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Edited Transcript of WBT earnings conference call or presentation 5-Nov-19 3:00pm GMT

Q3 2019 Welbilt Inc Earnings Call

NEW PORT RICHEY Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Welbilt Inc earnings conference call or presentation Tuesday, November 5, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Josef Matosevic

Welbilt, Inc. - Executive VP & COO

* Martin D. Agard

Welbilt, Inc. - Executive VP & CFO

* Richard J. Sheffer

Welbilt, Inc. - VP of IR & Risk Management and Treasurer

* William C. Johnson

Welbilt, Inc. - President, CEO & Director

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Conference Call Participants

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* David Sutherland MacGregor

Longbow Research LLC - CEO and Senior Analyst

* James Martin Clement

The Buckingham Research Group Incorporated - Analyst

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Lawrence Tighe De Maria

William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure

* Robert Cameron Wertheimer

Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery and Cannabis

* Timothy Thein

Citigroup Inc, Research Division - Director and U.S. Machinery Analyst

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Welbilt Third Quarter 2019 Earnings Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Richard Sheffer, Vice President of Investor Relations. Please go ahead, sir.

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Richard J. Sheffer, Welbilt, Inc. - VP of IR & Risk Management and Treasurer [2]

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Good morning, and welcome to Welbilt's 2019 third quarter earnings call and webcast. Joining me on the call today is Bill Johnson, our President and Chief Executive Officer; Marty Agard, our Chief Financial Officer; and Josef Matosevic, our Chief Operating Officer.

Before we begin our discussion, please refer to our safe harbor statement on Slide 2 of the presentation slides, which can be found in the Investor Relations section of our website www.welbilt.com.

Any statements in this call regarding our business that are not historical facts are forward-looking statements and our future results could differ materially from any expressed or implied projections or forward-looking statements made today. Our actual results may be affected by many important factors, including risks and uncertainties identified in our press release and in our SEC filings. We do not undertake any obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or other circumstances.

Today's presentation and discussion will include both GAAP and non-GAAP measures. Please refer to our earnings release for our non-GAAP reconciliations, another important information regarding the use of non-GAAP financial measures.

Now I would like to turn the call over to Bill.

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [3]

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Thanks, Rich, and good morning. As you saw in today's earnings release and on Slide 3 of our presentation, we are pleased with our operating results in Q3 despite facing softer-than-expected end market conditions in the Americas and EMEA.

Organic net sales increased 0.6% in the quarter. The foreign currency translation headwind of 1.2% resulted in a 0.6% decrease in net sales. Operationally, adjusted operating EBITDA decreased $4.6 million or 5.3% and the margin decreased 100 basis points.

We have positive contribution from price and material cost and tariffs in the quarter offset unfavorable manufacturing variances due to the softer than expected sales and inefficiencies in those plants that are currently participating in the transformation program.

There was also a favorable incentive compensation adjustment in last year's third quarter that created a negative comparison in this year's third quarter. I will let Marty dive deeper into margin variances in his comments.

Moving to Slide 4. Our Transformation Program remains on schedule for achieving the key objectives we outlined at our Investor Day. As an example, our procurement team has been very active in initiating sourcing events that will cover all of our addressable material spend by year-end.

As the RFQ process has one of the longest timelines of any of our activities and represents 40% of our anticipated savings, we decided to bring forward the RFQs from all the waves to have them issued by December 31, a full 6 months ahead of schedule. This increases the likelihood that we will achieve our targeted savings from procurement within our original timeline.

We have continued to make great progress at both of our Wave 1 North American manufacturing plants and see them on schedule with their planned activities. We have started to take delivery of new fabrication equipment at the plants and will install, test and go into production with this equipment over the next few months. We've continued to improve the layouts of our assembly lines, and where we've done that, we've seen efficiencies and lead times improve significantly. As we finish installing the new fabrication equipment and continue expanding line flow changes over the next 1 to 2 quarters, we expect to begin driving the cost out of these operations.

We began work on our third North American manufacturing plant in September, which signifies that we have moved into the second of 4 waves of our Transformation Program. We are applying learnings and people from the first 2 plants that should allow us to move faster with this plant. We have also accelerated KitchenCare originally scheduled in Wave 3 into Wave 2 and have launched their planned activities. We'll report progress on both next quarter.

We remain on track to deliver the targeted savings we envisioned. The first 2 plants from Wave 1 and our procurement team have identified additional savings above their original plans, which gives us higher confidence of achieving our targets. As a reminder, there is an unavoidable lag from identifying and implementing our new processes and ideas. We're seeing efficient gains on those lines for reducing head count and other costs at the facilities. We're seeing those cost reductions run through inventory and finally to the income statement.

This is why we are only expecting a small benefit in 2019 from these actions and really only seeing a meaningful ramp up in the second half of 2020, reaching our previously established target of approximately $30 million of annualized run rate savings by the second half of 2020.

With that, I'll turn the call over to Josef for a summary of our segment results.

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Josef Matosevic, Welbilt, Inc. - Executive VP & COO [4]

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Thank you, Bill, and good morning, everyone. I will make a few comments on our top line results within the segments. Starting on Slide 5 with the Americas, sales were relatively consistent with prior year. We continued to see growth in the general market as sales increased with the majority of our buying group customers.

We have been striving to cultivate improved relationships at both the buying group level and the dealer level and see this as stronger than they have ever been. We remain fully committed to the channel.

We saw a slowdown in projects with the large chain customers beginning in the middle of the quarter. This appears to be a push out of demand with some large customers as we haven't seen projects get canceled, but we don't have visibility at this time on when they will start up again.

Finally, KitchenCare aftermarket sales declined slightly in the quarter, mainly from aftermarket part sales to large chains. We did see growth in KitchenCare sales to the general market.

Looking at EMEA on Slide 6. Third-party net sales decreased 5.4%. Organic net sales decreased 0.5% while foreign currency translation was a 4.9% headwind as the dollar strengthened against European currencies. While we saw some sales growth from large chains, general market sales were softer in the quarter.

Moving to Slide 7. Third-party net sales in APAC increased 4%. Organic net sales increased 5.2% while foreign currency translation was a headwind of 1.2%. We are continuing to win with local and regional chains in APAC across multiple product categories, which is reflected in the general market sales growth. Sales to large global chains increased slightly in APAC this quarter.

Before I hand the call over to Marty, I will just comment that while sales did soften in Q3, we continue to have confidence in our innovation program. To share a few highlights here, first, with Fresh Blend. We have established a reference customer on the West Coast that will help us increase the exposure of this new product nationally. We are also making progress with additional large convenience store chains and expect to see some of them began to add these products to their stores in the near future.

Second, is the new Unity fully automated coffee machine from Crem. Unity is gaining traction in China with a large global chain customer, who is beginning to add them to the local stores. We are also in the field trials with several U.S. customers that are progressing very well. We remain excited about Crem's potential in the U.S. market.

I will now let Marty get into the operating details of the quarter and our updated 2019 outlook. Marty?

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Martin D. Agard, Welbilt, Inc. - Executive VP & CFO [5]

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Thanks, Josef, and good morning, everyone. I'm going to start with some comments on the adjusted operating EBITDA margin drivers shown on Slide 8. Looking at volume, mix and net pricing, most of the positive impact came from net pricing, mostly related to March's price increase that we put through in the Americas. We also had a benefit from the January price increases that we implemented in EMEA and APAC.

Material costs including tariffs were a combined 70 basis point tailwind this quarter. We've now lapped the implementation of the first 2 lists from the Section 301 tariffs that began impacting us in the third quarter last year and are benefiting from the favorable ruling we received last quarter related to certain products that were originally included in list 1.

Our results are still impacted by the cost increases and pass-through tariff costs from our vendors that we've discussed in the last 2 quarters, but we had a net benefit during Q3 versus last year. This pattern should generally continue in Q4, but we are watching stainless steel prices carefully due to the rapid increase in the nickel component pricing.

Other manufacturing expenses, mainly labor and overhead, were our biggest headwind this quarter as softer sales impacted our fixed cost absorption in our manufacturing plants. We also experienced inefficiencies in our plants that are currently included in the Transformation Program. These inefficiencies occurred during the transition to new production layouts and the upgrading of fabrication equipment at the plants. As these transitions are completed, we expect manufacturing efficiencies to improve and contribute to our future margin expansion.

SG&A on an adjusted basis and excluding FX was 110 basis point headwind in the quarter. The biggest driver here was the impact from last year's favorable $3.7 million adjustment for compensation expense related to the departure of the former CEO amounting to a year-over-year 90 basis point negative impact in the third quarter.

If you're reading the face of the income statement, SG&A is also elevated by the inclusion of the Transformation Program investments not included in adjusted operating EBITDA. You can track the specifics through the non-GAAP reconciliation schedules.

The last item, FX, was a 10 basis point headwind. We saw the strengthening of the U.S. dollar continued to have a large impact again this quarter, particularly in EMEA.

So to recap, the third quarter adjusted operating EBITDA margin of 20% was up sequentially from Q2 by 60 basis points, but down 100 basis points from last year with price and material cost improvement being offset by transitional manufacturing headwinds and the non-recurrence of last year's large SG&A credit.

Moving to Slide 9. Free cash flow was $54.2 million in the quarter, bringing year-to-date cash flow to $39.7 million, an increase from $26.2 million in 2018 driven primarily by working capital improvements. This was the second consecutive quarter of generating in excess of $50 million of free cash flow and positions us again to achieve a free cash flow conversion ratio of 100% or better for the full year.

Cash increased by $28.5 million during the quarter, while our overall debt balance decreased by $23.3 million. Our leverage ratio improved to 4.5x and remains a little ahead of the projections we shared at May's Investor Day.

Finally, on slide 10 I'd like to make a few comments on our updated 2019 guidance that we provided in today's earnings release. Beginning with sales. We lowered our organic sales growth to be between 1.5% and 2.5% for the year following the softer than expected growth in the third quarter. We are at 2% year-to-date and expect Q4 to be around that range as well.

Our Q4 view for the Americas reflects our expectation of some general market pre-buy ahead of our annual list price increase in January along with their efforts to earn annual incentives for 2019. We expect large chains to remain choppy with some of these customers continuing to delay projects into 2020.

In EMEA, we still expect full year growth but expect the fourth quarter to be down year-over-year. We are expecting the soft market conditions to persist through the fourth quarter and face a difficult comp from a large chain rollout that began in last year's fourth quarter. We expect APAC to deliver the strongest full year growth of the 3 segments, but see a tough comp from last year's fourth quarter, driving a softer finish to the year.

We have updated and narrowed our full year adjusted operating EBITDA margin guidance to be between 18% and 18.5%, about even with last year despite a weak start in the first quarter. There are really 2 moving pieces here. The first being a 50 basis point unfavorable revision to manufacturing costs driven by both the deleveraging effect of the softer sales and our more aggressive efforts on the transformation and related cost impacts we saw in Q3. The second shift is a 25 basis point favorable adjustment to the FX impacts.

With regard to the manufacturing cost, the emerging efficiency gains at our transformation plants along with the recent sales adjustment is enabling us to begin reducing our workforce levels at our plants in the fourth quarter. We expect additional reductions in the first half of 2020 at the transformation plants as their efficiencies improve.

We also announced the consolidation of our Crem Shanghai plant into another of our existing facilities in China. This is expected to be completed late in 2020 with savings benefiting 2021.

Overall, you'll notice the net adjustment of the midpoints of our guidance ranges across margin drivers is flat with the prior year and down about 25 basis points from the low end of our previous range. When considering the depressed first quarter we experienced followed by 3 quarters, we expect to be around 20%, and where we are with the Transformation Program, we continue to feel good about 2020 in our margin expansion journey.

Moving down to P&L from there. Our updated guidance range for adjusted diluted EPS is now $0.67 to $0.72 per share. This reflects our updated sales and margin guidance ranges and our updated effective tax rate of 30% to 32%. The increase in the tax rate is due to our expectation for lower U.S. income at 21% with the same level of net unfavorable permanent adjustments, which tend not to vary with changes to income levels. We will address our 2020 tax rate outlook when we provide our annual earnings guidance in February.

That concludes my comments. Operator, we'll now open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Tim Thein from Citigroup.

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Timothy Thein, Citigroup Inc, Research Division - Director and U.S. Machinery Analyst [2]

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Maybe one for Josef or Bill. And just with regards to the Americas, we're essentially looking at, call it, flat year-to-date organic, and given some pricing, I assume it implies slightly down volumes. As we came into the year, there was a bit more optimism just across the space with regards to the prospects for '19. So maybe just update us in terms of some of those discussions you've had that you call out large chains a number of quarters. And I don't know if that's just a general pause you think or is it just kind of ongoing friction between some of the franchisees or all the above.

And then as it relates to looking further out, the target for outgrowth of 1% to 2% on an organic basis, do you still feel good about that?

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [3]

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Yes. So lots in that question. I would say that we felt pretty good about the -- we feel pretty good about the general market. The general market has kind of performed the way we thought it would perform. And up and through kind of July even I would say the QSRs were on track. And then we saw a shift in the latter half of the quarter in the QSRs and more shifting out of the quarter and out of the year. I think the weakness that we see in the Americas certainly comes from that piece of the business. The general market in general performed exactly how we thought it would perform through the quarter.

As we look going into the fourth quarter, what we've modeled -- there's probably some pre-buy activity getting in front of our price increase in January that we've modeled in a little bit. But I would say that's the color on the Americas.

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Josef Matosevic, Welbilt, Inc. - Executive VP & COO [4]

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Yes, Bill. And looking forward, maybe a couple of more data points here. The project hopper is still pretty active in the QSR segment and in the general market. So we're not looking at this as a detrimental back to year versus just some projects being delayed. Our new innovations have been performing extremely well in the market and we are in a test period with quite a few franchisees and including the general market. So overall, I still feel pretty good where we are and where we're going.

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [5]

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But with that said, there certainly is softness in the market that overall when you combine the 2 segments together, that softness has continued.

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Operator [6]

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Your next question comes from Jeff Hammond from KeyBanc.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [7]

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Can you just talk about -- I guess I'm trying to parse out this manufacturing -- kind of what's disruption and what's kind of deleveraging from the lower volumes. Because it seems like some of this transformation disruption is pretty temporary and would go away.

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Martin D. Agard, Welbilt, Inc. - Executive VP & CFO [8]

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Yes. Jeff, it's Marty here. They intertwine a little bit. But roughly speaking, I would say it's something like half and half. And then we are going to work at the -- what I'll call the fixed cost overhang sort of immediately. We alluded to some head count actions that we'll be taking and that will continue kind of in steps across different facilities and that will help get rid of that.

And then the transitory kind of stuff relative to transformation. We think the lead plant will get through that sooner rather than later, maybe the fourth quarter. Other plants will step in a little bit. So it will be with us a little while, and we've kind of reflected that and how we talk about our targets for next year on an exit basis as opposed to the first half. There's all these lags of getting these things in place and getting the cost savings through inventory and on out.

So we think we're going to probably operate sort of like this through the fourth quarter. The comparison gets a little easier in the fourth quarter, but some of these manufacturing issues will hang around a bit into the first half and then we really start to see the forward progress in the back half of next year.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [9]

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Okay. And then just on the savings into 2020. I mean it sounds like you're going to get de minimis this year. You'll exit $30 million. What's a good way to think about kind of incremental cost savings from the transformation '20 over '19?

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Martin D. Agard, Welbilt, Inc. - Executive VP & CFO [10]

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Yes. So we talk about $30 million kind of exit basis. That's an annual run rate. So think of that as something like $8 million a quarter on a $400 million sales base. So that's about 200 basis points. And so whether we get all of that in the third quarter, I don't know. We'll be working towards it. That's kind of a target. And certainly by the fourth quarter, we'll be looking for that to be showing up.

There are, meanwhile, moving parts around price and material cost and stuff. But all in, we're hoping for that kind of margin expansion as we get through -- into the back half of next year. And then the rest of the targets we set related to the second half of 2021 step up from there.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [11]

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Okay. And then final -- a couple of final cleanup questions. KitchenCare just seems like it's very stubborn. When do we start to see more consistent growth there? And just what's the implied 4Q tax rate?

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [12]

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So on KitchenCare, we were kind of -- it was kind of flat in the third quarter. The recent acquisition (sic) [announcement] of Parts Town and Heritage coming together, we're trying to figure that out in terms of what that means. We don't see it -- we've been in contact with both companies. We don't see it as an issue in the fourth quarter. But going into 2020, there certainly will be some overhang of the KitchenCare business as they consolidate their inventories. So we're monitoring that pretty closely to see what the impact is on 2020. But 2019, this shouldn't be -- should be business as usual and normal activity for us. But yes, it was flat in the -- coming into the third quarter.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [13]

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And tax rate?

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Martin D. Agard, Welbilt, Inc. - Executive VP & CFO [14]

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Yes. Jeff, it should be 30% to 32%. That full year guidance should hold up in the fourth quarter as well.

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Operator [15]

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Your next question comes from Larry De Maria from William Blair.

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [16]

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Could you -- maybe you guys touched on this and I didn't catch it, but can you talk about the magnitude of the pushouts compared to your expectations? And I don't think so, but do you guys expect anything -- to come back in the fourth quarter? It sounds like it's more about next year. And really just to try to get to the core of the reason of why we're getting push outs. Is it company-specific or is it just uncertainty in general with the large global chains?

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Josef Matosevic, Welbilt, Inc. - Executive VP & COO [17]

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Yes, I can start it and then, Bill, you might want to...

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [18]

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Yes.

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Josef Matosevic, Welbilt, Inc. - Executive VP & COO [19]

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Jump in as well. But the majority of our push-outs is really into the QSR sector. So in the areas of -- some on the beverage and some on the hot side. But again, those projects are still active. There is funding available. So quite honestly, we're really not exactly sure why they were pushed back.

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [20]

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Okay.

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [21]

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Yes. So I mean these things tend to move quarter-to-quarter on us. And it's kind of -- I would say the miss that we had in the third quarter was almost all related to QSRs and the move in the QSRs. So (inaudible) magnitude.

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [22]

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Got you. Now I'm just looking at the guidance into year-end and the full year and the fourth quarter. And if we start with the EPS you guys gave and we roll back up to EBT, it looks like you're lowering the lower end by about $1.5 million and the rest is tax. Is that right?

And secondly, it looks like still a pretty wide range in fourth quarter for sales, EBITDA margins, et cetera. But we're obviously over a month into the quarter. Why have -- is there a reason why we have such a wide range? Is it that variable? Or we just have some conservatism given some of the lumpiness that's occurred?

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Martin D. Agard, Welbilt, Inc. - Executive VP & CFO [23]

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Yes, it's Marty here. I think that's the case. Some of the behavior in the fourth quarter gets tricky. These guys are trying to earn incentives. There is this pre-buy, the price increase. There is our own ability to build and ship product as you get to the holidays. And having seen the third quarter soften sort of abruptly as we did after a pretty good July, we just felt like we needed to open the range or keep the range a little wider than you might think this late in the year. You could call that conservatism. We're just trying to be as fair as we can with the guidance, and that's the way we felt was necessary.

And then EBITDA has some of the same issues associated with leverage as we finish the stretch. But in general, if you look at the guidance and imply the fourth quarter, it's kind of in line with where we've been running. So -- and that's what we actually feel like the business is going to do.

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [24]

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Okay. And then if we -- like I said, if we roll up that EBT -- and that was really helpful -- EBT from where you guys guide the EPS and the share count, et cetera, is it right the low end of the EBT guide is really only about $1.5 million below the prior range? And then a lot of the adjustment is therefore tax because you already said that you're going to come in on the lower half of the prior guidance. Is that right?

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Martin D. Agard, Welbilt, Inc. - Executive VP & CFO [25]

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I haven't done exactly that math, but I would say that sounds -- it sounds reasonable to me. Yes, the EPS was -- disproportionately the tax rate. And the rest of it has been pretty close from a low end of the guide, the previous guide.

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [26]

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First, we don't guide quarterly. So that's based on your models, not ours. But I think what you're saying...

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [27]

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Well, I was using the annual. Actually, I'm using the annual for that.

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Operator [28]

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Your next question comes from David MacGregor from Longbow Research.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [29]

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I wonder if you could just talk a little bit and dig in a little bit around the NexGen business because when you really got started on that, I think you talked about it was going to ramp over 12 to 18 months. And we're kind of approaching that now. And so I'm wondering if there's any way to just -- if there's any way you could talk about the growth prospects on that going forward. Is it driven by whatever they are generating organically? Or do you feel you have a reasonable opportunity to pick up incremental business, incremental listings there? That's my first question.

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [30]

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Yes. So the -- first off, it's been a good relationship for the last year, year and a half that we've been working with them. We fully expect to be at the run rate by the end of this year. They have delivered on the volumes that they've committed to. And so it is predicated upon how much business they can convert -- or switch away from prior suppliers, and they're actively working to do that. So I'm very pleased with the actions so far.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [31]

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Yes. Is there an opportunity to pick up incremental listings? I mean how does that play out?

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [32]

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Yes, I think there is always opportunities for that and we constantly are working with them as a partner to find areas where we can bring value to their businesses. And once you get started with these guys, our hope is that we'll continue to grow and expand our business with them.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [33]

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How would you handicap the probability -- is that happening in 2020 at some point during that year?

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [34]

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It's hard to say. We have almost daily conversations with these guys on all aspects of their business. And remember that you don't necessarily have to be a primary category with any of these buying groups to participate with -- at the dealer level. So we work at each and every dealer no matter whether they're in the buying -- regardless of the buying group, we'll work with the dealers. So -- but going forward, we are always looking for opportunities to grow share and to work with our channel partners to take share.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [35]

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Okay. So the question was just around the production inefficiencies. How do they impact revenues and your ability to deliver product into the market?

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [36]

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Yes, I don't think there was too much of a revenue impact. The revenue shortfall came from just the lack of orders, not a lack of being able to deliver. We've seen our lead times come down as these volumes -- as the softness has occurred. So it's a little bit of the opposite problem, quite honestly. What Marty was alluding to is that some of these costs build up on you because you can get the cost out fast enough when the volumes kind of come down. But we've seen all the lead times -- in particular the one business that I know you follow, we've seen the lead times come down substantially there as we've improved our efficiencies and probably because of a little lack of volume in that particular sector.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [37]

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Last question for me is just -- you typically see sort of an uptick in competitive discounting and promotional activity in the fourth quarter. As you pointed out, people are after their volume rebates and there's a lot of reasons why that happens. We're heading into a price increase and you talked about the possibility for pre-buy. Is it likely that you'll see competitive discounting at the same level as last year? Or given that you're heading into a price increase, there might be a little less of that this year. How do we think about that?

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [38]

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No, I think you still will see very -- it's a very competitive environment. There's a lot of discounting going on. As you can tell from our commentary, we're being very selective about where we do that. We're trying to maintain our discipline there. And I think when you guys do your channel checks, you'll find out that we've been very disciplined in our approach to that.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [39]

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Yes, it's true.

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Operator [40]

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Your next question comes from Jamie Clement from Buckingham.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [41]

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Can you hear me?

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [42]

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Yes, yes, yes.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [43]

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Josef, you commented on the large QSR chain rollout business. How did -- the large chain I guess replacement type of business, how did that progress as the quarter went along? Like in other words, when some of the rollout projects got pushed off, did they also kind of pull back the other stuff? Or was that generally more consistent?

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Josef Matosevic, Welbilt, Inc. - Executive VP & COO [44]

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No, the replacement, Jamie, has been pretty consistent. We don't see an issue in the replacement business versus new store development, new store openings, brick-and-mortar type of stuff and installation. So that's the area that we have seen those push outs.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [45]

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Is it possible -- I mean, obviously, in the month of August the financial news headlines weren't great. It seemed like there was incremental uncertainty that kind of hit the marketplace. Certainly, the stock market reacted. I mean is it possible some of your customers just got a little bit spooked?

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [46]

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Yes. I mean there could be lots of reasons. I mean we can say that it happened in August and it continued in September. And I would say we still see a little softness still to this day. So whatever it is, it hasn't reversed itself.

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Operator [47]

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Your next question comes from Walter Liptak from Seaport Global.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [48]

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I wanted to ask about Europe. The numbers didn't look too bad there in terms of organic growth. And I wonder what you're thinking about for -- I guess the general market is weak, but -- so presumably projects are still good. What's the visibility like for projects in the EU I guess or EMEA in the fourth quarter and going into 2020? Is that a more stable market now?

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [49]

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Well, I think it's a difficult market with Brexit. We see Germany retracting. We have some pretty tough comps in the fourth quarter to overcome. We had some big rollouts with the chains last year in the fourth quarter. So -- and as we model it, I would say that we're modeling it kind of very conservative in the fourth quarter. We don't see a lot of upside in EMEA in the fourth quarter.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [50]

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Okay. Great. And the pricing, I might have missed it. But did you guys talk about the percentage or the average price increase that you're putting through for January?

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [51]

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No, we didn't talk about it. We're still working with our customers. We're discussing it with them. So that will come out in February.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [52]

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Okay. And I wanted to ask about cash flow and inventory levels. With the things you're doing with the line flow changes, it didn't look like you're having to add extra inventory. I wonder -- usually, fourth quarter is pretty decent for working capital and free cash flow. What are you thinking about for the fourth quarter?

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Martin D. Agard, Welbilt, Inc. - Executive VP & CFO [53]

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Yes. So far the things we've been working on have longer-term inventory upside, reducing working capital. In the near term, there will probably be stable levels and there may be a few projects where as we consolidate some facilities and stuff we have to build some inventory while we take down -- we start up one site and maybe take down another. So there's a little bit of upward pressure net-net through this, but not a lot, not enough to disrupt generally the seasonal pattern. Fourth quarter should come down. First quarter generally consumes working capital and inventory.

So we still feel good about the cash flow generation in the fourth quarter and the deleveraging even as -- I will say even as we ramp up the CapEx a little bit. You'll notice our full year -- we've been slow relative to the full year in sense of capital spending. We will pick that up a little bit. Fourth quarter, first quarter or second quarter will be a little heavier. But even with that, we still feel good about the cash generation and deleveraging.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [54]

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Okay. And just so we have an idea, the CapEx is up a little bit, but it doesn't sound like it's a big incremental program. It might be running $6 million, $7 million per quarter through next year (inaudible).

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Martin D. Agard, Welbilt, Inc. - Executive VP & CFO [55]

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Yes, we'll give some guidance out for the year. But you're right, it's not a big capital-intensive business and we see a bit of an uplift, but not substantial and not in the scheme of our cash flow generation, not big. So I'll hold off on confirming your quarterly run rate till we get to the next call and we talk about the full year more broadly. But suffice to say we don't think CapEx is something that's going to disrupt the historical cash flow pattern of the company or our deleveraging program.

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Operator [56]

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(Operator Instructions) Your next question comes from Rob Wertheimer from Melius Research.

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Robert Cameron Wertheimer, Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery and Cannabis [57]

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I'm sorry to hit the -- beat the dead horse again, but on the QSR side, can you characterize this in terms of past trends. Have you only seen this happen at points where there's a reflection impending? Or I don't recall it being called that quite as aggressively, but maybe it's happened a few times. And then could you just clarify, smaller restaurants you're not seeing the same hesitation, right?

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [58]

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Yes. So I mean -- look, there is no playbook for these QSRs. They all kind of do -- it just depends on their rollouts, right, and depends on what they're rolling out. So I would say in my 10-plus years, I've certainly seen it before where things roll out and move out from quarter to quarter. I've seen them more infrequently roll in or pull in, but that does happen from time to time.

Usually, it doesn't roll off the table. So it just moves somewhere else. And they tend to be rather large projects. So they do have a meaningful effect on your results from quarter to quarter. And that's why you see the choppiness. And that's why we call them out because it's really hard to overcome them with just general market type behavior.

But with that being said, the biggest part of our business is general market. And so there's some stability there. And yes, we haven't seen -- the smaller restaurants or smaller chains, we haven't seen -- the replacement business, I think it was Jamie who had the question. The replacement business is still moving along fine.

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Robert Cameron Wertheimer, Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery and Cannabis [59]

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Okay. That's very helpful. And then I mean you touched on this earlier as well. But looking into 2020, do you expect any revenue negative disruption from factory works that you're doing? Or right now that's not something you anticipate?

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [60]

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No, I would say it's -- we've been able to keep that noise pretty muted to this point. As we go through the transformation process, we're getting better and better at this, in identifying ahead of time where we have -- where we might have issues. So hopefully, it's a small impact and not something that we have to call out too much.

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Operator [61]

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We have no further questions. I'll turn the call back over to Mr. Bill Johnson for closing remarks.

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William C. Johnson, Welbilt, Inc. - President, CEO & Director [62]

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Thank you. To conclude today's call, I want to reiterate that I believe Welbilt has the right strategy to focus on profitable growth and drive significantly more dollars to the bottom line.

We expect to drive our profitable growth by improving our go-to-market approach to deliver more dollars of sales and by improving operations and therefore margins.

Our Transformation Program is ahead of schedule and I believe our investments in this program will become apparent to investors as we move into 2020.

I have confidence in this team to continue delivering profitable growth and delevering the balance sheet.

This concludes today's 2019 third quarter earnings call. Thanks again for joining us this morning, and have a great day.