Q2 2020 Welbilt Inc Earnings Call
[music].
Twentytwenty Q2 earnings conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session.
To ask a question during this time, you'll need to press Star then one under telephone.
If you require any further assistance. Please press star then zero.
I would now like to hand, the conference over to your speaker today Mr. Rich Sheffer you may begin.
Good morning, and welcome to well built 2022nd quarter earnings call and webcast.
Joining me on the call today is Bill Johnson, our President and Chief Executive Officer, and Marty a guard, our Chief Financial Officer.
Before we begin our discussion please refer to our safe Harbor statement on slide two of the presentation slides, which can be found in the Investor Relations section of our website www dot well built dot 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.
Actual results may be affected by many important factors, including risks and uncertainties identified in our press release and in our FCC 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 on discussion will include both GAAP and non-GAAP measures. Please refer to our earnings release for our non-GAAP reconciliations and other important information regarding the use of non-GAAP financial measures now, we'd like to turn the call over to Bill.
Thanks, Rich and good morning.
Our people demonstrated a strong sensor resiliency during the second quarter as they remain focused on executing our strategy, while dealing with the most difficult conditions ever faced by our industry.
The made great progress on our transformation program train customers dealers reps and consultants on top of developing goes kitchen, and how to improve safety with our enhanced sanitation features that are available with many of our brands.
We're well underway to developing a continuous improvement culture that is a key success factor and high performing companies will emerge as a stronger company wants this crisis the base business conditions began to normalize.
Before we get into our second quarter results I want to review well goods business responses to the cold. It pandemic can give you a little more color on the current environment for the commercial foodservice industry.
Starting on slide three.
You can see some of our responses to the crisis.
Most of which we shared with you last quarter.
I'm not going to cover each individual item on the slide but would point out that our early recognition of the magnitude of this crisis created an urgency within well bill to create meaningful responses across our entire company that allowed us to remain profitable and maintain a stable liquidity position in the quarter.
Now that we are in the third quarter and have a little better understanding that the impact from the pandemic will not be over in a couple of quarters.
We're taking a narrower setup cost reduction actions in the third quarter to further adjust our cost structure.
These actions were made possible by their progress we've made on our transformation program are helping us permanently lock in the productivity improvements achieved to date.
On slide four we've provided some detail on the current market environment.
Looking at the Miller Pulse weekly same store sales graph.
You can see the recovery in the restaurant markets since the historic dropped and begin the second week of March.
It's notable that QSR same store sales are now above prior year levels.
Most QSR is have more than 50% of their sales come through their drive-thru windows prior to the crisis and have also now embraced delivery.
As a result, they have been more resilient in casual dining restaurants, who pre crisis saw the majority of their sales tied to dine in traffic.
We have seen improved interest in activity around restarting some equipment rollouts inspect to be speaking more about next quarter.
Casual dining restaurants have recovered from seeing same store sales dropped 82% compared to prior year at the end of March to now being down 30%.
The recent rising cobot, 19 cases, and some reopenings rolled back in certain location.
Same store sales have plateaued since late June.
So no cobot 19 case counts begin the fall.
Reopening to begin again and diners, we agree gain confidence in eating Nielsen restaurants, there will be difficult to see additional recovery in same store sales for casual dining restaurants.
Used equipment hasn't been a big part of the commercial foodservice equipment markets historically due to reliability warranty and food safety concerns.
In addition, the industry does not have the infrastructure to refurbish and sell used equipment and significant volumes.
Most used equipment dealers are localized in their geographic footprints and wouldn't even be considered to have a regional presence.
We've not seen any discernible impact from used equipment in the market.
However, it is possible that it could mute demand for new equipment for a period of time, we'll continue to be ready to respond if we see it happening.
It's also possible that operators will differ new equipment purchases temporarily while they recover financially from the crisis.
And get clarity on the new demand environment.
This case, we would expect to see an increase in kitchencare aftermarket sales, it's operator spend more on repairing existing equipment rather than replacing it.
However, foodservice equipment, our income producing assets for operators and the cost repairs lost sales well equipment is down.
Food safety concerns and hang over the into she will likely keep extended equipment lives in check.
On slide five we haven't updated view, both demand drivers and our end market exposures.
On the demand side, you can see that the replacement demand, where they're coming from equipment or parks drives approximately 60% of our annual sales.
This has been long term driver stability in the commercial foodservice equipment industry has equipment and kitchens, our income producing assets for the operators and have average useful lives of eight to 10 years.
We expect that increased emphasis on takeout and delivery will drive newbuilds and remodels to adopt goes kitchens.
We also expect them remodeling will occur to implement new equipment for safety and sanitation protocols and kitchens.
Newbuilds or the next biggest driver of demand new builds for many end markets are expected to be very low for a while is the industry gradually recovering from the pandemic, although QSR spending may start up again soon as many chains and fully recovered to four are above prior year sales levels.
The final driver is demand driven by menu changes.
This can be in the form of adding new menu items or categories into an existing kitchen requires different equipment to produce.
Operators are also increasingly revamping their menus improve speed of service and improved quality of both take out and delivered foods.
These requiring equipment that can be used across multiple menu items have faster Cook times and it can extend holding times are prepared food, while maintaining the original quality. It had one freshly cook.
The next chart on the slide is our end market exposure.
Starting with the exposure within restaurants, our largest exposure is to QSR and pizza restaurants.
He's operators get the majority of their revenue through drive-thru takeout and delivery.
Making them to lease impacted by the pandemic with most back two or above same store sales from a year ago.
Our next largest exposures to fast casual because a large casual chains.
These operators have traditionally relied for dine in as a larger percentage of the revenue base, but have adopted takeout and delivery for a portion of sales.
They have been more impact isn't the QSR is could have been focusing on improving their takeout and delivery operations and options. Many have mitigated a portion of their lost sales during the nine in bands and ongoing reduce capacity orders.
Smallest exposure in the restaurant sector would be other casual operators.
These would include five dining independent operators and barring girls.
The majority of these rely on dine in for nearly 100% of the revenue.
Had been the most severely impacted operators in the restaurant sector.
Moving to non restaurant operators are four biggest exposures are to education C store healthcare and government correctional facilities.
But then education, we have continued to see some demand as schools are focused on making the changes necessary to keep students and staff safe when they reopen.
Healthcare's remains strong and should maintain that strength for the foreseeable future.
We have seen C stores and the government correctional segments spends on expanded sanitation.
The weakest sectors travel and leisure, which is still flat on its back that 4% of our end market exposure. It is one of their smaller segments.
Moving to slide six of our presentation to review our financial results.
Our net sales declined 51.7% in the second quarter with most of the decline being organic do the impact from Cobot 19 pandemic on our global end markets.
As we previously reported April sales declined, 60%, which was the worst month the quarter.
With may sales declining 56% in June improving the 40% decrease.
Despite previously unimaginable sales decreases.
We delivered an adjusted operating EBITDA margin of 9.6%.
This operating performance was made possible by the progress we've made on the transformation program over the last year by the cost containment actions we took in March.
Some of which were also enabled by the transformation program.
It's also helped us deliver positive free cash flow in the quarter and keep our liquidity stable with the first quarter.
On slide seven sales in the Americas decreased 52.4% in the quarter from the prior year.
As with all of our regions Americas sales were weakness in April and improve sequentially each month.
We did have strong large chain rollouts in our prior year comparisons those costs will begin easing in the third quarter.
Sales decreases were a little less than the general market in the second quarter due to the health care T. store and education markets performing better than some other end markets.
We did see demand for Manitowoc ice machines improve in the second half the quarter, which also supported general market sales.
Looking at M&A on slide eight sales decreased 56% with organic net sales now 55.1%.
Large chains sales were highly impacted as some were totally shut down in certain countries for much of the quarter.
In particular sales to our large carbonated soft drink customers were very low.
And the general markets the declines were smaller with crime outperforming in the quarter.
Crime as one some new customer business, which has started shipping already in the third quarter should have them close to their original expectations in the second half 2020.
On slide nine sales in APAC decreased 39.7% with organic net sales down 38.1%.
Sales gradually improve sequentially through the quarter led by China, Japan, and Australia, where the first to be impacted by the pandemic. The first to begin to recover.
Other areas of APAC were impacted later southeast Asia, the Philippines in India to name a few.
These areas were closed for some are most of the second quarter and impacted apacs overall results.
Moving to slide 10, we're continuing to make really good progress on our transformation program.
Our procurement team has issued the majority of the planned RF queues and we've been receiving embedding responses.
Responses continue to support our estimates for our targeted procurement savings.
We have now begun to implement new sourcing agreements with both current and new suppliers and delivered another small net savings from these activities in the second quarter.
We've also been developing our own site led value engineering initiatives, where they are a few processed and provide the rights solution for our businesses.
This is a great example of how we're transforming the culture of our company, it's one of that embraces continuous improvement.
We remain confident that we will complete our procurement activities close to our original timeline the may lag in actual dollar savings until the business returns to pre coven love.
We've continued to make progress at the five North American manufacturing plants that are currently part of the transformation program is.
It improves the layoffs of our assembly lines, where we've done that we've seen productivity and lead times improved significantly. These steps contributed to head count reductions beginning in Q4 2019 was more in Q1 2020, some additional reductions coming over the balance of the year.
We've taken delivery installed some new fabrication equipment. However, the pace capital spending for additional fabrication slow over the next few quarters as we focus on liquidity management.
Slowdown in capital investments combined with temporary plant shutdowns and furloughs.
Well slow the pace of recognizing manufacturing savings by a few quarters.
We remain fully committed to delivering the 500 basis points of margin improvement from the transformation program and expect to complete all of our planned activities that will drive the savings by the end of 2021.
However, the timing of realizing the full 75 million of cost savings in dollar terms, along with all in EBITDA margin target of 23%.
Maybe delayed due to the uncertainty of when sales and volume levels returned to pre filled at levels.
With that I'll turn the call over to Marty.
Thanks, Bill and good morning, everyone I'm going to start with slide 11 in the discussion of our adjusted operating EBITDA margin results as you might expect the drop in volume had impacts the water system and these margin drivers.
<unk>, which we measure at the gross profit level and is netted against the impact of net pricing drove a decline of 1600 70 basis points in the second quarter.
This reflects the 52% decline in sales versus prior year, only slightly mitigated by positive net pricing as our January price increases have mostly held up in the quarter.
Material costs, including tariffs was 250 basis point headwind this quarter compared to prior year.
This comparison reflects a 60 basis point benefit received in last year's second quarter from a favorable ruling on the application of the section three a one tariffs on certain products that were being imported from China.
Addition, we face some new tariffs that began to impact us in 2019, and finally, we saw inbound freight rates increase in the quarter due to capacity adjustments as carriers responded to feared covert disruptions.
On the positive side and mitigating some of these headwinds we did benefit from some early procurement wins, we've achieved through our transformation program and see a growing breadth of components coming into our plants at lower costs than a year ago.
As our production patterns return to normalcy, we are confident these procurement savings will contribute to margin expansion.
Other manufacturing expenses, mainly labor overhead and warranty were 250 basis point impact margin. This quarter, we're pleased with how quickly and aggressively we adjusted our production expenses to match volume declines we experienced this quarter as Bill mentioned, we implemented one to three week temporary plant closures at the end of May.
March can had sporadic temporary closure at some plants throughout the remainder of the quarter to match production with demand.
We implemented a reduction in force again at the end of March It was mostly a pull ahead of actions. We plan to take later this year as result of the improvements we've made in our plants through our transformation program.
This helped us reduce direct labor almost dollar for dollar with what we're sharp declines in demand and thereby maintained the productivity improvements we've made so far despite the lower volume.
But there is a degree of fixed costs, we could not impact proportionately to volume, causing the margin de leveraging.
We are continuing to execute the transformation program related labor strategies across our plants in Q3 and remain encouraged by the progress we see.
We're also critically reviewing our other plant cost to ensure we are adjusting to demand and creativity revisiting our structural cost we.
We continue to take additional restructuring actions in the second half of the year as each plant progress is in its individual transformation program.
SGN a on an adjusted basis was down from prior year quarter by $24 million or 1100, 80 basis point contributor to margin in the quarter.
Like our actions within the manufacturing footprint on SGN. A we also took early in aggressive actions to contain spending is the pandemics impact emerge in March.
Those actions enable us to show real favorability in most of the X gene a categories in the quarter employee related expenses marketing expense is traveling professional fees were all favorable.
As a reminder, if you're reading the face of the income statement SGN. A includes the transformation program investments that are excluded from our adjusted operating EBITDA you can track the specifics through the non-GAAP reconciliation schedule.
Moving to slide 12 free cash flow was a positive 3 million in the quarter.
Remember that we define free cash flow as cash provided by operating activities less capital spending, but historically have included unique adjustments for our accounts receivable securitization program that was terminated in March of 2019.
While the 2020 free cash flow has no unique adjustments 2019 was adjustments for the cash receipts on beneficial interest in sold receivables of 85 million. There was reflected as a use of cash in the operating section of the cash flow statement as well as a source of cash in the same amount from the investing section as we collected the balance of that.
Receivables that were sold prior to the program terminating the prior quarter.
This is the last quarter, where this adjustment will be in the prior years quarterly results.
One last reminder, on our free cash flow is that it is traditionally a seasonal use of cash in the first quarter as we pay customer rebates payout annual incentives build inventory and experienced seasonally lower volumes.
We then generate seasonally stronger cash flow and the remaining three quarters, we have averaged approximately $100 million of free cash so each year since our spin off which is a testament to the strong cash flow generation ability inherent in our business.
We demonstrated that ability again this quarter by generating positive free cash flow, despite seeing sales declined by over 50% in the quarter.
In addition in addition to generating positive EBITDA, we're managing working capital successfully with few if any collections challenges and selectively extending payables terms with the support of our vendors.
Inventory did rise during the quarter with finished goods due to some delayed and canceled orders by customers extra inventory in support of two sourcing changes between our plants and due to the buildup to support increasing ice machine sales.
Raw materials also increased due to materials and transmit as demand dropped coupled with our carrying higher levels of safety stock to manage risk.
While we're not providing a free cash flow forecast today, nor expecting it to achieve the levels over the last four years, we believe we've seen the toughest quarter in terms of the pandemic and this adds to our confidence relative to our liquidity.
Touching on liquidity, which we define as cash and short term investments plus availability on our revolver.
We ended the first quarter with $298 million of total liquidity, which is roughly even with where we were at the start of the quarter and as of June Thirtyth a year ago.
Cash and cash equivalents, plus restricted cash decreased by $9 million during the quarter, while our overall debt balance decreased by 10 million.
We're in compliance with the liquidity EBITDA and capital expenditure covenant in our amended credit agreement with significant headroom.
Finally on slide 13, I'd like to share a few updated thoughts on 2020.
First we went through our 2020 guidance in March and will not reinstate it until conditions have sufficiently stabilized.
The only guidance we are providing today is that we expect third quarter sales to decrease between 30, and 35% with understandably less clarity than our traditional guidance. We don't have a fourth quarter, nor a full year sales estimate at this time, we expect that the second quarter will prove to be the worst quarter will experience in this crisis the last.
Got to share on 2020 is that we're not abandoning our key strategic initiatives, but we'll balance our transformation investments along with our digital and new product innovation initiatives against what we can afford and the current environment. As Bill stated we remain confident the transformation actions are on track and the savings will be realized but due to the topline.
Uncertainties, and how that interacts with fixed manufacturing costs and SG Nay, we cannot at this time set a reliable target for achieving be end goal of 500 basis points margin expansion from the 2018 base, but just trust we have not lost sight of that goal.
That concludes my comments and operator, we'll now open the call up for questions.
At this time, ladies and gentlemen, if he would like to ask a question. Please go ahead and press Star then the number one on your telephone keypad.
If you would like to withdraw your question you May press the pound key.
Your first question today comes from the line of Jeff Hammond with Keybanc capital markets. Please proceed with your question.
Hey, good morning, gentlemen, Hey, Jeff.
Hey, so I'm just wanted to understand a little bit better the guy. So I think you said June down 40, maybe just talk about the exit rate in June and and into July where we're kinda plateauing versus that 30% to 35% decline just trying to square that up.
Yeah. So we came up in the 30, 35% or that the quarter.
We see July is in line with that.
We also see an uptick helping come out from June to July in the aftermarket kitchencare product and spare parts are improving so it's a little bit of a leading indicator for us. The you know some the reopenings and are occurring and but.
Kind of whats driving I think probably the improvement from second quarter to third quarter.
Okay, and then it looks like Decrementals on the segment basis were about 30% on the 50% decline and route. So how should we think about decrementals on that 30% to 35% drop.
Yeah. This this is Marty so what we talked about last time just to help you guys.
What a modeling is that for every 10 points of sales decline, we've we've sort of expected seen something like two and a half points of margin deterioration now we outperformed that in the second quarter here right. We were down 50 plus percent. Then you would say and we were all me off 10 margin points. So that was really sort of two point.
For every 10 points in sales.
So and I think that traces to the first the level of austerity measures in the aggressiveness that we were able to postpone all the but a discretionary spending stuff.
We would we would revert to those decrementals that's for the two and a half point to margin for every 10 point the sales or across the back half and I don't want to get too precise where we've given you guidance around it because there's just a little bit a timing effects and exactly where you are on the curve, but but I think that remains a pretty good indicator two and a half points.
The 10 point the sales decline and that's kind of where we might expect the second half to be.
Okay, Great and then just last one on you know can you just talk about health of distributors and dealers and you know that customer base and you know how you're kinda managing your relationships and receivables there and if we should see some of these guys kind of go through Reorgs, you know any kind of disruption.
You'd expect.
I think you know I think there aggressively managing their businesses just like anybody in this sector is we see yeah every one of the distributors and dealers, making headcount adjustments.
Cutting their cost.
You know and doing all the things that I think a prudent as business people to do we certainly you know I would say probably 100% of the the dealers.
Asked for extended terms and we know we've worked with with all the different dealers, but we've also worked our supplier base and been able to get some favorable terms the to really kind of help offset you know the additional terms that we that short term additional terms, we've had to give to dealers. So I think.
All along the whole supply chain I think everybody's kind.
Operating with each other in terms of you know understanding how difficult. It isn't we're all trying to do what we can for each other terms of receivables and payables.
But haven't seen any any foreclosures are bankruptcies.
There were some rumors but I think those were just on founded rumors.
It's kind of things happen, but.
Don't know of anybody that's in a real trouble.
I think everybody's managing as best they can right now.
Okay. Thanks, so much.
[music].
Your next question comes from the line of Tim Fine with Citigroup. Please proceed with your question.
<unk>.
Thanks, Good morning, Bill I just wanted to.
Come back to your comment earlier about.
About some large chain rollout activity that we can you said you may have some more color on next quarter.
What is the discussion between.
We were basically what what do you earned from the phones or.
I guess.
Think about those historically, sometimes those are a little elusive in terms of.
No actually converting those discussions about orders so.
Maybe just help us in terms of of Ah, Yes, I think level I think we have a little bit of both going on we have some business that we're pretty very confident is going to start rolling out in the third quarter.
And ER in terms of chain rollout.
And then we have others that are kind of fluid in terms of.
The QSR segment has done is performed actually pretty well.
Through the pandemic in terms of the same store sales after the after the bounce off the bottom with delivery takeout. So.
Everybody's looking at.
And how they adjust their their menu items and how they adjust their kitchens to account for more take out more delivery.
We've seen some strengthen and.
Oh schools in health care.
Theres been some some verticals that have held up pretty pretty well.
And you know you will see some of those people spend in money I think.
Second half the year that were delayed in that.
Second quarter so.
But we do have some roll out so we're pretty positive about and we'll we'll have more comments on the specifics and third third.
Okay got it and I'm just bulkier reporting also on that.
On the discussions with the dealers and distributors in terms of.
More favorable terms I'm curious, what's your to extend that to pricing and and you know as volumes hopefully do kind of.
Normalized here and gradually recover just how would you expect that the interplay there with.
Well you know I think.
We were we've been positively impacted by pricing in a marty's comments.
And on the call earlier, you know pricing was definitely a factor in the second quarter results.
So I think.
Look it's going to get if this continues longer this drags out the tougher pricing becomes course.
On the more hungry, everybody gets but but right now.
The price increases that we went in with January seem to be holding up as expected.
Alright, very good thank you.
Your next question today comes from the line of make debris with Baird. Please proceed with your question.
Yes, good morning, good morning build Marty.
I guess.
Bill did I hear this correctly that you were saying that orders in July are consistent with that 30% to 35% down guidance that you provided.
Yes.
Okay. So you know still got better versus versus June though that's.
Good point right, yes, and.
Thank you for the breakdown that you provided on slide five I for one point of very helpful and I guess my my first question.
If you're thinking about the outlook that you provided for Q3 and you look at at the orders that you've received thus far in July we're kind of looking at these pie chart that you've given us here in terms of your business breakdown.
I recognize you're not going to be able to give me perfect granularity here, but I guess I'm wondering how do we think about the moving pieces here, you know QSR and pizza.
How are they trending year over year is it fair to say that that portion of the market is.
I'll, maybe only down modestly and you're kind of have.
Casual and retail a rather travel and leisure and others that are down significantly I mean can you give us some color here I think that can be helpful. Yeah I think.
If you look at it in terms of what has the better opportunity for rebound there what is rebounding faster I would say QSR pizza.
C store.
Health care and parts are probably the kind of four verticals there that they give you the most opportunity for rebound.
Can you kind of have the next tranche of of verticals, which would be correctional government.
Education.
Or kind of.
And that and that next tier of you know kind of rebound.
The ones that are just.
But on their back right now or.
Casual travel and leisure.
Let me, let me see if I can ask this question a little different if on a go forward basis. Okay. If were say thinking that we can get against sequential improvement into Q4 or into 2021. My question is.
Should we think about that improvement being generated they'll buy areas of your business that are currently doing better meaning is there enough upside still to generate recovery in QSR in pizza.
And those similar verticals or will we have to count on some of the more depressed and market coming back in order for things to get less bad or improve.
No I think I think so the ones that have opportunity for improvement or you know.
Isn't is enough to generate what we're kind of looking at the to get us.
To the guidance level in third quarter.
I think they're going to be the one leading and.
There's some argument that there's the QSR as may be taking share from some of these you know restaurant going forward that are going to end up closing.
And and so you know there may be more rollout opportunities are more expansion opportunities as as they continue to win share. So.
I think it's yet to be determine how much of that share they actually take from some of that segment, but I think it's.
Those those are the guys and of course are really we have a very strong position that that segment.
Okay.
No. It does and lastly related this on on the parts business.
Maybe a little more color would be helpful. In terms of where parts of trended through the quarter and do you expect this business to be able to get back to growth mode.
At any point over the next say 12 months or so.
Yeah. So second quarter was was a really really tough quarter for kitchencare. The ER the overhang from the parts down heritage merger created an enormous.
Inventory build.
It at Park Towne operation.
So the second quarter was it was really slow for aftermarket parts.
Now the their sales actually rebounded, but they had to burn off that overhang.
And most of that I think will be gone by the end of the third quarter. They burned off a big chunk of it in the second quarter.
And so some of the improvement as I said.
Jeff going into the third quarter from the second quarter is the rebound that aftermarket peaked.
And we're continuing to work our strategies.
In terms of how we can generate more sales there.
We're working to become more digital and news.
Our partnership with our suppliers there too to help generate more leads and help drive our our aftermarket business.
In kind of get it to the levels, where we want to get it too.
Okay, and then environments squeeze one last one.
I'm wondering if there any variances that you're seeing between the hot side and the cold side of your business.
Obviously, there is seasonality on the cold side of the business.
So I'd I'd kind of love to hear your thoughts and do you think that there's different sets of actions cost actions that are required on one side of the business versus the other as you look back half going forward. Thank you.
Yeah. So there is some seasonality there you know in terms of the hotter the better for the ice business and it's been pretty hot last several months and so you know you saw our inventory was up a little bit and we got some work to do there, but a lot of that has do with the bills for ice coming into the seasonal high periods here.
In the summer months.
There is a little bit of you know some of the some of the colder side product is you know has has less of a margin profile than hot side anything that touches the food it tends to have a higher margin. So.
One is hot sign.
Yeah, its and direct contact with the food, where the cold lot of the cold stuff the storage. So it tends to it tends to be.
A little more price sensitive than not time, but.
But both have been doing well.
In the cold side is it has been holding up quite nicely I'm very pleased with the ice business and our.
Belfield operation.
Up in.
Michigan.
Thank you.
Your next question today, 'cause nine and David Macgregor with Longbow Research. Please proceed with your question.
Hi, Good morning, it's what's on for David Macgregor, Thanks for taking my question.
I guess to start off are you still thing are you still having trouble getting service and installation crews into the businesses, especially there is located in recent hot spots like Florida and Texas.
I haven't heard any any a more difficulty I mean I think.
As the restaurants open up and if they have problems certainly I would say the best indicator that we have is the repair part businesses improving so.
That means that the service level somebody's got to get in there to the put to those parts and so I would say you know that would be my only indicator.
On on aftermarket service side of it.
Okay. Thanks, and then on the first quarter call. The discussion of used equipment came up and at the time Ugly build said that.
Would most likely take a quarter or two to see any meaningful impact as the permanently closing restaurants, because bankruptcy liquidation et cetera.
Now that we're in August can you provide us an update on what you're seeing there and how things are playing at home.
And the equipment market, it's not event really for US we don't see we don't see any impact a were unable to quantify if there is an impact.
It's the people who are supplying the used equipments ones going out of business or the most likely buyers for the used equipment as well as independent changed small independent.
Restaurants and stuff so I think.
For us it's it's a non event I have I, you know I watch pretty closely and listen pretty closely to.
Everybody in the industry and I haven't heard anybody that's that said theres a lot of used equipment being purchased right now.
Okay, and then lastly, if I may can you provide some color on any supply chain challenges that you experienced during the quarter and to the extent that you can were just the risk to the supply chain stand today that you look ahead.
Yeah, you know every now and then you run into US you know.
A supplier who has you know maybe a peak in the coldest cases and they have to shut down for a couple of days or.
Two cleaner facility or whatever and so I would say that at this point. It's those types of disruptions that kind of push lead times out a week or two maybe you know if theres Mrs. But in terms of suppliers that are you know just shut down and causing us a lot of aggravation.
We don't have any we've been able to dual sourced through this RFP process and the transformation program that weve been undergoing and a and really improve our supply base, where needed where we had critical risk but.
I can't point to any any even throughout this whole crisis, where our suppliers have been fantastic.
The helping us meet our customer expectations.
Okay. Thank you very much for the color.
Sure.
Your next question comes in the line of type books, we CL King. Please proceed with your question.
Hey, good morning, gentlemen, just a few questions for you.
First she made some positive commentary about early to suffer markets in Asia, showing some sequential improvement.
In Q2, so I'm just wondering if you look at trying to Australia and Japan.
Do you feel like that's instructive for what the recovery curve should look like in the European and North American businesses. As you are kinda planning the business going forward.
Yeah, I think it's certainly a proxy for us to look at you know that Europe is a bit of.
You know, there's culturally differences the way people kind of attack these.
The virus and the way the government's react and and I think the EMEA area Aerie EMEA is taken probably the most.
Aggressive approach to shutting things down and keeping it shut down.
More so than than any of the Asian or even you less.
Regions.
So I think I think you'll see.
I think M&A is still just going to lag everybody because the way they they're doing things now it's interesting. They also have that some creative programs in the UK, They just announced a.
Ido help out program, where.
The government Subsidizes you know if the family for goes out they'll give a 10 pound node for each person up to 50% of the meal so that.
Somebody goes out and they have a 80 pounds.
Meal.
The governmental paid 40 pounds of that so you get it's driving traffic to restaurants, which I think is a real creative way in hopefully that that helps the recovery.
In that country, but I think solutions like that you know will drive.
Can drive recovery faster than just waiting people because the big the big problem is people just need to feel safe and need to get to a restaurant right getting to that restaurant and Theres a financial region like that to drive people to restaurant I think you'll see in recover faster, but I think you probably see the U.S.
Look more like China, and the Asian regions, and I think Europe will lag a bit.
Thanks, That's helpful. Second question, if you look at it.
And this goes back to the Pie chart on page five if you look at maybe the 11% of the businesses in the more challenged.
Buckets of the restaurant industry, what's your latest thoughts on kind of survival rate and door contraction as we head towards the back side of the pandemic.
Yeah, I mean that all over the math right. We know it's going to be that that those particular verticals are going to be really challenged and I think you know that they're going to have to rethink.
And the cases of like hotels and.
And travel and leisure, they're really gonna have to rethink how they prepare food.
Presented and those kinds of things. So I, that's why I think theres kind of the long pole and attend.
In terms of closures restaurant closures you know you can read and you know the same data that I do.
You know there talking 15% kind of range of restaurant closures, which.
I don't know exactly what the number is at this moment, but that's kind of number they're talking about over the next 12 months.
Okay, Great and then just a final question the working cap performance was.
Strong on the receivable side, you called out a couple of reasons for the inventory increases in the quarter between raw materials and some canceled orders are delayed orders if you're looking at the Q3 from a cash flow standpoint.
You expect inventory will be a substantial contributor to cash in Q3.
You know it will be a contributor I don't know if it will be substantial and the receivables will grow again as the revenues coming back. So I think working capital will be probably.
More neutral in the third quarter relative to how supportive it was in the second quarter.
Okay, great. Thank you very much.
Our next question today, because why anecdote.
Yeah, all capital market.
Please proceed with your question.
Alright. Thank you for taking my question. So I just on on those charts on page five those the up to date is that where we are sort of now or is that more historical view.
It it's it's more of a historical view and kind of Oh look at just a snapshot of where our markets are and you know I think what that's going on Mig was trying to get at as you know where these things trending or they're going to get bid the pie is going to get bigger or smaller.
I think you know as I said I think theres.
The QSR.
Pizza QSR has a chance of kind of growing and taking share from from some of the other sectors.
In the near to medium term.
And where would cafeterias fit in there or that's not even big enough to get a mention.
Yes, probably not big enough, it's probably falls into.
Like like Cafeterias like school cafeterias.
Yeah, and office cafeterias, and things like that kinda like education and stuff like that as some of that.
It's probably sprinkled throughout.
Can you speak a little bit about I'm kind of smaller competitors and maybe more generically being under a lot more pressure then than you guys are then the bigger competitors and kind of the opportunities at that setting up for for you and for the industry.
Well I think we're all under pressure I don't think the you know whether your big or small I think everybody feels a lot of pressure you know when you're on your markets are down 50 kind of percent and I think everybody's managing.
Yeah. That's they can in this environment I think you know the teams here well Bill leadership is not an exceptional job to this point of managing that downturn, but you know for sure there will be there'll be opportunities I think you know we're.
Competitors going forward to to look it.
You know are they going to survive long term and are those products or regions that you wanted to look at.
But yeah, I think right now it's it everybody's got their head down trying to keep their factories open keep people say.
And do all the right things, but.
Things a little too early to make a call on any of the competitors at this point.
And.
Do you think there's going to be like like can you help us think about this why do you think theres going to be a lag on on restaurant closures you know as like the PPP money runs out and things like that like here in some of that from other industries like maybe truck drivers that that kind of stuff. So I just wonder like how do we think about.
You know the lag or the potential for a lag for for that Yeah. You know I think probably the units there.
There are holding on right now in the problem comes when you start up and then shutdown started up in shutdown and.
Just let him start up and keep operating I think they can you know they have obviously, even at reduced levels will have a much better chance.
When you got to rehire, all your people kind of got a load up your food and get your you know years get ready to operate for a day or two in the operate for a week and then the government shut you down to operate for Montney shut you down you lose all that food and spoilage and its you know all that all their working capital basically.
And that's what's going to kill them as if we start and stop start stop all.
All the time, so it's better for them to just be shut down than it is to start stop start and stop so I think I think thats, what we got to watch out for now that will drive more stress on and just.
Being shut down.
All right that's super helpful. Thank you so much.
Your next question comes the line of Larry de Maria with William Blair. Please proceed with your question.
Hi, Thanks, and good morning, everybody.
Hey, guys first question.
Kind of following an until about the restaurants and helping them.
What do you feel the legislative front domestically to help restaurants, I think there's a restaurant act out there obviously, the debating but not nursery close and then other stimulus what's out there that are you guys. There may be hoping for and actually fees realistic that could help the industry.
You not obviously is there any kind of stimulus helps but I think you know like the program I mentioned earlier about the UK driving you know people into restaurants by giving them a giving them because you know the restaurants vouchers to essentially pay half the meal prices I think that's that I think.
That's really a something our government should look at and.
You know.
Different region should look at to try to help these restaurants, because it's just getting people. There I think once people get there they'll feel safe you know because the restaurants the ones that I've been to.
You know you don't you don't even have a menu anymore. You know you have you scan a QSR code and you pulled the menu up on your phone. So you know, there's the everybody's where mask. It's the restaurants are cleaner than I've ever seen them in my lifetime and I think once people just get over that initial fear.
And get out to the restaurants, I think if we can figure out ways to drive traffic to the restaurants, I think people become more comfortable.
So.
Those are the kind of actions I think we need to be thinking about.
Promoting target.
Besides the domestic the new stimulus it's been debate it doesn't sound like there you guys are very hopeful that theres something in the pipeline specifically right now right.
I don't know of anything else in the pipeline other than that.
Okay and.
Obviously, you guys had rolling plant closures in second quarter, what's the outlook for your kind of production plan and factory closures or openings in the second half where they now we'd beyond the worst obviously would be on the worst but continue to move towards having them open and are you thinking about structural capacity coming out at this point.
It's more about the more efficient with what you're having your footprint now.
Well, so theres a lot of things at play into it right, but from an operations perspective, it's easier to run a full plant than it is to try to run partial shifts and partial lines. So what you want to try to do is.
Build up of demand and that means you have to shut down for a week. So you can run for two straight weeks, that's better than running three partial weeks in terms of.
Manufacturing costs.
We watch that when we put all the tools in place now so that we can look at how many hours we need per week per customer per order per job and we can do a good job managing.
Our.
Our earned hours and what we need to run the factories with.
There are some countries where in order to qualify for some of the the.
Employee pay programs you have to stay down for at least a week to two weeks. So you can't do it every day at a time, so that that factors into your decision, making and of course, just the order rate itself.
We went down where we had two shifts we went down the single shift operations.
Yes, so we've done all those all the things that you could you could do.
From that capacity planning you know I think as we look at our factories.
And as we look at our office space, even I think there's there's a lot of room, we've learned a lot of lessons about men working from home and video conferencing and things like that and I think you know we've we've learned that you can be very successful doing it. So I think we go forward. We're gonna have to look at you know.
Office space and in doing how much do we really need if people were going to be working from home more often than they used to be I think there's some opportunities there for or some.
Cost out.
And certainly you know as we said you know there's some things that we were looking at in the third quarter and we'll talk about a third quarter call.
Maybe a little bit capacity standpoint, but nothing nothing radical.
At this point.
Okay. Thanks, if I could just sneak one more or less than the.
Mexico first on heritage that that it's kind of sunset it.
Any more consolidation in the aftermarket or distribution channel that's likely in the near term that could be headwind or has that more or less run its course, but having acronyms run its course I mean, all the those were the two biggest ones right. So.
Anything else would be pretty small deal.
[noise], Greg Alright, thank and good luck, yes.
Your next question comes not.
I am sorry line of wealth liquid seaport global please.
Please proceed with your question.
Hi, Thanks.
Hi, Jason if I missed this but Marty you talk about what you thought the restructuring cafs cash costs might be in the second half of the year.
Yeah, it'll it'll pick up from what we showed in the second quarter.
But not as high as the first quarter I would say somewhere in the middle of that that range is probably where the restructuring stuff and the transformation costs. Those two pieces, adding together will run in the in the third and fourth quarter. So they'll continue to be a span on both of them, but it won't get backup to the first quarter levels, but it won't.
He is.
Quiet as the second quarter was.
Okay got it and just.
You know when we think about it a normal year, which is hard to do this year, there's usually fourth quarter.
On the buying groups distributors started hitting their their volume levels to get rebates.
And that impacts pricing, how does how do things look for this year.
And you kind of alluded to maybe there could be more pricing competition I don't know if you were.
Talking about before were alluding to the fourth quarter or if.
You think that will have no impact this quarter not wasn't alluding to the fourth quarter I think just in general you know I think you no longer that stretches out them. The hungrier people get for business I think I think.
I think the fourth quarter by.
We historically see in the in this industry will be muted.
Because of the just the uncertainty in the cash position of dealers and distributors on it we're not anticipating.
Big buys from dealers and distributors it ended the year.
Okay, great. Thank you.
Okay.
And that's all the time, we have for questions today I will now turn the call back to Mr. Johnson for any closing remarks.
Thank you before we end todays call I'd like to thank our employees once again for stepping up to the challenge presented by the cold at 19 pandemic.
Entire management team really appreciate your efforts.
Next I want to reiterate that I believe well built will emerge from this crisis, a stronger company that is structurally leaner and more efficient.
We will focus on opportunities, where we can use our competitive advantages of innovation and digital leadership to help our customers succeed and grow.
We will continue to win new business as opportunities arise by leveraging our culture of innovation and customer service.
We will return to delivering profitable growth and de levering the balance sheet as this crisis debate.
This concludes todays 2022nd quarter earnings call. Thanks, again for joining us this morning and have a great day.
Thank you for your participation on today's call you may now disconnect.
[music].