Q3 2020 Welbilt Inc Earnings Call
Good morning, My name is Amanda and I will be your conference operator today.
At this time I would like to welcome everyone to the Welbilt, Inc. 2020, Q3 earnings call.
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After the speakers remarks, there will be a question and answer session.
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Thank you Rich Sheffer you may begin your conference.
Good morning, and welcome to well builds 2023rd quarter earnings call and webcast joining.
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 and in our earnings release, both of which can be found in the Investor Relations section of our website.
W.W. dot well built dotcom any.
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 many 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.
Sure events or other circumstances.
Today's presentation and discussion.
Well 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.
I now would like to turn the call over to Bill.
Thanks, Rich and good morning.
Before we get into our third quarter results I want to share some details on the current market environment.
Looking at the Miller Pulse weekly same store sales graph on slide three.
You can see the recovery in the restaurant markets I said historic drop that began in the second week of March.
It's notable that QSR same store sales are now above prior year levels.
Most QSR had more than 50% of their sales come through their tried true windows prior to the crisis and now are also embracing delivery.
As a result at a more resilient than casual dining restaurants.
Pre crisis saw the majority of their sales tied to dine in traffic.
Same store sales at casual dining restaurants began the quarter down 30% compared to the prior year proved to being down 20% by the end of the quarter.
We're not expecting to see much improvement in the near term due to the recent rise in Kobe 19 cases, causing some reopenings to be rolled back and portions of the U.S. and the M.B.A.
The colder weather that is now impacting northern regions will also compete additional improvement.
Phil News called the 19 case counts begin the call again, diners regain confidence and eating meals indoors at restaurants.
Be difficult to see additional recovery in same store sales for.
Casual dining restaurants.
The National Restaurant Association estimates that 100000 restaurants or 15% of the pre called the population have closed.
We also reported that restaurant employment remains 2.3 million below pre cold then levels imager.
The majority of this is in those operations that rely on indoor dining for sure.
He was ours have also reduced headcount as they have been closing their indoor dining rooms, and shifting to a takeout and delivery only model.
Given the current state of the market and it's possible that operators will need for new equipment purchases temporarily while.
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 as operators spend more time on repairing existing equipment rather than replacing it.
Our foodservice equipment, our income producing assets for operators and the cost of repairs lost sales, while the equipment is down.
Good safety concerns that hang over the industry will likely keep extended equipment lives in check.
You had several QSR as publicly comment recently that they will begin to focus on newbuilds over the next several quarters as their same store sales have recovered and they see a share growth opportunity do.
Due to the continued weakness in casual dining.
Given our strong position with most of these change we expect to benefit as this market segment starts to expand again.
Looking at other end markets the education market in a seasonally strong during the summer months as they do the majority of their plans remodels and upgrades from schools not in session.
As expected we did see this market seasonally slow in late August.
As project work was completed in time for the anticipated return of students.
Healthcare remains stable and is likely to stay that way for the foreseeable future although.
Although there is the potential for some remodel and upgrade projects.
Long term care facilities once the pandemic ends.
We have seen C stores and government and Correctional segments continue to spend on expanded sanitation. We have also seen a strong focus on beverage offerings in the C store market, especially for our first once when the machine.
As well as the growing interest in our cram coffee machines.
Yes, many units in touch with a number of major C store chains and are optimistic that this will drive new revenue opportunities for us in 2021 and beyond.
Moving on now to slide four of our presentation to review our financial results.
Our net sales declined 27.3% in third quarter with organic net sales decreasing 28%.
Year over year monthly sales decreases in creek each month during the quarter and the 27.3% decline was almost half compared to that of the second quarter.
Despite the continued high level sales decreases we delivered an adjusted operating EBITDA margin of 15.3%.
This was down 470 basis points from last year's third quarter, but once it's 570 basis point sequential improvement from this year's second quarter.
This operating performance was made possible by the progress we've made on the transformation program over the last year and by the cost containment actions we took in March.
We delivered 32.1 million of free cash flow in the quarter increased their total global liquidity.
On slide five sales in the Americas decreased 28.8% in the quarter from the prior year yet.
We had $16 million of Nonrepeating large chain rollout sales than our prior year comparison, only $3 million a new role off volume in this quarter, which accounted for the majority of the sales decrease attributed to QSR is in the quarter.
Mobile within this corners rollouts with the first shipment to marry show high speed ovens to a new global customers.
These four shipments occurred late in the quarter and we expect sales to this customer to gradually ramp up as they replace all their existing islands over the next several years.
In the general market the sales decreases were a little less than the third quarter due to the healthcare C store and education end markets performing better than some other end markets.
We did see demand for Manitowoc ice machines, and Crane, which also supported general market sales.
The level of Kitchencare aftermarket sales decreases ease later in the quarter as the distribution consolidation and inventory destocking related to the merger the two largest master parts distributor near.
Neared completion.
Looking at EMEA on slide six sales decreased 21.6% organic net sales down 25.8%.
Our chain sales were weak with sales to our large carbonated soft drink customers remaining very low.
Our chain sales were also impacted by strong QSR sales last year.
We had a smaller decline in the general market due to a couple of small roll outs, one for crown with the European governmental entity another for Mary shaft, the UK grocery store chain.
We also saw a better sales in the UK during the quarter as they reopen for dining out.
Which was supported by the government through their eat out to help out program that subsidize 50% of the cost of the meal to 10 pounds.
Individuals who dined out.
Gregory most successful there were 64 million meals eaten at a discount in the first three weeks, but unfortunately program has ended.
Even more unfortunately, many areas of the UK and you're seeing spikes in Colby cases are re and closing localized restrictions.
On slide seven sales in apex decreased 26.9% organic net sales down 27.3%.
Sales in China, and Australia, the first areas to be impacted by call. It last winter.
Increase year over year with China benefiting from a large project.
Excluding that project, China sales would have decreased slightly.
Other areas of APAC Southeast Asia, the Philippines, Japan, and India to name a few.
Impacted later and remained weak during the quarter.
Moving to slide eight we're continuing to make really good progress on our transformation program.
Our procurement team has implemented many new agreements with current and new suppliers and it's continuing to review the majority of the remaining RFP responses.
Most of which are now going through their product qualification and testing processes.
We're starting to see the savings from our procurement activities begin to ramp up with some of the early benefits are currently capitalized as inventory well rpls, reflecting some inventory obsolescence.
Transitional cost as we shift suppliers.
We've also been developing our own site led value analysis value engineering or D.A.B. initiatives, where.
So there are a few process didn't provide the right solution for our businesses.
Please be a the initiatives have identified additional savings opportunities supplement the RFP process and is a great example of how we are transforming the culture of our company into one that embraces continuous improvement.
We remain confident that we will complete our procurement activities close to our original timeline, but may lag and actual dollar savings until the business returns to creek holding levels.
We have continued to make progress at the five North American manufacturing plants are currently part of the transformation program and.
We have seen productivity gains emergent not only these sites in most of our sites globally. As we are deploying our lessons learned broadly to accelerate improvement.
Some of these productivity gains have been substantial spike dealing with lower volumes and partial production shifts that her cost absorption and lead to higher transitional costs.
These productivity gains and led to a leaner operations in a smaller workforce with head count reductions that began in Q4 2000 and I he can.
Continued in each quarter of 2020.
We anticipate some additional productivity related headcount reductions continuing through 2021.
We've taken delivery in this false new fabrication equipment. However, the pace of capital spending for additional fabrication equipment has been slower than originally anticipated due to the impacts of coated.
Slowdown in capital investment combined with temporary plant shutdowns and furloughs that we were enacted in the second quarter and continue to a lesser extent in the third quarter. It will slow the pace of recognizing manufacturing savings by a few quarters.
We did complete the transfer of all coffee machine manufacturing from our crime Shanghai plants, one of our existing manufacturing plants in China during the third quarter.
We're now in the process of shutting down the Shanghai plant should be fully funded by the end of the year.
We did see a step up in transformation program savings in the third quarter within period savings increasing to approximately $4 million.
Which is a 16 million dollar run rate.
We remain fully committed to delivering the 500 basis points of margin improvement from the transformation program.
Expect to complete all the planned execution actions 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 the all in EBITDA margin target of 23% maybe delayed due to the pause experience related to the pandemic, creating uncertainty when sales and manufacturing volumes returned to pre called at levels.
Before I turn the call over to Marty and want to share. Some recent developments from some of our other strategic initiatives on slide nine I'm pleased to announce that we launched our newest version of kitchen connect.
First our new common controller into our first product lines.
Kitchen connect is our open cloud based digital platform that brings the benefits connectivity to commercial foodservice operators and helps them in five key areas.
Facilitates new menu downloads and updates to provide.
Wise visibility into the service needs so the equipment.
At CES with asset management and tracking.
Helps a measure what they produce and how they are utilizing their kitchen equipment.
And finally attract quality management metrics, such as oil filtration and priors for cleaning cycles in Colombia.
Good. She connect 3.0 provides enhancements on all of these key features and a stable secure digital environment.
Because it is an open cloud based solution, we can share data with other kitchen management platforms.
And connect competitors' equipment dwell both kitchen connect.
Our new comics controller connects to kitchen connect 3.0, and is now being integrated into new products across all of our brands.
We also will be retrofitting existing products with the new controllers and will offer kits the operators who wants to retrofit their equipment.
The new controller take advantage of our integrated digital platform.
Operators increasingly demanding digital capabilities and choosing what equipment they will use in their kitchen.
Well this integrated approach of having a leading cloud based data management system, but the only control. Other uses the same operating logic across all its brands 12, all that leading edge digital platforms in our industry.
Moving to slide 10, we launched our newest common term combi oven product line, the Max and the Asian and European markets two weeks ago.
The Max is for those customers need a combi oven that is larger than our minis as more features and performance.
We don't need all the premium features and performance of our flagship seaport Combi ovens.
The Max is born digital with our new comment controller and connects to kitchen connect 3.0, well being price to be competitive with other mid tier combi ovens in the market.
It several hundred people attend our live launch event in China, and many more join virtually.
For our launch events in Europe.
The last item I want to cover is an update on our gross kitchen efforts on slide 11, you can see one of our standard goes kitchen designs that was developed by the kitchen team to help operators. These kitchens adopt an efficient module.
Modular layout that additionally enabled by kitchen connect.
The man for goes kitchen is expected to grow rapidly with an estimated 1000 goes kitchen opening over the next four years and Americans, representing approximately $100 million of equipment.
We estimate that we have some equipment and the majority of those kitchens in operation today and have installed 25, well built goes kitchen, so far this year.
The majority of the equipment in the kitchen as well as other equipment.
This is yet another example, where our leadership in digital capabilities will help us growing in emerging market segment.
With that I'll turn the call over to Marty.
Thanks, Bill and good morning, everyone I'm going to start with slide 12 in the discussion of our adjusted operating EBITDA margin results as you might expect the drop in volume at Impax water system and these margin drivers volume, which we measure it the gross profit level and its netted against the impact of net pricing.
The decline of 310 basis points from the third quarter. This reflects the 27% decline in sales versus prior year, partially mitigated by positive net pricing as our January price increases have continued to hold up.
Material costs, including tariffs was 150 basis point headwind this quarter compared to the prior year.
Well, we have had some savings come through from our transformation programs procurement activities. We had two timing related adjustments that impacted this driver.
First last year's comparison included favorable material costs linked to a large rollout volume buys in Q2 last year. They went to inventory and benefited the PML in Q3 last year and Conversely, this year the transformation driven per piece cost reductions can sell or partially capitalize the spread across Q3.
In Q4, yes.
The other issue to mention is that we increased our reserve for excess and obsolete inventory this quarter tied to the transfer of some production from China to North America, and also tied to inventory of older controllers that are being replaced by our new common controller.
Lastly, we still had a negative impact year over year for tariffs that have been imposed within the last 12 months.
Other manufacturing expenses, mainly labor overhead and warranty work 340 basis point impact margin this quarter we.
We continue to effectively flex our production expenses to volume declines we experienced again this quarter as a reminder, we implemented a reduction in force at the end of March that address both lower volume in anticipated productivity gains.
We took an additional but smaller action in early Q3, as we made further progress on improving productivity in our plants and gain more visibility and upcoming demand.
It's helped us reduce direct labor in excess of the demand declines and thereby continue to build on the productivity improvements we've achieved through the year. Despite the lower volume.
But there is a degree of fixed cost we could not attack portion if the volume, causing the margin de leveraging.
Continuing to execute the transformation program related labor strategies across our plants in Q4 that several more equipment upgrades planned over the next few quarters and remain encouraged by the progress we see where.
We're also critically reviewing our other plant costs and creativity revisiting our structural costs by for example, exiting warehouses and consolidating buildings within a given campus.
We expect to continue taking additional restructuring actions over the next few quarters as each plant compressors and its individual transformation program.
Yes today on an adjusted basis was down from prior year quarter by $9 billion equating to a 310 basis point contributor to margin in the quarter.
Like our actions within the manufacturing footprint on asked you name. We also took early and aggressive actions to contain spending as the pandemics impact emerged in March many of those actions remain in force and enabled us to show real favorability in most of the X gene eight categories in the quarter as employee related expenses marketing expenses.
Travel and professional fees were all favorable as.
As a reminder, if you're reading the face of the income statement as gene a includes the transformation program investments that are excluded from our adjusted operating EBITDA.
You can track the specifics to the non-GAAP reconciliation schedules.
Moving to slide 13 free cash flow was a positive $32 million in the quarter with.
With the sequential growth in sales and production volumes, we did see growth in both accounts receivable and accounts payable during the quarter.
Both are still well managed and specific to accounts receivable, we have seen only a negligible impact on collectability from the industry contraction.
Net inventory decreased by $16 million in the quarter as we made progress on moving our inventory levels into better alignment with our sales levels.
Decrease is inclusive of our investment in the initial stocking of our new comic controller as we ramp up production of our born digital products and pursue our digital strategy execution.
Also impacting free cash flow is our investment program in both traditional capital spending and the transformation program.
The quarter, we spent $5 million in capital down slightly to 2018 and year to date. We are at 16 billion in line with 2019 17 billion to three quarters, but we will ramp this up a bit in both Q4 and 2021 related to equipment upgrades facility investments new product innovation and key initiatives.
Yes.
The transformation program investment is reflected in both SDMA and restructuring.
For the spend reported yesterday after the 6.7 million in Q3, we have spent 56 million since inception in May 2019, and combined with transformation related restructuring charges of 9 million since inception, we have already incurred 65 million of the original 75 to 85 million.
In dollar range of investments planned and these costs will certainly ramp down in coming quarters as the program continues into 2021.
One last reminder, on our free cash flow is that it's traditionally a seasonal use of cash in the first quarter as we pay customer rebates and annual incentive compensation build inventory and experienced seasonally lower volumes.
We then generate seasonally stronger cash flow in the remaining three quarters as shown on this chart. We have remained free cash flow positive since the beginning of the pandemic.
While we're not providing a free cash flow forecast today youre expecting it to achieve the levels of the last four years.
Absent an abrupt market disruption, we should remain cash flow positive in the fourth quarter.
Moving on to liquidity, which we define as cash and short term investments plus availability on our revolver.
We ended the third quarter with $333 million total liquidity, which is well ahead of where we were at the end of the last two quarters.
Cash and cash equivalents, plus restricted cash decreased by $17 billion during the quarter, while our overall debt balance decreased by 52 million, providing the 35 million improvement in liquidity this quarter.
We were in compliance with the liquidity EBITDA and capital expenditure covenants in our amended credit agreement with significant headroom.
Finally on slide 14, I'd like to share a few updated thoughts on 2020.
First we withdrew our 2020 guidance in March and will not reinstated until conditions have sufficiently stabilized given rising cobot case counts installing or even a reversing of the reopening process, we cannot offer any guidance on the fourth quarter.
Color I cant offers that october's declines from last year was slightly better than Q threes overall, and we are hopeful that quarter will also show slight improvement in the decline versus last year. We caveat. This with the realization that the ongoing cold at night to pitch them. It could make the pace of the gradual recovery uneven, especially during the winter months.
The last thought to share 2000, twentys that we are focused on the execution of our key strategic initiatives I believe we have the financial resources to do that and we'll of course closely watch market dynamics and adjust as required.
As Bill stated we remain confident that transformation program actions are working on a transactional level. We can clearly see the savings are materializing and we're confident those benefits will accelerate I will point out the direct pass through to our PML and old margin progression will not be a linear path due to volume effects inventory impacts.
Acts and other time lags, but we remain convinced we are doing the work now that will make us a stronger and more profitable company in the quarters ahead, when both our transformation actions are mature and the market has recovered.
We have not lost sight of our 500 basis point improvement goal, nor our path to it.
That concludes my comments operator, we'll now open the call for questions.
Ladies and gentlemen, as a reminder, if you would like to ask an audio question. Please press Star then the number one on your telephone keypad again that is star one to ask a question.
Your first question comes from the line of Mig Dobre with Baird.
Thank you very much good morning, everyone.
Couple of questions from me, a shorter term and the longer term one I guess I'll start with the shorter term one I appreciate the commentary in terms of trends through the quarter, but I'm wondering if maybe you can put up.
Sure.
Give us a little more context in terms of how you're seeing the October play out how you're kind of thinking about revenue sequentially in the fourth quarter I know that the channel itself. So your distributors.
Do kind of have some stocking dynamics that normally happen in your end and I guess I'm wondering if this year is consistent with normal seasonality, where we should be thinking something different.
Yes so.
Regarding October if we look at what's.
What's come in.
We improved each month through the third quarter.
Fly August and September and October was an improvement over that.
I would say in the low twentys in terms of.
The sales.
For the for October.
When we started looking at November and December gets a little more dicey to to kind of see.
The improvement is going to continue on through the quarter. So theres a lot of closure is happening in Europe, right now and around the world and we're just monitoring that big to be completely honest on kind of all day.
A day to day basis, and we look at it every day and try to two.
So you would see what's going on but October was was better than September.
And maybe.
Maybe a little more color.
You know like the kitchen kitchencare side of things.
Was it was an improvement over over the third quarter as well and the third quarter was an improvement over the second quarter. So the aftermarket side of things is getting a little bit better.
In terms of you know the.
The.
Seasonality.
We haven't seen the distributors.
Trying to come to us with a kind of year end buys that normally you would see.
And I think a lot of them are watching their own balance sheets and trying to see what the volume levels are going to do.
Throughout the quarter. So, we'll we'll just have to wait and see.
But bill.
Did did you see those kinds of buys last year, so meaning do we have a difficult comp in that regard that we need to be aware of into year end.
Yes.
Mig it's Marty no not not not really I mean, there was a little bit of that going on last year, but I would say, we should expect a similar kind of seasonal pattern and if the if the year over year declines improved a little bit.
You know that that will sort of help mitigate the seasonal patterns normally that fourth quarter is down from the third quarter by you know a couple of points lets say in.
18. It was it was two point to 19, it was seven percentage point sequential decline so.
Somewhere you know.
That would be the normal seasonal pattern call. It low single digits sequentially and ER and then the question is just what this improvement pattern does bill was saying October was down in the low twentys as opposed to the third quarter that was down 27 Thats. The improvement we're talking about in October. So we just don't know what November December going depending on.
Okay things really start to close up again.
Sure No I understand that that's helpful. Thank you.
Then you know sort of a longer term question is.
You know where we.
We obviously know more about the industry now than we did at the beginning of the pandemic in terms of where things seem to be heading and you know you provide a good detail as far as the structural transformation, but I'm curious if you're if you'd be willing to expand a little more on what do you think you have to be.
I have to do that incremental from what you you've announced as far as either footprint or capacity because while the framework that you put forth on returning back to pre cobot level volumes margins are going to look the way that way you outlined them. Initially I'm wondering if there is not an argument to be.
Made that the volumes here are either gonna take quite a long time to get back to pre cobot or who know it's structurally that might not so.
I'm I'm curious to get an update on your thinking here and what else we could be expecting as we look towards next year. Thank you.
Yeah. So you know.
As we as we.
Continue to monitor the situation I think your point is valid we are looking at other structural types of actions that we can take we announced the closure of the Shanghai Cram facility and move that into.
Another facility that we had in China and there are other actions that we're contemplating and looking at and.
Depending on how quickly. These volumes return we may have to take other structural actions to take out cost.
Do you have some sort of a timeline in mind for where when you're going to make this decision or be able to announce it more broadly.
Yeah, we'll be announcing any.
Any of those types of actions in the first half of next year.
Okay. Thank you good luck guys.
Your next question comes from the line of Jeff Hammond with Keybanc capital markets.
Hey, good morning, guys Brad on HHS.
Hey, Brett so it's good to see some some.
Minor rollout activity in the quarter and Bill you mentioned that a positive tone from some of the chains around return to potentially news New unit development I guess I'm wondering if that if that commentary or that kind of anecdotal feedback is beginning to show up in your you're quoting pipeline and maybe your order book or is that we still kind of early on in the state.
Planning.
It varies by customer, but we saw.
I think we called out about $3 million worth of activity in the third quarter, and we'll see a little bit more of that in the fourth quarter, it's not that big rollouts that kind of happening it's kind of the one to 2 million dollar kind of Rollouts and.
Small smaller on the smaller side, but the funnel is building I think you know a lot of them are just waiting to see what happens with this cold.
You know, they're going to be more lockdowns, how does the industry recover.
But the QSR is because their volumes are up.
Are starting to look at more of the Rollouts and more additions.
So theyre back back of the house.
Okay, and then you know maybe taking a step back and just kind of looking at.
You mentioned the enter a whole, which said 100000 restaurants at closing and that's up mid September. So it stands to reason that number probably gets a little bit higher winter comes.
I'm wondering going back to the conversation from earlier this year on the used equipment market has your view changed there at all given just how significant this capacity reset is or do the same kind of fundamental barriers still hold and that doesn't have the infrastructure and and theirs.
Just specific around the equipment that makes it a challenge and I guess, yeah, along those lines.
Yes, I'm just kind of wondering about the mechanisms of kind of a losing a restaurant in replacing a restaurant like where you typically see an operator come in and completely refurbished the kitchen or or is there some kind of blend between using the equipment that's already there.
Yeah. So on the used equipment side, our position hasn't changed at all there and we continue not to see any meaningful used equipment flooding into the markets for all the reasons. We stated in the past, which is mainly there is you know.
It's a regional business.
It's a very hard distribution network to the comp.
Complicated to get the used equipment, where it needs to be there's food safety concerns.
With used equipment, the warranty lapses, all those kinds of things and so.
We just don't see it means.
And we don't expected to materialize.
You see all the TV.
With regard to your second question, we see all kinds of.
Different ways people do this you know some people come in and take over a restaurant they they take over the kitchen and they do small modifications and some people come in and depends on their concept right. They may want an open kitchen design and mill remodel the whole kitchen and put all new equipment and so I think there's all different variants of that did that occur and then.
Market. The you know it's going to be interesting to see you know as these hundreds of thousands of closures take place how quickly they.
Reopenings or new restaurants emerge and I do think you know at some point.
You know out there you know several years there will be a big.
Buildup of restaurants, that's it's a very popular form a business that people lot of people like to get into.
And I.
And I think we will see more restaurant newbuilds, but I think it's a couple of years out.
Okay I appreciate the time I'll customer.
Okay.
Your next question comes from the line of David Macgregor with Longbow Research.
Yes, good morning, everyone.
Hey, Bill.
Phil It on a tough environment, you guys seem to be making very good progress on the things you can control the transformation projects. So I guess you know.
Congratulations on the progress there.
I you made the observation that.
People are repairing or turning to repair as opposed to replacement than and clearly sales are running below kind of replacement rates for historical replacement rates for these recruit right now which is putting stress on that situation.
What's your sense in terms of how much deferral room people have them in how far people likely to go on the repair side before being forced to revert back for all the reasons you just talked about in answering the question about used here back to the purchase of a new product.
Yeah I mean.
I think you know there's a there's they can delay it for a reasonable maybe a year or two but I don't I don't think they can delay at much past that these are income producing assets and if these things start breaking down more than their operating they have to replace them. It's just you.
Hi, guys its.
They just can't afford for it to to constantly have service technicians in there so.
I think.
I think maybe a year or two on the QSR side, maybe a little longer on the casual side, because they are not operating them as heavy but.
The QSR is are there operating those things seven days a week for the most part you know 20 hours a day.
And David I'd also remind you that the functional gap between new equipment in old equipment, it's going to increase markedly as we get the digital program going and this is going to drive demand may not people are going to go out and carte Blanche overhaul all of their equipment, but it's going to be a night and day generational change year to year and that's one of the reasons why we made our.
Our common control or retrofittable to the equipment right. So that we knew that there would be a good.
A drive through digital but people would have.
Perhaps.
It would be reticent to change out the entire piece of equipment that hopefully will we can get the controlled new controller and get on board get them digital that way.
Yeah is there much of an order book developing around this common control or I mean, what kind of.
Well, it's a little too though.
Well, it's the common control is going to be the new standard right. So it doesn't matter what the order is youre going to get it that's why we say you're born digital.
Okay, and then I guess on a related point with people turning more to repair one would expect the kitchencare business begins to reflect that and you talked about things were improving there but.
The improvement you're seeing in kitchencare related more to deferred replacement and the repair as we've been discussing or is it more related to some of the channel inventory dynamics, we've been talking about over the last few quarters can you just help parse that out for me.
Yeah. The you know the channel dynamics or the.
The heritage and power.
Parts down coming together, there was a lot of inventory overhang there. So there was a.
But we had very clear visibility into that and we knew exactly what that dollar number was that had to be burned off so that was in the range of 20 million.
And like that $15 million to $20 million that had to be burned off.
Of duplicate inventory in the channel and so there was that dynamic going on but we as as these restaurants reopened we certainly saw a the service kitchencare business get better.
And but we also see a slowing when these closures happen so.
It's it's.
Those are the two dynamics that are going on.
Yeah.
Last question for me just you talked about some of the manufacturing curtailments in the quarter. Just as you were trying to balance a command with production.
I realize you've got to limited forward line of sight around this but what can you say about the likelihood of more of these curtailments in fourth quarter and into early next year do you feel like those are for the most part behind you at this point.
You know we took out a substantial number of people too.
Between starting in March and you know some of that was volume related some of those productivity related.
And.
We've been able to really operate these plants pretty efficiently by shutting down for a week or two weeks and then building a backlog up and then we can operate more efficiently that way without having you know.
Shutdown day on Monday every week or something we've tried to to make.
Make it so that it's it's more manageable by shutting down for a week at a time if needed.
I think probably that's still going to be the case, you know and some of that's driven by some of the government subsidies that are out there that requires to be being shut down for a period of time in order to qualify for the government assistance, so that drives a little bit of decision, making as well and so I think you know.
With the rate of shutdowns that are occurring right now I think you'll see us probably you know sporadically not not at the level, we were in the second quarter, but.
We care weak there depending on the plant some plants are full out right now there the volumes are really quite good so.
You know they they obviously will be shutting down.
Okay. Thanks, very much keep punching yep yep sure. Thanks.
Your next question comes from the line of Todd Brooks with CL King and associates.
Hey, good morning, guys. Thanks for taking my questions.
First first question you were just talking about some.
Color on our new unit development coming with some of the QSR customers.
When they're talking to you about new unit development can can you speak to how.
New units are going to change as well greater focus on off promises to will drive throughs and is the equipment content and some of these new formats less or greater or about the same when you. When you look at these opportunities that are starting to get into the pipeline.
Yeah, So I think they're all looking at different formats and trying to assess it varies.
Varies by QSR.
And I do think for the most part you know the ones that I can think of a top of my head.
They are the new store development. They are actively looking at their programs, but the kitchen piece of that are you know, whether it's a ghost kitchen or delivery only location.
Depends on the format and that that will be the choice the QSR, but the kitchens look pretty similar.
Two two whether it's a dine in or or or not but what they're all wanting is digital right and they're all wanting us to.
The have the capabilities that come with being connected to our kitchen connect 3.0 and being digital so that they can.
Lower their cost and improve their processes.
That's the common driver between all the formats.
That's great. That's helpful and if you look at this kind of universe of customers. How many are currently kitchen cabinet customers that you're just bring you up to the new version versus the environment has gotten some customers over the hurdle to actually.
Die for anything and get involved with kitchen.
I don't have that number off the top of my head.
We were adding new customers all all the time every week there is a new set of customers inquiries or.
You know coming in we're having to actually staff up and add people and more resources into the area and we'll continue to do that.
As we get more and more people on kitchen connect but.
It's coming it's going to be the new norm.
For for most people.
And we think we're positioned really well to take advantage of this new macro trend.
Okay, Great and then the second question.
Is just on the free cash flow side, but.
She talked about.
Inventory I guess, it was about $6 million year over year, but there's maybe some obsolete controller inventory there you're building.
Common controller inventories just what are the what's the outlook for being able to get some.
Some capital out of the inventory balances over the next couple of quarters and then.
Any free cash flow generated she would just understand that earmarked towards debt reduction in the near term.
Thanks.
Yeah. So we are continuing to work on inventory and then we should see it come down a bit over that at least in the fourth quarter and probably a little bit more in the first although that started a seasonal build pattern as well. So if the industry is coming back a bit.
Maybe the first quarter alone will be a little bit more neutral maybe less built and seasonally we typically have in the first quarter, but certainly in the fourth we're still bringing it down.
This is just a natural function of you put on the breaks you production system, we did that in the second quarter and then it backs up to your supply chain and the purchase orders you've issued and stuff you start to slow those down and figure out what the level of production to plan for it is and you eventually counting.
On a lag basis, you eventually get your inventory compressed. Meanwhile, we were as we consolidate plants like weve mentioning around the cram Shanghai facility you build some transitional in inventory while production is sort of disrupted like that and then we had this common control or we could we take up a base load of that so we can start to put it into the u.
And it's that we're building so a few things like that will run their course as well.
And we should see inventory continue to come down.
And longer term I think we have we have.
Turns improvements around inventory longer term, but I don't think its substantial we don't we're not way out of line. There. We do have a long complicated supply chain with all these global plants.
So what will make some improvements, but after we get through this sort of a compression it'll be more continuous continuous improvement I guess and yes that the free cash generation generally I comment a little bit of a ramp up in capex from from last year this year and on into next year.
Kind of that run rate to ramping up a little bit we've got still some equipment upgrades and some of the things to do.
Somebody's to facility consolidations actually require some capital so there'll be a little bit Oh.
Elevated capex.
But the rest will go to debt pay down yet we still want to get back on the de leveraging program that we talked about you know.
A year ago.
Great. Thank you.
Your next question comes from the line of Walter Liptak with Seaport.
Hi, Thanks, Good morning, guys.
And well.
I wanted to ask.
Just a couple of things about you mentioned the pricing.
So we're still holding up I wonder if you just talk about the pricing dynamics and.
Kind of alluded to the fact that there might not be that distributor build in the fourth quarter.
Have you been seeing some of the large distributors come due at all.
Pricing in the fourth quarter.
Yes, so on the pricing I think we've.
We've been.
Fortunately and pleasantly surprised that the pricing that we went out with a January is held up pretty well, we haven't seen a ton of deep discounting.
Out there and I think probably a lot of that is because there's not a lot of large project work to be had right now so a lot of what's going on is replacement type activity.
I think the dealers and distributors are still watching and seeing what what's going on you know Marty Marty.
Marty being some comments about the seasonality.
From mix question.
But.
Last year, we didn't see we didn't see a large by either.
And right.
Right now I would say that.
Books were just watch and see what they want to do but I would I would think that they're watching their inventory levels just as closely as we are so.
Okay great.
And then you mentioned on the retrofit for the controller I Wonder if there's a if you have an idea of what the size of that opportunity are you seeing some of the bigger customers.
Talk to you about getting those and you talked positively about using digital technology, we think we controllers part of that.
Yeah, it's a little early.
Give us another quarter or two to kind of see what what the retrofit capabilities are you know, we we've just launched to the.
The retrofitting capabilities.
We'll need a couple of quarters to kind of give you a little more color on that but certainly everybody is talking about is what everybody wants they are they all on the digital capabilities.
So I think it's a good opportunity for us to to have new equipment. That's born digital but also a you know retrofit the existing equipment thats out there that we can.
They they can take advantage of all the kitchen connect 3.0 stuff.
Okay great.
Then the last one for me is you guys called out a warranty issue and then wonder.
You just refresh us on what that was regarding is there any fourth quarter impact from that.
No. All if that was just me describing whats in other manufacturing cost in that EBITDA Bridge, you know Weve got labor overhead.
Warranty isn't there there was really nothing special about warranty. This particular time we.
We haven't had warranty issues for.
At the end of 18 gross billing early last year. So.
Okay, great. Okay. Thank you.
Yes.
Again, ladies and gentlemen, if you ask an audio question. Please press Star then the number one on your telephone keypad.
You do have a follow up question from the line of Mig Dobre with Baird.
Hey, Thanks for taking the follow up guys Bill.
Bill it's good to see that.
We continue to to invest in new product and then you've got some product intros.
Can you can you give us a little more context around this I'm kind of curious how your overall investment has changed with the pandemic. It sounds like it hasn't it hasn't stopped which is a good thing.
But what does your pipeline look like in terms of new product introduction as you look into 2021.
Yes, it's actually pretty robust I mean, we we we.
We kept up the investment from a SDMA side on the engineering front.
So all the.
Activity around fryers Combi ovens.
Fresh blend.
All the digital spend.
The new 30 pounds prior coming out next year so.
I would say that it's all.
All of the key initiatives weekly we continued to invest in and then what we did was we took some of the engineering talent and.
And this downtime when the factories werent running and allocated into the VA JV activity the business transformation. So that we could continue to drive those costs. So I think we kept the you know we decided to cut elsewhere in spending and and we were able to maintain a pretty high.
The spend and overall development of our innovation pipeline.
Okay.
And then lastly.
I don't know if this is too early to know or not but I'm curious if you are hearing from either customers or or your salespeople in terms of any shift in competitive dynamics, you're investing in new product.
I suppose other competitors, maybe smaller competitors.
Might not be in a position to do so.
Are you getting a sense that there in share shift from some of the larger players in the industry such as yourself.
Yeah, I think digital is the is the the key there make.
The little guys, just aren't going to be able to keep up with with the digital revolution.
As you know connecting to you know these systems like kitchen connect 3.0 and stuff like that it's it's just going to be very difficult for them to do that so I think thats. The key one that will result in share shift going forward.
Okay. Thank you.
<unk>.
There are no further questions at this time I would now like to turn the call back over to bill for any additional or closing remarks.
Before we end today's call I'd like to thank our employees once again for stepping up to the challenges presented by the COVID-19 pandemic, we'll continue to stay focused on our strategic priorities.
Entire management team really appreciate your efforts.
Next I want to reiterate my continued belief that 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 on the innovation 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 abates.
This concludes today's 2023rd quarter earnings call. Thanks, again for joining us this morning and have a great day.
Ladies and gentlemen, this does conclude today's conference call you may now disconnect your lines.
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