Welbilt, Inc.
Q2 2019 Earnings Call Transcript

Published: 8 Aug 2019

[Operator:]

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Welbilt 2019 Second Quarter Earnings Call. [Operator Instructions]Rich Sheffer, Vice President, Investor Relations, you may begin your conference.

[Richard Sheffer:]

Good morning, and welcome to Welbilt's 2019 second quarter earnings call and webcast. Joining me on the call today is Bill Johnson, our President and Chief Executive Officer; Marty Agard, our Chief Financial Officer; and Josef Matosevic, our Chief Operating Officer.Before we begin our discussion, please refer to our Safe Harbor statement on Slide 2 of the presentation slides, which can be found in the Investor Relations section of our website, www.welbilt.com.Any statements in this call regarding our business that are not historical facts are forward-looking statements, and our future results could differ materially from any expressed or implied projections or forward-looking statements made today. Our actual results may be affected by many important factors, including risks and uncertainties identified in our press release and in our SEC filings. We do not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or other circumstances. Today's presentation and discussion will include both GAAP and non-GAAP measures. Please refer to our earnings release for our non-GAAP reconciliations and other important information regarding the use of non-GAAP financial measures.Now I would like to turn the call over to Bill.

[Bill Johnson:]

Thanks, Rich, and good morning. As you saw in today's earnings release and on Slide 3 of our presentation, we delivered solid operating results in Q2 across all of our key reporting metrics. Net sales grew 1.3% in the quarter with 2.2% coming organically, another 0.7% from Crem through the anniversary date of the acquisition on April 19. Foreign currency translation was a 1.6% headwind.Operationally, we delivered a 9.7% increase in adjusted operating EBITDA and 150 basis point increase in adjusted operating EBITDA margin. We benefited from improved net pricing following our list price increase in the first quarter from higher volume and mix. I will let Marty get into more details on our second quarter margin, adjusted net earnings and free cash flow performance in his comments.Moving to Slide 4, our Transformation Program is progressing well. Our teams are very engaged in these projects and the energy at the Wave 1 plant is very evident as we are not only transforming our operations at these facilities, but also the culture at those locations. It's been amazing to see how our people have embraced these changes and taken ownership of delivering the improvements.Our procurement team is also making great progress on its Wave 1 activities. It's important to remember that procurement is a multi-wave effort. While we are progressing well on Wave 1 activities, there are planned activities for procurement in Waves 2, 3 and 4. We are on pace to complete our Wave 1 activities by the end of the year and we’re on track to deliver the targeted savings we envisioned.As we stated during our Investor Day presentation, there will be a lag from when we complete our planned actions to when the savings are fully realized in our reported numbers. We are anticipating that lag to be three to six months from the completion of the activity before we realize the run rate savings. This is why we’re only expecting a small benefit in 2019 from these actions, approximately $30 million of annualized run rate savings by the end of 2020.With that, I will turn the call over to Josef for a summary of our segment results.

[Josef Matosevic:]

Thank you, Bill, and good morning, everyone. I will make a few comments on our top line results within the segments. Starting on Slide 5 with the Americas, third-party net sales increased 2.7% with organic net sales increased 3.1%. We continue to see growth in the general market as sales increased with the majority of our buying group customers. The strongest growth came from NexGen as store sales are continuing to ramp up.We also saw growth from large chain this quarter as we had strong sales of Merco Visual Holding Cabinets and Multiplex nitro coffee machines that offset difficult comps from last year's rollout of Frymaster fryers and Garland clamshell grills. KitchenCare aftermarket sales returned to growth this quarter.Moving to Slide 6. Third-party net sales in APAC were even with the prior year in the second quarter. Organic net sales increased 1.7% while the Crem acquisition contributed 1.1% growth, but this was fully offset by a foreign currency translation headwind of 2.8%. We had stronger sales to large chains of Garland grills and Merrychef high-speed ovens, which were offset by tough comps related to rollouts last year of Frymaster fryers and Merco hot-holding cabinets.Looking at EMEA on Slide 7. Third-party net sales decreased 2.9%. Organic net sales decreased 0.5%, while the Crem acquisition contributed 3.4% growth. Foreign currency translation was a 5.8% headwind as the dollar strengthened against European currencies. Large chain sales grew with stronger sales of Multiplex Blend-In-Cup machines. The general market was softer in the quarter as some orders were pulled ahead into the first quarter in anticipation of Brexit, which was originally scheduled to take effect at the end of March.I will now let Marty get into the operating details of the quarter and our 2019 outlook. Marty?

[Marty Agard:]

Thanks, Josef, and good morning, everyone. I’m going to start with some comments on the adjusted operating EBITDA margin driver shown on Slide 8. Looking at volume, mix and net pricing, both of these components were positive. The net pricing contribution is mostly related to March's price increase that we put through in the Americas. We also had a smaller benefit from last June's interim price increase and from the January price increases that we implemented in EMEA and APAC.Material costs, including tariffs, were a combined 30 basis point headwind. Year-over-year comparisons are still being impacted by the cost increases in pass-through tariff costs from our vendors that we discussed last quarter and the direct impact from the Section 301 tariff that began in the third quarter of 2018.We did receive a favorable ruling on the applicability of the Section 301 tariffs on certain products, which provided a 60 basis point benefit as we were able to recover a portion of the overall impact from prior periods. This recovery largely offset the higher material costs this quarter, and the ruling will reduce the ongoing impact from the Section 301 tariffs.Subject to our fully understanding last week's proposed new tariff, a favorable ruling from 2Q could leave us neutral to favorable in the second half on a year-over-year basis for materials and tariff costs. Our manufacturing expenses, mainly labor and overhead, were positive this quarter, reflecting solid plant performance and good overhead absorption.SG&A, on an adjusted basis and excluding FX, was positive by 30 basis points in the quarter. This was primarily driven by lower acquisition-related costs attributed to last year's Crem acquisition. If you're reading the face of the income statement, SG&A is also elevated by the inclusion of the Transformation Program investment not included in the adjusted operating EBITDA. You can track the specifics through the non-GAAP reconciliation schedule.The last item, FX and Crem, was a 30 basis point headwind. Crem was a minor detractor as it was only a non-comparable element for the April 1 to April 18 period. We saw the strengthening of the U.S. dollar had a larger-than-expected impact in the quarter, particularly in EMEA.So to recap, the adjusted EBITDA margin of 19.4% would have been 18.8%, excluding the out-of-period benefit from the tariff ruling and a marked improvement from Q1's 13.3%, all consistent with our guidance on last quarter's call.Moving to Slide 9. Free cash flow was $54.4 million in the quarter. In addition to higher cash-based earnings net of the investment in the Transformation Program, we also benefited from the termination of a fair value interest rate swap. This was a swap of the fixed payments on our high-yield notes to floating, and the position had improved significantly throughout the year with the market anticipating a rate-cutting cycle. Given the shape of the forward curve and near-term maturity, we went ahead and cashed it out before quarter end.We received $14 million upon terminating the swap, most of which represented prepaid floating interest that was accelerated on termination and is really only a timing difference since we'd have received the scheduled payment in August.A quick comment on our accounts receivable securitization program that terminated in the first quarter. At the time of the termination, the receivables that were in the program came on to our balance sheet. As we've collected those receivables, the cash proceeds have been reflected in the investing section of the cash flow statement with a similar use of cash in the operating section.When we calculate our free cash flow as shown in our non-GAAP reconciliation table, we include those receivables collections even though they’re in the investing section. From here forward, our statement of cash flow should have no more distortion from the securitization program.Our overall debt balance decreased by $53.2 million. So substantially all of our free cash flow was used for debt reduction in this quarter, and our leverage ratio came down about 0.25 turn, a little ahead of the projections we shared at May's Investor Day.Free cash flow year-to-date is still negative, but it is seasonal in nature, and we expect it to come around and be close to or exceed the onetime net income target we discussed at our Investor Day.Finally, on Slide 10, I would like to make a few comments on the 2019 guidance that we provided in today's earnings release. Beginning with sales, we expect to grow organically by 2% to 5% for the year. We are expecting growth in all 3 regions with all expecting to be within the guidance range. There's no change to this guidance.In the Americas, we’re expecting growth in the second half as we’ve now anniversaried the tough comps from the large chain rollouts from the first half of 2018. We expect higher sales in the general market with gradually improving conditions in the dealer channel, benefits of the continued ramp-up of sales to NexGen and the effects of the March price increase.In EMEA, we still expect full-year growth though the progression looks like it would be lumpy. We had a very strong organic growth in the first quarter followed by a flattish second quarter. We are expecting third quarter to be better with some growth in large chains, and then for sales to soften in the fourth quarter with risk related to any Brexit contraction combined with a tough prior year comp. In APAC, we also expect full-year growth led by large chain, but see a tough comp from last year's fourth quarter driving a softer finish to the year.Our adjusted operating EBITDA margin is expected to be at the low end of the 18.5% to 19.5% range. We expect volume/mix/net pricing to continue at a similar level as a contributor to margin expansion in the second half and be positive by 150 to 200 basis points for the full-year. You will notice the range here is down by 75 basis points from previous guidance as we are now expecting a more conservative mix trend in the second half across the three segments.Again, subject to any new tariffs, we expect material costs and tariffs to have a neutral to slightly positive year-over-year impact during the balance of the year given we begin to anniversary the Section 301 tariffs in Q3, and we will see an ongoing benefit from the favorable ruling we received in the second quarter. Balancing this with the unfavorable first half, we expect this category to run a 25 to 75 basis point headwind for the year, which is an improvement from previous guidance range by 50 basis points.We expect manufacturing to be approximately neutral for the year as we continue to expect a small margin benefit in 2019 from Wave 1 of our Transformation Program, realizing the benefits will really begin to appear in 2020. We lowered the forecasted favorability for manufacturing due to some extra effort and inefficiencies within the Wave 1 plant as we reset production flow and move the equipments.We expect SG&A to be dilutive by 25 to 75 basis points. This includes our investments in our KitchenConnect and common controller initiatives and other more evolutionary investments in our brands. SG&A is running favorable compared to our original forecast and we’ve reduced its dilutive impact in our updated guidance to reflect this.Finally, the FX Crem category is now expected to be dilutive by 25 to 75 basis points with a stronger U.S. dollar driving the larger FX translation variance than previously expected. Overall, you will notice the net of shifting guidance ranges across the margin drivers is a reduction of 25 basis points, and hence, the indication of our being at the lower end of the range.In the larger context, we feel the business is right where we expected it to be, and we continue to feel good about 2020 and our revenue trends and our transformation margin journey.Moving down the P&L from there. Our adjusted diluted EPS is also expected to be at the low end of the $0.71 to $0.81 per share range mainly due to the adjustments we made to our adjusted operating EBITDA margin guidance. This range assumes 141.8 million fully diluted shares outstanding and interest expense of $92 million to $97 million. We did lower our effective tax rate range by 2% to now be between 26% to 28%.That concludes my comments. Operator, we will now open the call to questions.

[Operator:]

Thank you. [Operator Instructions] The first question comes from Tim Thein of Citigroup. Your line is open.

[Tim Thein:]

Great. Thanks. And Marty, maybe just dovetailing off one of your last comments there just in terms of the margin expectations relative to what you provided at the Analyst Day in terms of the expectation that you potentially could be exiting the second half of '21 with margins up, call it, 500 basis points from where you finished '18. Obviously, it looks like we've got a lower starting level in terms of where we are exiting 2019. So, just -- obviously, only two months from that event, but just wanted to kind of come back to basically the question, do you still feel that, that kind of ramp is achievable in light of where it looks like our starting point is now?

[Marty Agard:]

Yes. Absolutely. We still see all those programs really right on track. One of them, we've actually started to take up a little bit of our expectations. The guidance -- the lower end of the guidance for the current year, really it's not so much about the back half, it's just a couple of little things working against us that we thought grounded us down. But we really see the year finishing out where we expected it from then and next year's progression and cadence of those transformation savings rolling in, we really haven't changed our expectations of that either and certainly not by the 2021 period. We are right where we thought we would be.

[Tim Thein:]

Okay. And then, maybe just shifting to kind of the overall macro conditions in North America. Obviously, there's some -- a little increased level of concern just in terms of broader investment spending and activity in light of some global trade issues and other factors. So just -- maybe you can just spend a minute in terms of overall quoting activity and conversations with customers in North America and just how that informs you about the back half of the year?

[Bill Johnson:]

Yes, it's Bill. I mean, we still see the second half as we had predicted it coming out of the last quarter. We’ve a little easier comps in the second half because we've kind of gotten through the first half where we had some rollouts. So general markets being -- could be holding up. Our affair at NexGen is increasing, so we see that as a positive. Our KitchenCare business is back up to normal levels. The chain business, there's a healthy amount of rollout activity out there. It's pretty hard to predict when that's going to hit. So that always creates a little bit of a problem for us in forecasting. But in general, I'd say the activity is still pretty strong out there.

[Tim Thein:]

All right. Very good. Thank you.

[Operator:]

Your next question comes from Jeff Hammond of KeyBanc Capital Markets. Your line is open.

[Brad Vanino:]

Hey, good morning. This is Brad on for Jeff. Just focusing on the margin guide, broadly, how did the quarter track relative to your expectations? I guess if 1Q was kind of largely in line and then 2Q maybe a little bit better than expected, I guess, we are a little bit surprised by the guidance fine-tune given some of the momentum that seems to be building. So maybe could you take a little bit deeper into the mix dynamics that seem to be offsetting that, the higher price and some unexpected inflationary relief in the second half here?

[Marty Agard:]

Yes. It's Marty here. So first, on the quarter, I'd say it was pretty close to what we expected. On this recovery we got from the favorable ruling, there was a piece -- we had some visibility to that and we are sort of betting on some of it in the balance of the year. But the part that was probably an upside to it was how far back we got to go. So we actually did get to recover some out-of-period, that was a bit of a lift to us and a pleasant surprise. Now we have these kind of things all the time. We have unpleasant surprises and we don't air them all out every time. But that was one of the kind of pleasant surprises, a relatively small amount.When we talk about the guidance and this lower end of the range, again, the mix thing is -- mix is mostly just we've seen better cold side than hot side and don't have quite the margin profile there. There's a little bit of mix down within the regions in some of the product categories. It's a little hard to sort out and characterize, but let's just say that’s worked a little bit against us. And then the FX has certainly been persistent. And so I think I clarified that with you guys, and you can imagine where the currency curves are. So that's kind of worked against us.And then the last piece of this was really in the manufacturing, these couple of plants we're working on. As we move equipment around, we are putting a little bit more engineering resource, a little bit more procurement resources into those facilities. And that between moving equipment and some of those resources, we just had to round down some of the manufacturing variance forecast. So each of them in themselves are small. And I would say we are comfortable with them all. We still feel like the business is where it is, but they all added up to saying, look, we are likely to be at the lower end of this guidance, and we are trying to be -- sort of give you that transparency. So that’s how it added up.

[Brad Vanino:]

Okay. That’s helpful. And then, I guess, just within that discussion on mix, the aftermarket business, KitchenCare was positive in Americas. Can you talk about just kind of the sequential improvement in there? And then what we should expect from that business in the second half of the year? Thanks.

[Bill Johnson:]

Yes, I mean, it certainly improved coming out of the first quarter and the second quarter returning to kind of the levels that we had anticipated. We had a price increase early on in KitchenCare that impacted the first quarter a little bit. But overall, I’d say that we see a strong second half in KitchenCare. The order patterns are there. So no change to our guidance on that.

[Brad Vanino:]

All right. I appreciate the color. Thanks, guys.

[Operator:]

Your next question comes from Mig Dobre of Baird. Your line is open.

[Mircea Dobre:]

Thank you and good morning, everyone. Just wanted to dig in on the guidance, the EBITDA margin guidance. And really, once again, thanks for providing all this breakdown and detail as to the moving pieces. So on material costs, you've improved your outlook, if you will, by about 50 basis points. And I guess I understand the positive impact from the tariff ruling in the quarter. If you look at the back half though, is it sort of fair to expect you to be flat year-over-year raw material costs in the third quarter and maybe some benefit in the fourth? Is that what I think I heard in your prepared remarks?

[Marty Agard:]

Yes, Mig, that's right. We actually think that the tariff ruling where we no longer are incurring that in the back half where we did in the third and fourth quarters of last year will put us in a positive position and then where our own performance and the commodity cycles are, have kind of -- and maybe some of the mix is in there as well that's going with the low revenue is also helping on the cost side. But those pieces have left us thinking we are likely to be a little bit favorable on the materials and tariffs in the back half on a year-over-year basis. Now that’s again subject to just how big and hostile the tariff situation goes going forward. But under what we've talked about, the all-other list at a 10% tariff, we had some exposure there, but probably not enough to take us from where we think it will be slightly positive into some sort of negative territory. So we think neutral to slightly positive in the back half is the right spot to be.

[Mircea Dobre:]

I see. And then on List 4, the stuff that's being talked about in September, do you anticipate any impact from that?

[Marty Agard:]

There will be -- well, we suspect there will be a little and we tried to quantify that based on what we understand, but not -- again, not as -- it's not as impactful as the relief we got through this favorable ruling. And so we think on balance, we net out slightly favorable.

[Mircea Dobre:]

I see. Okay. And then the other manufacturing, labor and overhead, I don't know if -- when I'm thinking back at 2018, there were some inefficiencies. You had a supplier that caused some issues in the fourth quarter, specifically if I remember. Perhaps you can remind us as to what the magnitude of the cost drag was last year. But is that embedded in this category in terms of the year-over-year comparison?

[Marty Agard:]

Yes, there's a meaningful part of it that was in the fourth quarter that was materials related. There were some warranty issues and other costs. But -- and some of that got carried into the first quarter. Recall the slow start we had, to say the least, in the first quarter with some of that coming through. So, yes, it's heavily weighted in the materials and you would say we’ve an easier fourth quarter comp because of that. And if you look at our adjusted EBITDA trend, third quarter to fourth quarter last year, you will see the drop-off in the fourth quarter. So that is all embedded in this year-over-year guidance that we are talking about.

[Bill Johnson:]

The magnitude of that -- yes, the magnitude of that, Mig, was around $5 million.

[Mircea Dobre:]

That’s helpful. Thanks. And on SG&A, the drag here getting a little bit better, about 50 basis points versus the prior guidance. And I'm trying to understand does that have to do with how you are phasing out or rather phasing in certain investments, or is this related to how compensation accrual is progressing -- any help here?

[Marty Agard:]

Yes, it's a little bit of both, and it's a little bit on both years. Last year there were some things as we worked through some of the management changes and other kind of spending -- I call them restrictions efforts. You will see SG&A actually trending down in the back half of last year. And this year, we’re expecting it to be steadier. And so it's -- and I wouldn't say there's significant new investments this year, but we’re continuing on some of the BTP and some of the brand innovation stuff. We are continuing some of those innovations. So the shape of the SG&A through the quarters is steadier if not a little bit up this year whereas last year, it really kind of fell off in the second half. And so you get that comparison, and that's the drag that really has been kind of within the guidance all along. We fine tuned it a little bit at this point, but there's not much so different here.

[Mircea Dobre:]

Then, lastly, maybe some color from you, Bill, in terms of what are you seeing from the general market versus the QSRs in North America? And I guess my specific question is this, I mean, the general market seems to have struggled for quite some time here. And I'm wondering if something is starting to feel a little bit different to you, or your expectations in the back half for improved demand simply has to do with NexGen and some items that are specific to your company rather than the market itself. Thank you.

[Bill Johnson:]

Yes. Yes, I think probably more so through our share gain and some of the share stuff that we are accomplishing with the NexGen is giving us the lift that we see. I wouldn't say the overall market is different than what you guys have kind of looked at in your channel checks. But I think we are winning more of our fair share of the business, and we are doing it the right way.

[Mircea Dobre:]

Meaning with decent price?

[Bill Johnson:]

Meaning that -- yes, meaning that we are creating a preference with the value that we create, with the products that we’ve, the innovation that we’ve and being very disciplined on price.

[Mircea Dobre:]

All right. Thank you.

[Operator:]

Your next question comes from David MacGregor of Longbow Research. Your line is open.

[David MacGregor:]

Yes. Good morning, everyone, Maybe just overall on the topic of price, just -- can you just talk a little about what you're seeing in terms of market behavior and discounting? And I realize it typically is a little more acute as you head into the end of the year. So maybe your thoughts in terms of how the second half this year might be different than the second half last year maybe due to tariffs and RMI or for other reasons?

[Bill Johnson:]

Yes. You know I think everybody has needed the pricing this year, right, because of the market events and tariffs and just in general. And so I think we see everybody being a little more disciplined in their pricing. But you're right, it does -- we will tell in the fourth quarter what happens depending on where people's volumes are at. But I would say it's more disciplined this year than most years and I think that's working well for everyone.

[David MacGregor:]

Yes. It's good to hear. Just with regard to Wave 1, the work you're doing there, I guess we picked up through some of our channel checks that lead times are extending in some of those products. And I guess I'm just interested in your thoughts notwithstanding it was a pretty good quarter for organic growth, but what that may be costing you in terms of just a revenue headwind and your thoughts on that going forward?

[Bill Johnson:]

Yes. Yes, well, I think you've got to separate the two. I’m not sure that the lead time extension has much to do with the Wave 1 process. I think there's -- in particular, the one business that I think you're talking about is there's a lot of order potential there and our capacity is getting filled up. And so that's creating the lead times to push out. And actually, our BTP process is helping us take more business. And the faster that we can get our BTP process done at these locations, the more that we can add capacity and expand our ability to take care of customers. So I don't think the actions that we are taking are extending the lead times. They're certainly not those kind of action. They're actually helping the lead times. But in the one business, there's an awful lot of demand for those products right now.

[David MacGregor:]

So, I mean, that's good to hear, but -- so you don't feel like Wave 1 is an impediment to revenue growth right now, you're able to execute around that?

[Bill Johnson:]

No, actually, I can tell you that in that location, I've improved the efficiency, the labor efficiency significantly. And it's allowed me to take some business -- additional business that I probably wouldn't have been able to take.

[David MacGregor:]

Right. Last question for me is just on the aftermarket. You said it sounds like it's taking a turn for the better here now. It's good to hear. Can you just talk about kind of where channel inventories are? And how are you -- that influences your view on the second half?

[Bill Johnson:]

Yes. So I think -- because we haven't done -- we haven't really had any buy forward programs or any promotional type stuff, I think we see the channel as being adequately -- has an adequate inventory in it. So I think we're going to see more normal buying patterns rather than kind of the pull-forward stuff.

[David MacGregor:]

Is there any mix issue there within aftermarket that could be adverse to the margins, or is it going to be pretty straightforward?

[Bill Johnson:]

No, not really. It's pretty straightforward. It has a different margin profile than kind of traditional forward stuff.

[David MacGregor:]

Yes. Thanks very much.

[Operator:]

Your next question comes from Jamie Clement of Buckingham Research. Your line is open.

[James Clement:]

Hi, gentlemen.

[Bill Johnson:]

Hi, Jamie.

[Marty Agard:]

Jamie.

[James Clement:]

Great. I was curious to kind of drill down a little bit on your expectations for the large chain business and I think in some of your comments, you might have been bouncing around between the Americas versus globally. I thought that the June quarter was supposed to be the toughest of the year-over-year comps in the Americas. But I think your slide said that the chain business was up in the Americas in the second quarter. Do I have that wrong?

[Marty Agard:]

That's correct.

[Bill Johnson:]

No, you don't.

[James Clement:]

Okay. So if -- so when I look at your guidance slide, you are talking about the Americas, general market and KitchenCare offsetting prior year large chain rollout comps. Shouldn't the large chain business be kind of smoother sailing in Q3 and Q4, or am I wrong about that?

[Marty Agard:]

That’s a comment on the full-year, not on specifically the second half.

[James Clement:]

Okay. So you would -- so in the second half, you -- just globally, you would expect large chain business to likely be up. Is that right?

[Marty Agard:]

Most likely, yes.

[James Clement:]

Mostly, okay. Okay. Thank you all very much for the time. I appreciate it.

[Operator:]

Your next question comes from Larry De Maria of William Blair. Your line is open.

[Lawrence De Maria:]

Thanks. Good morning, everybody. You had mentioned in the release you may have additional benefits from pricing optimization. Could you just maybe put some more context in that and some of the timing, scale and scope of that?

[Bill Johnson:]

Yes. We are at that time of the year where we look at all of our programs and how we -- different buying groups, different rebate programs, the different discounting, and we put all that together about this time of the year looking forward to 2020. And so as we pull those things together, we are -- we will see what the outcome is. But it looks like there might be some opportunity there for us.

[Lawrence De Maria:]

So is this part of structural change, or is this just normal part of the year?

[Bill Johnson:]

Well, I'd say it's probably not normal that some of the actions that we want to take, but it's a normal review process that we take and we are looking at how do we gain share? What’s the most effective way for us to gain share in the market? How do we create a preference for the Welbilt brand?

[Lawrence De Maria:]

Okay. And secondly, it looks like I think Crem's in a little bit more of a headwind on the margin side, maybe tariffs or something. Can you just talk more -- a little bit more broadly about how Crem's doing? I know you had -- obviously, it's been featured at some of the shows this year because you have the North American rollout. Is that going okay, is that impactful, or is that headwinds because of inventory coming from China, let's say?

[Bill Johnson:]

Yes, I would say on the Crem side of things, we're off to a slower start than what we had built and thought about. There's -- we launched it in North America at the shows. There's some really good activity that we are generating from that, have yet to have that turn into meaningful orders. But it looks like the second half, there's some opportunity for us to make up some ground on that. But I would say that it's not performed as to our expectations, but we see upside to the second half to be able to close that gap.

[Lawrence De Maria:]

Okay. Thanks. And then last question. The overall market seems healthy, obviously, as indicative by your guidance and your performance so far. But obviously, [indiscernible] maybe underperforming versus historical rates as has been the last -- recent memory. So curious in the overall health of the market as you see it? Maybe discuss how the quarter played out as you went through the quarter? And then since the quarter closed to now is -- with time to close orders, has that changed? Any delays or fairly normal business? And is much of it mostly replacement still at this level? Thanks.

[Bill Johnson:]

Yes, I think we haven't seen any change. It's -- since the quarter closed, it's normal replacement. As I said earlier, I think we're getting more of our fair share and we're gaining share where we want to. The NexGen business, as we said, coming into the first half, we anticipated that would help us close the gap on the large chain business, the tough comp that we had and those guys performed for us. And so I would say that in terms of the general market, it's where you guys think it's at by all your channel checks, but we're just -- we're getting more of our fair share of it.

[Lawrence De Maria:]

And sorry, just a follow-up. The NexGen business, is that where you're gaining share the most, or are there other pockets? I mean, I know chain rollouts vary from quarter-to-quarter, but the predominant share gains, is that through NexGen, or are there other avenues that you could talk to?

[Bill Johnson:]

Well, you mixed two things there, right? There's the general market, and then there's chain rollouts. And those are two different things. So we were aided in the first half by the Merco rollout on hot holding that we thought might happen in the first half. It did happen in the first half. And then between that, NexGen and the KitchenCare business kind of pushed us through the tough comps in the first half. So -- but, yes, there's always pockets of business. We tend to highlight the NexGen one because that was a pretty big deal for us.

[Lawrence De Maria:]

Okay. Thanks. Good luck, guys.

[Operator:]

The next question comes from Walter Liptak of Seaport Global. Your line is open.

[Walter Liptak:]

Hi. Thanks. Good morning, guys.

[Bill Johnson:]

Hi, Walter.

[Walter Liptak:]

I wanted to ask some top line questions about North America and Europe. And you guys talked a lot about the NexGen. Are we at like a full run rate now with NexGen, or is there still a ramp of business that you can still get with NexGen for the second half?

[Josef Matosevic:]

Yes. Walter, good morning. Josef here. We entered NexGen just about a year-ago, and we anticipated the changeover to take anywhere between 12 and 18 months. We are within the 12-month period now. So we still haven't seen the full impact, but it's ramping up and that justifies our current top line growth in -- within NexGen, but there's another swing to come over the next 6 months to full run rate.

[Walter Liptak:]

Okay, great. The -- and maybe you don't want to answer this, but like the organic of 3.1% in Americas, how much did NexGen add? Like was that a big part of the incremental growth, or where you think the market was for the quarter?

[Marty Agard:]

Yes. Well, we are not going to get into that level of granularity.

[Walter Liptak:]

Okay. All right. Fair enough. Wanted to ask, too, I guess, when you talked about the guidance in EMEA, and it sounds like there's some lumpiness to it. I wonder if you could just go into a little bit more detail on, are there projects that you just don't know when they're going to hit, so you've got a good quarter or bad quarters and a comp,? or why is it that, that's going to be so lumpy? Because we hear a lot about Europe slowing down. I wonder if it's related to a macro thing or if it's visibility on ...

[Bill Johnson:]

Well, the big swing -- what's driving some of our big swings is the pull-forward. We had a pull-forward in Q1 from the Brexit, potential Brexit that affected -- so we tend to look at the first half for EMEA, right, and look at what overall happened because the second quarter certainly was impacted by the pull-forward on the first quarter. So the second quarter was kind of flattish, in second quarter for EMEA. And you couple that with, I think, the first quarter was double-digit kind of growth. So it's kind of in line with where we thought it would be. Now with all the geopolitical stuff going on again with Brexit in the U.K., there's an opportunity that maybe the same phenomenon occurs where there's a pull-forward in the third quarter. Backlog is strong in the EMEA. We do have a tough fourth quarter comp. There was a rollout on Merrychef and Garland in the fourth quarter last year in EMEA. So we’ve to overcome that. So it's a pretty tough comp. But I would say that's -- it is lumpy, but it's been -- it's kind of -- driven by some of the political stuff that's going on in the U.K. I would say the rest of the region is pretty standard.

[Walter Liptak:]

Okay, great. And then just the last one on the Wave 1. I wonder if you could comment just on the culture, the way the uptake by the employees to do the restructuring, how many programs are there? Can you just comment on the enthusiasm for it?

[Bill Johnson:]

Yes, it's really exciting for us because we are really working at the employee level and driving ideas coming from the ground up rather than the top down. And our employees are doing a great job of bringing the ideas forward, implementing them, getting the savings and bringing those forward and getting them through the processes and to the P&L. I can tell you the enthusiasm in the company is very high. It's the first time in their recent memory that they can remember where their ideas were brought forward and implemented. And there's resources being added into the businesses, which I think just adds to the excitement, because they know that we are serious about this and we want to make it happen. So I couldn't be happier with the performance of the teams.

[Walter Liptak:]

Okay, great. Okay. Thank you.

[Operator:]

[Operator Instructions] The next question comes from George Godfrey of CL King. Your line is open.

[George Godfrey:]

Thank you. I just wanted to come back to the adjusted EBITDA margin for a second. And I heard everything you said about the pricing. It sounds like the volumes are okay, the organic sales growth hasn't changed. So looking at the margin expansion that you came into the Investor Day, looking at just volume, mix and pricing, 225 to 275, so a midpoint of 250 and now we are at 175 coming out. So a 75 basis point reduction. Is that mostly related to the mix of those three out of the volume, mix and pricing is the reason why that's being reduced?

[Marty Agard:]

Yes, that's right. It's Marty here. Yes. I mean, we knew, for the most part, the kind of pricing we were going to execute March 1 by that and had a sense of its uptake and it has taken good traction. So we feel good about that. We separate the FX in that other line. So some of this is just honing in, but the mix of the cold side has been stronger. And a few other pieces down within the regions as I was commenting on, but short of breaking out a lot of little pieces. That’s where that came from.

[George Godfrey:]

Okay. And then drilling down, Marty, a little bit further on the EMEA section. At the Investor Day, you called out momentum in Convotherm and Merrychef, but here in today's slide deck, Convotherm and Combi Ovens are negative in EMEA. So did you see a change in that product momentum there? And I will leave it there. Thanks.

[Bill Johnson:]

Yes, it's mostly just some of that stuff has pushed out a little bit. So the shifting and some of the other pieces of these rollouts have started actually late last year and have been going on are a little stronger and bigger contributors. So the mix of the brands that are carrying the weight in EMEA has shifted a little bit.

[George Godfrey:]

Got it. Thank you very much.

[Operator:]

There are no further questions at this time. I will now return the call to CEO, Bill Johnson.

[Bill Johnson:]

Thank you. To conclude today's call, I want to reiterate that I believe Welbilt has the right strategy to focus on profitable growth and can drive significantly more dollars to the bottom line. We expect to drive our profitable growth by improving our go-to-market approach to drive more dollars of sales and by improving operations and therefore margins. We are off to a good start with Wave 1 of our Transformation Program and believe our investments in this program will become apparent to investors as we move into 2020. I’ve confidence in this team to continue delivering profitable growth and delevering the balance sheet. This concludes today's 2019 second quarter earnings call. Thanks again for joining us this morning and have a great day.

[Operator:]

This concludes today's conference call. You may now disconnect.