Welbilt, Inc.
Q3 2017 Earnings Call Transcript

Published: 6 Nov 2017

[Operator:]

Good morning. My name is Matthew, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Welbilt’s Third Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. Rich Sheffer, you may begin your conference.

[Richard Sheffer:]

Thanks, Matthew. Good morning, and welcome to Welbilt’s 2017 Third Quarter Earnings Call and Webcast. Joining me on the call today is Hubertus Muehlhaeuser, our President and Chief Executive Officer; Haresh Shah, our 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 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 the last five pages of our earnings release for our non-GAAP reconciliations, and other important information regarding the use of non-GAAP financial measures. You can find a copy of the press release and the presentation slides for this earnings call in the Investor Relations section of our Web site, www.welbilt.com. Now, I’d like to turn the call over to Hubertus.

[Hubertus Muehlhaeuser:]

Thanks, Rich and good morning everybody. We’re pleased to be speaking with you about another very solid quarter. As you saw in our press release this morning and you can also see this on slide number three of our earnings call presentation, we had a small organic sales decline of 0.9% with continued strong growth in EMEA and APAC being offset by softness in the Americas. Our Simplification and Right-Sizing initiatives, positive net pricing and lower SG&A expense levels more than offset headwinds from lower volume in the Americas and some ongoing material cost inflation, resulting in a 21.4% adjusted operating EBITDA margin. This is a 150 basis point improvement over last year’s third quarter and 350 basis points sequential equipment versus Q2. These operational improvements drove 16% increase in adjusted net earnings and 15% increase in adjusted diluted net earnings per share. Moving on to slide four. This was also the 9th consecutive quarter of year-over-year adjusted operating EBITDA margin improvement since the new management team took over in August of 2015, and the highest level achieved during this period. As you can see on slide number five, our year-to-date organic net sales have increased 1.7%. Our adjusted operating EBITDA margin has increased 100 basis points. Our adjusted net earnings have increased 14%, and our adjusted diluted net earnings per share have increased 13%. Even though this remains a short-cycle business that doesn’t have much visibility or backlog beyond a few weeks, our nine month results and improved positioning with our general market and large-chain customers, provide the confidence to maintain our organic net sales guidance because we had anticipated the softening of the market in Q3, as well as Q4, when we updated our organic net sales guidance in August. Also, we have chosen not to participate in highly discounted project in this softer market. We are very encouraged with the margin improvement we have achieved so far this year, led by continued success from our Simplification and Right-Sizing initiatives. And with our third quarter performance, we expect our full year adjusted operating EBITDA margin to be, I would say, comfortably within our guidance range. This achievement will also have us approximately half-way through our 1,000 basis point margin improvement journey and the two-years since we launched it in 2015. We continue to see this as a multi-year journey, mostly likely five to six years in total, and we continue to see no structure impairments to our ability to bring our adjusted operating EBITDA margins to the mid to the high 20% range. Moving to slide six, I will make a few comments on our top-line results. Starting with the EMEA segment, we had strong organic net sales growth of 9.9% this quarter, led by Merrychef, eikon e2s high-speed ovens, our new Garland’s XPress clamshell growth and our European beverage systems. KitchenCare sales also contributed to growth in EMEA in the quarter. These increases more than offset the headwind from lost sales due to 80/20 product line simplification. And in the APAC segment, we also had strong organic net sales growth of 8%, primarily driven by higher KitchenCare aftermarket part sales. In the Americas segment, softer market conditions led to lower sales of hot-side products and KitchenCare aftermarket products. On top of this, we have chosen not to participate in highly discounted project as we’ve previously mentioned. Looking at slide number seven, the National Restaurant Association reported that restaurant growth rates slowed each month throughout the quarter. NRA's restaurant current situation index dropped to 100 in August, and 99.9 in September, indicating a slight contraction. The expectation index for forecasted conditions fell below 101 in July, and continued declining in August before rebounding in September to 101.6, which indicates that restaurant owners and operators became more optimistic about conditions over the next six months. Both NRA and Technomic continue to call for the food service industry to grow between 1% and 2% in 2017, which is consistent with their prior forecast that were slightly lowered last quarter. Despite this short term contraction of the market, we believe that we are very well positioned to outgrow the market next year, which I'll delve into after Haresh's comment. Haresh?

[Haresh Shah:]

Thanks, Hubertus and good morning everyone. Our simplification and right-sizing initiatives generated $10 million of savings in the quarter and $31 million year-to-date. As you can see on slide eight, our simplification and right sizing initiatives are comprises seven categories. Within simplification, we include 80/20, lean manufacturing, strategic sourcing, product cost and platforms and kitchen care improvements. Within rightsizing, we include manufacturing capacity reductions and headcount reductions. 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 continue to see significant runway remaining to enable the completion of our 1,000 basis points margin journey. Within simplification, we are still in the early stages of lean manufacturing and strategic sourcing initiatives. We are near the midpoint of the product line simplification of 80/20 and on product costs and platforms, and are in the later stages of KitchenCare improvements and the customer line simplification component of 80/20. In rightsizing, we are in the later stages for both manufacturing capacity and headcount reductions, having already completed 75% of our targeted capacity reductions. A couple of comments on two of our simplification and rightsizing initiatives. Within simplification, we are continuing to make good progress with implementation of 80/20. We upped our efforts on product line simplification this quarter and realized additional savings from these actions. During the quarter, we pruned approximately 42% of our equipment SKUs, bringing our total reduction to 57% year-to-date. Admittedly, much of this large percentage came from cutting away the long tail of slow to non-moving SKUs. These cuts are important as they advance us further on our lean journey by reducing the complexity in our infrastructure, processes and the tooling in our plants. Since we began the initiative, we have reduced those gross SKUs by 65% or 54% net of new product introductions. Within rightsizing, we had additional headcount reductions related to our rebranding and product line consolidation that was announced earlier this year. This impacted approximately 80 people throughout our organization in late August. While we continue to see that much of the heavy-lifting from our rightsizing initiatives are completed, we expect to pursue smaller actions and projects as we implement additional strategies to streamline our business. Reviewing our third quarter adjusted operating EBITDA margin drivers on slide nine. Our simplification and rightsizing initiatives have positive 300 basis point impact, while net pricing contributed 100 basis points of margin growth. Lower SG&A expenses in the quarter contributed 90 basis points and foreign currency translation had a positive 30 basis point impact. These positive contributors to margin in Q3 were partially offset by a few factors. First, we had 220 basis point headwind from lower volumes, primarily in the Americas segment. We also had a 110 basis point of material cost increases in the quarter. Ferrochrome moderated in the quarter, but is still higher than a year ago. Our June price increase helped to mitigate the impact of the EBITDA markets. We also saw higher prices in a number of other purchase categories. While we had several commodities up to 80% of our forecasted exposures, not all categories of purchase materials are hedgeable. We will continue to pursue hedging strategies as a primary tool to offset rising commodity cost, but would also look to offset rising cost through savings from our simplification and right sizing initiatives and pricing when necessary. One additional comment on SG&A. Our expense level for the third quarter will not repeat in the fourth quarter. We expect our normal SG&A run-rate to be in low $70 million range. During the third quarter, we updated our healthcare cost projections based on current trends and higher capitalized development costs and vendor settlements. Moving to slide 10. Our free cash flow was $59 million this quarter, which is an increase of 32% compared to last year’s third quarter. Cash increased by $26 million in the third quarter and debt decreased by $38 million. As a reminder, nearly all of our cash is outside of the U.S., while nearly all of our debt is in the U.S. Interest expense was $21.7 million in the third quarter compared to $25 million last year. The decrease reflects our success in reducing our debt since last year, and a benefit from the successful reprising of our Term Loan B in March and again in September. Year-to-date, we have reduced our borrowing rates on Term Loan B by 200 basis points. Finally on slide 11. We have reaffirmed our guidance for organic net sales growth, adjusted operating EBITDA margin and adjusted diluted net earnings per share. We have slightly decreased our effective tax rate guidance for the year to be between 21% and 24%, reflecting our forecasted mix of earnings being more weighted towards international versus the U.S. This mix shift is also impacting our forecast for debt reduction as only U.S. free cash flow can be used for debt repayment. While our total free cash flow has increased 26% year-to-date over last year as we expected the shift towards international versus our prior expectations and a settlement of some intercompany obligations have led us to reduce our debt reduction expectations to now be between $45 million and $65 million. Even with this lower debt reduction, we forecast to remain compliance with our debt covenant for the balance of this year and next year. That concludes my comments. I will turn the call back over to Hubertus.

[Hubertus Muehlhaeuser:]

Thanks, Haresh. We’re continuing to generate customer interest in our fitKitchen system concept. We have more than a dozen customers who are engaged in fitKitchen projects to address either specific process flow issues in their kitchen or the setup of their entire kitchen through equipment selection, connectivity and automation. We are uniquely positioned to help serve our customer system needs as we are the only commercial food service equipment manufacturer that have a full product suite of hot, cold and beverage equipment with an internal organization structure to efficiently and effectively and roof their entire operation. This is why both existing and new customers are approaching us for help in solving their issues. As you know, we see fitKitchen as a long-term enabler of additional equipment sales across all of our product lines as the systems approach to kitchen design becomes increasingly demanding. During the quarter, we won a large program with Taco Bell, for the subsystem of our Frymaster low oil volume fryers and our Delfield single door freezers. Taco Bell values the technical capabilities of the equipment that will help reduce their operating cost and improve their product quality while keeping future menu flexibility in mind. Being able to successfully bundle and connect our product solutions in a meaningful way to include improvements within our digital touchscreen and user interface where key factors and being selected as a partner for these product categories. This win should be additive to revenues in 2018 as we’re replacing their previous supplier for their fryers. We also expect many of the other fitKitchen programs that we won during the last five quarters to begin generating revenue in 2018 and '19. This firmly supports our goal of outgrowing our end markets by 100 to 200 basis points beginning in 2018. As a matter of fact, our 1.7% organic net sales growth year-to-date in a flattish market environment is consistent with the recognition we’ve received from third-party industry experts. In October, we won six best in class awards from Food Equipment & Supplies magazine, including our Lincoln Impinger Ovens, our Clifton steamers, kettles braising pans and skillets and our Delfield undercounters and our Manitowoc ice machines one there is a word for an impressive 17 years in a row, plus we won 14 more awards from other recognized industry organizations so far this year. Our customer wins and product awards demonstrate the value proposition that only Welbilt can deliver. When a customer wants the best individual grill or the best individual prior or the best individual ice machine or oven or walk-in, they come to Welbilt. When a customer wants the best grill and the best fryer and ice machine, because they want to take advantage of common operation logic, connectivity and data analytics, they also come to Welbilt. We have position to provide the best individual clients and can arrange them into an intelligent system that provides superior operating benefits. So when a large chain customer wants the operating benefits of a system approach, they choose Welbilt. And when a customer wants the very best individual clients and brand, they also choose Welbilt. That is why we’re winning today and we’ll continue to win in the future. Shifting gears, I’d like to make a couple of comments regarding the leadership changes we announced also this morning. First, we announced that Andreas Weishaar, who joined us in February of 2016 will be leading our digital strategy and IT efforts in addition to a strategy, M&A and marketing responsibilities. Embedding our digital strategy into our overall corporate product line and M&A strategies demonstrates the importance we are placing on the growing role that connectivity have in our company and industry, and will help us to stay at forefront of this development that will change the pace of our industry. Second, we announced the hiring of our new Chief Human Officer, Diana Sacchi to take over HR from Andreas. Diana brings with her a strong record of human resource leadership experience from companies such as LG, Avon and Bristol-Myers Squibb. She has experience in leading International HR Organizations, developing and implementing employee initiatives and establishing diversity and inclusion based cultures. Interestingly, Diana lived and worked in Europe, Asia and the Americas and she is fluent in Spanish and Italian which will make her a valuable partner as we continue to build and expand our business outside of the U.S. To wrap up our prepared comments, I will update the progress on our 2017 priorities that we previously shared with you. First, we committed to continuing our Simplification and Right-Sizing agenda. The $31 million of saving we delivered in the first nine months of 2017 has us solidly on track to achieve our projected full year margin target and position us well to complete our 1000 basis point margin journey in the next three to four years. Second, we're committed to continuing our de-levering journey by using all available U.S. cash for debt reduction. We have paid down $70 million of debt the last two quarters, following a larger than normal seasonal debt increase in the first quarter. While we have reduced our full year debt reduction forecast due to the reasons that Haresh discussed earlier, we foresee no debt covenant issues and remain committed to deploying all of our U.S. free cash flow to debt reduction. Third, we committed to continuing to bring innovations to the table. Refreshing our product lines and driving system solutions in the kitchen. We have completed most of our planned 30 new product introductions and upgrades for 2017. We are focusing our spending on product, platforms digital and equipment connectivity, automation and energy efficiency. A great example of this is the acquisition of the technology rights around convection frying that we completed in October. This technology purchase holds great promise as the next big innovation for high volume frying applications. More to come for sure on that as we commercialize this technology. Last but not least, we have begun seeking smaller bolt-on acquisition event if desired target is available that fits both strategically and financially, we anticipate completing a deal over the next couple of quarters. The targets we’ll pursue with the commercial food service equipment and digital companies that would be complementary to our current business and that would either fit in a product gap, we having in the general market internationally, or would add a new piece to the portfolio globally, ut only within the realm of commercial food service solutions and very importantly, all the incorporation with our distribution partners. With that, I will turn it back to Rich.

[Richard Sheffer:]

Thank you. This concludes our prepared remarks. We will now open the call up for questions.

[Operator:]

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

[Mircea Dobre:]

If I may, I'd like to start with your debt reduction targets. Can you maybe give us some color going forward as to how you're thinking about the potential need to access cash from abroad in order to be in line with your covenants going forward? Is there enough cash generation in the U.S. to satisfy that? And it also sounds like your M&A ambitions maybe have ticked up a little bit. And it sounds like something could be imminent here. Is this a function of just your pipeline or channel coming through fruition, or should we read into this as incremental confidence in terms of business trends into ‘18?

[Hubertus Muehlhaeuser:]

So Haresh takes the first one on the debt, I take the M&A part.

[Haresh Shah:]

When we look at our covenants, you look at where we came out this quarter, 4.82 versus 5. We feel comfortable with where the forecast is and being in compliance for Q4 as well as in '18. So we don't -- without accessing cash, I agreement, without accessing cash. So I'll let Rich add any other comments to that.

[Richard Sheffer:]

So as you know, we discussed this before about wanting to use our cash debts outside the U.S. to fund our M&A agenda. We have not changed that view. Our forecast and remaining in compliance with the covenants is based on just the U.S. forecast of free cash flow. We don’t see, at this point, that we need to do any major repatriation to make that achievable.

[Mircea Dobre:]

I understand that at this point you don’t. But will you potentially have to do that in 2018 that’s my question.

[Richard Sheffer:]

We do not see the need to have to do that.

[Haresh Shah:]

We really don’t see that, Mic. And we were – we’re fully not cash generated in the U.S. that we can comfortably pay down what we anticipated. And to answer your question on the M&A side, you’re right. Yes, we spend a lot of efforts behind the scene and we’re preparing our company as well that if one or two or even three targets would come, we have the necessary post merger integration horsepower with us. This is also, by the way, the reason why Diana joined us as Chief Human Resource Officer with her very international background, also geared towards Europe and Asia. That is also the reason why we moved digital under Andreas who was already running the M&A agenda in the background. So whereas we can’t share anything at this point in time, but we feel pretty good that out of the many in our funnel right now, a couple of targets might come that fit also our financial objectives and that we can announce something in the next quarter.

[Mircea Dobre:]

Okay, I appreciate it. Then, I want to ask you a little bit about your guidance, your organic growth guidance you reiterated it. But we got a quarter left and the implied guidance in the fourth quarter is about a mile wide. I mean it’s anywhere between down 4.5% to up 6%. Can you help us narrow this and maybe set us up for how we should be thinking about next year given the way you’re going to be exiting ‘17?

[Haresh Shah:]

You’re referring sales right now or EBITDA, what it the…

[Mircea Dobre:]

Or core organic sales, that’s what I’m referring to…

[Haresh Shah:]

The organic sales shouldn’t be any surprise and it’s kind of plan. We said here in Q2 call with you guys and you pushed us -- you want to push us higher on our guidance and we said no, because we fully anticipated that the market is, I would call it, challenging in Q3 and Q4. And on top of that challenging Q3, we have -- we knew already that a couple of competitors are fishing bottom fishers for a couple of projects that we just don’t want to go. So we pardon a lot of sales in Q3 that we could have taken, but we didn’t like the margins. So we said as a premium brand, we don’t have to fish that business. And we have anticipated that. But for the full year, we feel very good that we are within that 0% to 3% organic net sales range as we have said. And yes, there have been remains challenges in Q4 but we feel very, very good that we’re going to manage that as we have done over the last quarters. And don’t forget that we really have started the first half of the year with the head start versus competition. We outgrew everybody, to be very honest and we’re still year-to-date ahead of most of our competitors, albeit some not have yet reported, I think, there is one more coming. So let’s see what they have to say. But we feel pretty good about it. And so therefore for this year, no changes to our organic net sales guidance. And then when we look into 2018 and if you look at NRA outlook and economic outlook, there is two scenarios possible; one is it might be a reply of 2017, so in the low one percentage range; and then we still -- we can outgrow the market by 100 basis points, 200 basis points. However, it might be that the market really takes off. I think it depends right now a little bit on the tax plan, nobody really knows whether this is approved or not. I could imagine that if it is approved and goes through then we’re going to have a demand spike, and then this could basically increase the market size. But I don’t want to speculate you on politics. We’re going to see it for the time being without any tax plan being approved by Congress. We see that 2017 is more replay -- 2018 more replay from 2017. However, very importantly, we will be ahead of the crowd by 100 to 20 basis points.

[Mircea Dobre:]

I appreciate the 2018 comments. And look, not to try to pen you down here, but the range that you have out there, 0% to 3%, is still very wide that’s what I was trying to get at. I’m trying to understand how you’re thinking about the fourth quarter, either sequentially. However, you want to frame it in that regard because we’re still dealing with a very wide range implied in the fourth quarter for growth?

[Hubertus Muehlhaeuser:]

Haresh, you want to say something to that…

[Haresh Shah:]

Mirc, it comes back to what we’ve talked about. There is low visibility. We’re seeing softness in the market as we say. And the key want to do is we want to make sure we walk away from business, if it’s a margin dilutive. So this has been a year about consistently delivering on our margin target. So that’s what we’re focused on. And if there is pressure on the top-line and pricing, we’ll walk-away and make sure we focus on the margins. So that’s why we are comfortable with the range.

[Hubertus Muehlhaeuser:]

Which is our strategy, in the first two years, and we have always said that because we said we prepare ourselves for a better industry growth for 2018 and we feel very confident that we did with all the fitKitchen wins that we have right now in the pocket. So we know exactly what we’re going to do in 2018 in terms of outgrowing the market. But 2017 our focus was, is and will remain also in Q4 on margin improvement and we still got something to do there, as you know. But we feel very, very good that we’re going to achieve that.

[Operator:]

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

[James Picariello:]

So just focusing on North America, you talked about walking away from some highly discounted projects? What’s going on there? Is that for both hot and cool equipment pretty broad based? And also you mentioned the Taco Bell project win. What does give you this confidence in terms of whether it’s project visibility or just CapEx indications from customers? Do you feel comfortable that next year you could still outgrow and deliver low to mid-single-digit growth? Thanks.

[Hubertus Muehlhaeuser:]

As I just said in my last remarks, we have won more than a dozen of fitKitchen system projects and we know when those rollout are going to appear in 2018, and that gives us confidence on the QSR side. And the confidence on the general market size is really in our new importance that we have with those customers. We have really reestablished to connections and then Josef and my-self we have been out in the street. We listen to them. We are fully supporting the dealership model in North America. I think this is valued very highly. And therefore we believe that we will be able with that help from the QSR side because we won all these projects and also supported by the general market partners that really see a new Welbilt here with a lot of energy and a lot of trust on both sides. That will basically drive the 100 to 200 basis points. And I guess you made a couple of channel checks in the last quarters and those are published now. And I think those seem to confirm that.

[James Picariello:]

And the discounted projects in the quarter that you walked away from, were those both in hot and cold equipment or predominantly focused in hot?

[Hubertus Muehlhaeuser:]

That’s predominantly on hot. And honestly, this is nothing to worry about it. It's not a structural thing it's kind of from in the industry. I mean, some of us are only in the industry now for nine quarters, but it seems that always in Q3, some people go crazy. And there are a couple of projects that you just walk away. We don't assume that this will happen in Q4 and this is not across the board, but it happened in Q3. And we decided not to participate in that and still year-to-date outgrow the industry. And we've taken little of softness in the top-line here, but we're very proud and very happy with our bottom line. And I'd also like to reiterate that if you look at it structurally, I mean, this year we’ve been in the U.S. a bit down on the hot side and on kitchen care, which is of course higher margin than cold. And yes we are doing 21.4% of EBITDA margin so that's quite outstanding and that also makes us confident that we have no structural impediments, as we have said, to moving into these mid to high EBITDA margins that we are envisioning to be between 25% and 27%.

[James Picariello:]

And then Haresh made the comment about SG&A normalizing in the low-70s for the fourth quarter. I think you mentioned on a webcast event recently that we'll see a sequential margin ramp through the second half. Third quarter profitability was pretty strong. Do you still expect the fourth quarter to be better than the third or has something changed?

[Haresh Shah:]

I think if we normalize, we do expect a strong fourth quarter. I'm not sure it will be stronger than Q3, but we expect to be strong enough where we'll be comfortably within our margin guidance. We did have a couple of items in SG&A. But as you look at our total run rates, you look at gross margin that we had in Q3 that was our highest gross margin. So we’ll continue to make progress and that's being driven by our initiatives on the simplification and rightsizing.

[Operator:]

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

[Larry De Maria:]

You mentioned support of the distribution model couple of times. Has there been any change in the market, given that your competitors -- when your principle competitors purchased company that does some distribution. So I am curious has there been any change there? And secondly, you've mentioned Taco Bell rollout. Can you give us some idea about the scale and scope and the timing of the rollout, because it actually sounds significant. Thank you.

[Hubertus Muehlhaeuser:]

On the first one, we don't want to talk about competitors and what they do and whom they buy and not buy. It's very important that you understand and our distribution partner understand that, that we firmly believe in the distribution model that we have independent and leaders and service partners, and so none of our future acquisitions is going to be in that area. And with that, I think there is another conference call and you can ask them what they have done there. And then on the second question on Taco Bell, it's a very important win for us but we want to share any numbers on that one. And we also don't want to share the sequence of the rollout. As some of it start now and goes well into 2018 and 2019. But it is significant. And we mentioned it here on the call and Taco Bell agreed to it that we can mention, because for us it's very important because it one more time confirms that the bundling and the connectivity between different product lines makes absolute sense. And that's really why where we also won that deal. Apart from having very, very strong single brand, it's really the combination that made us winning team there. And we're very, very happy with that. And obviously we’re replacing the incumbent and that makes us even more happy.

[Larry De Maria:]

As it relates to the first question, I was really trying to understand it. You’ve seen any change in the market, given what’s going on with some of the competitive dynamics and some of the changes occurring that you’re actually seeing any change in the markets. And then secondly, you mentioned softness in the market obviously we know that and you mentioned waiting on the tax plan. So there is some issues there. But do you think there is structural over-capacity in the industry, and is that an issue that could limit some of the market reacceleration into next year?

[Hubertus Muehlhaeuser:]

No. No, we definitely don’t see that. And I think the wait and see position as well in the general market right now with the tax plan and again as soon as this is approved or not approved, we’re going to have either a continuation of 2017 or we’re going to have an uptick. And the QSRs, we’ve been positive on the QSR since a couple of years now. And we just said, yes, they have been in the trough but they’re coming back, they’re coming back slowly but surely. And we see all these projects that they’re piling up. And so we feel very good about it. And with most of those projects, we are part of them. So that makes us feel positive. And then again coming back, zooming back on the change market dynamics, we don’t want to talk about market dynamics. But what we like is your dealer sentiment surveys that you do and I think you get a lot more and a lot more unbiased and objective views on how dealers think and do not think. So, I think you should do that and those report rather than listening to us, because it will always be biased and subjective to one side.

[Operator:]

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

[Walter Liptak:]

Good work on the cost reduction and 80-20. I wanted to ask about just a follow on the SG&A number, something that we’re seeing onetime things once you’re there a vendor settlement. And I wonder if you could help us understand what those were if you can quantify them for us?

[Haresh Shah:]

I don’t want to quantify the components Walt. But the vendor settlement was a onetime that will not repeat, but the other reductions were really, when we add them in, we do expect to be in the low 20s. So that’s what we want to guide to in the low 20s -- low 70s. We will be in the low 70s. And if you look at what we’ve said consistently, we were frontloading expenses in the first half of the year. So we’re seeing the benefit of that and we expected it to be a tailwind. So we feel good about it. We’ll be in the low 70s. So I think we should stay with that.

[Walter Liptak:]

And the 80% rightsizing that you did, what geographic region was that in? And you start accruing benefits from that in the fourth quarter?

[Haresh Shah:]

Yes, most of it was in the Americas. So we had a little bit small benefit in September and then we’ll see the full quarter impact in Q4, going forward.

[Hubertus Muehlhaeuser:]

And as we have said, Walt, most of the rightsizing is really behind us. But we of course always, when we move forward, we look always at the one or the other area where we might have some adaptions. And that one was leading to because we have realigned our product line organization, we have streamlined our product portfolio and there were some obvious things that we have to do.

[Walter Liptak:]

Yes, the product line simplifications really have been impressive, those were impressive numbers. Was there an impact on the top line from that or are these so small volumes that the ones taken out during the quarter that matter?

[Haresh Shah:]

I think they were immaterial. When we look at what these were, they were really as we said SKUs that we have not used a lot. We’ve talked about in the past some of the management changes we’ve made and it’s really the focus at the plant level, I’m getting rid of the excess SKUs. So I think it’s us catching up a little bit going from in our early stages and mid-stages now but the focus is there with the party managers.

[Hubertus Muehlhaeuser:]

And there’s still more to come. I mean, there is -- in the next one next cut that we’re going to do on the 80/20 side. We’ll have an impact on top-line. However, as we’ve said we sallow that. So our guidance that we give is always inclusive of that. So we will set that out.

[Walter Liptak:]

And if I can just switch gears and talk about some of the larger projects, larger restaurant chains and the timing of the fitKitchen projects. Do you anticipate that it’s going to be first half of 2018 where you start getting some of these projects that where you start getting the revenue benefits from it, or is it the back half? And then also by geographic region, when you talk about the growth rates for next year? Are you thinking Americas’ growth or is it worldwide, or you thinking continued strong growth out of Europe?

[Hubertus Muehlhaeuser:]

I mean, on the rollouts and with last QSRs, we don’t want to be more specific. And because one is that those QSRs don’t want us to be very specific about it and then therefore. So we know what we have and our guidance should include all of those different rollouts. But we know that they’re going to come. And then when it comes to our overall industry outlooks, obviously, when we talk entering into technologies, mainly Americas that we are focused on, Europe is very consistent with the Americas and Asia is continues to grow. And we grow nicely there because we grow A, with the QSRs that had, by the way in the last quarter, a very, very good quarter in international markets to QSRs and we grew with them, you see that. And we’re also starting to address the general market with our lower product cost right now because we have localized a lot of product, as you know. So Asia is going to continue to grow in 2018 a little bit more, we would say, than the America. But it can drive from quarter-to-quarter. So we also got to be clear here, because as you know, if you have rollout in Asia, for example in one quarter, and the next quarter you don’t have that you will see that in each of these. So don’t expect to continue them there. It will be variability from quarter-to-quarter and volatility.

[Walter Liptak:]

And if I could just ask one follow-up on the quarter, you guys didn’t mention anything about the hurricanes, but there is a lot of restaurants down in Southern Florida and in the Houston area. Did you see any disruptions from that or did they comeback any thoughts on that one?

[Hubertus Muehlhaeuser:]

We see disruptions. But I spend a lot of years in the ag industry and where numbers were better, it was always the weather and other like these excuses. We live here in Florida and when we have hurricanes and we got typhoons in Asia and we got other stuff other were, we got to manage with that stuff. And of course we had some pressure. But we found it cheap to talk about those pressures right now and justify lower sales. And of course, they added add little bit to it, but it’s not worth mentioning because -- I mean, this is what it is.

[Operator:]

Your next question comes from the line of Jon Fisher with Dougherty & Company. Your line is open.

[Jon Fisher:]

Just to follow-on on the strength in both EMEA and APAC this year. You had consistent strong outperformance in both of those regions. I’m just curious if you could describe it as slightly outperforming, generally a strong market in both of those regions or has most of your outperformance in both of those regions been primarily driven by market share wins?

[Hubertus Muehlhaeuser:]

I think, in Europe, it's definitely market share wins because Europe is not growing at the pace that we are growing. And that was also helped by a couple of very nice rollouts that we had, specifically around the Merrychef side and also on the beverage side. And I think in Asia we're growing with the market. We are little bit in a disadvantage because the general market of course is growing stronger than the QSR side. However, the QSRs have grown and we have grown nicely with them. And on the general market, we're growing into that. And so that is what it is. And as I said, I do not expect now every -- and as I said this last year and when we grew in Q4 of 2016, 30% in Europe then another 20%. Obviously, this was driven on the back of rollout. And sometimes those rollouts stop and then you have a quarter which is a bit weaker and then you have another quarter where you have again a rollout. But we feel good right now. And also to come back to Walt’s question there, I mean, we are in the rollout with a lot of QSRs right now. So this is what you're seeing there.

[Jon Fisher:]

And then to follow on when we look out to '18. Would you necessary except a deceleration in the absolute growth rate in both EMEA and APAC, because of some of the comments that you just made?

[Hubertus Muehlhaeuser:]

Honestly, let's talk about 2018 when we have our next conference call. Whatever we can tell you is we’re going to outgrow the market by 100 to 200 bps whatever that industry growth is that it's going projected because there is some variability in right now.

[Jon Fisher:]

And then did have a specific balance sheet question. Just the balances for both accounts receivables and accounts payable were lower than I expected. And just wondering if those were one offs for this quarter or if that those are the DSOs, DTOs types of ratios that we should expect you to be managing the balance sheet too?

[Richard Sheffer:]

John, this is Rich. There was nothing noteworthy in change in the metrics around ARAP this quarter. I think the metrics are fairly consistent. So I wouldn’t read anything into that, just the seasonal issue.

[Operator:]

And your next question comes from the line of Robert Aurand with Longbow Research. Your line is open.

[Robert Aurand:]

I wanted to go back, talking about the competitive environment and how you just thought people were getting kind of crazy in the third quarter. And that it wasn't anything structural. I guess, just the limited part of what we’ve seen in the fourth quarter so far. Are you seeing things get more rationale competitively, or are you seeing the continuation of that crazy discounting?

[Hubertus Muehlhaeuser:]

No, I mean again, sometimes my German English puts me into a strange English words. There has been some discounting, not crazy discounting. And we don't see this necessarily in the Q4 right now. However, if it happens on one or the other larger projects, we would walk away from those deals because we are not discounting. And as you know, the part of the problem with old Manitowoc was that there was like a rationale discounting going on in our company and we stopped that, because we do not have to discount because we have the premier brand. So there is nothing right now structurally ongoing that you should be concerned of. But as I also said, it seems in Q3 summer times come people have a lot of time, they come from Holiday and I don't know when they may do deal but sometime this is where discounting happens. But it's not something that we’ve seen driving into Q4 and into 2018, no.

[Robert Aurand:]

And then with the weaker high category, so you’re having unfavorable mix between the categories. But when you look with any to the categories, how you’re seeing customers trading up to premium products how you’re margin products favorable mix within the category is how do we think about that?

[Hubertus Muehlhaeuser:]

Well, I mean, overall hot was a bit a weaker in the Americas market across the board. And what we are seeing, as you know, I mean we are very, very happy with our Merrychef product and our Convotherm product, specifically. And if we look at Convotherm as a single category, I mean, we have been growing two digits, 20%, 30% in the last quarter year-to-date, where we’re in the mid 20s organic growth for Convotherm. And this is exactly what we have anticipated, because this is a premium product. And that is dealing competitors and it’s highly sort after by QSRs and general market alike. So that’s a great product with very nice margin for us and the same goes with the Merrychef, amazing product. And yes, we’re seeing that despite. So despite a slower overall hot market, we basically see that we’re gaining share in those areas.

[Operator:]

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

[Mircea Dobre:]

Just wanted to ask another margin question, if I look at EMEA this year, the performance there has been really impressive, the differential versus the Americas is essentially eliminated, Asia is the one geography that still trailing behind. And I’m wondering here, is there a structural reason as to why this business would be less profitable than -- rather why this geography would be less profitable. And as we think going forward is it fair to say that this is essentially your next big opportunity to maybe close this gap?

[Hubertus Muehlhaeuser:]

Well, on the gross margin side, we don’t see that. It is really the scale that we have. We have our [indiscernible] there in Asia and we want to grow there over proportionately. So we’re going to grow into those EBITDA margins that we want to have but same thing. There is no structural impediment why we should not be at same levels of profitability in Asia as we are in America and Europe. And in Europe, we said this already and we’re proving it right now that it works and Asia will follow.

[Mircea Dobre:]

Sure.

[Haresh Shah:]

I was -- just to confirm that what we’ve consistently said is when we grow in international, it’s always starting with the QSRs and EMEAs. The general market is coming there and now we’ll continue to focus on that. So we see that as the driver for our growth going forward and margins will come with that.

[Mircea Dobre:]

And I guess I’m trying to understand why, for instance, the pick-up in margin in EMEA has been quicker than Asia. Does it have to do with your customers, or does it have to do with specific initiatives that you implemented in one region sooner than the other?

[Hubertus Muehlhaeuser:]

I don’t think that we want to share those specifics. But what happen in Europe for sure this year is we had a couple of very nice rollouts, of course. And we talked about those rollouts with the Merrychef product, which is a hot product which is the hi-tech product. It’s a very nice margin product. And that has of course helped, okay and let's put it like that.

[Mircea Dobre:]

Then lastly, I don’t know if I missed this, but going back to your comments on the Taco Bell win, you mentioned connectivity. Can you maybe expand a little bit as to how that contributed to you winning this business?

[Hubertus Muehlhaeuser:]

I don’t want to go too much into detail, because we’re going to see are there any ways in two days at your conference and I’m happy that we can talk about there. But if you look at the low oil volume fryers, we have a very, very interesting display and connectivity to the cloud and also measuring and monitoring unit set up that really convinced Taco Bell that this is the way to grow. So it was the controls and it was the underlying software that is driving those controls that we convinced the customer apart from the other benefits that they see with our Frymaster brand.

[Operator:]

And our next question comes from the line of Jon Fisher with Dougherty & Company. Your line is open.

[Jon Fisher:]

And to follow-on on the Taco Bell question, when you talk about the Taco Bell win and other fitkitchen wins. Is that just domestic win or is that a global win? And in general with the fitkitchen QSR wins, is that for the global store base or is that usually specific to a region?

[Hubertus Muehlhaeuser:]

Depending what, if the QSR is a global QSR, it tends to be global. If the QSR is a regional QSR, it tends to be regional phenomena. But across the board of these 12 projects that we won most of them are global in nature, and they’re also rollout and timing specific. But it’s very unusual that you win something for in international QSR in the U.S. and it’s not rolled out internationally. So most of the time, it’s basically global rollouts. But of course, you then have to deliver of course. And so nothing is for guarantee nothing is forever you got to deliver, which we do.

[Operator:]

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

[Larry De Maria:]

Just wanted to follow-up, obviously, you talked about SG&A run rates and continuing the long-term margin journey from a high level, and 120 basis point market out growth. Can you give us some framework to think about the incremental margins for next year? Where we are based on obviously with the heavy lifting you guys have already done? And if we just put in perspective of a flattish market and 120 basis points market outgrowth to you guys. What kind of level should we be thinking about if we kind of tie it all together?

[Haresh Shah:]

When we talk about the drivers and there is Simplification and Right-Sizing, we’ve been very clear that regardless of the market, we don’t see impediment. So we don’t want to quantify what ’18 is going to look like yet. But we know with our continued focus, we’re still early and lean and strategic sourcing. So as we continue to execute on those, we’ll continue to improve our margins.

[Hubertus Muehlhaeuser:]

Yes, we’re still on the middle of our planning process, Larry. So we’ll promise that we will guide to higher margins and wherever this year ends. But we’re not going to get more specific than that at this point and start selling ranges, which shouldn’t be a surprise.

[Operator:]

There are no further questions, at this time. I’ll turn the call back over to Rich Sheffer.

[Richard Sheffer:]

Thanks. As a reminder, we will be at the Robert W. Baird Industrial Conference on Wednesday. We will webcast our fireside chat at 2.30 p.m. Eastern time. Please see our Investor Relations page at www.welbilt.com for details. This concludes today’s third 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.