Q1 2021 Welbilt Inc Earnings Call
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Good morning, My name is Thea and I will be the conference operator today at this time I would like to welcome everyone to the Welbilt, Inc. 'twenty 'twenty. One Q1 earnings conference call. All lines have been placed on mute to prevent any background noise should you need operator assistance you May press Star then zero.
Thank you at this time I would like to turn the conference of would you Rich Sheffer you may begin sir.
Good morning, and welcome to Welbilt, 2021 first quarter earnings call and webcast joining.
Joining me on the call today is Bill Johnson, our President and Chief Executive Officer, and Marty <unk>, 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 Www Dot welbilt 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.
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.
Other as a result of new information future events or other circumstances.
Today's presentation and discussion will include both GAAP and non-GAAP measures. Please refer to our earnings release for our non-GAAP reconciliations and other important information regarding the use of non-GAAP financial measures.
Please note that we will only be providing prepared comments on today's call and will not be conducting a question and answer session.
Now I would like to turn the call over to Bill.
Thanks, Rich and good morning, I'll start by simply saying I'm excited by the pending metal B transaction.
But beyond that I won't address it today as we continue to run our businesses independently.
Before we get into our first 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 since the historic drop that began in the second week of March 2020.
<unk> same store sales have consistently been positive since early July.
Most of <unk> had more than 50% of their sales come through their drive through windows prior to the crisis and now are also embracing delivery.
As a result, they have them more resilient than casual dining restaurants, who pre crisis solid majority of their sales tied to dine in traffic.
Same store sales of casual dining restaurants began the quarter down 25, 30 per cent compared to the prior year and gradually so all of the comparisons in premium through mid March when.
When they lap last year's shutdowns.
The other pulse has now switched to presenting same store sales comparisons to 2019 in order to show how sales are recovering relative to pre COVID-19 periods.
As the chart shows both <unk> and casual dining were positive through mid April following the latest government stimulus checks.
We expect conditions to gradually improve for casual restaurant operators as temperatures of warming up enough to allow outdoor dining and colder areas and more and more people are getting vaccinated.
The National Restaurant Association's restaurant performance Index rose to $100 one in February.
First time it has reached 100 since the pandemic began and two one of five one in March.
But then the overall index of capital expenditures component within the current situation index increased to one of 1.6 after being below 100, the prior two months.
Likewise, the capital expenditures component within the expectations Index remained healthy at 102 point set.
While the interest cautious to say that it doesn't mean the industry has recovered and returned to normal growth.
Is indicative of the improving conditions that were reflected in our first quarter results in the Americas and.
In EMEA most countries still have restrictions on dining away from home, but more of allowing takeout delivery compared to last spring.
Market expectations are that most of these restrictions will start to be easier in the second quarter, we have already seen the UK begin their phase reopening.
They have aggressively vaccinated their population and free.
<unk> has now announced plants reopened cafes and restaurants of May 19.
In APAC, there's a split between countries that are operating with few to no restrictions like China, and Australia and those that are still significantly impacted by the pandemic, primarily southeast Asia and India. These countries will likely trail in their recovery until the global distribution of COVID-19 vaccines improves.
Moving on to slide four of our presentation to review our financial results.
Our net sales declined three 7% in the first quarter with organic net sales decreasing 6% pace.
Pace of recovery really picked up later in the quarter with March being the highest order month, we've had for any month in the Americas since our spin off in 2016.
With sales still down year over year, and we delivered an adjusted operating EBITDA margin of 15, 7%.
But she is of 190 basis point increase from last year's first quarter.
Adjusted diluted net earnings per share was eight cents compared to <unk> in last year's first quarter, along with the increased margin and EPS, our first quarter free cash flow was significantly smaller use of cash than in either of the prior two years first quarters, which are usually of seasonal use of cash.
This operating performance was made possible by the progress of the Welbilt team made on the transformation program over the last year by the cost containment actions, we took in March 2020.
On slide five sales in the Americas increased one 3% in the quarter and the prior year with organic net sales increased <unk>, 7% sales to <unk> increase year over year in the first quarter driven primarily by an increase in non repeating large chain rollout sales saw rollouts crossed our ovens grills hot holding cabinets.
Refrigerated prep tables, and beverage equipment categories with multiple chain operators.
The general market sales decreased in the quarter, but we did see continued momentum in the C store segment.
We remain very excited about the C store segment other.
Areas and the general market, such as casual restaurants education health care, and travel and leisure and markets remained down in the quarter due to the impact from rising COVID-19 cases.
Starting to improve we're.
We are beginning to see orders come in from the education market as they start preparing for their busy summer season.
We heard of almost all schools being open for in person learning in the fall and the funding provided by the American Rescue Plan Act in March.
We believe sales of equipment into the education market will be strong over the next two quarters.
Finally kitchen care aftermarket sales increased for the first time since the pandemic began its more professional kitchens are reopening of requiring service looking.
Looking at EMEA on slide six sales decreased 14, 8% with organic net sales down 22, 1%. These percentage decreases are generally in line sequentially from the fourth quarter.
Large chain sales increased in the region as they were allowed to be open for takeout and delivery and they began preparing for the eventual reopening of the region.
Declines in the general market with larger than in the fourth quarter due to the continuation of many local dine out restrictions were implemented midway through the fourth quarter.
Restrictions also impacted kitchen care aftermarket sales with fewer professional kitchens opened during the quarter on.
On slide seven sales in APAC decreased 11, 2% with organic net sales down 14%.
Net sales growth in China, and Australia again, this quarter as those countries of fully recover from the pandemic.
These countries represent less than 50 per cent of our sales in APAC and the rest of the region is still seeing significant impacts from COVID-19 and the South East Asia, the Philippines, and India being highly impacted.
Moving to slide eight the progress we have made on our transformation program. Once again positively impacted our results. This quarter, we delivered a little over $4 million of in periods of savings in the first quarter. Despite the rising inflation, which is of 16 million of run rate.
Since the inflation, we would've delivered in periods of savings of approximately 6 million of increased our run rate again, so we can still season of progress looking.
Looking at various initiatives our procurement team has implemented many new agreements with current and new suppliers and is continuing to work on implementing the remaining opportunities presented by RFP responses, most of which are now going through the product qualification and testing processes.
We continue to see savings from our procurement activities ramp up in the quarter, which kept us positive when netted against commodity inflation net increase further in the first quarter.
But as Marty will discuss we also have inflationary capitalized into inventory on the balance sheet, which will also be flowing onto our P&L.
We will continue to see some inventory obsolescence of transitional cost as we shift suppliers along with the escalation of logistics costs.
We're continuing to develop our onsite value analysis value engineering, our VIP.
The initiatives for the RFP process didn't provide the right solution for our businesses.
The initiatives have identified additional savings opportunities to supplement their RFP process isn't a great example of how we are transforming the culture of our company into one of that embraces continuous improvement.
We remain confident that we will complete our procurement activities close to our original timeline and the discrete projects themselves will deliver the targeted dollar savings.
The timing of realizing those savings will ramp gradually into 2022. That's final qualification of materials is completed and by which time, we were hopefully receiving pre COVID-19 volumes of lower cost materials.
Additionally, in the near term, we are seeing the inflationary impact from rising commodity purchase components and logistics costs and expect these to increase in Q2 and Q3.
We remain committed to offsetting these pressures with the savings we are now generating through the price increases that we have initiated in the first quarter of announced for the third quarter.
We've continued to make progress at the seven North American manufacturing plants that are currently part of the transformation program has seen productivity gains of emerge in not only the sites, but in most of our sites globally. As we are deploying our lessons learned broadly to accelerate improvements.
Some of these productivity gains have been substantial despite dealing with lower volumes and inconsistent production shifts that work against us in some facilities.
These productivity gains have led to a leaner operations and a smaller workforce.
While recent volume improvements have resulted in the rehiring of some production staff, we anticipate additional productivity related head count reductions continuing through 2021, as we complete our planned activities.
We've taken delivery of installed some new fabrication equipment of these investments will contribute more as they're fully integrated.
We're working on two additional plant consolidations currently one is in Shreveport, Louisiana, where we have had two plants in support of Prime Master of Merkle businesses.
We are in the process of consolidating one of those plants into the other one that you expect to have this completed in the next few months.
We've also initiated the consolidation of manufacturing plant in the EMEA region and expect to complete this by the end of 2021.
We expect to complete all of the planned execution actions that will drive the transformation savings by the end of 2021. However, the timing of realizing the full savings will be delayed until sales of manufacturing volumes return to pre COVID-19 levels.
We are in the process of ramping downs of consulting spend related to the program and have lowered our estimate of total cost for the program to now be between 70 and $75 million.
Since we've already incurred $70 million of these costs there should only be small additional costs over the balance of the program.
Before I turn the call over to Marty I want to share. Some recent developments from some of our other strategic initiatives.
I've shared a lot of details on our last two calls about our newest version kitchen connect launch of our new common controller, our strong position with the rapidly growing ghost kitchen market segment.
All of these continue to be a focus for us and we are seeing benefits from each.
Today I want to share some recent product developments related to our enhanced sanitation solution now.
On slide nine you're highlighting three new product offerings that we've recently announced and will be featured in today's virtual trade show that begins after this call.
The first product shown as the Merkle order pickup of solutions powered by the apex.
These are self serve solutions that make our food pickup easy contactless and convenient per restaurants and their customers.
Worldwide licensing partnership with apex to manufacture and distribute these cabinets.
Secondly product featured as the Arab firm portable air Purifiers powered by <unk> 10 of these units are scientifically proven to separate 99, 995% of pathogenic viruses and bacteria for medium to large sized rooms, and then periodically expose filter thermal decontamination to reduce the.
Our risk Rican tammen nation during the field through changing process.
This process has a dual benefit of regenerating the filter and extending its life for up to three years.
<unk> also integrates of Wi Fi and Bluetooth enabled user interface. So operators can see real time of air quality conditions make adjustments based on these readings.
By being portable it could easily be moved into areas within a facility to quickly decontaminate additional rooms.
Well, though as the exclusive distributor of <unk> in the U S.
The third new product feature is the newberg Roland blast chiller piece.
Blast Chillers has the highest air flow rate in industry and deliver a 25 per cent of pasture cooling times of limit the opportunity for bacterial growth during the critical filling process.
Each of units allow for full sized racks to be removed from a comp of firm Combi oven Amelia rolled into the newberg last children well.
Welbilt as the exclusive distributor of these glass chillers in the U S and Canada.
Common thread among these three new offerings is that each provides enhanced sanitation either through safer food pick up of cleaner air in the kitchen of restaurants or by improved food safety.
These all provide significant benefits for our customers. They are also great examples of how welbilt and partnering with innovative companies to bring new value added products to market supplement our internal new product development efforts.
John I'll turn the call over to Martin.
Thanks, Bill and good morning, everyone I'm going to start with slide 10 in the discussion of our adjusted operating EBITDA margin results of broad theme. Here is we are pleased to see our execution of progress being able to widely covered of persistent pandemic related volume headwind in more recent commodity and logistics inflationary headwinds.
At 15, 7% EBITDA margin were 190 basis points ahead of Q1 last year and 240 basis points ahead of 2019.
This progress is not just the procurement of productivity elements of our transformation program, those certainly contribute but broadly our execution on pricing of warranty improvement SG&A reductions and more.
So working from the slide 10, specifically volume, which we measure at the gross profit level and it's netted against the impact of net pricing drove a decline of 20 basis points in the first quarter. This reflects the 6% decline in organic sales versus prior year, partially mitigated by positive net pricing as we had a partial quarter benefit from the kitchen care.
Aftermarket price increase that went into effect early in the quarter and our EMEA and APAC list price increases that went into effect of mid quarter, we expect to get a partial quarter of benefit in the second quarter from the Americas list price increase that went into effect at the end of the first quarter.
Material costs, including tariffs were a 30 basis point positive contributor this quarter compared to the prior year. This is a reflection of the net savings coming from our transformation program to procurement activities, which are still ramping up but did fully offset rising commodity costs in the quarter.
Inflationary pressures increase through the first quarter of her continuing so far in the second quarter. These are related to both vendor pandemic related operating constraints and logistics costs, particularly overseas as we manage the supply chain inconsistent piece.
We expect these headwinds to be present in Nike increasing through the next few quarters, but despite that we believe our transformation program effort and our recent price increases will be effective in expanding our margins in 2021.
Other manufacturing expenses, mainly labor overhead and warranty were a 50 basis point positive contributor to margin.
Continued to effectively flex our production expense the lower volume environment again this quarter.
We have worked to minimize the head count brought back into our plants and are holding on to the productivity gains that we've made.
Going ahead, we are expanding the transformation program related labor strategies across our plants in 2021 expect volume of supply chain headwinds will turn into a tailwind we have several more equipment upgrades planned over the next few quarters and we are executing the two facility consolidations as Bill mentioned.
We remain encouraged by the organization's urgency in this area.
SG&A on an adjusted basis contributed 90 basis points towards margin improvement in the quarter.
Our actions within the manufacturing footprint. We also took early and aggressive action to contain SG&A spending as the pandemic impact emerged in March 2020.
Many of those actions continue to contribute to lower SG&A costs and enable us to show favorability and most of the SG&A categories in the quarter as professional fees marketing and travel expenses were all favorable as a reminder, if you're reading the face of the income statement SG&A includes the transformation program of investments there.
Excluded from our adjusted operating EBITDA.
You can track the specifics through the non-GAAP reconciliation schedules in our earnings release.
Finally, FX provided a larger than normal benefit to our margin this quarter.
Moving to slide 11 free cash flow was $21 million of use of cash in the quarter. As a reminder, our free cash flow is traditionally of seasonal use of cash in the first quarter as we paid customer rebate can annual incentive compensation build of inventory and experienced seasonally lower volumes.
Then generate seasonally stronger cash flow of the remaining three quarters.
Our performance in this year's first quarter is of significant improvement from the first quarters of both 2019 and 2020 and its attributable to the earnings based improvements we have made along with balance sheet and accrual related improvements working capital was a use of cash in the quarter consistent with prior years with higher receivables at quarter end due to.
Our strong March and seasonal increases in both inventory and accounts payable overall working capital remains well managed.
Also impacting free cash flow is our investment program and both traditional capital spending and the transformation program for the quarter. We spent $5 million of capital down 1 million from Q1 last year. We continue to expect Capex of 2021 to be more similar to 2019 spending levels with investments planned for equipment upgrades.
<unk> investment new product innovation and IP initiatives.
The transformation program of investment is reflected in both SG&A and restructuring for.
So the spend reported in SG&A after the $2 2 million in Q1, we have spent 61 million since the program began in may of 2019.
And combined with the transformation related to restructuring charges of 9 million since inception, we have now incurred approximately $70 million and we've lowered the estimated total program cost from the original $75 million to $85 million down to the $70 million to $75 million range, we expect to finish the incremental spending later in 2021.
Moving on to liquidity, which we define as cash and short term investments plus availability on our revolver.
We ended the first quarter with $354 million of total liquidity of decrease of $21 million from year end of well ahead of where we were at the end of Q1 of 2019 and 2020.
In summary, we are very pleased with our free cash flow and liquidity performance since the pandemic began last March <unk>.
Cash and cash equivalents, plus restricted cash increased by $15 million during the quarter, while our overall debt balance increased by 37 million accounting for $21 million decrease in liquidity this quarter.
We remain in compliance with the liquidity EBITDA and capital expenditure covenant in our amended credit agreement with significant headroom.
One last comment on our covenants the leverage ratio of comes back into effect at the end of Q2, and we will need to be less than 775 times levered at that time as measured by our credit agreement definitions as you can see on the slide we finished the first quarter at seven one times and expect this to improve quickly with the improvements in this.
EBITDA relative to last year, and we generated positive free cash flow, we expect to be in compliance with our covenants with sufficient headroom in 2021.
Finally, I'd like to share a few updated thoughts on 2021.
We continue to believe that 2021 will show full year growth compared to 2020, including significant growth in Q2, but that we won't be back to 2019 or pre pandemic levels in 2021.
Similarly, with regards to our EBITDA margin, we expect to deliver meaningful expansion from 2020, but we currently don't expect to reach that pre pandemic 2019 level.
We expect continued inflationary pressures to limit near term margin expansion until we are fully benefiting from the price increases we implemented in Q1 and any additional increases we implement to mitigate inflation.
As Bill stated we remain confident the transformation actions are working kind of on a project by project basis, we can clearly see the savings of materializing.
We have a game plan for managing through the current inflation cycle to ensure we come out ahead at least by Q3 and the balance of pricing and inflation and the transformation program is on track to deliver our margin objectives in the quarters ahead, when the program to actions or mature in the market has recovered.
That concludes my comments as rich mentioned at the beginning of the call. We will not be conducting a question and answer session today with that I'll turn the call back over to bill for his closing remarks.
Before we end today's call I want to reiterate my continued belief that welbilt is a stronger company that is structurally leaner and more efficient than we were at the beginning of the pandemic. Our when we began our transformation program in May 2019.
We will continue to focus on opportunities, where we can use innovation and digital leadership to help our customers succeed and grow.
We will continue to leverage our culture of innovation and customer service to win the battle for brand preference.
Deliver improved margins and much improved free cash flow as this crisis abates.
This concludes today's 2021 first quarter earnings call. Thanks, again for joining us this morning and have a great day.
Ladies and gentlemen, thank you for participating in today's conference call you may all disconnect.
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Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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