Welbilt, Inc.
Q1 2017 Earnings Call Transcript

Published: 8 May 2017

[Operator:]

This call is being recorded today, May 08, 2017. A replay of this call will be available beginning at noon Eastern Time today until midnight, Friday May 22, 2017 by dialing 855-859-2056 or 404-537-3406 and entering access code 6286337. You may also listen to a replay of this call over the Internet beginning at noon Eastern Time today and running through noon Eastern Time on June 22, 2017. You can access the Internet replay by visiting the Investor Relations page at ir.welbilt.com

[Rich Sheffer:]

Thanks Tushan. Good morning and welcome to Welbilt's 2017 First Quarter Earnings Call and Webcast. Joining me on the call today is Hubertus Muehlhaeuser, our President and Chief Executive Officer, Haresh Shah, our newly appointed Chief Financial Officer and Josef Matosevic, our Chief Operating Officer. Before I turn the call over to Hubertus, I need to review our Safe harbor statement with you. 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 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 discussion will include both GAAP and non-GAAP measures. Please refer to last three pages of our earnings release for our non-GAAP reconciliations. You can find a copy of the earnings release in the Investor Relations section of our website www.welbilt.com. Now I'd like to turn the call over to Hubertus.

[Hubertus Muehlhaeuser:]

Thanks, Rich, and good morning everybody. I'm pleased to be speaking with you about our successful start to 2017. As you saw in our press release this morning, we delivered organic net sales growth of 2.7%, which drove a 16.1% adjusted operating EBITDA margin. This is a 70 basis point improvement over last year's first quarter. This is also the seventh consecutive quarter of year-over-year adjusted operating EBITDA margin improvement since the new management team took over in August of 2015. Not only does this position us well for a successful 2017, it also continues us on our 1,000 basis point margin improvement journey that we launched in 2015. Let we continue with a couple of comments on our topline results. The organic sales growth of 2.7% was driven by a 14.2% increase in APAC and a 6.7% increase in EMEA. APAC grew sales with large chains in the region and grew their KitchenCare part sales. In the EMEA segment, we again had strong sales growth of Merrychef, eikon, e2s high-speed ovens as well as beverage systems. Sales in the Americas increased slightly with improvements in KitchenCare parts, ice machines and beverage systems, offsetting soft hot side product sales and a slight headwind from lost sales due to 80/20 product line simplification. For the total company, lost sales from 80/20 product line simplifications were approximately US$2 million in the quarter. The National Restaurant Association NRA reported that restaurant sales began the quarter soft before improving in March. NRA's restaurant current situation index was below a 100 in January and February, which indicates a slight contraction before increasing to 101.4 in March. The expectation index for forecasted conditions was over 102 in both February and March which indicate that restaurant owners and operators are expecting improving conditions over the next six months. The latest forecast from NRA and Technomic call for the Foodservice industry to go 1.7% in 2017. We believe these expectations for a slight expansion in the restaurant market will occur but at a slow pace with month-to-month volatility. Moving on to our savings initiatives. We remain fully on track with our simplification and rightsizing initiatives generating $10 million of savings in the quarter. To remind you, our simplification and right-size initiatives are comprised largely of seven categories. Within Foodservice we include 80/20, lean manufacturing, strategic sourcing, product cost and platforms, and KitchenCare improvements. Within rightsizing, we include manufacturing capacity reductions and headcount reductions and as a reminder we won't quantify savings for these individual categories but we will discuss them qualitatively to show our implementation progress. Overall, we believe we have significant runway remaining to enable the completion of our 1000 basis point margin journey. Within simplification, we are still in the early stages of the product lines simplification component of 80/20, as well as the manufacturing and strategic sourcing initiatives. We are near the midpoint on product costs and platforms and are in the later stages of KitchenCare improvements. In rightsizing, we are in the later stages for both manufacturing capacity and headcount reductions having completed 75% of our targeted capacity reductions already. A couple of comments on two of our simplification initiatives. We're continuing to make very good progress with our implementation of 80/20. We made further progress on the pricing portion of this project as the quarter as prices for B products have been increased. We continued with the rollout of our product line and customer line simplification strategies and realized additional savings from these actions. The focus of much of our attention was on 80/20 pricing actions in Q1. However, we pruned approximately 1% of our equipment SKUs bringing our total reduction to 17% since we started applying the 80/20 principles. KitchenCare has been performing very well in the last several quarters as our total fill rates are consistently averaging 90% and of course higher for high-volume and critical paths. This is a massive improvement from the depths of the KitchenCare disaster during 2015, while fill rates plan to between 30% and 40%. In addition, KitchenCare is now up to 19% of our total sales in Q1 which is very close to our goal to get it into the low 20% range. I’ll make a few additional comments later. But now it gives me great pleasure to introduce our newly appointed Chief Financial Officer, Haresh Shah who was promoted to this role last week. Haresh?

[Haresh Shah:]

Thanks Hubertus, and good morning everyone. As Hubertus mentioned, our adjusted operating EBITDA margin increased by 70 basis points in Q1. The simplification and rightsizing initiatives that Hubertus discussed had a positive 270 basis point impact. Pricing, net of discounts and rebates contributed 110 basis points of margin growth while volume and mix were positive 50 basis points in Q1. These positive contributors to margin in Q1 more than offset $5 million or 130 basis points of material costs increases in the quarter primarily from Ferrichrome which is used in stainless steel. We have announced the 3.5% increase for products containing stainless steel to offset this input cost increase. The remaining 230 basis point negative impact on margins was primarily driven by higher compensation, R&D and new product development and marketing costs compared to last year. The increase compensation costs in the quarter was driven by higher headcount versus last year. You may recall that a year ago we were still building our headquarters team so we could function effectively as an independent publicly traded company. The increased R&D and new product development cost in the quarter is mostly timing. Our spending is more front loaded this year as we focus on the 27 planned new product introductions for 2017. Finally, the increased marketing expenses are related to the cost of the NAFEM show that is only held every two years. Interest expense was $23.2 million in the first quarter compared to $8.5 million in last year's first quarter. It is important to note that we only had one month of interest expense in last year's first quarter as our new capital structure was not in place until the spinoff in March 2016. As we announced on March 06, we did successfully reprice our $825 million term loan B with the new pricing set at LIBOR plus 300 basis points, which is a 175 basis point reduction. As we were looking at the accounting implications of the repricing, we determined that we should write off the portion of the original debt issuance cost that were related to OIG as debt extinguishment cost. This resulted in the $3.2 million non-cash charge taken this quarter. A portion of this charge is an pure adjustment related to last year's debt -- last year's debt paydown of term loan B. Our effective tax rate was 29.6% in the first quarter, compared to 20.3% in last year's first quarter. The year-over-year increase was primarily driven by a $2.9 million benefit from discrete balance sheet adjustments related to the spinoff that were recognized in last year's Q1 and a geographic shift in our booking -- lower rate international to higher rate U.S. source income. We did recognize a $1 million discrete tax benefit related to the previously mentioned debt extinguishment cost in this year's Q1. Our free cash flow was a $56 million use of cash this quarter. As we mentioned during our last call in February, our first quarter is typically our softest quarter of the year, both from a sales and profitability standpoint. We expected to be and were impacted in the first quarter by some large cash outflows. Year-end customer rebates, a semiannual interest payment on our high-yield notes and our first annual cash bonus payments in a few years. In addition to those cash outflows, we also increased inventory by $24 million in the quarter. Part of the inventory increase was to better serve our customers by expanding our quick ship program. We also built seasonal ice machine inventory in advance of the warmest summer months when ice machine demand normally surges. Finally, we had purchase parts for new products that we expect to begin shipping over the next several months. Debt increased in the quarter by $81 million however, cash also increased by $29 million. As a reminder, nearly all of our debt is in the U.S. or nearly all of our cash is outside of the U.S. We do expect to resume U.S. debt paydown in the second quarter now that we are past the majority of our lumpy annual cash outflows. However, the cash balances outside the U.S. are also expected to continue building. Finally, we are reaffirming our full-year guidance on all the financial metrics we provided last quarter. The only item where we've given additional color in this morning's press release is interest expense, which we now expect to be towards the low-end of the $85 million to $90 million range, all the successful repricing of our term loan B. The benefits of a successful repricing are expected to be partially offset by our higher inventory and the rising forward curve for LIBOR. That concludes my comments. I look forward to meeting many of you at the NRA show in Chicago in two weeks and at our upcoming analyst conferences in June. With that, I will turn the call back over to Hubertus.

[Hubertus Muehlhaeuser:]

Thanks Haresh. As Haresh mentioned in his comments, we're planning to introduce 27 new products in 2017. Some unusual products and some are significant upgrades or next generations of existing products. A couple of them that we'll have at the NRA show, I'd like to highlight specifically for you. First, is the Garland's Xpress Grill, the next generation of two-sided cooking. The next-generation grill reduces cooking time by half and it has precise temperature control to ensure food is cooked to appropriate core temperatures, enabling both consistent food quality and safety. Second is our MercoMax hot holding platform. It has unique features for the best food quality and maximum holding times. It also features industry exclusive touchscreens, that are similar to those commonly used on smartphones. In addition the new holding cabinets come with both Bluetooth and Wi-Fi, enabling food conductivity to the customer's kitchen controls. Both of these Garland and MercoMax products have just one NRA Show Kitchen Innovation Awards that will be presented at the upcoming show. In addition to these two awards, we have also won Energy Star Partner of the Year Award for sustained excellence and energy efficiency in six product categories and just last Friday, Taco Bell awarded our Delta business with its Star Award for strategic partnership and dedication to their business. In EMEA, our Merrychef eikon e2s ovens won the green good design award for having the smallest high-speed oven with the largest cavity to footprint ratio. And finally in APAC, again our Merrychef eikon e2s oven won the HOTELEX Mirror Innovative Design award. We are continuing to generate customer interest in our fitKitchen system concept. We have a dozen of customers who are engaged in fitKitchen projects to address either specific process flow issues in their kitchens or to set up their entire new kitchens. As you know, we see fitKitchen has a long-term enabler of additional equipment sales across all of our product lines as a systems approach to kitchen design becomes increasingly demanded. Last year we shared our 2017 priorities with you. I'd like to revisit those and comment on our progress. First, we committed to continuing our simplification and rightsizing agenda. The $10 million of savings we delivered in the first quarter have us solidly on track to achieve our projected savings for the full year. Second, we committed to continuing our delevering journey by using all available U.S. cash for debt reduction. The debt increase in the first quarter was expected and remain committed to paying down $100 million to $120 million of debt by the end of this year. Third, we committed to continuing to bring innovations to the table refreshing our product lines and driving system solutions in the kitchen. We already had six of this year's plan 27 new product introductions at the NAFEM show in early February. Our R&D and engineering teams are as busy as they ever been as our customers continue to come and partner with us for solutions to solve the issue they're facing. Please visit us at the NRA show in two weeks to see for yourself the innovations we are bringing to the table, as well as excitement of both our employees and of course our customers. Last but not least, 2017 will also be the year where we will begin to seek smaller bolt-on acquisitions. With that, I'll turn it back to Rich.

[Rich Sheffer:]

Thanks Hubertus. Tushan, this concludes our prepared remarks. We will now open the call up to questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Mig Dobre with Baird. Your line is open.

[Mig Dobre:]

Thank you, good morning and Haresh congratulations and welcome to the calls here. Gentlemen, I guess my first question I want to talk a little about our product introduction and in your press release you say, we expect to begin benefiting from 2016 and 2017 product introduction and I guess maybe not the parse things too finally but at least to me that implies to me that you really haven't seen the full benefit from this thus far. So I guess I'm wondering for a little more color as to how you expect these benefits to may be ramp-up based on your product launches. And then related to this, when I'm looking at your filings historically, we've seen a pretty good uptick in product introduction. You know you did about 10 I think in 2015, '16 - in 2016, now you're talking about 27 new products for 2017. Hubertus, can you give us some color here as to what the company has been doing internally to accelerate innovation and where do you think you are in terms of your goals for '17 vis-à-vis what the company can and should deliver going forward on a sustained basis?

[Hubertus Muehlhaeuser:]

Thanks for the questions Mig, quite a lot. Let's start with the first one on the sales. Definitely we've not yet seen the full benefits of all our product introductions from 2016 and 2017 and those are rolling in. And as you know that we're still in restructuring mode and we basically predicted for this year kind of a sideward move on sales and we want to keep that firm for the time being so we don't want to change at this point in time our sales guidance. But we are very positive going into the year and we feel very, very good for increased sales above industry most likely in 2018 but for the time being we would like to hold our guidance. And when it comes to the innovation pipeline, you're absolutely right, I think we are starting to fire on all cylinders. Josef and the team jointly with Rick Caron, our Chief Innovation Officer and [Lee] who is managing the NPI the new product introduction process has done a thorough review of our product portfolio and as we said when we took over nearly two years ago, we had a couple of guests. We addressed those and we found a couple of like send an unpolished diamonds in the pipeline such as Nitro and we're pushing those right now. So I think going forward to expect from us North of 20 product introduction per year is absolutely what you will see and those are going to drive the sales going forward and the reason perhaps why the change is perhaps where this is existing better to our customers right now and also if you see our kitchen system approach I think the system approach brings us a lot closer to our customers. So a lot more intimate customer discussions and out of those discussions, we not seldom derive pretty intriguing joint product collaboration and product introduction. So that might also be the reason why the introductions are higher than in the past. Anything to add Josef from your side or…

[Josef Matosevic:]

Maybe the only comment is as we start launching the new products, the customers hit their own wishes on what they want to tell us the product towards and put an additional slight delay in the system for implementation, which we will see starting in June, July timeframe.

[Mig Dobre:]

I guess to be more clear, the nature of my question was more process-driven I am wondering if you're spending more in order to generate these new products or if internal you have made some changes vis-à-vis your engineering team, your capabilities that would allow you to introduce more products now than the company has previously done?

[Hubertus Muehlhaeuser:]

Haresh is going to…

[Haresh Shah:]

On the spend part, we did increase in the quarter about 20% or 25% when we look at year-over-year and in my prepared comments, we talked about the spend for new product development.

[Hubertus Muehlhaeuser:]

Whereas going forward our spend traditionally has been around the 3% of sales for total innovation cost, so to say and we intend to keep that -- to keep that stable but as Haresh has said, it was a bit more front loaded this part this year and in the process, there is no, I think we're just following the processes better. It's not that we've never been innovative. Even before this management team is well built and the time Manitowoc Foodservice was a very and is a very innovative company. It's just perhaps a bit more disciplined on the process right now and we're also trying to be smart about product development. So we looked at a couple of developments, but we basically saw we could cut sometimes time-to-market without jeopardizing the cost of poor quality and we've been successful so far with that.

[Mig Dobre:]

All right. Then I guess one more follow up and I'll be back in the queue, I'm trying to understand pricing dynamics a little bit better and Haresh I appreciate all the color that you've given on the moving pieces. So I think you said 110 basis points of positive pricing that you've experienced in the quarter, but you're also talking about the 3.5% price increase in June. I am presuming that obviously that's going to be in excess of what we've seen in the first quarter, I guess I'm wondering what percentage of your overall mix will be impacted by this, by this increase and frankly why you're waiting until June to implement it?

[Haresh Shah:]

So what I would say Mig to that is a 3.5% is focused on the products that are impacted by Ferrichrome as we discussed. So with that impact, we do expect our sales to still be in the guidance that we've given. So we have not adjusted for that at this portion.

[Hubertus Muehlhaeuser:]

And we basically the price increase was timed so that our distribution partners can really adjust to it and so June 1 was really the first moment we could do it respecting our distribution partners and end customers and we feel very confident that with that increase, we will recover what we have lost in terms of premature headwinds in the first quarter. So we're very good about that.

[Mig Dobre:]

And what percentage of your overall mix would be affected by this increase?

[Haresh Shah:]

Mig these two or three product lines, one thing I -- the other one in the Delfield grew to quantify this in the percentage, I think we should get back to you separately on that. I don't think we have good numbers.

[Hubertus Muehlhaeuser:]

And I also don't think there will be one necessary change though, the basic share of those numbers.

[Haresh Shah:]

I think for color I would say that it's below 20% of our sales will be impacted by the price increase given the North American nature of the increase and product lines involved.

[Mig Dobre:]

All right. Thank you, guys.

[Operator:]

And your next question comes from the line of James Picariello with KeyBanc Capital Markets. Your line is open.

[James Picariello:]

Good morning, guys. So just with respect to your unchanged outlook and sort of tying in the prior question on new products, last year was a story of our key account customers pushing out receipt of your new products. This year you guys have communicated pretty well that, this is the back half weighted year and that mix will improve throughout the year as these new products get shift. So the question is, what are your key account customers saying most recently and what gives you the confidence that we’ll see a ramp this year.

[Hubertus Muehlhaeuser:]

Well I think you saw a very strong Q1 where we are ahead of expectations and 2.7% organic growth compared to our competitor also is very nice start to the year. So we are very confident that we are solidly untracked and rolling out with our large QSRs. But also with the general market and I was mentioning the hot holding, you know I mean where we had some pushback last year, was around those hot holding cabinets with the large QSRs, those are buying right now. So I think we're back on track on that and it makes us very happy that that the product is also received extremely well by the general market, hence the award that we won at the NRA show. But at this point in time we also don't want to change to guidance. I mean we are now quarter into the year as you can imagine we do by annually updates, we have a four plus eight right now underway and let's see how the second quarter goes and then we see in summer whether we want to up something or whether we want to keep our guidance.

[James Picariello:]

Okay, appreciate. And just a follow-up the 5 million called out in material cost increases. How are you thinking about that for the full-year?

[Hubertus Muehlhaeuser:]

Well I mean, I think Josef and Haresh have said it already, we believe that with 3.5% increase in June, we will offset and that had been that we had in the first quarter and in the remainders of the year. So we feel good about that that this is actually going to be worst.

[Josef Matosevic:]

That's correct, I have nothing additional to add.

[James Picariello:]

Okay, thanks. I’ll back to queue.

[Operator:]

And your next question comes from the line of Larry De Maria with William Blair. Your line is open.

[Larry De Maria:]

Hi, good morning guys and welcome Haresh. Haresh if you could discuss maybe the outlook and the size of the business specifically for Merrychef that you might have some opportunities to outgrow the market there this year and even going forward. So can you just talk about the competitive environment and the opportunity there please?

[Haresh Shah:]

Well, let me start then I hand over to Josef. Obviously, as you know Larry, we don't disclose our individual product line strategies and so I will not do it even though I would love to do it because I think Merrychef is an exceptional strong product and you know who the main competitor is. And in German you would say, put on warm clothes [indiscernible] it’s going to be fun. And I think we are going – we’re going to see good growth there but this is not the only product where we see good valid. So Josef you want to give some more color perhaps without giving colors?

[Josef Matosevic:]

Good morning, Larry. We have tremendous amount of excitement with Merrychef product line globally and clearly this product line has differentiation built-in in the technology that we will clearly benefit for – over the next years to come. So a lot excitement, a lot of great quality products being launched and deployed and also in the pipeline to be deployed over the next couple of years. So I think that as far as I can go and you want me to go.

[Haresh Shah:]

And the interesting thing I think where the Merrychef is not only is our significantly better than the available ones from other competitors and we're talking two digit percentage productivity and energy savings productivity gains and energy savings. It is also right now moving slowly but surely into the fine dining segment. Very interesting, so new statements for that product that has been traditionally found more in the convenient store type of environment. The same development by the way we see right now just the other way round with the combi ovens, we're seeing very, very nice growth now finally coming with our Convotherm product with the mini combis that make their way now finally into the large QSRs as they step up food quality need more versatility in the kitchen a Combi oven is ideally suited for that and thanks to our very good contact with them and also our core product features that are unique to our Convotherm we're seeing nice growth there as well.

[Larry De Maria:]

Okay. Thank you. And secondly, just one clarification with the price increases and still with the same organic guidance, does that imply volumes are down for the year, just as clarification and then what kind of visibility at this point you have on QSR getting better? I think you mentioned it's slowly getting better, but some of this starting to buy from hot hold machines. So it is based on discussion with industry customers or is it more additional on the industry data and waiting to see the things get better.

[Rich Sheffer:]

Larry this is Rich, on the impact from the price increase given that it's limited in the number of our products. So it's going to impact the topline impact still fits within our revenue guidance. It's really about recovering the lost margin.

[Larry De Maria:]

Okay. And then the visibility on the QSR getting better, is that based on customers or trying to be true about ordering or is that just about looking at the industry data and waiting for it to get better?

[Hubertus Muehlhaeuser:]

Look at Q1 posted, I think all this that messages and rumors around QSR is a bit softened right now. I think they're doing better than overall expected some of them and we talked about it longtime at McDonald is doing better. The industry generally is doing better. So we are modestly positive also for the QSR side for the remainder of the year and we had always been positive on the general market side but positive in our sense means 1.7% of growth that we see for this year.

[Rich Sheffer:]

Larry, this is Rich again, looking at the updated data from both NRA and Technomic, generally things are slightly more positive which is kind of what we expected coming into the year. It's not a massive step function increase in positivity. More of a small step, but that's kind of what we were banking on coming into the year, what we've been hearing anecdotally and starting to prove out in the data that we're getting. Hubertus mentioned not only the current conditions index that NRA reported on that one from a slight contraction to positive in March but the expectations index over -- conditions over the next six months are positive as well. So it reinforces our guidance that we gave and that we reaffirm today. It doesn't materially change how we see this year turning out.

[Hubertus Muehlhaeuser:]

And then as you know visibility, we're not a backlog industry. Yes we do have always a couple of smaller rollouts or larger rollouts, but the majority of the business is really not a long backtalk business. So visibility is limited.

[Larry De Maria:]

Okay. Thank you very much for the color.

[Hubertus Muehlhaeuser:]

You're welcome.

[Operator:]

And your next question comes from Robert Wertheimer with Barclays. Your line is open.

[Robert Wertheimer:]

Good morning. A couple quick ones on international, what really is a driver of the organic growth solid strength there?

[Hubertus Muehlhaeuser:]

The thing is as simple. It's difficult a great product and a pretty good management team and we said it last time in the call, we did make some management changes in EMEA and APAC and then Phil is doing a very, very good job jointly with his team there and of course supported by a clear focus on our strengths, focus on the products that have a high margin and that have superior features and high demand by our customers. That's really the story and we are outperforming the market there and we're gaining market share, which was our strategy all along and if you look at APAC, yes the markets are stabilizing surely, slowly but surely. You see a lot of the last QSRs that now have ended their restructuring maybe on the shareholder side and successful IPO Micky Pant is doing a fantastic job there in Asia. And with that they produce growth the other thing is the same thing you see progress there and when we see very good demand. And also it’s going to be interesting to see with McDonald's right now with the new shareholder how that’s going to benefit in the business. But we're making nice inroads there and we’re very happy with that business and very happy how both management teams in APAC and in EMEA are attacking the challenges.

[Hubertus Muehlhaeuser:]

And I would just add Haresh that we called out in our earnings release what the drivers were in EMEA it's the heart with the Merrychef eikon as well as beverage. And then a stronger hot-side in KitchenCare in APAC.

[Robert Wertheimer:]

Okay. I think we’ll put that together okay thank you. And then just in general on the price increases on stainless. Have you seen competition take similar increases already it is the magnitude of the move and the inputs sort of clearly with even prior periods where people taking pricing and industries sort of done it in the past though altogether?

[Hubertus Muehlhaeuser:]

Let’s not talk about competitors you can ask them that in their conference calls we're focused on our numbers and for us it was discussed with our distribution partners they understand the end customers understand and we’d like to keep it there?

[Robert Wertheimer:]

Okay thanks.

[Operator:]

And your next question comes from the line of Walter Liptak with Seaport Global. Your line is open.

[Walter Liptak:]

Hi, thanks congratulations on the nice quarter and a good start. You talked not to beat a dead horse in North America but you talked about the macro numbers and the industry numbers improving. Did you see any improvement throughout during January, February, March now April that correlate with those industry numbers?

[Hubertus Muehlhaeuser:]

Rich you want to say something.

[Rich Sheffer:]

So Walt obviously we’re not going to comment on April at this point, but I would say that as is typical Q1 is a softest quarter that we have in the year the buying groups tend to add inventory to max out there volume rebates as we come into year-end so they're sitting on extra inventory that and there is just less business activity. Generally we did see things ramp up as we moved later into the quarter and I think that that bears out a little bit just looking at our receivables balances at the end of the quarter they were up because we had a decent March again not going to comment on April at this point we’ll talk about that on our Q2 call across the bridge when we get there.

[Walter Liptak:]

Okay, great. But Hubertus it sounds like the tone that you’re hearing from customers is trying to get better because there has been weaker for awhile now?

[Hubertus Muehlhaeuser:]

As we said that several times yeah it is concerned by the statistical data the outlook data is good and we basically see right now a positive mood not only in the general market and remember the general market was already positive but also in the QSR market which is nice.

[Walter Liptak:]

Okay. And then I wonder if you can talk a little bit about the profits in North America or the Americas last year you guys were really stepping it up on the profit improvement I wonder what are your thoughts are in 80/20 for this year and when some of those projects that you're working on where you start getting the benefits from it – the timing of the benefit?

[Hubertus Muehlhaeuser:]

First, North America really it is Ferrichrome issue right now that kind of at the start of the numbers there a little bit and I think we clearly have taken care of it and it is our step up in R&D and marketing costs because remember we are currently in a quarter where we have not only changed our corporate Welbilt brand but we're also now moved from 25 product lines to 12. We have the rebranding of those brands and that cost is basically baked into the first quarter. So it’s front heavy loaded cost quarter. If you basically stream that output for the full year we feel very good about it. And on 80/20 I think we’ve said it we have a lot of runway still to go and 80/20 very well. We have folks focus so much so far more on the pricing component of that project less so on the SKU reduction even though we have proved 17% for SKUs and they are significantly more to come. So you’re going to see a switch there from being more focused on the customer line simplification to be becoming more on the product line simplification and pruning more SKUs. But as you also know Walt we don't want to give our specific SKU pruning targets for the year, but I think our comment should be nothing you could expect a lot more to come and you know what that relates into profitability.

[Walter Liptak:]

Okay. That should great.

[Hubertus Muehlhaeuser:]

By the way I see in EMEA look at their step up 780 basis point increase in EBITDA margin last -- in the first quarter that is of course because we focused on the product and we have done a lot on SKU reductions. We've also taken out model lines that were not profitable. So really focusing on the right stuff and killing which is creating complexity that has been driving also our international profitability a lot.

[Walter Liptak:]

Okay. Good, that's a good point. You mentioned the products that you increased prices. I wonder if you could talk a little bit about just -- have we taken the hit now with PLS in this quarter or are you expecting that 1% to be the run rate throughout the year?

[Hubertus Muehlhaeuser:]

No as I said, we talked about the price increase that we have -- that we have done on the B products and I think if you look at 80/20 you know the methodology. It has two components of product and the customer line simplification customers. It's more about prices, product is more about SKU pruning. We've been focused on the pricing and the SKU pruning the 1% is really a slow start to the year and that one and it was managed by that. So you can expect a lot more than 1% pruning going forward okay.

[Walter Liptak:]

Okay. Thank you for that. Okay. Thanks.

[Operator:]

[Operator instructions] We do have another question coming from the line of Jon Fisher with Dougherty & Company. Your line is open.

[Jon Fisher:]

Yes. Thank you. Good morning. Just a clarification on the price increases on the inventory build. If I remember your comments correctly, you said a majority or some of the inventory build was on the high side and you alluded to the fact that the price increase was on ice equipment. So just trying to marry how if you've already stock inventory ahead of the price increase, how the price increase in the second half of the year helps and if I got to mix up in product allocation please correct that.

[Hubertus Muehlhaeuser:]

Okay. The two issues, inventory and price are completely not related. Nothing to do with each other and I think the price increase we have beaten now to death. The 3.5% increase both cover and more than cover the increase that we had in chrome. So that is one and I don't think they need further comment. I think the inventory build-up is a very interesting one and Josef would like to say something about that because that's something that you should be aware of.

[Josef Matosevic:]

Jon. Good morning. The inventory bids was driven on two large scale components. One is EPA requirement under rent for the R290 where we will build up a little inventory to have a smooth transition as we change over and the second one is to increase our quick ship program to meet the demand as to some amount come in beverage and ice. But there is no hidden scale and no hidden agenda. Those are the two key largest drivers.

[Hubertus Muehlhaeuser:]

And I think if you benchmark us in networking capital, we're leading in the industry. Perhaps we're too good there. So we've taken the conscious decision in the management team to basically soften our strictness on the inventory side little bit just to be there when the demand comes and not to leave these couple of percentage points of market share on the table for others, but to basically take advantage of that solutions. So I think that's a smart move that we've done there and you're going to see that in the numbers going forward.

[Jon Fisher:]

Okay. And then just going through the regions and looking at the market, the strength in the macro trends that you saw in APAC and EMEA to put up the kind of numbers that you did in Q1, are those trends you feel sustainable for this year from both a demand standpoint and the ability to take share with the new products?

[Hubertus Muehlhaeuser:]

Absolutely I think obviously if you look at EMEA, they grew in Q4 by more than 30% and now another high single-digit. Obviously, these are step changes that you cannot continue on that pace, but they will continue growing and I think the market environment in Europe is very good right now. We're extremely happy with the elections in France, that would have been a disaster if it didn't happen and this positive mood has driven the ducks this morning if you saw it and it will drive consumer confidence. So that's good and that basically helps us and also in APAC I said APAC for us a big QSR side, international QSRs and they had been restructuring more than they're coming out and we’re still also feeling quite positive about the economy there. So for the time being we are positive on the on the macro environment in both EMEA and on Asia. And then perhaps small thing Mid East for us a very interesting segment as well. We’ve done very good in the Mid East right now Saudi, Dubai there are a lot of projects going on it’s one of the largest construction sites on the planet and with that you have a lot of hotels you have a lot of equipment need. We got a very strong presence there we’ve just ramped up ourselves and team there in the Mid East so very good about that as well. Josef anything to?

[Josef Matosevic:]

No I mean was driving down this year we tie everything back to our originally strategy to be communicated last year. This is the outcome what you see now we said we’re going structure for success, we said we’re going to create a differentiation in the market with breakthrough projects and products you’ve seen as well so both the trends continue as I think we feel pretty positive that our strategy has started to work and we’ll continue to work.

[Jon Fisher:]

And then just the last region on North America the lower hot side product is that something self-inflicted by the company due to the SKU reductions and things or is there some lost market share going on obviously hot-side is a faster growth category than cold. So that's concerning I guess in the North America side if you’re struggling on the hot-side right now?

[Hubertus Muehlhaeuser:]

I mean it of course always relatively more difficult to show two digit growth on a large base and our business is primarily North American focused built and so that is that and the softness that we’re talking about on hot-side is relative to the cold side and the three project timing. So we have anticipated that and so we don't see that.

[Jon Fisher:]

Okay. Thank you.

[Operator:]

And you have another question coming from the line of Mig Dobre with Baird. Your line is open.

[Mig Dobre:]

Yes, thanks for taking my follow-ups. Here just want to go back to margins and maybe talk a little bit about Asia Pac and EMEA and Hubertus to your point is good performance we saw good lifts in both those segments. How do you think about the margin potential for these businesses longer-term meaning do you see yourselves been able to fully close the gap margin wise versus your Americas segment or is there something structural within these two segments that would be keeping these margins below Americas?

[Hubertus Muehlhaeuser:]

No, we don't honestly – we don’t see a big reason for differential in the target margin for EMEA and APAC and I think the progress that we have made right now on closing the gap first internally benchmarking concerns that. And is that really now that we get them all on par with kind of in the high teens on EBITDA in the first quarter it’s now about moving it further up. And we stick very, very firmly to EBITDA margin target for the entire company of mid to high 20s and we will achieve that and this is going to be the same profile in America, Europe and in Asia because that's really what our industry is driven in. And I don't have to mention a couple of competitors that we have in Europe that show that very successfully already I think that's a clear proof that this is possible.

[Mig Dobre:]

Yes, it’s fair enough I guess as I'm looking at your 2017 guidance and what you're calling out for EBITDA margin improvement considering what we see in the first quarter I guess I'm wondering if our expectations are to be that a lot of your improvement is really driven by EMEA and Asia Pac rather than Americas?

[Hubertus Muehlhaeuser:]

No, no this is going to - look at Americas again, the Americas margin right now is distortion because of the Ferrichrome issue which we’re going to take care of. This is going to be recovered in the outer year with our price increase that we talked about no but we state firmly on what we want to do but as you also know and of course you have your models we have our models we are firmly on track for this year Q1 is always the weakest quarter in our industry. And so our models show that we are nicely progressing on our journey.

[Rich Sheffer:]

And Mig, this is Rich. Just to remind you, we called out the - little bit higher marketing and R&D/and new product development cost in Q1 those are America's costs. Again those were a bit frontloaded this year based on the reason we've already discussed. So as we move through the year, we won't be seeing those types of year-over-year pricing with frontloading of the cost as well as the price increase. We will see the improvements coming back to.

[Hubertus Muehlhaeuser:]

The outer years America is going to benefit over proportionately of course from the rightsizing niches that we've taken. We've done a lot there with some more to come obviously, but we've done a lot there and we're going to harvest the benefits of that in the outer quarters now.

[Mig Dobre:]

Okay. That's understood and then somebody already tried to get at this, but we're basically trying to figure out how sustainable the trends, the topline trends from the road -- from the first quarter really are in EMEA and Asia Pac as we look at the rest of the year, I guess in EMEA the my sense is that your growth there has really been a factor of product introduction and rollouts and I don't know whether or not, for instance the second or third quarter can continue at a pace that's similar to what we've seen in the first. And then Asia Pac I get it that's it's macro driven, perhaps you don't have visibility to really comment there but your thoughts in terms of sustainability again would be appreciated.

[Hubertus Muehlhaeuser:]

Well it's couple of things and Rich has also some comments here to make in a second. I guess we don't want to change our sales guidance at this point in time because we first want to wait for our four plus eight, but obviously we're going right through the books and basically look how sustainable it is and whether we have to up our guidance or we stick with our guidance. And you must give us this quarter to basically make that analysis and we come back in summer and we're going to tell you, but at this point in time our guidance stays fair where it is. We feel very confident that we're going to be within that guidance ranges for both sales and profitability and if something changes, we will let you know in Q2, but right now we don't see any need to change something.

[Rich Sheffer:]

So Mig, just to remind you, we don't give segment guidance. We only give full corporate guidance. So I don't think we want to start giving segment guidance on this call. Yes…

[Mig Dobre:]

Rich, I am not asking you for guidance. I am just asking you for color and I was hoping that you would be able to comment to that, but my last question really would be on your clarification on your savings, you mentioned $10 million in the first quarter, I think the full-year number that you were aiming for this year, correct me if I'm wrong, was somewhere around $30 million. So should we expect an incremental $20 million versus the front -- versus 1Q to be layered on as the year progresses, any update there will be helpful.

[Rich Sheffer:]

Mig, the only comment we made last quarter about our savings initiatives relates to that program we had announced in 2015 and yes we have the remainder of that to get this year and we'll fully get that, but we're not actually intentionally not commenting on that anymore because there has been new initiatives that weren’t part of that 100 that have come into simplification and rightsizing. So I think there's an opportunity to think about it a bit differently.

[Haresh Shah:]

And I think what we will do Mig as we did early today is as qualitative because as now the lines start blurring where it's hard to identify pieces and we don't want to keep tracking that portion of it. So we will get qualitative, but we feel -- again we feel comfortable with the guidance and we will accomplish what we said we're going to do.

[Hubertus Muehlhaeuser:]

Yes and the guidance is 18.5% to 20% of EBITDA and if you make the math, you need a bit more than the $30 million I guess in order to get there.

[Mig Dobre:]

All right. Thank you.

[Operator:]

And your next question comes from line of James Picariello with KeyBanc Capital Markets. Your line is open.

[James Picariello:]

Just a quick question on capital allocations, you're obviously committed to using your U.S. free cash flow to pay down the $120 million debt this year, but you do have this growing foreign cash balance. So just wondering what your plans for that in terms of M&A both on M&A, how does the pipeline look there and what your thoughts on timing regarding that, thanks.

[Hubertus Muehlhaeuser:]

Let me take it. I think we told already last year that that's smaller definitely on our fan and we're looking in the international markets for targets and I think as you know M&A is even more difficult to predict than sales and it needs two to dance and the price need to be right, but we feel very confident that a part of our outside of the U.S. cash in part will be spent on smaller tuck-ins and it most likely is going to be in the EMEA region. But I think you understand and also for competition reasons, because we don't want to disclose further on that one, but we have a team set up and we're making very nice progress there.

[James Picariello:]

Thanks guys.

[Operator:]

And I see no further questions over the phone. I’ll turn the call back over to Rich Sheffer for closing remarks.

[Rich Sheffer:]

Thanks Tushan. As Hubertus had previously mentioned, we'd like to invite investors to visit our booth at the National Restaurant Association show at the McCormick Center in Chicago on May 22 and 23. Please call me at 727-853-3079 or email me at [e-mail] to arrange a time to meet us and to have a tour of our booth. This concludes today's 2017 first quarter earnings call. Thanks again for joining us this morning and have a great day.

[Operator:]

And this concludes today's conference call. You may now disconnect.