Welbilt, Inc.
Q4 2017 Earnings Call Transcript

Published: 26 Feb 2018

[Operator:]

Good morning. My name is Jodi, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Welbilt 2017 Fourth Quarter Earnings Call and Webcast. [Operator Instructions] Thank you. Rich Sheffer, Vice President of Investor Relations and Treasurer, you may begin your conference.

[Richard Sheffer:]

Thanks Jodi. 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 website, 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 our successful conclusion of 2017. As you saw in our press release this morning, and can see on Slide 3 of our earnings call presentation, we delivered a 200 basis point adjusted operating EBITDA margin improvement over last year's fourth quarter despite a 3.7% decrease in organic net sales. The biggest driver of the organic sales decrease was volume driven by the $17.3 million decrease related to 80/20 customer line simplification or CLS. In 2017, we have entered a new phase of CLS. Our initial efforts around CLS focus on our pricing strategy which increase prices on nonstandard products, and reduce discounts for nonstrategic customers. This new phase of CLS is focused on pursuing sales and customer and all projects that meet our margin objectives and moving away from those that don't. This phase has been ongoing throughout 2017, and in the fourth quarter it impacted sales by 4.6% but it also supported our 200 basis point adjusted operating EBITDA margin improvement. We had lower interest expense compared to last year and now our tax expense was lower. Even after removing the 32 million benefit from the Tax Cuts and Jobs Act, the 200 basis point adjusted operating EBITDA margin improvement, lower interest expense and lower tax expense drove a 57% increase in adjusted net earnings and is 62.5% increase in adjusted diluted net earnings per share. Moving to Slide 4, this was also the 10th consecutive quarter of year-over-year adjusted operating EBITDA margin improvement since the new management team took over in August of 2015, as we continue our relentless pursuit of operational improvements in the business. Over the last two years, we have improved our adjusted operating EBITDA margin by 450 basis points. As you can see on Slide 5, our full-year organic net sales increased 0.3% despite a $52.1 million or 3.6% impact from the aforementioned CLS. Our adjusted operating EBITDA margin increased to 130 basis points, our adjusted net earnings increased 25%, and our adjusted diluted net earnings per share increased 24.2%. Moving to Slide 6, I will make a few comments on our topline results. Starting with the Americas segment, our organic net sales decreased 0.8%. The 80/20 CLS was focused on the Americas that impacted organic net sales by 6.6%. Even with the impact from CLS, we saw sales increases in both hot-side and KitchenCare products. Full-year organic net sales for the Americas segment decreased by 0.7%. In the EMEA segment, organic net sales decreased by 13.3% this quarter due to tough comps from last year's roll-out of our Merrychef eikon e2s high-speed ovens. However full-year organic net sales for the EMEA segment increased by 2.1%. In the APAC segment, organic net sales decreased by 7% primarily driven by last year's ramp-up in sales due to the recovery of large change in the regions which create a difficult comp. However, full-year organic net sales for the APAC segment increased by 4.6%. Looking at Slide 7, the National Restaurant Association reported that restaurant growth rates remain soft in October and November. Both months were below 100 on their scale before rebounding into the growth range in December. The expectation index for forecasted conditions increased each month during the quarter which indicates that restaurant owners and operators became more optimistic about conditions over the next six months. Industry sources are currently forecasting continued soft conditions during the first half of 2018 with some improvements in the second half. Haresh will discuss how this fits in within our initial 2018 guidance and after that I'll provide some comment on this morning's announcement of the Crem International acquisition. Haresh?

[Haresh Shah:]

Thanks Hubertus, and good morning everyone. Our implication and rightsizing initiatives generated $15 million of savings in the quarter and $46 million for the year. As you can see on Slide 8, our Simplification and Right- Sizing initiatives are comprised of seven categories. Within simplification, 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. 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 thousand basis point margin journey. Within simplification, we are still in the early stages to lean manufacturing and strategic sourcing initiatives. We are near the midpoint of the product line simplification of 80/20 and on product cost and platforms and are in a later stages of KitchenCare improvements, and the customer line simplification component of 80/20 as it relates to pricing. In rightsizing, we are the later stages for both manufacturing capacity and headcount reductions having already completed 75% of the capacity reductions we originally targeted. A couple of comments on the Simplification and Right- Sizing initiatives. Within simplification, we're continuing to make good progress with our implementation of 80/20. We continued our efforts on product lines amplification this quarter and realized additional savings from these actions. During the quarter, we pruned approximately 5% of our equipment SKUs bringing our total reduction to 62% for the year. Admittedly, much of this large percentage came from cutting away the long tail of slow to nonmoving 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 our gross SKUs by 68% or 56% net of new product introductions. Within rightsizing, we had additional headcount reductions in EMEA related to our rebranding and product line consolidation that was announced in early 2017. While we continue to see that much of the heavy lifting from our rightsizing initiatives has been completed, we expect to pursue smaller actions and projects as we implement additional strategies to streamline our business. Reviewing our fourth quarter adjusted operating EBITDA margin drivers on Slide nine. Our Simplification and Right- Sizing initiatives had a positive 630 basis point impact. Lower SG&A expenses in the quarter contributed 310 basis points and foreign currency translation had a positive 100 basis point impact. Material cost inflation is notable in that the headwind we faced during the first three quarters of this year finally abated in the fourth quarter. These positive contributors to margin in Q4 will partially offset by the 720 basis headwind from lower volume and mix. One additional comment on SG&A. The fourth quarter expense level was below our expectations as the plant frontloaded spending for R&D and marketing from early this year came back down to meet our full-year expectations for those items. We also reduced incentive compensation expense due to the decrease in fourth quarter sales. Looking at Slide 10, we recognized a net tax rate benefit of 26.9% for the full year as our estimated impact from the recently enacted Tax Cut and Jobs Act in the U.S. This included a 38.3% benefit from the revaluation of our deferred tax assets and liabilities to the new 21% tax rate partially offset by an 11.4% impact from deemed repatriation. The actual impact may differ from this estimate due to changes in interpretations and assumptions we made, new or additional guidance that may be issued and actions we may take as a result of this new law. In particular, in light of the tax legislation, we're still evaluating whether we will repatriate foreign cash despite already accruing total charge. Our comp position continues to be that our foreign cash is permanently reinvested in our international subsidiaries. As Hubertus will discuss in a few minutes, some of our foreign cash is expected to be used to fund acquisitions that occur outside of the U.S. If we decided that it's in our best interest to actually repatriate foreign cash for use in U.S. rather than consider a permanently reinvested in our international subsidiaries, we would begin to accrue withholding taxes that we need to be paid in order to complete the repatriation. In addition to the $32 million net tax benefit from the tax law change in the fourth quarter, we also recognize other discrete tax benefit of approximately $9 million primarily related to state taxes and R&D credits. Moving to Slide 11, our free cash flow was $61.4 million this quarter which is a decrease of 6.1% compared to last year's fourth quarter. For the full-year, our free cash flow increased by 6.6% to $117.1 million. Our total cash balance was unchanged in the quarter while debt decreased by $59 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 million in the fourth quarter compared to $24.7 million last year. The decrease reflects our success in reducing our debt since last year and a benefit from the successful repricing of our term loan B in March and again in September. As many of you have noticed, we amended our senior secured credit agreement earlier this month to reset our leverage covenants back to five in the quarter times through Q2 of this year, before it begin to tighten again by a quarter turn per quarter until we just four times at the end of Q3 2019. We did this to provide the flexibility to pursue growth investments this year. Both CapEx and for acquisitions as today's announcement of Crem International demonstrates. We remain committed to using our U.S. free cash flow for debt repayment in 2018. We expect CapEx to increase approximately $40 million in 2018. We expect 35% to 40% of this to be targeted towards new product introductions and our digital strategy. Approximately 10% to 15% of total will be spent on investing in our customer and innovation center in Tampa and is primarily focused on creating more labs and test kitchen to supports our customers. Another 15% of total will be spent an IP projects and the balance will be dedicated to maintenance CapEx. Finally on Slide 12, we have provided our initial 2018 guidance for organic net sales growth, adjusted operating EBITDA margin, and adjusted diluted net earnings per share and the assumptions behind each item. I'd like to make a couple of comments on these items. First, our organic net sales range is 1% to 4%. The soft conditions in the general market we experienced in the second half of 2017 are expected to continue through the first half of 2018, and then stabilize in the second half of the year. We expect to see improved demand from our large chain customers as they continue to recover and we expect to benefit from several new product rollouts with them. In addition many of our fitKitchen system projects we have won over the last two years will begin their initial rollouts in 2018. Typically initial rollouts focus on a small number of stores so that customer can focus on getting the installations complete and the operation stabilize to ensure everything is proceeding as expected before moving to succeeding ways of roll out. The initial roll-outs are beginning during the first half of 2018 and we anticipate moving on to the new waves during the second half the year. We also see continued strong demand for new fitKitchen projects, and we anticipate this continuing the positive sales momentum well into 2019. We won't be reporting fitKitchen as a separate revenue category but it will be evident in the growth numbers we report for equipment sales. Within our adjusted operating EBITDA margin range of 19.5% to 21%, we expect Simplification and Right- Sizing initiatives to contribute another 200 to 300 basis points of margin improvement. We plan to make some SG&A investments mainly focused around on building out our digital strategy for kitchen connect and common user interfaces. We also expect in an increase in incentive compensation expense back to target levels and for some other general inflationary increase. This leaves us to our adjusted diluted EPS guidance range of $0.80 to $0.90 per share. This range assumes $141.6 million fully diluted shares outstanding and a 24% to 26% effective tax rate. It also includes a $0.02 benefit from the Crem International acquisition inclusive of integration costs. 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 added six customers in the quarter and are now at 18 key customers who are engaged in fitKitchen projects to address either specific process flow issues in their kitchens or the setup of the entire kitchen through equipment selection connectivity and automation. We are uniquely positioned to help serve our customers system needs as we are the only commercial food service equipment manufacturer that has a full product suite of hot, cold and beverage equipment with an internal organization structure to efficiently and effectively improve their entire operation. The budget investments in our technology and customer center here in Tampa that Haresh mentioned in his comments are reflective of these project wins and will help us to strengthen our leadership position for automation and connectivity in professional kitchen. Moving to Slide 13, today we also announced in addition to our product portfolio that will complement our full solution offerings which is hot coffee through our acquisition of Crem International. Crem is headquartered in Sweden, and is unique in the fast-growing hot coffee space and that has a full-line of coffee machines, manual and automatic filter coffee machines, manual and automatic espresso machines, instant and liquid coffee freestanding machines, and a full aftermarket offering. With the addition of Crem, Welbilt will have the broadest line of hot and cold beverage equipment in the global market. Crem is strong in Europe and China and will broaden our customer reach in those regions but will also provide very interesting cross-selling opportunities for us. Crem currently has a small presence in the U.S. market but we see that with our North American industry contacts and distribution partners, their products will translate very well here given their superior technology to some of the incumbents and their clean Europe designs. In 2017, Crem had sales of approximately US$19 million equivalent with margins slightly below ours. On Slide 14, we summarized the transaction details. The total consideration for the acquisition is approximately SEK1.8 billion or around US$2 to US$4 million equivalent that we will fund through cash on hand and existing credit lines. We expect the closing to occur in early Q2 of 2018 subject to certain closing conditions. This is a highly strategic acquisition for Welbilt given that we had a gap in our hot beverage offering. Crem fills that global gap in our product portfolio. Coffee is one of the fastest-growing categories in the beverage segment. Crem establishes the platform for new product line for Welbilt. Crem is complete range of professional coffee equipment, and unique dispensing technologies combined with our wide range of cold beverage equipment will give Welbilt the broadest and most complete portfolio beverage equipment in the global industry. We see significant cross-selling opportunities due to the complementary customer bases of each company. Both Crem and Welbilt will benefit from access to the others customers and there is very little overlap. Operationally we see opportunities to leverage each company's strengths in digital technology, systems, user interfaces as well as bring Welbilt's new product introduction process and the Welbilt production system to Crem. Further, Crem has a very strong and energetic management team in place to drive these growth and operational improvements. To leveraging these strengths, we expect to achieve run rate synergies of approximately $10 million by 2020 and expect the acquisition to be EPS accretive beginning later in 2018 inclusive of integration costs. We expect the acquisition to achieve a return on invested capital in excess of Welbilt's weighted average cost of capital by 2021. With the successful acquisition of Crem, we are reentering the M&A arena and will be a participant in the ongoing consolidation of the still fragmented commercial food service equipment market. We will continue to target bolt-on acquisitions that fill in product gaps that we might have regionally, add new product categories that we're not in today or add specific product technologies that we can commercialize. Our M&A pipeline remains full and we will continue to pursue deals that fit our target strategies and of course fit financially. In summary, we are very excited about 2018's prospects for growth. Organically, with improved demand from our last chain customers, the initial roll-outs of our fitKitchen systems and from improved conditions in the general market in the second half of the year. These drivers will help us outgrow the industry in 2018 and position us to continue to do so going forward. We're also very excited about our growth prospects from the Crem acquisitions and others that maybe executed this year. 2018 will also be year 3, on our 1000 basis point margin journey as we expect to be more than halfway to our goals by the end of the year to the continued laser focus on executing our Simplification and Right- Sizing initiatives. These successes will provide the cash to continue improving our capital structure and shareholder returns. With that, I'll turn it back to Rich.

[Richard Sheffer:]

Jodi, this concludes our prepared remarks. We will now open the call up for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Robert Barry of Susquehanna. Your line is open.

[Robert Barry:]

I guess I just wanted to understand first what the expected outlook was for sales. It sounds like you expected to be down in the first half is that right at about similar to the rate you saw it down in the back half.

[Hubertus Muehlhaeuser:]

No, you mean for 2018 the outook Rob?

[Robert Barry:]

Yes, for 2018.

[Hubertus Muehlhaeuser:]

No, we don't expect to be down. Actually we are very, very pleased with the strengths that we see where the large SKUs are. And as we have said, our roll-outs are now - under roll-outs and so it's not a wish it’s a reality. The fitKitchen projects are starting to rollout and we were referring to still soft conditions in the general market and those to improve in the second half. So we definitely don't think that we’re going to be down in the first two quarters of 2018.

[Robert Barry:]

So your sales you expect will be up in all the quarters, but it sounds like more so in the back half of 2018, is that the right interpretation?

[Hubertus Muehlhaeuser:]

We don't give quarterly guidance as you know. I mean I think we gave our guidance range from 1 to 4 organic and that's playing out pretty evenly over the year.

[Robert Barry:]

And then I wanted to understand better what was driving that SG&A investment up. Can you maybe decompose that bucket a little bit, there are couple points of headwind. And did you also imply in the prepared remarks that there was maybe some SG&A spending you had planned for 4Q that got pushed into 2018?

[Haresh Shah:]

So let me clarify Rob this Haresh a couple of points. The Q4 spending there what we implied there was we had frontloaded R&D and marketing expense in the first half of the year. And since Q3 we've been talking about us having a lower run rate to get to our expected SG&A targets for those areas for the year. So, I think that’s what our comment was referring to. As far as our investments in 2018, they are focused on our digital strategy, as well as calming control. So a few areas that we continue to focus on that's what will drive it going into 2018.

[Robert Barry:]

And maybe just finally on prices, so that was negative in the quarter. I thought you had been implementing pricing during the year looks like you expected to be on average a point in 2018, was that a comp issue or how should we expect pricing to cadence going forward here?

[Richard Sheffer:]

The undertone in the market was still especially in general market, it's a tough pricing market out there right now. As we called out there were a lot of sales that we chose not to pursue as we identified as part of our 80/20 customer line simplification. But we did accept a number of sales that came with - higher levels of discounts then we generally would like and that's just a fact in a soft general market. What we see, we have our 2018 price increases already implemented. Those go in at various times through the fourth quarter. So we’re starting the year off at a good place from a pricing standpoint. So I think that kind of explains where we’re at from a pricing standpoint.

[Robert Barry:]

Did that dynamic at worse I know it came up last quarter it sounded more like a one-off, would you say the pricing competitive pressures is worsening?

[Hubertus Muehlhaeuser:]

No, what we said it’s CLS - I mean we want to also back off from perhaps the aggressive language around the discounting. What it really is, all our competitive have different cost structures and we for us just set the bar you know what is the threshold for margin. And therefore we basically take the liberty to move away from that business. And it was a lot and it was 52 million not tremendous - I mean not catastrophic but what it was pronounced. And we basically forecast for this year within our guidance range a good portion of that CLS as well, but our guidance range is of course net of that. So we’re going to weather that.

[Josef Matosevic:]

And we’ve been very clear throughout 2017 our focus was on margins so that aligns with the 80/20 CLS.

[Operator:]

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

[Mircea Dobre:]

Just want to talk a little bit about the CLS 80/20, my recollection is that you said in the past this is a drag, but this is not a material drag based on the numbers you disclosed here, it looks to me like it's very material. We’re talking something like north of 5% in the fourth quarter for the full year north of 4%, I mean these are big numbers. So I'm trying to understand how you're thinking about materiality first and foremost and then if CLS has been different in 2017 then maybe the way I've heard it characterize in the past?

[Hubertus Muehlhaeuser:]

Well I mean let me start off telling you that we have spelled it out in all the calls last year. And you might remember that we were up three points something in the second half - in the first half of 2017. And we have not increased our sales guidance so we were up 3.6% and we left our guidance range with 0% to 3% because we saw that we’re going to have some of that customer line simplification for some moving away from project happening in the second half. So we did spell it out. We did not spell out in terms of absolute dollar amount, but we spell out in our guidance and that was exactly the reason why we have not increased our guidance last year. So if you look at 2018 now, I think our cost structures have first and foremost improved. So, some of that business that might have been not as profitable last year will be more profitable this year because of our improved cost structures. And then secondly as I told - Rob just a couple of minutes ago, in our 1% to 4% organic net sales guidance we have baked in a good chunk of walking away from projects. So this is going to be part of our ongoing journey because as we have said all along, we do not want to sign up for business that is not profitable for our shareholders in our company.

[Richard Sheffer:]

So Mig this is Rich just to expound on Hubertus' response, yes, I think over the prior two years we talked a lot about CLS as a pricing action. We're now taking CLS to the next level which is proactively walking away from sales and need be customers that don't meet our profit objectives. So early on it was increasing prices, limiting discounts to nonstrategic customers, that's how we were really looking at CLs initially. Now it's moved to the next phase which is really - walking away from stuff that we don't want to take at - those margins.

[Mircea Dobre:]

Just that I make sure that I understand this. So when you are saying that the impact from CLS is $52 million, am I to understand that in 2016 you had $52 million of revenue that in 2017 you walked away from as in product that you already shutdown or is it that the 52 million are potential contracts that you could have gotten in 2017 and you simply said no I'm not interested.

[Hubertus Muehlhaeuser:]

It is the latter one, I mean we have it very clearly because as we told you we have a lot of discipline here in the company since we have taken over here. And we did really ask our sales people to bring us deals that don't meet our benchmark. And so we have dropped purchase orders adding up to exactly $52 million so we know exactly which customer, which project did not meet our requirements. And we took a conscious decision as a company to not sign those deals but to walk away from the sales. And we continue to do so in 2018 and despite that we think we’re going to outgrow the industry and despite that - and basically guide to a 1% to 4% organic net sales or we try to range. And the reason for the widths of that range is pretty much because we cannot really say whether it's going to be 20 million, 30 million, 40 million this year but it's going to be a chunk in there.

[Josef Matosevic:]

That’s the short cycle nature of our business.

[Hubertus Muehlhaeuser:]

Exactly.

[Josef Matosevic:]

We've been saying that. So I think - again it’s consistent with what we've said 2017 was really a year of focus and continuing our margin journey. So when failed in that meet the target that we wanted and we walked away.

[Hubertus Muehlhaeuser:]

And what we also - and I think language is also important and I think what we found is when we talked about probably discount - that got in the wrong and then the wrong understanding in the market. It’s not about our competitors so much, it’s really about us and our cost structures and what is okay for us and what is not okay for us. So that’s what we want to talk about going forward and we’re going to have it under the header of CLS.

[Mircea Dobre:]

I want to ask a question about guidance, it's unfortunately not at all clear to me how I'm supposed to be thinking about revenue growth based on your reported segment. Your comps in your international segments are difficult and I think that what you've dealt within 4Q 2017 essentially we have to deal with that in the first half of 2018. So can you maybe help us understand how we should be thinking about Americas versus international and how should we thinking about comps from an organic growth standpoint?

[Richard Sheffer:]

So Mig this is Rich, so I think to start with I think we're feeling pretty good about the Americas given the - our commentary around the large chains with some rollouts and with the initial fitKitchen rollouts. Those are going to be more so focused on the Americas. EMEA and APAC were probably going to see some tough comps impacting growth probably Q1 maybe a little bit into Q2 before things rebound back to growth.

[Haresh Shah:]

And we have spelled those out last year because we have said that you cannot expect every quarter 30% to 35% or 25% growth which we had in APAC and in EMEA, so it was clear that that once those quarters come up for renewal for a comp, that those specific orders will be a bit down but we also spellbound that we grew in both of those regions four point something percent in APAC and 2.1% in EMEA. So both regions were growing and of course there were some spikes in there which we're pleased to spell about because of the membership very successful membership rollout in Europe.

[Mircea Dobre:]

Well I don’t want to put words in your mouth here but the way I'm understanding all of this essentially on a full-year basis just because of the way that comps play out and internationally looks like those segments are probably not going to grow a ton organically. So that would imply that you need to grow at the high-end of your guidance range or maybe better than Americas in order to be able to kind of the make the midpoint. Is that how you see it in and can the market and your product rollouts allow for something like that>

[Hubertus Muehlhaeuser:]

Josef, why don’t you comment on that one.

[Josef Matosevic:]

Our average growth region is about in the 2%, right now that’s the way you should guide yourself based on our commentary.

[Mircea Dobre:]

Then last question and I am done. Is really trying to understand Crem a little bit more, can you maybe help us understand the EBITDA, its lower margin than what you've got understand that but is there a dollar figure you can share with us and maybe walk us Haresh from the EBITDA to your accretion math. I am wondering how do we think about the run rate accretion to earnings once these short-term integration costs are baked in.

[Hubertus Muehlhaeuser:]

I will make two comments strategic on Crem and then Haresh goes into the finance question. First of all we don't disclose for any of the product line our percentage EBITDA margin but as you know from some of our competitors, the coffee business is a business that adjusts well into the mid to high 20s long-term envision targets margins that we have. And so therefore we see lot of upside for Crem to move into those. And then secondly it is for us a very strategic segment in that it is the fastest growing segment in foodservice growth between 4% and 5%. And then - so we feel very, very good about it and specifically also since Crem has a very, very small presence only in the U.S. and as we basically say in this script, with our context in the US with our distribution partners that we have in the U.S., we see tremendous opportunity to step change up to either sales in the North American market. And with that, Haresh why don’t you talk a little bit about the accretion and what you can share.

[Haresh Shah:]

We expect $0.02 accretion from Crem for 2018 that will continue to grow. I don't want to give guidance on the out years yet but we did talk about will have rates of approximately $10 million of synergies starting in 2020. So in every year when we look at our business case and our modeling, it continues to be accretive and it generates strong positive free cash flow similar to our business. So we're excited about the prospects there.

[Hubertus Muehlhaeuser:]

And as we've always said, if you look at a acquisitions, we want to see at least half of the multiples we pay in synergies and that's ballpark here where we are.

[Mircea Dobre:]

But you know Haresh, this includes - your number includes integration costs, I don't know if there is like an inventory step up, it excludes amortization, all this other stuff that gets you to $0.02 and it's also only part here right. So I mean, we're trying to figure out what 2019 is going to look like too based on this acquisition and I'm not sure that we get the picture here.

[Haresh Shah:]

We're not guiding to 2019 yet Mig and we haven't closed the deal. So we haven't finalized the opening balance sheet, some of the detail questions that you’re asking we will - when we close a deal which we expect in early Q2, we will talk about what the opening balance sheet looks like and then we can give a little bit more color. But at this point, we have modeled in our analysis what we expect these items to be, but until we actually go through the work and have our procedures done then we’ll be able to give a little bit more color Mig.

[Operator:]

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

[James Picariello:]

So just on the Crem acquisition the 10 million in synergies by 2020 are those all just cost out and does not include the cross-selling opportunity?

[Hubertus Muehlhaeuser:]

It’s two-third, one-third two-third topline that cross-selling and of course we know increasing dramatically the market share in the North American market. And one-third is really cost synergies that we’re going to have I mean we’re going to take the synergies from taken advantage of the scale that Welbilt has our purchasing saving. So one-third cost two-third sales.

[James Picariello:]

Got it and then…

[Richard Sheffer:]

James, it’s Rich. One clarification on that the cost synergy number is netted against integration. So we do have cost synergies and I think once we have take - close the acquisition and are running it I think we’ll probably identify other opportunities. But based on the due diligence that's what we've identified so far today.

[James Picariello:]

And it seems really early in this process, but is there a good chance that some or most of those integration costs will be or would be excluded from your adjusted operating number once everything is finalized?

[Richard Sheffer:]

No, we won’t exclude the integration costs what we will do is any transaction costs that we incur we will have that as a reconciling item to our adjusted. So they will be adjusted for any transaction fees, but integration will include going forward. And that $0.02 accretion in 2018 is including integration cost.

[James Picariello:]

And then your free cash flow through the year really improved especially in the second through fourth quarters working cap improvement pretty clear pretty visible. What's the opportunity looking forward to further improve those turns when thinking about free cash generation?

[Richard Sheffer:]

I think when we look at our working capital metrics we continue to run significantly ahead of our industry competitors. So we’re taken another look at whether we are still too low on inventory levels whether we need to continue to invest in a little bit more quick ship stock to make sure we’re not losing sales because we don't have the ability to ship to meet customer demand. So I wouldn’t look for a lot of improvement in the working capital. We may strategically invest in it, but I think if we look at the first two years free cash flow conversion metrics we run a fair amount over 100% conversion the last two years. So I think it's a testament to the cash flow generation ability of this business and I think that will continue.

[Hubertus Muehlhaeuser:]

Plus I think it's fair to say that we have increased our CapEx for 2018 which is of course a drag a little bit on the free cash flow because we feel that – our internal organic focused of investment might be better for some of those [official] strategies than buying smaller companies is very, very high multiples. We felt it better to basically built on those capacities on our own and that’s an investment and we also talked about our custom innovation center. We're overwhelmed by the demand that we basically have and the success that we have with fitKitchen. And we basically want to mirror that with our own facilities and capacities and capabilities in order to satisfy all that demand. So that the reason why the CapEx for 2018 is a bit higher and that's the reason why we want to be cautious on the free cash flow.

[Operator:]

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

[David MacGregor:]

I wondered if you could just start off just because you just mentioned fitKitchen on earlier calls you expressed some confidence that you’d outpaced the industry growth in 2018 by a 100 to 200 basis points as the trials conducted last year I guess convert to revenue this year. What’s your latest assessment of what that might represent in way incremental 2018 revenues. And can you comment on how we should think about the profitability of those early program revenues?

[Hubertus Muehlhaeuser:]

Let me talk about the first one. We’re certainly going to outgrow the industry by 100 to 200 basis points. It’s always difficult of course to define that industry because we have very little bit industry data. So if you look at our guidance I think you have to compare that with other guidance ranges from our competitors and I have not yet seen all of them. But I think you have to review by year-end whereas in 2017 our target was to stay with the market share and not outgrow I think we did exactly that the 0.3% growth was approximately what the industry had on average. And this year 1% to 4% organic most likely is going to put us at the upper end of our competitors and would help us to gain share and outgrow the industry. And whether it is 100 or 250 bps we’re going to see at year-end.

[David MacGregor:]

Can you talk about the profitability how should we think about that?

[Haresh Shah:]

As we come out with the solution the key for us is really especially on the kitchen side. We are providing solutions that are driving our total cost of ownership for our customers down and the four components we've discussed before. So we do expect our fitKitchen projects to help us along our margin growth journey. So we will have examples of where we're bundling products in terms of selling multiple pieces of equipment as a solution. So we do see that helping us with our margin profile.

[Hubertus Muehlhaeuser:]

Giving the exclusive nature and the unique nature of some of those projects needless to say that that you know it's a joint development with our customers. So we all have skin in the game and that is basically that’s giving you that innovative premium that you want to see from those projects. So it's actually a good margin business for us.

[David MacGregor:]

And Hubertus in responding to the last question I think you used the word overwhelmed with handling of fitKitchen is it possible that you're experiencing the success has been so I guess dramatic that you're experiencing pinch points in your ability to deliver and that could constrain the growth for 2018?

[Hubertus Muehlhaeuser:]

No, okay again it’s my German English I'm sorry for that when I mean overwhelmed that I mean we're happily surprised and we are very happy that we have such a good response for these project. What we also very happy for it of course others are trying to follow us and so far these projects have been argued in the industry so far we really have a tremendous hit rate on those projects and that's good. But we’re absolutely able to deliver on those and that's the reason why we’re stepping up that is the reason why we are investing. We get new engineers on, we basically investing in our innovation and R&D center and customer center here in Tampa and in order to keep track with that. So we're not overwhelmed in terms of we can't deliver in contrast we're happily surprised and definitely we can deliver.

[Haresh Shah:]

And just one point that's important here is we are not chasing projects here yeah where we require new customers that come in is the coinvestment from that. We are not a free R&D vehicle for customers so we require them to have skin in the game and we work together with them. So that coinvestment model ensures that these are projects that were focused on along with the customer.

[David MacGregor:]

Second question just the general malaise and the general market you’re talking about being soft in the first half and then seeing some stabilization in the second half. Can you just say what gives you confidence in that second half stabilization scenarios just industry association view and you’re just leveraging off their data or is there something in your order book you are seeing that will give you that level of confidence?

[Hubertus Muehlhaeuser:]

It is industry data and it is really talking to our distribution channels and I think what you also see is as we did talk about the potentially positive impact of the Tax Act that was put in enforce last year and we see that towards the second half of the year that will have a positive impact that the least what we’re hearing right now. But regardless of the general market what makes us very upbeat for 2018 is the strength in the QSRs. They are really ordering and again it’s what we can control it’s a success of our system kitchen our fitKitchen process.

[David MacGregor:]

Last question from me is just what are your plans for deleveraging in 2018?

[Haresh Shah:]

So David we haven't provided specific debt paydown guidance for the year. I think we – the first two years is helping the street understand how to model us. We’ve gave a lot more guidance and we intended to on a go forward basis. I would say there will be some deleveraging this year part of it will be dependent on the success of our M&A agenda. So to get to specific at this point would be a little premature. We kind of laid out where our new leverage ratios are from our covenants we intend to stay compliance and that means that are leverage will be stepping down over time. We are still committed to paying down debt in the U.S. with our U.S. free cash flow. They’re still no dividends and no share repurchase authorization here so that is the major focus.

[Operator:]

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

[Walter Liptak:]

And as a follow-on to that last question what is your available capital at this point for M&A and are you looking both in the U.S. and Europe?

[Haresh Shah:]

We’re primarily targeting a lot of bolt-ons in Europe we’re more of a full-line supplier in the U.S. than we are outside the U.S. So and that's where the cash is. So we do have more cash available outside the U.S. but as far as available debt capacity we still have plenty of borrowing capacity under the covenant. So I don't think that's going to limit our agenda.

[Walter Liptak:]

Okay.

[Haresh Shah:]

I don’t want to get more specific then…

[Walter Liptak:]

That's fine - I didn’t see a interest expense guidance can you give us a ballpark about interest expense will look like in 2018?

[Haresh Shah:]

Part of it will depend on exactly the M&A agenda right now we think it'll be in the same neighborhood maybe slightly lower than it was in 2017. Of course we’re also facing some rising interest rates in the floating rate market. So right now we’re thinking kind of in that 80 million to 85 million range.

[Walter Liptak:]

And does that include Crem or that doesn’t include Crem?

[Haresh Shah:]

That would include the impact.

[Walter Liptak:]

And if I guess the follow-on I guess from the revenue guidance maybe starting with the fourth quarter I understand CLS hit your top line and good for you for doing that. The comps were tough you know how does fourth quarter come in versus your expectation knowing those two things what happening with CLS a bigger impact than you originally thought it was a general market in line or weaker than you thought?

[Hubertus Muehlhaeuser:]

Well I mean given that we have our own internal sales objectives were of course higher because we wanted to achieve more we did not want to walk away from 17 million of business. But we’ve done that decision and we’ve done this decision consciously because it is the right thing to do. So are we disappointed about that we had to walk away from 17 million yes have we foreseen that in our budget no, have we foreseen that in our guidance yes. That’s exactly the reason why we told you by midyear that we do not want to increase our sales guidance because we spelled out that there is some you know that project – and business around that we might have to walk away and that's exactly what happened. So it was in the end not a big surprise it was disappointing, but it was not a surprise.

[Walter Liptak:]

And then the CLS that happened in the fourth quarter was that quick turn kind of general market business that would come at the end of the years for larger projects?

[Hubertus Muehlhaeuser:]

And so it was single individual projects and as we have taught last time this typically happens in the second half of the year and to be very clear we foresee a little bit of that also in 2018, but our guidance is net of that. So we basically believe that we will also be walking away from a couple of those projects but we’re still going to think that we’re going to grow by 1% to 4% organically.

[Haresh Shah:]

And Walt I think just one point here is if you look at our gross margin for the year we were at 37.2% so we had strong gross margin first time since 2014 and I look back that we’ve been above 37%. So we're moving directionally where we want from a cost structure also.

[Walter Liptak:]

It sounds like you’re following the 80/20 playbook very well and so it’s great I wonder with the Crem acquisition are you planning on applying 80/20 to that business?

[Hubertus Muehlhaeuser:]

Absolutely, I mean that's what we've said. I think with Crem we have an extraordinary strong management team. We were so - and we spend a lot of time with them in the last half year we are really impressed with them. The CEO Sebastian is a great guy very, very strong supporter of 80/20 and so I think that with the tools that we have they’re going to take that and run with it and that we are very happy with that acquisition and with that management team.

[Walter Liptak:]

So the growth rate that you gave for Crem, I can envision that maybe if you through PLS and CLS that maybe in your one year you don’t get or is there something different about that market where you can offset the 80/20 topline programs with something else?

[Hubertus Muehlhaeuser:]

I think Walt with the accretion we're seeing even with integration cost, we have accretion in 2018 assuming we close early Q2. So, we expect to see that and yes we will apply 80/20 what we do from our Welbilt perspective to Crem also once we bring it in under our umbrella.

[Operator:]

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

[Larry De Maria:]

Just staying on the subject a bit, looks like obviously you out grew the market in the first half but under grew in the second half. Are we basically saying that’s the result of walking away from deals more than anything and is a price more pervasive in the industry or is it briefly just a few suppliers that are being undisciplined let's say?

[Hubertus Muehlhaeuser:]

I said we don’t want to talk about our competitors and it is really about what is for us the threshold given our existing cost structures. And as you know, we're constantly working - Josef and the teams are doing a tremendous job by the way with Right- Sizing and Simplification our cost structures increase and improve - decrease improve quarter after quarter. So business that we might had to walk away in 2017 might be interesting for us giving our new cost structure. But it is what it is and we saw this coming and we spot this out, and I also want to echo what Haresh has said. For 2017, our mantra was bottom line EBITDA and staying with where the industry growth is and with 0.3% growth which we did, we are right where the industry was. So we have not gained, we have not lost share, we are right whereas. In 2018, our mantra is bottom line growth is important and topline growth is going to come. So we will outgrow the industry in 2018 helped by better cost structures.

[Larry De Maria:]

So I guess you talk about outgrowing the industry obviously 120 basis points and you said you’ll see that by the end of the year. So there is the fitKitchen outgrowth and then there's the lower cost structure and may be some things that are going on in the industry that maybe help you out. So can you help us understand the regular market growth and then the outgrowth and what are the bigger buckets of the outgrowth, I assume it's more than just the fitKitchen is that right?

[Hubertus Muehlhaeuser:]

Yes, but I think I mean on the industry I think we said it the overall industry is going to be around 1% you know and if you basically take our guidance it's around 1% but it can also go lower as we have seen because it's an industry with a very low visibility. And so if you basically take the upper end of our guidance and we handily outperform that if you take the lower percent of our guidance than we are with industry.

[Larry De Maria:]

But we just haven't seen any forecast to say only 1% industry growth that seems kind of light especially with tax reform. So maybe how do you tie tax reform that helps your customers into only 1% industry growth?

[Haresh Shah:]

I think Larry that we've seen a couple of publications come out with forecast in that range so far. Not everybody's got there 2018 research out yet but FER I guess would be one that I point to that has 0% to 1% growth for the general market. Fortunately, we know how a better visibility with large chains and the rollouts of new products and the fitKitchen rollouts so a little bit better confidence on that side. The general market we’ll see how it comes.

[Larry De Maria:]

Then just last question maybe, can you just talk about commodity cost going forward and the impact in the margins, just the broad assumptions about where you think commodity costs are and if you have - they’re neutral or I know you have price up 1% I think, but just commodity cost in general?

[Haresh Shah:]

Yes, so we in our guidance slide we showed that we’re expecting some headwind for materials. We do hedge carbon steel, we hedge nickel, so those two hedge out the steel and stainless steel for us. We hedge aluminum I know there's a lot of conversation about what might happen with the administration around that. These hedges have been put on over the last couple of years so as the prices were lower, we've been layering those in. So we feel like we’re pretty well protected on probably 80% of our material purchases here. But there will be some headwind ferrochrome, that hit us last year. Right now we’re seeing that the pricing in that market, while it was up from Q3 into Q4, a fair amount below where it was when it spiked up last year in Q1, we think the Q4 levels will kind of continue through the first half of 2018 then we’ll have to see what happens after that obviously the markets do move.

[Josef Matosevic:]

And Larry if you take a look at Page 12 in our guidance, we did – at the total level we do expect inflation from material cost to be about 50 to 100 basis points headwind for us.

[Larry De Maria:]

And last thing sorry, Crem looks like somewhere around 13 times EBITDA and 227 million and that’s characterized as a bolt-on I believe. Is that what we should have expect going forward or are we given maybe more capacity we should think about larger deals or is that more where we should kind of what expectations?

[Hubertus Muehlhaeuser:]

Well let's cross the bridge when we get there. As we said it needs to fit strategically, it needs to fit financially and we want to stay within our covenant ranges and we have more deals but let’s see when we get there.

[Josef Matosevic:]

But Larry in that range there will be in this range there will be bolt-on acquisitions to fill product and technology gaps, as well as retail gaps.

[Operator:]

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

[Jon Fisher:]

Just one quick question on Crem You noted in the press release $90 million in 2017 revenues, how much seasonality is there to that business especially since we’re kind of focused on the second half of seeing accretion there. Is the revenues pretty evenly split first half, second half or is there a bias to one half of the year versus the other?

[Josef Matosevic:]

Evenly split that we've seen so far, very evenly split.

[Jon Fisher:]

And then just on the industry given the growth of the industry the last couple of years and the fact that you're talking about roughly 1% growth for 2018. And the seasonality of the business for Q4 is traditionally the strongest quarter of the calendar year in you had negative organic growth. When you step back and you look at everything from a big picture standpoint, are you more concerned that there has been a meaningful readjustment downwards in the long-term growth rate of the overall category and sector. And what does that imply for valuations on acquisitions and what does that imply for profitability going forward if - instead of a 2% to 4% growth category we’re dealing with a category that is going forward 0% to 2%?

[Hubertus Muehlhaeuser:]

Well, I mean just to be very clear we’re very positive on the overall industry. And as we said we got these two cans, we got the QSRs, and you got the general market. And what happens right now these QSRs are now coming back very, very strongly and if the second half the general market also comes back strongly than industry growth might be more, might be 1% or 2%. But whatever it's going to be we feel very comfortably that we can outgrow whatever the industry growth is in a given year for 2018 with everything that we have done. And Josef is just sitting here and noting and why are we so confident on the general market. I think we have spent the last two years on rebuilding those relations and those contexts to the general market. And we firmly believe in the distribution model with our strong dealers and distributors. And I think these investments into our relations and also into our quality and reliability are paying off, they are paying already off and they will pay off even stronger. So, the industry is not a bad industry, its non-cyclical as we said when it's tougher its growing between 0% to 2% and in the better years, it grows 3% to 4% and I think we have now seen a second, third year - of kind of 1% to 2% and it can go better, but let's look at it. But we are positive on our track in that industry and what we can achieve for 2018 very clearly.

[Jon Fisher:]

And then final question. Just on QSR performance during Q4 given the negative organic growth and given the seasonality of the business, and you had made on earlier calls Q2 and Q3 that you were seeing building improve sentiment from QSRs from a spending standpoint. Did QSR spend at a normal or above average rate in Q4 or were they also either negative organic or at a below average spend rate in Q4.

[Hubertus Muehlhaeuser:]

They are coming actually up and I think we said this. The QSRs turn to the corner of kind of mid last year and we also mentioned big win with Taco Bell in Q4 and that helped tremendously and they are starting to buy right now. And so that one is positive for Q4. What was down in Q4 was the general market and of course you know on top of that us walking away from some of those project. Haresh you want to…?

[Haresh Shah:]

Just to be a little bit more specific. We did have strength in the QSRs in the Americas and then we had a little bit of weakness with the tough comps in EMEA and APAC that we've talked about. So we saw growth in the Americas QSRs offset by the tougher comps in the other two regions.

[Operator:]

Thank you for your questions. I will now turn the call back over to Rich Sheffer.

[Richard Sheffer:]

Thanks Jodi. This concludes today's 2017 fourth 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.