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HGS: Middleby Corp. (MIDD)
The Enodis Breakdown

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By platoish
May 22, 2006

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Greetings,

I've spent some time looking at the Enodis portfolio of companies and products. I've tried to focus on how the company is organized, and which pieces would be complementary to Middleby and where there would be overlap. My conclusions in a nutshell are that they are largely complementary companies, that there are a few areas of significant overlap, and that a combined company would be a significant force in the international food equipment market segment. With this position would come a major change in the strict "hot side" focus that Middleby had been pursuing up to this point. I would like to point out that their recent acquisition of Alkar was a first step away from this focus, as it involved a whole new customer base, as well as packaging and flash cooling equipment in addition to "hot side" products.

Before I get the individual companies and brands under the Enodis umbrella, I want to view them at a top level. They break their business into two segments � Global Food Service Equipment and Food Retail Equipment. Food Service Equipment makes up 83% of their revenue base and Food Retail Equipment accounts for the other 17%. The Food Retail piece is actually the fastest growing segment on a percentage basis. Most of this write-up will focus on the Global Food Service Equipment division. I'll cover the Food Retail in the following paragraph.

The Food Retail Equipment business (17% of company) is transacted almost exclusively in the United States. It is largely comprised of their Kysor/Warren subsidiary, as well as the related Kysor Panel Systems. This business is headquartered in Columbus, Georgia and sells walk-in refrigeration systems, refrigerated display cases, and all types of fresh and frozen food display systems. Their customers are supermarkets and convenience stores throughout the US. They are a major player in this space. This piece has no overlap with any company in the Middleby portfolio and undoubtedly would be allowed to operate in much the same manner they are currently. This piece doesn't seem to be even be integrated with Enodis, other than they contribute to the company as pretty much a stand-alone entity. I estimate this segment to be a $225M annual business, which has been growing at a 20-22% rate. According to their latest annual report, this segment achieved operating margins of around 7%. Some work would need to be applied to this segment to get to the Middleby target of 14% or so.

Now I want to turn my attention to the Global Food Service Equipment segment that provides 83% of the company's revenue. Most of the companies under this umbrella are located in North America, as we will see. Overlaid on top of these manufacturers and brands are regional distribution networks. Enodis uses a combination of their own sales and distribution channels, augmented with independent local distribution companies. It looks like they are incrementally buying distribution companies in key geographies to bring more of this function in house. The two main distribution segments are Enodis US and Enodis Europe. They have a couple of companies in Asia that I'll also mention but rely heavily on independent distribution channels in this region from what I've been able to tell. They have expansion plans for Asia on the table.

Let me first look at Enodis US. This is the bulk of the company presently and the underlying manufacturing companies also supply the bulk of the equipment to the European segment either through licensing arrangements, regional rebranding strategies, or directly. I'll try to roughly order these functionally beginning with the hot-side equipment. This is where we will see the greatest overlap between the two companies. Enodis does not break out the sales or margin data at the brand level, so all I'll have in that regard is anecdotal information pulled from public filings.

Lincoln is located in Fort Wayne, Indiana. They make accelerated-cooking ovens, pizza conveyor ovens, countertop ovens, and general purpose portable cooking devices that they refer to as smallwares. They also have a line of superheated steamers marketed under the Fresh-o-matic brand. In addition, they are the nation's largest supplier of commercial and institutional foodservice supplies � utensils, mixing bowls, trays, pans, etc. This division is largely complementary with a couple of exceptions. They compete in the high-end pizza conveyor market with Middleby-Marshall. Midd-Marshall is the market leader in this segment and the WOW oven will serve to cement this position. Lincoln brings some countertop technology to the game that is probably superior to what Middleby has at Southbend. The steamer line is something that Middleby has stated they want to add to their product line. The accelerated-cooking oven technology is similar to some of the concepts that Middleby has been rolling out where two technologies (e.g. infrared convection/microwave) are used to speed up cooking times. Using this technology, Lincoln has partnered with Delfield (see below) to produce a custom integrated station for producing hot deli sandwiches for a McDonald's rollout. They have 3400 of these stations installed at McDonald's in the UK, Canada, Australia, and New Zealand. This is not a standard menu item for McDonald's in the US.

The Garland Group is headquartered in Mississauga, Ontario and includes the US Range brand manufactured in the US (imagine that). This is probably the division that has the largest overlap with the current Middleby product line. They make broilers, fryers, griddles, grills, ovens, ranges, and traditional pizza ovens. They compete head to head with Blodgett in almost all of these lines of business. Garland is #1 in many of these areas with Blodgett usually the #2 supplier. They have a strong focus on energy efficiency. It will be interesting how a combined company would handle these traditional competitors.

Frymaster is a group of brands that includes most notably Dean. They are located in Shreveport, Louisiana and make fryers, pasta cookers, and water-bath rethermalizers. They compete straight up with Middleby's Pitco brand and are probably larger than Pitco. These can be found in many of the large chain restaurants such as McDonald's and Burger King, although some of these places use Pitco instead. This is the area of second largest overlap and will be another interesting integration challenge.

Cleveland Range is located in (you guessed it) Cleveland, Ohio. They make steamers, Convotherms (which are combi-steamers/ovens), jacketed kettles, braising pans and skillets, specialty ovens, and rotisseries. There may be some overlap with Blodgett here but this company would be mostly complementary.

As we begin to transition away from the US-"hot-side" business we get to Merco-Savory. This company is also located in Fort Wayne, Indiana and makes equipment including food warmers, holding tables/cabinets, conveyors, toasters, and food servers. This would operate as is in any combined company.

Varimixer is also located in Shreveport and makes high end mixers for both home and restaurant use. Purely complementary business.

Delfield was founded in 1949 and is located in Mt. Pleasant, Michigan. This company is one of the jewels in the crown and was one of those leading cold-side brands that Selim mentioned in the conference call. They make ventilation systems, refrigeration units, freezers, prep systems, serving counters, dispensers, display cases, and blast chillers. They have annual revenue in excess of $100M and are one of the largest stainless steel custom refrigeration equipment manufacturers in the world. Their products are distributed worldwide by Enodis and they make up a large part of the European operations to be described in a bit.

ICE-o-matic is located in Denver, Colorado and makes cubers, flakers, storage bins, ice dispensers, and water filters. I'm sure you've seen these machines in hotels, restaurants, and institutional settings.

Jackson is located in Barbourville, Kentucky and makes a complete and extensive line of warewashing equipment. Conveyor systems, flight systems, undercounter units, glass washers, pot scrubbers � just about every conceivable dish washing machine you can think of is in their catalog.

Scotsman is located in Vernon Hills, Illinois and makes ice machines for both restaurant and home use. They also make drink dispensers and this line is also very popular in Europe under the Scotsman Beverage Systems brand. The Scotsman brand achieved >40% growth in one of their main product lines during the latest fiscal year as a major unnamed retailer embarked on replacing their ice machines with Scotsman units which have superior energy efficiency. Although it was unnamed, I believe there is only one retailer that could have an impact of this magnitude and it begins with a Wal and ends with a Mart.

The example that Enodis likes to bring out when discussing how they can use their test kitchen facilities to create truly custom, integrated solutions by combining the capabilities of several of their brands is of course our dear friend Buffalo Wild Wings. In 2002, BWW approached Enodis with a problem. They were embarking on a major nation-wide buildout from their Midwest regional roots. To accomplish this they were focusing on a standard store format. One of the pillars of their approach and format concept was that they would provide an extremely small footprint for the kitchen, yet they wanted to produce a fairly wide range of menu items. Enodis brought together representatives from Frymaster(fryers), Delfield(refrigeration products), Garland(ovens, grills, ranges), Jackson(dishwashing), and Scotsman(ice and dispensing solutions) to collectively design a custom kitchen solution to meet the requirements of BWW. They were able to tightly integrate solutions from all five companies to produce a custom design that fit BWW's requirements for size and workflow. Each new BWW gets one of these custom kitchens from Enodis as standard equipment. Middleby obviously does this type of thing too, as exemplified by the Papa John's WOW oven. Enodis can extend the customization to additional functions of the kitchen. I'm not sure how much of this type of business is really needed, but it sure works well at locking in a customer, if you can be sure the customer will flourish.

The European arm of Enodis' operations is mainly based in the UK. It consists of Enodis Distribution which can sell any of the US manufactured products as well as those made in the UK. It also includes the Merrychef brand of cooking systems. Merrychef has been around since 1950 and was founded to apply microwave cooking technology to catering and accelerated cooking solutions. This situation was explicitly discussed in the conference call. Merrychef's technology is essentially the same that was used by Turbochef to establish a full-blown company in the US. Turbochef got the contract to supply fast sandwich cookers to every Subway and the rest is history. Merrychef hasn't had as much success in the US, but is an established brand in Europe and has the potential to gain marketshare elsewhere because it does represent strong technology. As mentioned earlier, another element of the European operations is Scotsman Beverage Systems. They produce beverage dispensers and are very large in Europe. They have a line of beer keg coolers, as well as soft drink dispensing equipment. The final piece of the European puzzle from the manufacturing perspective is the Viscount group. They mainly serve the catering industry. This group includes Moorwood Vulcan and Delfield Sadia, and through all of their pieces they make a complete line of cooking and refrigeration equipment for this industry. This equipment is smaller than the restaurant equipment usually, but heavy duty nonetheless because of its workhorse nature. The European operations also consist of a smattering of companies located on the continent � Convotherm in Germany, Icematic, Technomac, and Simag in Italy, and the Frau Group in Spain. They also have various distribution companies scattered geographically.

As I alluded to earlier, their operations in the rest of the world mainly consist of sales of their US and European products through independent distributors. Middleby has a far superior Asian operation. Enodis does own Newton in Thailand, which is Thailand's largest producer of ice machines, and they have set up a Scotsman subsidiary in China.

The combination of efforts in Europe and Asia is where Middleby sees the ability to achieve significant rapid synergies. It certainly looks to be a plateful. If this thing goes through, Middleby will be transformed into quite a different looking company than they are presently. If they can continue their customer-focused, technology-driven, and employee-friendly corporate culture, it may prove to be a transforming event in the company's history. I have every reason to believe that the management of Middleby can pull off this acquisition if they get some level of buy-in from the management of Enodis. They don't need to keep everyone because a great portion of the business is managed from small independent product clusters. They do need some buy-in to make the European operation achieve its potential.

If it doesn't happen, I guess we all know quite a bit more about Enodis. If anyone is still awake, thanks for reading.

Regards,
Stan


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