Welbilt, Inc.
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Welbilt, Inc. 2020 Q4 Earnings Call. I would now like to hand the conference over to your first speaker today, Mr. Rich Sheffer. Please go ahead.

[Rich Sheffer:]

Good morning, and welcome to Welbilt's 2020 Fourth Quarter Earnings Call and Webcast. Joining me on the call today is Bill Johnson, our President and Chief Executive Officer; and Marty Agard, our Chief Financial Officer. Before we begin our discussion, please refer to our safe harbor statement on Slide 2 of the presentation slides and in our earnings release, both of which can be found in the Investor Relations section of our website, www.welbilt.com. Any statements in this call regarding our business that are not historical facts are forward-looking statements, and our future results could differ materially from any expressed or implied projections or forward-looking statements made today.

[Bill Johnson:]

Thanks, Rich, and good morning. Before we get into our fourth quarter results, I want to share some details on the current market environment. Looking at the MillerPulse weekly same-store sales graph on Slide 3, you can see the recovery in the restaurant market since the historic drop that began in the second week of March. QSR same-store sales have consistently been positive since early July. Most QSRs have 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 been more resilient than casual dining restaurants, who precrisis, saw the majority of their sales tied to dine-in traffic. Same-store sales at casual dining restaurants began the quarter down 15% to 20% compared to prior year. The loss momentum beginning in November bottomed down nearly 40% in December. They've recovered much of the ground they lost since the first of the year and are now down just slightly more than 20% compared to last year. We expect conditions to begin improving for casual restaurant operators as temperatures warm up enough to allow outdoor dining in colder areas and we make further progress on vaccinating the population. The National Restaurant Association estimates that 110,000 restaurants or 16% of the pre-COVID population have closed temporarily or permanently. They also reported that restaurant employment remains 2.5 million below pre-COVID levels. Majority of this in those operations that rely on indoor dining or service, QSRs have also reduced headcount as they have been closing their indoor dining rooms and shifting to the takeout and delivery-only model. In EMEA, most countries still have restrictions on dining away-from-home, with more allowing takeout and delivery compared to last spring. Market expectations are that most of these restrictions will start to be eased beginning late this quarter through the second quarter. In APAC, there's a split between countries that are operating with few to no restrictions like Australia and China to those that are still significantly impacted by the pandemic, primarily Southeast Asia and India. Increased distribution of COVID vaccines globally will help these markets reopen.

[Marty Agard:]

Thanks, Bill, and good morning, everyone. I'm going to start with Slide 11 and the discussion of our adjusted operating EBITDA margin results. As you might expect, the year-over-year drop in volume had impacts throughout our system and these margin drivers, although this is beginning to be mitigated by the progress we've made in executing our transformation program. Volume, which we measure at the gross profit level and is netted against the impact of net pricing, drove a decline of 100 basis points in the fourth quarter. This reflects the 16% decline in sales versus prior year, partially mitigated by positive net pricing as our 2020 price increases continue to hold up. Material costs, including tariffs, was a 30 basis point positive contributor this quarter compared to the prior year. This is a reflection of the net savings coming through from our transformation program's procurement activities which are still ramping up, but more than offset rising commodity costs in the quarter. We have seen more inflationary pressures so far in the first quarter of 2021 related to both vendor pandemic-related operating constraints and logistics costs, particularly overseas.

[Operator:]

. So our first question today comes from the line of Jeff Hammond with KeyBanc Capital Markets.

[Jeff Hammond:]

Just trying to get a better read on what you're seeing from order momentum perspective, sequential trends into January, February, understanding seasonality? Any kind of disruption from kind of this COVID reemergence and restaurants shutting down? And kind of how that all plays in, into the guide?

[Bill Johnson:]

Yes. So we say in the January time period that it's better than the fourth quarter actual, which was the 16.2%. The shutdowns are having an effect. There's a slight amount of noise in the order patterns in February. We think that will kind of normalize for March from the guide that we've given you here. But yes, to be sure, it's choppy week-to-week right now.

[Jeff Hammond:]

Okay. And then just -- you mentioned kind of rebuild and companies starting to talk about plans for new store reemergence. Like when do you start to see? I think some of that will start to move ahead as we kind of come out and we get momentum on vaccines, etcetera.

[Bill Johnson:]

Well, we saw a little bit of it in the fourth quarter. In the Americas, we had some rollouts that -- from some of the QSRs that -- taking effect, a little -- the smaller rollouts. And what we're hearing from them is everything that was in 2020 -- delayed out of 2020 will take place in 2021. I think it's -- there's some small things happening in the first half, but it's really a second half kind of an event that we'll start to see more pickup of that type of activity.

[Jeff Hammond:]

Okay. And then just on the savings, good to hear that you're on track, and you gave kind of run rate exiting -- $20 million exiting 2020. Where do you think that -- how are you thinking about incremental savings for 2021 or exit run rate savings as you exit 2021?

[Martin Agard:]

Yes. We're not ready to sort of give you a specific kind of range around that, but it should continue to build. I mean each quarter, we think, is ramping in. We are continuing to finish the qualification of parts and the procurement side of this, continuing to buy a little bit more of those new parts at lower cost, and the productivity, as we talked about, continues to expand. So I just can't quite give you the kind of range you'd like. But just, let's say, it's going to continue to advance. In fact, probably faster. It will probably advance faster than Q4 did from Q3. If you recall, I think we were at $4 million a quarter, $16 million run rate in Q3 and now $20 million. I think that pace will pick up a little bit as we get through 2021.

[Bill Johnson:]

And it's probably a couple of quarters longer than what we said at the Investor Day, kind of what it feels like right now. And we kind of said that we will be there somewhere around the end of 2021 hitting that kind of stride. But it's still subject to volume constraints, right? And I just don't know when the volume is coming back. But all the actions that we've taken, as you can see them in the numbers, are taking hold and materializing -- having material effect on the margins.

[Operator:]

And our next question today comes from the line of Mig Dobre with Baird.

[Mig Dobre:]

I guess where I'd like to start is maybe with a little more color on the fourth quarter. I'm trying to sort of separate out the impact of the rollout, which it sounds to me like you called out as a little bit of a onetime item that helped you in a quarter relative to the actual replacement demand that you also noted in your press release that is starting to materialize. So can you sort of help us understand what's going on there? And I ask this in trying to understand your guidance for the first quarter, right? Because if I look at the midpoint, it seems like the dollar revenue is very similar to what you reported in the third quarter. So, we're stepping down sequentially. Trying to understand how much of that is the natural seasonality of the business relative to maybe the onetime effect of the rollout or maybe channel stocking or something like that, that might have helped you in the fourth quarter?

[Bill Johnson:]

Yes. I think we had a couple of rollouts that -- in the fourth quarter that were kind of -- in total in kind of the $10 million range compared to Q4 of 2019, which is -- were a couple of billion dollars. So that's the order of magnitude that kind of rollouts that happened and kind of tailwind in the fourth quarter for kind of the QSR segment.

[Mig Dobre:]

That's helpful. And do you get the sense that your distributors behaved any differently than they did in the prior year as far as their own sort of stocking goes?

[Bill Johnson:]

Yes. I think there was no -- of course, we didn't announce price increase. Sometimes, we do it in -- on January 1, sometimes we do it after the first quarter. This year, we've done it after the first quarter. This is effective that -- for the first quarter. So sometimes, they do prebuys on that. They weren't doing any of that, partly because we didn't have a price increase announced, and mainly, because of their own cash constraints and liquidity issues. The inventory in the channel is relatively low right now. And as Marty said, there's some seasonality to inventory stocking. And right now, we're starting to ramp up, particularly ice demand for the second quarter -- second and third quarter, there'd be demand for ice products. And so we'll start ramping up the inventory levels and working with our distributors to just -- to get their stocking levels up. But in general, I think when you talk to any of the dealers, on the general market side of things, their inventories are really low at this point. They're just not carrying anything.

[Mig Dobre:]

I see. And then just to clarify here, as far as the guidance for the first quarter and the sequential downtick in revenue, it sounds to me like this is pure seasonality that we're experiencing here. Do you think the business can build sequentially from Q1 in terms of revenues higher sequentially as you look at Q2 and Q3? Or are you thinking of a different progression at this point based on what you're seeing in the end markets?

[Bill Johnson:]

No. I think you've got it pegged right. It's seasonality in the first quarter. And there is -- we'll be able to grow from there.

[Mig Dobre:]

Great. Then my follow-up is on the transformation program and the way we should think about margins. So if I understand Slide eight correctly, you're maybe going to spend closer to $75 million. You already spent $67 million. The implication here is that most of the work is done, is behind us, and maybe now all we need is volume. So if I look at the targets that you've reiterated here, 23 margin -- 23% EBITDA margin on revenue that is close to 2019 levels. I guess this would imply 44% incremental margin on $440 million of additional revenue. So my question is this, how should we think about the way these incrementals kind of ramp with revenue? Should the first, say, $200 million in revenues carry different incrementals than the subsequent $200 million? Are -- should the incrementals be higher earlier in the recovery? Or should we see higher incrementals later as your savings are sort of maturing and ramping up? Thank you.

[Martin Agard:]

Yes, Mig, it's Marty. What I would say is the paces of the rebound and recovery in revenue is not exactly the same time pattern as the savings ramp-up. So I think the incrementals will be a little steeper in the second half of the revenue gains as the procurement cycle really runs its course and the productivity side run their course, whereas some of the steeper rebound in revenue will happen kind of in the, particularly the second quarter, when we're comparing against the depths of 2020 will be the steepest. So you'll get some natural bounce in margin in that second quarter for sure from just scaling SG&A and so forth year-over-year. But the real drive towards the 500 basis points and the 23% will come as the, as kind of the BTP really matures in the second half of this year and into 2022.

[Bill Johnson:]

Yes. And I would say that there is a significant amount of work still to be done, Mig. It's, even though some of the dollars have been spent, we have, a lot of the CapEx is for fabrication equipment and things like that, that have yet to be installed, up and running, fully operational, all bugs worked out. So there's still quite a bit of work to be done on the productivity side of things that we see accomplishing that this year. And as Marty said, on the procurement side of things, that's just an ongoing everyday fight, right? And that, we'll see that mature towards the end of the year in terms of all the actions that we've taken. And then the funnels fill back up again for more after that, right? So we don't stop.

[Mig Dobre:]

Yes. I appreciate that. It's just a little counterintuitive. If you ask me, I would expect incrementals to be higher as volumes are just starting to come back and then moderate over time. But it sounds to me like you're saying that maybe we should be thinking the opposite here. I'll get back in the queue.

[Marty Agard:]

Yes. Mig, it's that lag around procurement, in particular, that's powerful, a, qualifying products, getting them starting to buy them and getting them into inventory, buy them in scale as opposed to, what I'll say, buying them at full volume and then getting them through the inventory capitalization cycle and out through the P&L. It's just, even though the transformation spending has been done, that exercise, that procurement follow-through will run. I mean it's been going on several quarters, has several more quarters to go. And so the lag of getting that into the P&L and drive the incremental margins is just not to be underestimated.

[Operator:]

Your next question comes from the line of Larry De Maria with William Blair.

[Larry De Maria:]

First question. I think through the first few quarters, you had about $12 million in kind of government assistance, credit, cash, et cetera, that flowed through to you guys. So I'm curious what the full year benefit was, if that was impacted the fourth quarter? And then secondly, does any of that come back in '21? Or do we have to overcome, obviously, a multimillion-dollar headwind? And how do we do that?

[Bill Johnson:]

Well, Marty's kind of scrambling for the numbers there. I'll tell you that we did see benefit in the fourth quarter. We do still have some benefit in the, in 2021, obviously, not to the magnitude that the 2020 was, but I'll let Marty give you the exact numbers here.

[Marty Agard:]

Yes. We're going to get the K out imminently, and you'll see it in there in a footnote. There was some lower in the fourth quarter, it's tapering down. It's in both cost of goods and SG&A. So I won't scramble around for this number now, but you'll get access to it in the K soon, and you'll be able to do your analysis. We don't expect much next year as these things come back just a little bit in some of the, more in the international markets really where we see a little bit of that still as an opportunity.

[Larry De Maria:]

Okay. It just seems like, probably in the low mid-teens overall, and it seems like a big number to overcome in 2021 considering 16% of, I guess, EBIT in the, through the first few quarters. But I guess maybe switching over to price. End of the first quarter, you have some price increase come through. Can you give us an order of magnitude and how much confidence you have that, that's enough? Or are we going to have to raise price again? And how broad across your product portfolio, the price increases are because, obviously, we all know there's an awful lot of inflation and supply chain inefficiencies out there in the industry?

[Bill Johnson:]

Yes. So we went out with a price increase on the spare parts piece of our business in January. So we did get part of it implemented in the first quarter on that. The general market and the rest of GSA, global strategic accounts, is in the second, starts in the second quarter. And it varies by product line, anywhere from 3% to 5%, depending on the product line, can be in that range. And we typically net 60% to 70% of the number that we go out with just based on contracts and the timing and the issues, different issues like that, depending on the customer.

[Larry De Maria:]

Okay. And last question. Merrychef obviously did well 4Q. Is that, was that part of the one-off things that helped or year-over-year help? Or is that indicative of the industry moving towards some more versatile cooking equipment that may have some legs? And I'll leave it there.

[Bill Johnson:]

No. We believe that we're growing share in Merrychef and being able to maintain that share and what you're seeing is sustained progress with Merrychef.

[Rich Sheffer:]

Larry, before you drop, I just want to revisit the governmental assistance. The Q4 impact was just a little bit over $4 million, most of that in cost of sales, just a couple of hundred thousand in SG&A. And for the full year, we were at just under $13 million, more evenly split between cost of sales and SG&A. But I think one thing to remember, while it's a number to overcome, without that, we would have reduced costs further. So one way or the other, I think, we still would have had a positive impact that just allowed us to keep folks around that we otherwise would have furloughed or taken other actions, so without the, in the absence of government assistance.

[Operator:]

Your next question comes from the line of Rob Wertheimer with Melius Research.

[Rob Wertheimer:]

Thanks for the discussion on just sort of some of the customer conversations you're having. I just wanted to expand on that. And just kind of what people are saying on the role of technology on connectivity, et cetera, as to whether not next week or next month or next quarter, but just over the next few years, if it does ignite a larger refurbishment or change in the average content that you have. I mean just some general comments on the sense of urgency your customers are and a sense of value-add your customers are seeing from the sort of things you're developing?

[Bill Johnson:]

Yes. So it is important. It's happening at the larger QSRs right now in terms of people wanting connected devices is where the initial thrust is, and I think that's important because once you start once they start it, they start making it affordable for everybody else for the smaller players as it becomes more prominent. Every piece of our equipment is born-digital now and will be in the future and capable of analytics and kind of connecting to either our cloud or customer cloud. We're able to connect other people's equipment to our cloud. So it's a very open platform and which it has to be because there are so many different pieces of kitchen equipment from different manufacturers in the kitchen that you have to have an open platform. We have somewhere around 8,000 units connected across thousands of kitchens right now. And I can tell you that, that's up double what it was a year ago. And we see this accelerating and improving and just almost exponentially as people start to get more equipment connected. There's just too many benefits from having connected equipment for people not to buy connected equipment, their ability to monitor energy, to monitor usage, to monitor maintenance, all the things that it brings. And especially, if you look at some of the dynamics going on right now in the political landscape, if they've got you have $15 an hour labor, they're going to be focusing on how do they get more labor out of their kitchens, right? And having this digital technology and connected kitchens really enables that. And then all things digital, delivery, takeout options, all those things, everybody is working on their digital capabilities. We're coming out with a new product in the second quarter, storage cabinets that our Merco brand is having, and it's specifically centered around people picking up orders at retail outlets where they scan the code from their phone onto the cabinet and they pull the food out. And again, it's all loaded from the back and the customer never gets never has to touch anything other than their food. So a lot of innovation coming as a result of connected kitchen. And we think that we're in a very strong leadership position with our common controller, common user interface and having the ability to connect multiple Welbilt devices using the same controller and the same user interface, same amount of training for operators. They can operate a grill, they can operate a fryer, they can operate a holding cabinet using the same controller. So it's just going to accelerate.

[Operator:]

Your next question comes from the line of David MacGregor with Longbow Research.

[Unidentified Analyst:]

Good morning. This is on for David. Great work on navigating through this challenging environment. I guess, to start, the commentary around QSRs, looking at new builds is pretty encouraging. Can you describe what you're seeing with quoting activity year-to-date compared to the fourth quarter across the various end markets? And are you still seeing a little in the way of order cancellations?

[Bill Johnson:]

Yes. I mean we're not seeing a lot of order cancellations. I would say that a lot of the projects, the larger projects are still on hold. We know they're out there. And I think, like I said, we'll see that activity pick up in the second half of the year. But there's a pretty big pipeline of projects that is just a question of when they pull the trigger on them and start moving them forward. But I think with all the recent COVID cases and just the news around the lockdowns, it slowed a little bit. But I think there's reasonable expectation to see that in the second half of this year at this point.

[Unidentified Analyst:]

Okay. And then it was mentioned that distributor inventories remained lean. Do you anticipate kind of a gradual build back to pre-COVID levels taking place this year and maybe next? Or do you expect that dealers will carry a lower profile going forward than they did previously?

[Bill Johnson:]

I think it's -- there are some interesting dynamics, right, because you got -- he who has the inventory will get the sale in some cases, right? And so I think you'll see dealers put more inventory in as they have more faith that those vaccinations are taking hold and that people are going to be operating closer to normal. And so I think you'll start to see them ramp their inventories up because if they don't have it in the inventory, then somebody will make the call to go to the next guy, right, who does have it. And we see this in ice all the time, which is why we have to be really careful and make sure that our ice distributors have a significant volume and inventory during the second and third quarters so that they can meet all the demands that are pretty quick in that quarter.

[Unidentified Analyst:]

Okay. And then a last one for me. What are you seeing in the market in terms of permanent restaurant closures so far in '21 compared to, call it, the fourth quarter exit rate? And what are your initial thoughts on closures for the full year?

[Bill Johnson:]

Yes. I have no idea. I think it just -- I think the restaurant association just came out that 110,000 restaurants have closed. I think the second round of closures is really hurting people even worse because of -- they were exhausted from the first round and used up a lot of their natural cash and just their ability to withstand this pandemic and having a second round is really going to be difficult on them. So I don't know what their closure rate is going to be, but it's not going to subside if they keep these lockdowns going.

[Operator:]

Your next question comes from the line of Walter Liptak with Seaport.

[Walter Liptak:]

I wanted to ask first about just the ghost kitchen opportunity, the $100 million. And I wondered if -- are those sold centrally or are those sold kind of direct to the customer through a dealer channel?

[Bill Johnson:]

There's a little bit of both. It happens. I mean there's different types of ghost kitchens. There's kitchens-as-a-service. There's restaurant-operated kitchens. There's kitchen incubators. So it just kind of depends on the type of format and the way that it goes to channel. But we do deal with dealers for the most part in this area and not direct. I don't know of any direct sales actually.

[Walter Liptak:]

Okay. Got it. Okay. So it's sort of a jump all general market for that $100 million. It doesn't sound like there's anything specific about your sales were -- except that -- are there -- is there -- do you have an idea of the mix of large chains versus small customers that are going into these ghost kitchens because maybe you have a competitive advantage there?

[Bill Johnson:]

No. I don't have a mix that I can give you on that. I mean there's different people that are doing different things. You've got to like triple things, some of these other restaurants are adding an extra line in their back of their kitchens, right, for the kind of what we would call a restaurant operated -- in a restaurant-operated kitchen kind of format. And then you just have other people that are putting it in a parking lot somewhere, right? And it's just different. But I don't have a standard for you.

[Rich Sheffer:]

Okay. Walt, I think -- this is Rich. I think really, though, these ghost kitchen operators, they're going to focus on more of the top-tier equipment. Connectivity is an absolute certainty for them. They have to have it to make their model work. So I think there does -- that does drive a preference for a manufacturer like Welbilt that has leading capabilities around connectivity, not just our cloud-based system, but then the common controller that helps us make the -- make us the easiest to connect and get the data up to the cloud and back down to the cloud as usable information and drive operational savings for these operators.

[Walter Liptak:]

Okay. Great. Makes sense. The APAC was down. I understand it's on that difficult comp with 2019 fourth quarter. Can you provide us with a little bit more detail about sort of the outlook for China. They seem to be a little bit ahead of us. Are you seeing more -- are these QSR openings in APAC happening sooner than in the U.S.? What does the growth look like for APAC in your guess?

[Bill Johnson:]

Yes. I mean China has fully recovered. It was down a little bit in the fourth quarter just because they had tough comps, but we see a good year in APAC, particularly in China and Australia, which are two markets that we have a significant presence in. Some of the other APAC regions are kind of in the same boat as the U.S., where they're struggling a little bit. But yes, we do see a good year for the APAC region.

[Walter Liptak:]

Okay. All right, great. Thank you.

[Operator:]

Your next question comes from the line of Mig Dobre with Baird. Please proceed with your question.

[Mig Dobre:]

Thanks for taking the follow-up. I wanted to see if you guys can give us a little color on your raw material hedging program. I know you employ that. And I'm wondering what various commodities does this program cover at this point? And how far in advance are you kind of bought, what portion of '21 you might have covered at this point?

[Marty Agard:]

Yes. So Mig, we look out typically four quarters and are covering the main metals, right, just three or four of the main metals really, and really, are looking for when the price is at an outlier relative to the market and then hedge. The closer we are we hedge a little bit higher percentages, the further out and, is much lower percentages, and we have a general bias not to do it. So we're really looking for times when it feels like there's an outlier. And I would say, relatively small percentage of 2021 is covered. I don't know if that's 25% or I don't know, somewhere less than half, I'm sure, but, and again, we're trying not to do this unless there's some outlier kind of movement there.

[Rich Sheffer:]

Yes. Mig, this is Rich. Just a little more color on the hedging program. So we de-designated our hedges late in 2019 with the new accounting rules and the added complexities that they put in and trying to comply with these. So we haven't been adding new hedges for the probably, call it, five quarters and letting the existing ones roll off. So we still have some protection out there going through '21 here, but it will continue to wind down a little bit as we move through the year.

[Mig Dobre:]

Right. So it's fair to say that we should be kind of thinking spot pricing for things like stainless, aluminum, copper, things like that, as you're looking in maybe like Q3, Q4, for sure, right?

[Rich Sheffer:]

Right. I think predominantly it's spot. Go ahead, Marty.

[Marty Agard:]

We realize a lot of these are components that we're buying as well that have metal content, but it's not as direct as the commodity is moving. It's not as kind of volatile as that.

[Mig Dobre:]

Understood. And then the pricing framework that you presented, the 3% to 5%, are you comfortable with the fact that, that can put you in at least a neutral kind of price cost situation for '21? Or does that, will that require additional action as the year progresses?

[Marty Agard:]

No. I think we took the time. We saw some of this happening in the fourth quarter, so we took the time to really evaluate what the impact would be. And we think we got it covered. So, but if we have to go back out, if things worsen, we'll go back out and do something to correct it.

[Mig Dobre:]

Understood. And then final question for me. The end markets are finally recovering, fortunately. And you're doing better as well from a margin standpoint as we've seen in the fourth quarter and your stock has recovered. I guess I'm curious as to how you're thinking about the balance sheet going forward. There's still, as we all know, quite a bit of debt there. What is your view on the strategy here as we think about the next two to three years, any updated thoughts from the board? Curious to know.

[Bill Johnson:]

Yes. So as we look at it, pre-COVID, we were on a kind of self-help program using our earnings that we generated to reduce the debt. I think that's still the right course of action here as these markets are recovering. We see this being able to delever to an acceptable level over the next couple of years. And so I think that's the course of action that we're going to be taking.

[Operator:]

And there are no further questions in queue at this time. I turn the call back to Mr. Johnson for any closing remarks.

[Bill Johnson:]

Thank you. Before we end today's call, I would like to thank our employees, and considering the challenges we collectively faced in 2020, I consider their performance to be at the top of any group that I have been privileged to lead. I want to reiterate my continued belief that Welbilt will emerge from this crisis as 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 leverage our culture of innovation and customer service to win the battle for brand preference and outgrow our end markets. We will deliver on our promise of margin improvement and delever our balance sheet as this crisis abates. This concludes today's 2020 fourth quarter earnings call. Thanks again for joining us this morning, and have a great day.