearly acquired companies.
Timothy FitzGerald
In the upcoming quarters we anticipate the food processing business will continue to represent a comparatively higher portion of the sales due to the recent acquisitions which will likely affect the overall gross margins. However, we anticipate improvement in the margins of this segment as we move into next year as we realize the benefit of business integration initiatives.
Timothy FitzGerald
Selling and distribution expenses during the quarter increased 6.7 million to 28.3 million as compared to 21.6 million in the prior year second quarter. Selling expenses in the quarter included approximately 4.3 million of additional expense from acquisitions not included in the prior year quarter results.
Excluding the incremental expense of acquisitions, selling cost increased due to higher sales and investments in the selling organization as well as increased investment in marketing programs.
Timothy FitzGerald
General and administrative expenses declined by 300 million to 28.2 million as compared to 28.6 million in the prior year second quarter. General expenses included approximately 3.5 million of additional expense related to acquisitions not included in the prior year quarter, this was offset by lower professional fees and stock compensation cost as compared to the prior year quarter.
Timothy FitzGerald
The provision for income taxes amounted to 12.7 million at a 29% effective rate as compared to the prior year provision at a 37.7% effective rate. The current year tax provision reflects lower taxes on earnings and foreign jurisdictions which have increased due to the foreign acquisitions completed in 2011.
The tax provision also reflects variable reserve adjustments associated with reduced state tax exposures which favorably benefited the effective rate by approximately 4% during the quarter.
Timothy FitzGerald
The company also continues to realize a cash tax savings associated with the utilization of net operating losses acquired from TurboChef. This tax benefit will amount to approximately 6.4 million for the year and is not reflected in the tax provision that has been recorded as utilization of an asset in the opening balance sheet of that acquisition.
Timothy FitzGerald
Cash flows generated by operating activities in the quarter amounted to 43.5 million and it was 54.3 million for the first 6 months. Consistent with the prior year’s cash flows are anticipated to increase in the second half as working capitals reduced from its mid-year peak.
Timothy FitzGerald
Non-cash expenses added back in calculating operating cash flows amounted to 9.7 million for the quarter and 18.5 million for the first 6 months. The non-cash expenses for the quarter of 9.7 million were comprised of 6.6 million of depreciation and amortization of 3.1 million of non-cash share-based compensation.
Timothy FitzGerald
In the first half of 2012, the company utilized 10.6 million to fund acquisition activities and made investments of 3.1 million for capital expenditures related to the production equipment and facilities enhancements. Total debt at the end of the quarter amounted to 274.2 million and was reduced by 43.1 million, 317.3 million at the end of 2011.
And this total debt reduction is net of the funding of acquisition activities.
Timothy FitzGerald
In August we entered into a new five-year multi-currency credit facility, this agreement provides for 1 billion in financing under revolving credit facility. And this agreement also includes an increased option of an additional 350 million.
Additional borrowings will be assessed at an interest rate of LIBOR plus 1.5% which is approximately 0.5% higher than borrowing cost under our current or prior credit agreement, and this rate will be adjusted quarterly based on the company’s leverage ratio. This credit agreement allows for borrowings to fund acquisitions, stock repurchases and other corporate uses and provides the company with the availability to fund its growth initiatives.
Timothy FitzGerald
And Eric, that all for our opening statements, could you please open the call to questions.
Operator
[Operator Instructions] First up is Peter Lisnic with Robert W. Baird.
Peter Lisnic
Can you give us a little bit of flavor for the gross margin outlook for the second half of the year, understanding that food processing a little bit more of the mix? But you got the synergies for acquisitions coming through for couple of quarters this year have been down year-over-year, just kind of wondering what the outlook would be given that mix change in the back half of the year?
Timothy FitzGerald
Peter, I think the food processing group increased as a percentage of the portfolio and that mix is going to continue in the back half of the year. So, while we think we are going to start to see some increase in the gross margins of that group, as we move into next year.
The mix will still be weighed out where that will be somewhat of a drag on margins in the back half. Probably pretty consistent with what we have seen in the first half of this year.
Peter Lisnic
And continuing with food processing, just given the confidence out there and the macro concerns, have you see any backlog being pushed out or any deferrals orders. Can you maybe talk about the backlog and order trends in that business right now?
Timothy FitzGerald
We haven’t seen any deferrals of projects we are spending at this point. The activities in that segment have been pretty strong.
Peter Lisnic
And then last question, just on Europe, in the foodservice business, can you give us a feel for kind of how significant that business was hit by the macro concerns of what sort of impact that had on the organic growth number of 5.4 in the quarter?
Timothy FitzGerald
I mean it was down quite a bit, I mean it was down double-digit for Europe. So, I mean a lot of the international sales in total for us was up, but Europe offset most of the gains in Asia and Latin America, because Europe still is a larger piece, is larger than Asia and Latin America, the biggest piece for international sales.
Peter Lisnic
For the chains here, I guess and what they are doing overseas, any change in their investment outlooks. In other words are you continuing to look at international markets the same in terms of what they like to do for a growth prospective there?
Selim Bassoul
We are seeing a lot change, little still growing the unit growth in emerging markets. And I can tell you exactly where it's going, India, Russia, Middle East, Latin America remain very strong.
We are also seeing regional chains, local chains coming to us and also adding going from 25 stores to adding 10, 15, 16, 20 stores. So, example, Dominos in India will be adding 100 stores in 2013 and they continuing adding significantly in Asia.
Papa John continues to add in Eastern Europe. I will continue saying that Yum!
is adding 700 units in China. So, we continue seeing emerging markets being very, very strong.
We also see something else that’s happening which is a great phenomena for us specifically.
Selim Bassoul
We are seeing a significant increase in labor inflation around emerging markets specifically in China. So, what’s happening is to establish brands in China including Yum!
are managed by great people, some their CEO in China is a great, great guy but they are feeling significant pressure from labor inflation that they will have to be forced to start looking at kitchen efficiency, labor efficiencies, force in the back of house and front of the house to keep their margins up. So, that drives significant opportunity for us as we see all the emerging markets labor cost going up.
Operator
Next in queue is Jamie Clement with Sidoti and Company.
James Clement
A follow-up from one of previous questions about processing and obviously I think some of the pork oriented companies have felt some pressure. And there has been kind of the bad news out of them over the last couple of weeks related to corn prices and what that does in their margins and that sort of things.
You all have a much higher percentage of the acquisition of processing the sales to things like breads and cakes and snacks and that kind of thing. Can you talk a little bit about that piece of the business and now what the mix looks like compared to where it was 3 years ago.
Timothy FitzGerald
With some of the recent acquisitions we have expanded the group so we are not only in meat processing, but there is breads and cakes and so forth. So, it's a broad portfolio of thermal processing technologies and we service all segments.
So, there still the majority of sales are in the meat processing segment, but we sell into really all cooking aspects of food processing now.
James Clement
And I was wondering, and Selim, I don’t know if you want to weigh in on this. I’m just -- because it's not an area that we heard you all talk of that much about, but in terms of processing to those other areas, what are the trends that you notice obviously you spend acquisition dollars over the last couple of years in that, what was particularly attractive about those markets?
Selim Bassoul
Jamie what I like about the food processing business is they are very, very focused. Those processors whether they are in meat or in baking are very focused on payback.
So for them, increasing their yield, lowering energy saving, lowering labor saving, they literally operate that segment operates like chains. They remind me a great deal that today, Maple Leaf Foods or Kraft or Sarah Lee or Nestle are literally operate like a Yum!
or a McDonald. They are looking at deficiencies in their factory similar to those chains looking at deficiency in their kitchen.
Selim Bassoul
So, what is fascinating for us is, we have taken our concept of payback introducing products that increase the yield, reduce labor, increase basically efficiencies and what you have seen right after the recession took place that those food processing continue to upgrade their equipment. For them 1% or 2% yield literally justify spending, 1.2 million, $3 million on a piece of equipment, because the feedback end up being less than a year.
So, we are starting to see a significant order demand and I think it will continue through 2013 easily on the food processing where we are seeing our more efficient equipment taking place.
Selim Bassoul
So, for example, we are right now in the process of working with several large food processor both in the United States and in emerging markets where we are laying out completely automated lines. Which reminds me of the pizza conveyer business, very much so, it reminds me of over 20 years ago, when Middleby Marshall literally took the pizza business from a deck up and when you have somebody standing in front of those deck ovens, and now they all went to conveyer, almost 90% of the business is conveyor.
And I see the same trend happening where you still see many factories. Large factories within Nestle, within Sarah Lee, Oscar Mayer where you have those big ovens and you are starting to see them going to automated conveyer belt and conveyer line.
And this is a sweet spot for us because we dominate the automation in the food processing business with a lot of the companies we own to-date, both in the baking and in the meat processing.
James Clement
Final question, Selim, given the earnings growth that you all seen over the last couple of years, modest balance sheet leverage, would the board consider regular dividend sometime in the near future?
Selim Bassoul
This is something that we will discuss, the problem I’m facing and the board is facing is the fact that we will continue to remain acquisitive and we have many -- the pipeline is pretty strong in our M&A and in fact it's getting stronger as we see a lot of larger sized companies both in food processing and foodservice coming into play. So, my feeling would be, it has to be literally balancing.
I don’t want to send the message to our investor that we are running out of M&A and that now we are doing a dividend. I think dividend is a great way.
I think repurchase of share is another option that the board always considers and we have done that in 2011; we have done some I think early this year. But I think we need to make sure we don’t send the message while our cash flow is very, very strong and we cannot afford to do both acquisitions and dividends and repurchase of shares.
Selim Bassoul
I want to make sure we don’t send a message to the investors that we are running out of acquisitions to buy, because this has been a fantastic part of our D&A, Jamie. So, it's a dilemma for us to give a dividend because you want to be shareholder friendly, no doubt about it.
And I’m sure it would attract some funds that would not even consider Middleby and would like to, because most probably their motto is that they should have a dividend paying stock to investment. But you are always concerned about sending the wrong message and starting to have investors to say well, it's Middleby now not being able to buy companies, which is not the case at all.
We will continue being very acquisitive and the pipeline is very strong.
Operator
Next is Tony Brenner with Roth Capital Partners.
Anton Brenner
A couple of things, first of all Tim, adjusting for all the recent food processing acquisitions that you have made in normalizing those margins, what is the difference in gross margins between food service and the food processing segment?
Timothy FitzGerald
It's roughly in the 5% range.
Anton Brenner
Second, as I recall beginning at the very early last year, maybe even little before that you began reporting that orders on food processing were accelerating sharply and that initially you thought that, that would result in an acceleration of shipments beginning in second half of last year and as we got into the second half of last year. You began reporting that that should result in an acceleration.
It's pretty easy comparisons, in the first half of this year, now you are saying it will be in the second half of this year. If in fact as you suggest there haven’t been any deferrals, I’m wondering why those shipments haven't picked up more significantly yet.
Timothy FitzGerald
Well, lot of the deliveries are scheduled for latter part of this year and even early into next year. So, the timing of kind of the orders that don’t necessarily correlate with the timing of the shipments given the longer lead times.
Anton Brenner
I’m not sure that you answered the question, but okay.
Selim Bassoul
Tony, let me answer the question, because we are the same way at point address the same issues because you had orders coming in very, very strong and they continue to be very strong. And when you look at the quarter you say well, shipments were up 2% in food processing, where are our orders, how come they are not coming slow.
I think part of it simple is, one, we received lot of orders, a lot of orders came in, in the end of the third quarter of last year and in the fourth quarter of this year. Those orders are dependent on 2 things.
They are depending on possibly recent orders, because every order is customized, those are not basically stock items. So, every order are multi-million orders that are customized.
We also tend to see in terms of dealing with our customers that sometime there is a slowdown in terms of literally laying out their factory to receive those orders. We tend to see some -- most probably slowdown on the perspective of customers, but I’d like to say that most probably 70% of the delays come from our factories versus our customers, because many of our customers are asking us to deliver as sooner that we can.
I think some of those lead times on our food processing business has been more stretched than we expected it to be, I think a little bit longer than we thought it's going to be and there are several reasons for that. I’m going to be very transparent to all of you.
Selim Bassoul
I think one of the challenge that we have faced is as the recession took place and the food processing business if you remember in 2009 we got hit very hard, 2010 we adjusted our workforce, we literally like everybody else we basically let go some people on your factories, we let go some engineers, we let go some technical service people to basically adapt, to order flow. The orders were anemic at the time in that segment.
So, as we received orders and literally we did not expect the flux of orders, we spoke about it and we said it's going to come. They have to start basically looking at labor efficiency, yield improvement.
However, we did not expect it to get as hard. I think our orders have been very, very strong, stronger than we even expected, and I think we had time ramping up and bringing people back.
And I think literally we were slow in hiding back in the food processing business because we were cautious and that cost us in lead time.
Selim Bassoul
And that’s the honest truth; I think when I looked out management in food processing they are basically balancing to hire full time people. We got burned really hard in 2009.
And this basically the memories remains very, very strong. We dream to be cautious.
We don’t want to bring a bunch of people again in volatile times where we have it here and ends up again hiding permanent people and then we have to lay them off and we have to pay old severance and net cost off.
Anton Brenner
One last question, could you Selim, give us a little update on this status of the kitchen retrofit program, are you working yet with Chili’s franchisees or still with company itself or other chains kicking in yet or where does that stand?
Selim Bassoul
We are program continues to be very strong with specific chain that casual dining chain, and we are in the process. We have received several orders from the franchisees, so we are starting to see the franchisees coming soon.
And we are very excited. I think that program specifically has not only worked very, very well, now we are seeing the franchisees embracing it.
And literally we continue now to see interest from other chains. So, I think as I mentioned in my previous conference call, I said that we will continue focusing on Brinker, to make sure that we give them the full service level of attention.
We are now I think over 500 stores and it's going extremely well. And I think now we are seeing the franchisee coming through and I think by somewhere in the second half of 2013, we will be working with other chains specifically to make efficient kitchen also for them.
It's not going to be very similar to Brinker, I think the Brinker model is the unique, but the similar ways where we are going to help some customize and automate their kitchen. So, we have several other casual dining chain lined up for the second half of 2013.
Operator
Next is Greg Halter with Great Lakes Review.
Gregory Halter
Tim, I just wanted to clarify one point that you made on the food processing gross margins, you meant that they are around 35%, correct, there are differential of about 5 points from the commercial food service?
Timothy FitzGerald
Yes, I was referring to the differential, the 5 points is the differential, that’s right.
Gregory Halter
I was hoping it wasn’t a 5% growth.
Timothy FitzGerald
That’s correct.
Gregory Halter
And the line of other income which you had some this period versus expense, can you elaborate the difference between the 2 years?
Timothy FitzGerald
Yes, so this year it's not a very significant amount. It's a slight income item and it largely is foreign exchange gains that’s primarily what runs through there.
Last year we did the acquisition of Lincat, which is a large, it is an acquisition that we did in the UK, and just with the financing of that transaction the initial financing there were some larger unrealized exchange losses, but it had to do with the timing of one reacquisition went through and how we financed that. So, that was more of an unusual items specific to the Lincat transaction in last year’s quarter.
Gregory Halter
And can you comment on what you are seeing or what you saw in the quarter in regards to steel cost and what the outlook is going forward?
Timothy FitzGerald
We have seen kind of the 2 component of steel; the basic price and the surcharges or the surcharges have come down lot of base price of steel come up. So, net-net the pricing is relatively flattish and we kind of expect that trend to continue for the remainder of the year.
Gregory Halter
And any shares repurchased in the quarter?
Timothy FitzGerald
There was not any shares repurchased during the quarter.
Gregory Halter
And what do you expect your capital spending to be for the year and maybe if you have an indication for next year that would be great?
Timothy FitzGerald
We always kind of indicated that we would spend in the 2% type range or something less than 3% we've typically tried less than that. Our CapEx spending has been a little bit lower in the first half of the year being at 3 million for the first 6 months, and we are well under the even 1% but expected that will probably ramp up in the second half of the year.
We got some consolidation in plant integration initiatives that are going out and that tends to be one of the drivers of CapEx for us. So we will see some of that come through in the second half of the year, that will bring us up closer to that average of 1% to 2%.
Gregory Halter
And looking at the new credit facility, going from 600 million to a billion seems like a large amount. I’m just wondering if there is something out there that you would need such a significant facility.
Timothy FitzGerald
It's a 5 year facility, so we put it in place with really a view for the longer term. And if you were to look back over the 5 years prior to the agreement we start off with, we are a much larger facility and we grow into it pretty quickly.
So, as Selim mentioned the pipeline for acquisitions are strong and we think it make sense for us to have to dry powder to go ahead and execute on our acquisition strategies. So, we do anticipate that over a 5 year period we may need that and want to keep the ability or the flexibility so we can act on opportunities as they come up.
Gregory Halter
And the rate I think is this LIBOR plus 1.5% I think.
Timothy FitzGerald
Yes, that’s correct. It's on a grid so the range it starts off at 1.5%.
Gregory Halter
And is that above or below your previous, I can’t recall.
Timothy FitzGerald
Well the grid has -- it depends on -- right now currently we are borrowing at LIBOR plus 1% roughly, so it's about 0.5% greater than the borrowing cost that we had up through the end of the second quarter. And generally prolongated that would be consistent.
Gregory Halter
And one last question, Selim, if you could comment on any new products that maybe out there and exciting will give you a chance to elaborate.
Selim Bassoul
Greg, I have to tell you I’m excited about literally 12 new products. We have 12 new products that have immediate payback of which it's less than a year.
We are fully measurable, they are in warming. They are in cooking.
They are in speed cooking. They are in ventilation, ventless.
So, when I look at what’s happening in the marketplace is literally right now, we are seeing 2 trends. We are seeing in the U.S.
specifically to U.S, which come into that second, is we are seeing a complete segment which is a casual dining segment totally remodeling their kitchen and their basically operations. That’s the segment that has not done much over the years, and they are under significant pressure.
Food cost, labor cost are, same-store sales have been under pressure and what happened was our basically changed our Brinker has led to now other casual dining to say, I have to remodel, Darden, TGI Friday's, Cheesecake Factory, everybody is looking, Applebees are looking at remodeling their kitchen. And we are on the sweet spot for that.
Selim Bassoul
Number two, we are seeing significant also change of saying okay, now food cost are going down which is a big relief for all the rest in segments in the U.S. Food cost has stabilized, neutralized in fact commodity price is going down, yes, maybe there is a spike in corn, but in general all the food commodities are way down.
So, now most of those operators are saying what do I need to do to grow my same-store sales. So, they have 2 options; one, they are going to spend a lot of money on promotional activity, so we are going to see a significant spending being spent on people promoting advertising.
Number two, you are going to see a significant updating of menu items.
Selim Bassoul
I’m looking at kitchen remodeling and just to give you a perspective what's happened this year. So, today, companies was new menu, a new product development.
I’m talking about [indiscernible] operators, are posting robust results. I’ll give you example, Taco Bell, Chili's, Panera, irrespective of how good you are, very strong you are and you do not introduce new product and new menu changes.
You are going to have a tough quarter. I’m going to give one example, McDonald’s has tough quarter, I truly believe that part of the tough quarters they have had is the fact that they literally slowed down their new menu introduction and platform this year compared to the year before.
And I’m sure the minute they introduce new product which they always do, they will most probably pick up again their results. So, our feeling is people are coming to us and saying I need to introduce your menu items, help us out, I need to change that, I need to introduce a new piece of equipment.
And we are seeing significant introduction of menu items, kitchen equipment and remodeling in the casual dining in the U.S.
Selim Bassoul
In emerging markets we continue to see specifically unit store growth. I talked about it, India, Russia, Middle East, Latin America, remain to be very strong.
In China, the unit growth continues to be big, but they have a major issue, labor inflation is here to stay. So, they have to figure out a way to offset that labor inflation that’s basically ramped and they are going to have to remodel and figure out a way to reduce cost, both in the front of the house and back of the house.
And I’m looking at established brand like Yum! McDonald’s, regional chain like East Bay, Jollibees, all of them are under the pressure of labor inflation in Asia.
And I think that’s a significant opportunity for us to introduce automation, to introduce versatile equipment that allows them to do more with less.
Operator
Our next question is from Jamie Sullivan with RBC.
Jamie Sullivan
Just wondering on the food processing side, maybe you can go into little bit more detail on what you are seeing on the order levels in the quarter and kind of how that’s trending. Is your book-to-bill greater than 1, are you building backlog?
Timothy FitzGerald
Yes, we built some backlog during the quarter. So, it is greater than 1.
Jamie Sullivan
And then as you look into the back half of the year, maybe kind of the magnitude or the improving growth that you are expecting just given that you probably have some decent visibility there with the backlog.
Timothy FitzGerald
Well, we do expect it to accelerate, I mean I think we are hesitant to give a number, but I think we are looking to high single-digit and perhaps double-digits type growth in the back half of the year.
Jamie Sullivan
And then you saw the trends you are seeing on the food service side maybe there as well, I mean could that start to accelerate as well with some of those trends?
Selim Bassoul
I can answer that Jamie. I think that literally on the chain side both in the U.S.
and the emerging market we are going to see increases. We are going to see that happening.
I think we are going to see 2 segments that continues to be pressured. The institutional segment which includes schools, hospital, military which represent around 10% of our sales is going to be quite under pressure.
I think the leisure and hospitality segment which is hotels, stadiums and country clubs, which represent a little bit less than 5% of our Middleby sales, also will be under pressure.
Selim Bassoul
So, when I look at specifically our food service business, 15% of that business roughly, of that food service business will remain under pressure for the second half of this year. So, of course, emerging markets will offset it because I think international continue growing.
I think Europe, as Tim mentioned earlier will remain under pressure except the U.K. as people start to see in the fourth quarter improvement in the UK and however, Europe, I’m not talking about Russia, because Russia will be strong for us and UK will start delivering in the fourth quarter better results.
I think we will start continue seeing Europe to be -- which represent around 16% of our business to be under pressure.
Jamie Sullivan
And then one last one on the stock comp looks like it was down a few million year-over-year just wondering what we should expect going forward on that line?
Timothy FitzGerald
There was some share grants that’s just based on nesting period sell-off, it was relatively lower year-over-year. Moving forward it's really dependent upon what shares are issued, but they typically are share grants that are issued or every other year.
So, at some point there may be an increase in that expense. That’s difficult for us to forecast.
Selim Bassoul
If there are no more question Eric, I’d like to give my final comments please.
Operator
Go ahead sir.
Selim Bassoul
So, basically summarized a little bit where the company is going on an organic gross, while the external environment is challenging and restaurant buying habit might change in the short-term. We believe that Middleby will gain market share in the short-term and long-term.
We believe that the second half of this year will continue to grow on that organically and for 2 reasons; over 60% of our business is coming from chain and chain continues to invest and remodel tat kitchen platform and adjust their menu offering to better connect with the end user.
Selim Bassoul
We have not seen a large change in restaurant chain behavior, so the question is, do we see it was all what’s going on with the volatility, we have not seen chains cutting back or changing their behavior. On the contrary they are continuing to invest in their platform.
Selim Bassoul
The second reason why we will see market share gain is the fact that restaurant operators are looking for specific product that can make them more money with immediate payback. And as I mentioned earlier, we are now having over 12 new product that are critical to making money to the restaurant operator.
Those products are not discretionary. We are rolling out many of those products today, and we see more chains asking for them.
Selim Bassoul
Our success with casual dining has brought forth many other chains that are looking for a similar results to what we have accomplished with that specific chain that we started over a year ago. In Europe, while the markets are very difficult right now.
Middleby sales in Europe account for less than 16% of our total sales. While most European markets are struggling, we see opportunities in the UK and in Eastern Europe, starting the fourth quarter of 2012.
Selim Bassoul
Our Lincat division in the UK will grow stronger also toward the end of the year. And specifically in 2013 due to the introduction in several new markets, products and to the final successful testing with several UK chain.
In Eastern Europe we continue to see store openings of U.S. based chains which are pulling up into this market.
Selim Bassoul
So, while Europe continues to be volatile, it will not be significant drag on our total sales. The only challenge I see is the foreign exchange impact in our bottom-line if the dollars continue to strengthen.
Selim Bassoul
Emerging market, we see a significant growth for Middleby this year and 2013 in China, India, Latin America and specifically the Middle East where we continue to grow double-digit in that market. Our market share in that segment in the Middle East is less than 5% and we us literally doubling that penetration by 2014.
Selim Bassoul
In summary, we see our international market to grow in double-digit despite the slowdown in Europe in 2013. Our M&A, we are delighted by the closing of our new credit facility of $1 billion with the cost of capital of LIBOR plus 150 basis points.
This allow us to fund strategic acquisition in the near future. The acquisition pipeline remains solid both on the food processing and the commercial food service.
We are also seeing largest size transaction specifically in food service within the next 12 to 16 months. Many of these companies are specifically looking to be acquired by strategic partner.
Selim Bassoul
What is the overall state of the restaurant industry? As many of you are following us, as you follow our customers.
During good times and bad times we eat out. Buying habits may change and the amount of time and money we spend may vary due to the current economic trends.
But the fact remain, that American will dine out. And it's not going to be Americans, we are basically teaching the rest of the word to dine out too, whether it's place in Jordan, whether it's place in China, Malaysia or India, everybody is planning up to dinning out.
Selim Bassoul
To just validate my point, let’s look at the food dollar spend on dining outside the home. In 1962, we spent $0.28 out of every food dollar for dining out.
Today that number is over $0.52. I predict that you will take up less than 15 years to be spending around $0.70 outside the home.
Just anecdotally, just watch your children, I think most of them eat out more than they eat in. So, this trend is in our favor.
Selim Bassoul
Second, also recent recessionary times have affected our buying habits; restaurants have bounced back since 2010. It's a badly located restaurant and the concept was bad food and bad service did not survive this downturn.
By early 2010, over 15% of old restaurant in U.S. closed down.
Between 2008 and 2010, roughly 125,000 restaurants closed their doors. To-date the one who survived are well run.
They are good well managed, well operated and they connect well with their customer. In 2011, restaurant revenue was up 3% from the previous year and is expected to be up 4%, total restaurant revenue will be up 4% in 2012.
We are also starting to see chains opening new store in the U.S. for the first time started this year, we are starting to see traditional chains opening new stores in the U.S.
While we are not back to the 2007 levels, it is a long way better than where we were in 2009 and 2010.
Selim Bassoul
The other trend we see is definitely menu changes to meet popular customer wants, and here they are. Customers today want basic comfort food which drive significant sales to fryers, oven and rangers.
Number two; they want healthy menu items which drive griddle and char broilers. They want value meals, they want healthy, they want basic comfort food at a value proposition.
It's driving conveyer ovens and they are driving holding cabinets and warming equipment.
Selim Bassoul
Number four, people want to be able to eat well in non-traditional location, such as airports and you are starting to see significant airport upgrading their food outlets and that bodes well for our ventless equipment and our counted top equipment.
Selim Bassoul
Middleby is today leadings of kitchen innovation for preparing breakfast, sandwiches and burgers. We are also changing the way casual dining is preparing its food.
Every 6 hours a casual dining restaurant is being automated using Middleby's patented technology. As I mentioned before international chains continue to grow fast as we follow American chains around the globe.
In addition to seeing traditional fast food chains like McDonalds, KFC, Starbucks, Pizza Hut, Dominos, Burger King, Papa John’s, Subway, we are now seeing full service casual dining chain such as Chili's, TGI Friday, Cheesecake Factory, having tremendous success in overseas market. This is the beginning of the expansion worldwide.
We are thrilled to be a great part of their growth.
Selim Bassoul
Finally, I’d like to sum up; pizza business is growing fast and accelerating fast overseas. The recent example of Dominos and Papa John and Pizza Hut in places like India, UK, Russia and Southeast Asia.
Companies with new product development and menu items are posting robust results, example, Taco Bell, Chili’s, Panera Bread. We will continue to see strong growth at kitchen efficiencies by many operators in China and Southeast Asia where labor inflation continues to rise.
They are going to be forced to look at equipment that’s efficient to cut labor in their kitchen, for that Middleby is very well positioned.
Selim Bassoul
This ends my comment and thank you.
Operator
Thank you very much ladies and gentlemen.