Welbilt, Inc.
Q1 2018 Earnings Call Transcript

Published: 7 May 2018

[Operator:]

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2018 Q1 Earnings Call and Webcast. [Operator Instructions] At this time, I would like to turn the conference over to Richard Sheffer. Please go ahead.

[Richard Sheffer:]

Thanks Tiffany. Good morning and welcome to Welbilt’s 2018 first 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 four 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 start to 2018. As you saw in our press release this morning and can see on Slide 3 of our earnings call presentation, we delivered a 3.7% increase in organic net sales. The biggest driver of the organic sales increase was volume, driven by the ramp up and roll-out from multiple large chain customers in the Americas, while EMEA had one notable rollout and higher Merrychef sales. We are also pleased with our EBITDA performance in the first quarter. We generated over $10 million of savings again this quarter through the execution of our simplification and rightsizing initiatives and had a small impact from rising material costs. We mainly had to temporarily headwinds to margin. One was the mixed impact on margins as our KitchenCare aftermarket parts sales were down in the first quarter. We view this as a temporary issue and expect to see KitchenCare sales contribute positively to our full-year growth in 2018. The second headwind were ramp up and launch cost relate to the multiple rollouts in Q1. These costs are an expected part of the beginning of new product roll-outs and typically counted on quickly as we integrate these new products and our standard manufacturing processes. Given that, we had several roll-outs in Q1. These costs had a larger impact than normal, which we estimate to be approximately 40 basis points to 50 basis points in the quarter. The increased EBITDA, driven by higher sales, lower interest expense, and lower tax expense drove 106% increase in adjusted net earnings, and an 88% increase in adjusted diluted net earnings per share. Haresh will discuss these items in more detail in a few minutes. Moving to Slide 4, this was also the 11th consecutive quarter of year-over-year adjusted operating EBITDA improvement since the new management team took over in August 2015 as we continue our relentless pursuit of operation improvements in the business. While the margin was slightly down in the quarter, we have continued to drive absolute EBITDA dollar increases and expect both margin and absolute EBITDA to show increases for the full-year. I will now let Haresh go into details on the quarter. Following his comments, I’ll discuss some aspects from the positive strategic partnership announcements we have made over the last five weeks. Haresh?

[Haresh Shah:]

Thanks Hubertus, and good morning everyone. Looking at Slide 5, I will make a few comments on our topline results within the segments. Starting with the Americas segment, organic net sales increased 4.5%. The primary driver of the increase was the new roll-outs of products for large chain customers with most of this being hot side products. Cold side products were up slightly, while KitchenCare sales decreased, and this was the primary driver of the mixed impact within our margin. In the EMEA segment, organic net sales increased by 4.6% this quarter. The growth was primarily driven by a roll-out of grills for a large chain customer and improved Merrychef high-speed oven sales. KitchenCare aftermarket sales increased in EMEA this quarter. In the APAC segment, organic net sales decreased by 3.3%, primarily from lower Fabristeel project sales and a decrease in KitchenCare sales. Looking at Slide 6, the National Restaurant Association reported that restaurant same-store sales dropped 4.1% sequentially in January were relatively flat in February and then increased 1.7% in March. Capital expenditures decreased 2.1 sequentially in January than improved approximately 1% in both February and March. Based on these two metrics, we estimate that the U.S. market was flat to up 1% in Q1, and our results demonstrate that we clearly outgrew the market. According to NRI's expectations index, same-store sales and capital expenditures are expected to improve over the next six months. This data supports our outlook that the general market will gradually improve as the year progresses. We expect to continue to outgrow the market for the year. Moving to Slide 7, as Hubertus mentioned, our simplification and rightsizing initiatives generated another $10 million of year-over-year savings in the quarter. Our simplification and rightsizing initiatives are comprised of seven categories. Within simplification, we include KitchenCare improvements, 80/20 product costs and platforms, purchasing and supply chain improvements, and lean manufacturing. 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 process. Overall, we continue to see significant runway remaining to enable the completion of our 1000-basis point margin journey. Within simplification, we are still in the early stages of purchasing and supply chain improvements and lean manufacturing. We are near the mid-point of the product line simplification of 80/20 and on product costs and platforms and are on the later stages of KitchenCare improvements and the custom align simplification component of 80/20 as it relates to pricing. In rightsizing, we are on the later stages for both manufacturing capacity and headcount reductions, having already completed 75% of the capacity reductions we originally targeted. Our rightsizing journey continues as we are consolidating two separate plants and Shreveport, Louisiana into one plant. This consolidation is expected to be completed later this year and restructuring costs related to this project are expected to be small. When finished, we will have completed the 20% capacity reductions that we’d originally targeted. However, as we continue to make progress on our simplification initiatives, they will create additional rightsizing opportunities in the future. In the first quarter, the majority of the savings we achieved came from the continued benefits from 80/20 and from product cost take-outs. In 80/20, our focus was on planning on next wave of product line simplification and our SKU counts were relatively flat, net of new SKUs created in the quarter. On Slide 8, I have a few comments on some of the first quarter adjusted operating EBITDA margin drivers. First, our simplification and rightsizing initiatives had a positive 300-basis point impact. Material cost inflation was a 40-basis point headwind or compensation was 120-basis point headwind. These two items were highlighted on the guidance slide during last quarter's earnings call and were favorable to the full-year estimates we provided for those items. The last item to comment on, is the net 170-basis point headwind from volume and mix. Volume was positive and we expect that to remain the case throughout 2018. Mix was negative in the quarter, largely driven by lower KitchenCare sales. We expect mixed improved as KitchenCare sales rebound over the course of the year. A quick comment on our effective tax rate on Slide 9. We had a positive $3.7 million discrete adjustment, primarily to adjust our tax provision upon the timely filing of over 2016 U.S. federal and state corporate income tax returns in Q1. Our filing deadlines, which normally would have been in the latter half of 2017 were extended until the first quarter of 2018, due to Hurricane Irma. Moving to Slide 10, our free cash flow was a use at $25.4 million this quarter, less than half the usage experience in last year's first quarter. We normally used cash in the first quarter as it’s the smallest sales quarter of the year and we have a few lumpy cash outflows that occur. We expect free cash flow to be positive for the remainder of the year. Our total cash balance increased by $25.4 million in the quarter, while debt increased by $54.9 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 $20.3 million in the first quarter, compared to $23.2 million last year. The decrease reflects our success and reducing our debt since last year and the benefit from the successful repricing of our term loan B. Finally, on Slide 11, we are reaffirming our 2018 guidance for organic net sales growth, adjusted operating EBITDA margin and adjusted diluted net earnings per share. I would like to make a couple of comments on these items. First, organic net sales range is 1% to 4%. We expect stable conditions in the general market with gradual improvement in the second half of 2018. We expect to continue seeing improved demand from our chain customers as they are now increasing their investments into their kitchens and we expect to benefit from several new product rollouts with them. In addition, some of our fitKitchen system products projects we have added to our pipeline during the last two years will begin their initial roll-outs in 2018. As a reminder, 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 rightsizing initiatives to contribute another 200 basis points to 300 basis points towards margin improvement in 2018. We plan to make some SG&A investments to build-out our digital strategy for kitchen connect and common user interfaces. We also plan to add engineering resources to support upcoming automation projects and to support growth. We are also expecting an increase and incentive compensation expense, back to target levels and for some other general inflationary increases. These lead to our adjusted dilutive EPS guidance range of $0.80 to $0.90 per share. This range assumes $141.6 million fully diluted shares outstanding and 26% to 28% effective tax rate. It also includes a $0.02 benefit from the Crem International acquisition inclusive of integration cost. That concludes my comments. I will turn the call back over to Hubertus.

[Hubertus Muehlhaeuser:]

Thanks, Haresh. I would like to discuss and give more color on how we will continue to achieve sustainable above market growth. The growth in 2018 and beyond rests on three strong pillars and customer segments that we have been developing. All of these customer segments reward us for our innovation and forward-thinking, our customer centricity, and our relentless efforts to improve our quality. The first pillar is the quick serve restaurants or QSRs. As you know, we have had a long-standing position as one of the leading suppliers to the largest QSRs in the world. We have continued to have our sharp focus on this end-market even in difficult years and we’re now seeing them re-strengthening and begin new roll-outs for individual innovative products. They are also adopting our visionary fitKitchen system's approach where we are helping them to transform and dramatically improve the efficiency of their kitchens. These new kitchens incorporate lean principles, connectivity, and automation to create connected and automated subsystems and systems, which are provided by viewers strong local partners like Welbilt. These large QSRs have come to understand that the only way they can effectively deal with a major cost issues they face rising labor cost and high employee turnover, the cost of food waste, rising rents and energy cost; this is to take a holistic view on the heart of the operation and re-think how they operate their kitchens and take advantage of connectivity and automation. Welbilt is uniquely positioned to help serve these 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 structured to efficiently and effectively improve their entire operation. The second pillar of our current and future success is the deepening of our relationships with the dealers and buying groups in the general market. This is an area that we have focused on extensively since Josef, our Chief Operating Officer and I have joined the company in 2015. We met with the successful entrepreneurs who run these great businesses and humbly listened to what they thought of us. We took to heart what they said, worked on our shortcomings and aligned our strategies with theirs. We invested in our leading brands by creating new products and refreshing existing brand offerings, while improving our on-time delivery rates, our product quality metrics, and the quality of our service network, and we have made it very clear to all our channel partners that we are committed to them as our exclusive channel to the market. All of these improvements, while not complete, have been noticed and appreciated by our channel partners. The best evidence of this was having two of our major brands, Cleveland and Delfield join NexGen as primary suppliers in the categories of steam, refrigeration, and serving systems. As many of you know, NexGen is the largest professional foodservice equipment buying group counting seven of the largest North American dealers as members. Without the substantial improvements we’ve made to our operations and the work that the Welbilt team has done the list them and understand the needs of these industry leaders, we would have not been granted the opportunity to join this group. Our commitment to all of our channel partners will be beneficial to them and us as we collaborate to bring innovative and winning solutions to our mutual customers. The third pillar of our future top line success is partnering with a successful new entrant to the food service industry, the so-called disruptors. We have two recent examples of entrants and disruptors that we are now partnering with because they see us as the best global food service equipment company that can help them achieve their visions. The first announcement we made was our partnership with XiaoMai stores. XiaoMai, whole is frequently referred to as the Amazon to go of China is developing small footprint on convenience stores to bring household products and fresh food closer to the consumers in China. They signed a strategic partnership agreement with Welbilt to initially work with our Merrychef e1s high-speed ovens and from that base will develop fully automated kitchens to prepare fresh meals for millions of customers in their stores. These stores are expected to replace the many thousands of street carts in Tier 1 and 2 of cities in China over time. They have strong financial backing to achieve their vision of adding thousands of the small footprint stores over the next couple of years. Another great example of working with new entrants and disruptors is our exclusive partnership with Zume and Zume Pizza that we announced in late April. Zume Pizza is changing the process for food delivery. Zume model moves to cooking process right into the customer's neighborhood and practically through their door by creating their patented Baked On The Way food delivery vehicles. Using artificial intelligence, they predict the demand for particular types of Pizza by neighborhood. The Pizza’s get prepared in central commissary kitchens in a highly automated process. The freshly prepped Pizza’s get then loaded into the refrigeration compartment of their delivery trucks with a predicted supply for the day. As Pizza orders come into Zume from customers, the orders are automatically transmitted to the truck in the neighborhood where the customer is and is placed in the Welbilt speed oven and Baked On The Way to the customer's house. So, in a matter of minutes, the customer gets a fresh, hot and healthy Pizza. Welbilt is now the exclusive equipment supplier for Zume's current and future Baked On The Way trucks, as well as their commissary kitchens. And Zume will open its platform to food companies of all sizes from Pizza chains to fast casual chains to Fortune 100 and Global Restaurants. This will create an expanded market opportunity for us to develop automated mobile foodservice solutions not only for baking Pizza, but also for frying, grilling, and preparing all types of foods and menus in these trucks. Over the years this has the potential to fundamentally change delivery model of food. In summary, we are very excited for the opportunity to partner with the leading QSRs that dealers in the buying groups and the new companies that will change and drive our industry. What they see in Welbilt is a company that is focused on helping how the customers succeed by listening to their needs and responding with innovative products and solutions that enable them to adapt to the changing world around them. As our examples show, the foodservice industry is in the process of rapid transformation, generational shifts, creating more awareness of the health consequences of our food choices. The desire to have food that fits into our busier lifestyles, new business models, and disruptive change because of the digitalization of the world, artificial intelligence, and automation will change the face of the industry over the next several years. And Welbilt is an enabler, an enabler of these changes and we get recognized for our leadership. The well-known consulting firm McKinsey, published a report two years ago about the numbers of job that would disappear in multiple industries due to automation, and identified commercial food service and hospitality as the industry with the highest impact. Only two weeks ago, they published a follow-up report that zeroed in specifically on the commercial foodservice industry. In that report, Welbilt was featured as one of the most innovative companies that leads the changes that have begun to happen in our customers kitchens. I was further honored to be invited by McKinsey to give a TED talk on this topic in the Silicon Valley earlier this year to talk about how Welbilt is supporting this change. What this means is that, Welbilt is recognized as a company that can help the incumbents and new entrants alike to disrupt and dramatically change the face of our industry and they churn for us for innovative solutions that will help them achieve their visions. Some of you might say that not everybody will jump on systems and automation solutions right away, and in fact many of our end customers will continue to ask for the most innovative appliance or brand, and we are also catering to those customers that require the best of breed equipment solutions. The good news is that we also recognized for that part of our business. Year-to-date, we have been then recognized as the energy Star Partner of the year and won awards in six categories for energy efficiency. The National Restaurant Association awarded two of our brands, the innovation award for 2018. Multiplex for the fresh blend smoothie machine and Garland for the instinct induction cooking series. Our customers are also recognizing our efforts. We won three awards from Yum! Brands. One award for Welbilt as supplier of the year, and for Frymaster, a supplier of the year for Taco Bell, as well as a star award for Delfield and Frymaster again for Taco Bell. Finally, McDonald's recognized our Garland brand as recipient of the global sustainability award for our [indiscernible] grills. And we continue to innovate. We are planning to bring up to 30 new products through our product introduction process this year. This will be another impressive increase over the 50 plus new and refreshed products that we brought to market in the last two years. In summary, we are extremely excited about 2018's prospects for growth. Organically, with improved demand from our large chain customers, gradually improving conditions in the general market in the second half of the year and from the initial roll-outs of our fitKitchen projects. These drivers will help us continue to outgrow the industry in 2018, and position us to continue to do so going forward. We are also very excited about our growth prospects from the Crem acquisition. 2018 will also be year number three on our 1000-basis point margin journey as we expect to be more than halfway to our goal by the end of this year through the continued laser focus on executing our simplification and rightsizing initiatives. We are firmly committed to this year's margin guidance and will update you on our progress on the margin journey as we move along this year. These successes will provide the cash to continue improving our capital structure and shareholder returns. And with that, I’d like to turn it back to Rich.

[Richard Sheffer:]

Tiffany, 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 with Susquehanna. Your line is open.

[Robert Barry:]

Hi guys. Good morning.

[Hubertus Muehlhaeuser:]

Hi Rob.

[Robert Barry:]

Hi, congrats on a solid start on the topline here, and also on the likes of Zume and some of these other wins. I did actually just want to start on the topline, you had expected some soft conditions in the second half to kind of carry over here into the first half, but looks like you started 1Q tracking at the high end of the organic growth range, so are we are in a better trajectory here where there is some timing benefits to some thoughts on this solid start on the top line?

[Hubertus Muehlhaeuser:]

No, but as we always said we have a business with sure visibility and we knew that we kind of have a, I mean 0 to 2 we called it first quarter and now it was even a bit less in the industry and we said last year that we feel very confident about our growth, but we showed them not to get too excited. I mean we know we had a good start to the year, we see a lot more coming, but we don't, we think on a good sport and we don't keep it like that. So, we don't want to increase our guidance at this point-in-time.

[Robert Barry:]

Got it. And then maybe just a couple on the margins, on this volume mix bucket, just wanted to get a better sense of how you see that going to, I think a target flat to up 150 from down 170 in the first quarter. Kind of how do those lunch cause subside and what is the line of sight you have today to the KitchenCare sales actually getting better?

[Haresh Shah:]

This is Haresh. The drivers we see KitchenCare coming back, we see an inventory build that we are expecting a subside towards Q2 and rest of the year. So, we will see that mix improve from a kitchen care perspective. From our ramp-up cost, there are a few buckets a cost that we generally incur there associated with training of production employees, training of fuel service, websites we are installing new products, cost associated with increased levels of warranty as the products are starting, and then just post-launch, engineering expenses. So, we see that as these products are out there, we see that subsiding and improving as we move throughout the year.

[Robert Barry:]

Got it. And maybe just finally, on the price cost, I think that was also targeted up 50, 150 started out with actually both price and cost a little bit negative, how do you feel about that and again just confidence on line of sight to that, that improving? Thank you.

[Haresh Shah:]

We did have our last annual price increase at the end of Q4, so we will see the benefit of that come in. And then we, also along with some of the are those in the industry did announce a price increase. Ours will take place later in Q2 or early Q3 and we will see the benefit of that, so we feel good about the guidance range.

[Robert Barry:]

Got it. And then you think we will start to see kind of progress on all these fronts in 2Q or is it more of a back half?

[Haresh Shah:]

We will see some at the end of Q2 and then certainly more in the second half of the year.

[Robert Barry:]

All right. Thank you.

[Hubertus Muehlhaeuser:]

Thank you.

[Operator:]

Your next question comes from the line of Tim Thein with Citigroup. Your line is open.

[Tim Thein:]

Thank you. Good morning. First, I will start Hubertus just on the shelf registration filed last week, I was just curious any thoughts there as to how we should read that in the context you have brought your capital allocation priorities? You have talked about M&A in the past being more kind of tuck-on in nature, but I am just wondering if we should read something more beyond that or just maybe some comment on that? Thank you.

[Hubertus Muehlhaeuser:]

Well I wouldn't read anything in that, I would like to give that question to rich, our Treasurer.

[Richard Sheffer:]

Hi Tim. I think most companies that plan to be active in the capital markets over a three-year period typically file shelf registrations, it protects against having to recast prior financials before you launch, sort of allows you to get to the market quicker. We know that our high yield notes become callable in February of next year, that’s the potential other things, you know we will take it as it comes. So, we'll look for opportunities all the time to improve our capital structure. Nothing else to really read into it at this point.

[Tim Thein:]

Okay. All right. And then just next on the NexGen announcement does that, maybe it is hard to quantify this point, but does that, how should we think about that in terms of the implications to the topline as you become less to therein and you just put your means to the second half and maybe more significantly in 2019, just kind of help frame the opportunity there?

[Hubertus Muehlhaeuser:]

For 2018, it has baked into our guidance, but Josef Matosevic why don’t you allude a little bit on to it.

[Josef Matosevic:]

Sure. Good morning Tim. So, our entrant to NexGen will begin officially in July 2018. We will see deposit turn on slowly with the remainder of the year, but I would assume a stronger impact going forward to 2019 and beyond.

[Tim Thein:]

All right. Thank you.

[Richard Sheffer:]

Thanks Tim.

[Operator:]

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

[Jeff Hammond:]

Good morning guys.

[Hubertus Muehlhaeuser:]

Hi Jeff.

[Jeff Hammond:]

Just back on KitchenCare, can you just talk about a little bit, I just want to understand a little bit better what happened in the quarter and again what gives you confidence or what you are seeing in the marketplace? I know Haresh you mentioned something about inventory adjustment, but a little more color there.

[Haresh Shah:]

Well, I will start off and then Josef adds to it. I mean what happens is typically they had their buy-in by the end of the year and then they kind of filled their inventories that and that is our past partners and they were assuming that they burn this all faster in Q1 but given that the general market was really not that vibrant and they burnt off less than they expected, and that is the reason why they basically now burn it into Q2 and we’ll then start ordering. Josef anything to add?

[Josef Matosevic:]

It is very well said. It is one simple answer. It is burning off of the inventory, a little bit of the lower pace as the general market starts to ramp up, and also the weather conditions improve in terms of the [indiscernible] business, but nothing to worry about Tim. This will continue as planned.

[Jeff Hammond:]

Okay that aftermarket mixed dynamics continues in the 2Q?

[Josef Matosevic:]

That is correct. And should slightly improve gradually month-by-month.

[Jeff Hammond:]

Okay. And then just on the role of dynamics, I mean if you look at kind of the rollouts that you are expecting to happen through the year, does that dynamic abate or do you continue to have that cost because you have rollouts continuing?

[Hubertus Muehlhaeuser:]

As we mature into the rollouts we will expect that cost to abate and go down, as generally again with new product rollouts and the few items I talked about earlier, so we do expect them to subside as we continue.

[Haresh Shah:]

And we add kind of a non-utilization [ph] because we had really several roll-outs simultaneously and what we see then than going on in the year, you basically then add another roll-out, but one at a time and not like three, four at the same time.

[Jeff Hammond:]

Okay. And then, just on, I know you said it is early in the year, but we are coming in the top end, is it still fair to say you think the industry, is the visibility is for the industry to improve in the back half and then anything around the timing of your roll-outs that would suggest your share gains or outgrowth is better in the first half versus the second? Thanks.

[Hubertus Muehlhaeuser:]

Well, again we said the data, the sentiment of our customers and that’s QSRs and dealers alike, it is very positive right now with an improving in the second half whereas the QSRs are already strong and you saw that with the earnings reports from some of our customers just recently. And again, we should not be away here right now and increase anything at this point in time with this shot visibility, and we're going to redo the situation by the end of Q2, but we feel good and again we are with our guidance range right now and we continue to be within our guidance range for sure in the quarters to come.

[Jeff Hammond:]

Okay. Thanks guys.

[Operator:]

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

[Mircea Dobre:]

Hi it's Mircea Dobre. Good morning everyone.

[Hubertus Muehlhaeuser:]

Hello Mircea.

[Mircea Dobre:]

Yes, hello. I want to sort of stick with this discussion surrounding rollouts and growth, you know, how should we think about the growth cadence really through the year, and I’m wondering here obviously the comps are moving around a little bit, but I’m wondering if you are sort of expecting growth to sort of runs somewhere similar to what we have seen in Q1?

[Haresh Shah:]

Well given that we have guidance between 1 to 4 organic fee and we are changing that guidance and we assume that the next quarters are going to be around that one as well. We do not foresee right now a drop, we also don't foresee a huge spike now in Q3 or Q4. We basically think that we're going to be ahead of the industry. The industry was 0 to 1 and we were up 3.7 and the industry is gradually improving, but we said we're going to outgrow the industry by 100 bips to 200 bips and that is kind of what we want to stay true to for this year.

[Mircea Dobre:]

Okay. And maybe if I asked this differently, if I’m looking at your prior comments that you are expecting a little bit of help from fitKitchen in 2018, obviously you talked about NexGen starting to contribute in July, so that’s going to help us well, it seems like there are a handful of items that are really kind of coming through that are may be specific to the company in the back half of the year and the comps are easier. So, that is why I’m asking. I'm trying to understand the differences between the front half and back half growth wise?

[Hubertus Muehlhaeuser:]

Rich?

[Richard Sheffer:]

So, Mircea, I think the right way to think about this is that the QSRs are strong now. We expect them to remain strong, maybe not quite as strong in the second half given the emphasis and rollouts right now, but they should contribute to growth all four quarters this year. We see the general market gaining in strength in the second half and contributing more in the second half. So, I think it sets us up for a solid year where we expect to have decent growth each quarter.

[Hubertus Muehlhaeuser:]

But given also the [indiscernible] of our business Mircea, we don't see any reason right now at the end of first quarter to increase our sales guidance for the full-year. We might review that by mid-year but let us cross the bridge when we get there.

[Mircea Dobre:]

Okay. Fair enough. And then maybe back to price cost, just looking at your guidance, it would imply that pricing picks up quite nicely from where it has been in Q1 and I’m wondering, again not only the cadence on that, but what’s your visibility and how does it normally work in terms of your ability to change prices through the year. And also, on a cost side, how do we think about may be the year-over-year drag going forward in that regard. Is that dynamics getting more challenging as the year progressing or where we were in Q1?

[Hubertus Muehlhaeuser:]

Well, let me take the first one. I mean pricing usually sticks in our industry, we get our annual price increases through. We did this in November of last year and remember last year we had the ferrochrome issue. We put a pricing increase in the week basically got fully. This year, the sentiment [ph] seems that people understand that there is inflationary pressure because of the tariffs and other things going on. For example, transport cost have increased by 50%, and you don't find truck drivers these days in the U.S. it is pretty annoying. And I mean that is the reason why there is a fair understanding that price increases, extraordinary unnecessary and as Haresh said, others have done it. So, we fully expect that those price increases will stick. And then secondly, I think we are relatively better positioned to cost pressures because what is hedgeable is usually hedged. And so up to 80%. Unfortunately, not everything is hedgeable. Like you can't hedge truck drivers for example. We wish we could. So, even with cost pressures going on with the price increase between 3% to 5% depending on product line. We feel good that we're going to be in a good spot. Haresh you want to add something to that?

[Haresh Shah:]

Yes, on the cost side I think it is consistent with what we said, we're going to continue to make investments. We're going to invest in the digital, the automation. So, we will see the impact of that and then of course Mircea we will see the compensation expense come back which was a tailwind at the end of last year. So, as we come back to normal levels we will see that come higher.

[Mircea Dobre:]

I see. Okay. Last question now is back on these roll-out costs, I know you’ve rolled out quite a bit of product over the past couple of years, I’m wondering what special with this year that you’re specifically calling out the headwinds here? Anything you can share in that regard?

[Hubertus Muehlhaeuser:]

I think it is a one-one aspect we have said. It is not so often that you have several roll-outs at the same time that puts stress on the system. And then secondly, I mean it is also, it is more advanced product that we are generating because I mean, our solutions albeit these are not fully automated systems that we rolled out, but if you look at our growth for example with the new controls. If you look at the fryers with complete new controls and touchscreen and automated odd quality sensors, these are just more delicate products and they need more support work when you start those roll-outs. And it is not unanticipated that this happened. Josef, you want to add something to that or?

[Josef Matosevic:]

And maybe just a final point to this. A chunk of the cost maybe was driven based on the customer actually changing and applied so to say, and we needed to change with it. So, it’s truly a one-time dealing in terms of dead chunk. There will be others going forward but hope that doesn't makes sense.

[Mircea Dobre:]

It does. Thank you.

[Josef Matosevic:]

Thank you.

[Operator:]

Your next question comes from the line of Adam Seiden with Barclays. Your line is open.

[Adam Seiden:]

Thank you so much for taking the question. Just, you know, Hubertus you had a pretty strong statement about strengthening their relationships with dealers and some of your peers are doing otherwise, I guess why do you have so much confidence in that strategy versus looking at more direct?

[Hubertus Muehlhaeuser:]

Honestly, since Josef and I came to the company in August 2015, our first visit really was to the – actually to the NexGen and dealer partners and then to CFAR and CPG and all these wonderful buying groups because we need the data channel, and so we are very, very convinced that albeit everybody wants to have full solutions fully automated there is going to be a long road into that journey where people need very, very strong distribution partners where they can buy first-class product and we feel that our distribution partners are giving that service and that’s the reason why we're very, very committed to that distribution model. We do not want to go direct. We do not want to install our business and we think that our distribution partners do a wonderful job for us. And in all honesty, we haven't listened to them enough in the past. I think we kind of neglected them. We perhaps were a bit too much focused on the QSRs in the past, and I think we kind of have a low balance strategy right now where we basically understand how much we need them and obviously they need us. And I think this is paying back right now. It is trust that has been built up in the last years between the dealer channel and us and that’s a good thing.

[Adam Seiden:]

And I certainly understand that. And then also it’s only been about, I guess two weeks or so since Crem closed, but any first takes on the asset or trajectory and its people, and I guess beyond that more strategically since this is your first acquisition in quite some time, maybe if you could talk about some of the business processes and how you think your team has done in getting to imagine integration and so forth?

[Haresh Shah:]

Yes, let me start to talk a little bit about the team and Josef should talk about the integration because about the team we know them now for a couple of months because we have dealt with them very intensively in the due diligence process and we're very, very confident that we have not only acquired a very strong company with strong technology and products, but also a very capable and strong leadership team and I did say it is here in the call last time, the CEO of Crem, Sebastian Lindstroem has done a fantastic job in five years to really build up Crem, and he is going to continue to do a fantastic job to integrating Crem into Welbilt and to really mix it with our cold beverages as well because again as we are creating automated solutions at the interface of hot and cold, the same will happen in beverage, and you're going to see in the future automated beverage stations having hot and cold side equipment and we feel very, very good that the Crem team is going to simulate well and we have a very, very shared set of values and cultures. We explored that when they joined us for our [indiscernible] team and we feel that we have joint with them, we're going to basically grow very nicely here. And then on the integration project, Josef?

[Josef Matosevic:]

I think [indiscernible], integration project we are – this is a very exciting journey for us. We have clear synergies because we have identified couple a two months ago and we're starting to execute those that we can actually fix for, but as we matured and with one another and learned more from one another there is actually a much broader opportunity than we anticipated, particularly on the product side leveraging our distribution side, leveraging our supply chain. So, those were new strategies that we're baking in right now and we will start executing here the week of 64 [ph].

[Josef Matosevic:]

And Adam as we said previously, we expect that $0.02 benefit to EPS including integration given as you just noted, we just closed the deal on 19 of April, we’re working through this and as we proceed we will provide further information in the future.

[Adam Seiden:]

Great, thanks guys.

[Haresh Shah:]

Thank you.

[Operator:]

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

[David MacGregor:]

Good morning everyone. Congratulations on the progress with all the program wins. It’s exciting. Will adjusted EBITDA margins be down again in 2Q?

[Hubertus Muehlhaeuser:]

No. That’s what it looks. We are not going to give guidance for the quarter. So, we expect to be within our guidance range for the year, we talked about some of the headwinds that we had in our first quarter and we do expect to see those costs subside and improve as we continue throughout the year. I don't want to get into a quarterly guidance again here.

[Haresh Shah:]

Well, as I said in my prepared comments, I mean, we're going expect absolute EBITDA in margins to improve quarter-after-quarter now in order to get to our guidance range of 19 now up to 21, which we firmly believe is achievable.

[David MacGregor:]

Okay. I'm just wondering you talked about the price increases, historically have gotten full traction or close to full traction, you had a round of increases in November, any first quarter traction on those price increases?

[Haresh Shah:]

Yes absolutely. I think, it happens that we had down related pricing. I mean pricing is impacting our industry as we always have said. The headwinds that we have had is our mix right now and some of the ramp up cost for the roll-out. That said, it has got nothing to do with pricing. Pricing is fully intact in the industry.

[David MacGregor:]

Yes. I'm just wondering given some of the sort of mix issues that have occurred in the first quarter, if you were able to get that whole traction or whether we get some incremental benefit in 2Q from the November increase?

[Haresh Shah:]

So, David I think heart of the pricing increase actually is buried in simplification and rightsizing. So, some of it was our normal price increases, our normal products. Some of it is related to our customer line simplification pricing strategies. And that gets recorded in the 300 bips of rightsizing their simplification.

[David MacGregor:]

Can you say how much of the 4.5% organic growth in the Americas in EMEA was pricing versus volume growth?

[Haresh Shah:]

We can. Give me few seconds. Maybe, see if I can find it quickly.

[Hubertus Muehlhaeuser:]

Let’s go back to that question. Why don't we take the next one David and we go back, we will come back to you and give you that answer. Okay.

[David MacGregor:]

Sure. Last question for me than would be just with regard to fitKitchen because it sounds like there is a lot of progress there and I mean you spoke very confidently last year about your ability to outpace industry growth this year by 100 basis points to 200 basis points, just based on sort of the orders you had in hand, I am just wondering of the roll-outs that you saw here in the first quarter, what percentage or how much of that was fitKitchen versus non-fitKitchen?

[Hubertus Muehlhaeuser:]

As Haresh said in his prepared remarks, we never wanted to break-out fitKitchen as a separate revenue item because the lines are blurred, and it will take us so much internal cost to carve that out, it doesn't make any sense. So, we are not reporting it as a separate segment. It is part of our overall product sales. Okay.

[Haresh Shah:]

Yes. We expect to contribute David, but it isn't going to be the biggest of the growth drivers this year. As we mentioned, the roll-outs typically are somewhat small on these first waves, especially when something is new as this. So, that would be something that I think as more and more hit the market and we get into additional ways it will become a little bit larger, but in Q1 it clearly is around the roll-outs with new products for specific customers, but not fitKitchen.

[Hubertus Muehlhaeuser:]

And the real positive impact we are going to see then in 2019 and beyond, when we move real into those subsystems and partially systems and that’s where you are basically going to see it as well. That’s the reason why we were also very confident that in 2019 and beyond we are going to continue to outgrow the industry. Do you have an answer on the first question of him?

[Haresh Shah:]

Yes. Net pricing including the 80/20 impact was a few million positive in the quarter. I don't want to get more specific than that. Okay.

[David MacGregor:]

No, I appreciate that. Congratulations on all the progress.

[Haresh Shah:]

Thanks David.

[Operator:]

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

[Larry De Maria:]

Hi thanks and good morning. You guys said, couple of time the change you are investing in the kitchen now, it seems to be a nice pivot in the industry, is this a result of poor confidence and tax benefit spending to offset the labor inflation, just curious as to why you are seeing the spending now, if it is specific to your wins or if it is more of an industry comment?

[Hubertus Muehlhaeuser:]

So, I think Larry we saw the QSRs really even going back to late 2016 as they were wrapping up some of their restructuring. Starting to plan new investments into the kitchens and redesign their kitchens based on the new realities that they are seeing in the marketplace related to rising labor, rising rents, foodways cost, all the pressures that they are seeing plus change in menus. So, we have been working with them for at least a year, a little longer than a year on these changes. So, we could see that coming pretty clearly. The general market gave us a little bit of a head fake in the first half last year. We thought that that it was going to stabilize, it took a little bit of a step back in the second half last year. It seems to now have found more solid footing with the tone of the economy with the new tax legislation lowering rates. So, there is a lot of positive drivers for the general market now and we're hearing consistently from our end-market customers our partners that the market is going to be coming back.

[Larry De Maria:]

Okay. Thank you. Secondly, I was getting into NexGen as a nice win. Trying to understand the significance of that and the magnitude of it, if I recall it was relatively locked up by one of your principle competitors and I think you sold into those individual dealers, but not into NexGen, just curious what exactly we're getting here if we get new guaranteed volume, was this a trial period for Delfield in Cleveland, and can it grow to other brands over time? So, you put a little bit of size and scope and significance around this, because there seems to be a very big change for you guys in the industry?

[Hubertus Muehlhaeuser:]

Josef is going to comment on that.

[Josef Matosevic:]

Good morning, Larry.

[Larry De Maria:]

Hi, Josef.

[Josef Matosevic:]

The significance is, NexGen will leave with our two primary brands of Delfield in Cleveland for its entirety of operating model through the years. So that’s the commitment we have to one another and we're going to focus on being the best supplier we can be on every brand, but on those two brands with NexGen as well. So, I hope that somewhat answers your question?

[Hubertus Muehlhaeuser:]

Yes, I don't think we want to get into giving guidance for 2019 at this point related to that but given that they are the leaders in the general market this is a nice win.

[Haresh Shah:]

And that is the big deal, the management team’s objective from the go get to basically re-establish and established better relationships with our general partners, and NexGen was one of those partners where we really wanted to be listed.

[Larry De Maria:]

Okay. I know you are displacing another customer or are they having they are pushing you guys up front to be leading with them?

[Haresh Shah:]

We don't want to talk about other competitors. So, we.

[Hubertus Muehlhaeuser:]

Larry. We are the primary supplier to NexGen

[Richard Sheffer:]

When it comes down to is those product line trends of Crem and Delfield.

[Larry De Maria:]

Okay thanks and just one last one if I could sneak in here? You guys have mentioned a few times in your reports recently about Merrychef doing well, is that mostly in Europe or are you seeing a broad increase also in the Americas with Merrychef? I will leave you there. Thank you.

[Hubertus Muehlhaeuser:]

We are seeing that across the board. We are seeing it in the Americas we're seeing it in Europe specifically we are now seeing a day in Asia. It is a global product line. And we have a very, very strong team there that is really driving it. And they are surprising us quarter-after-quarter. They are doing very, very good stuff, and it’s a very, very competitive product platform. Very competitive. And it lends also itself to the new life charge. It is very valid in these convenient stores. [indiscernible] basically where high speed and speed is of the essence. So, it is a very, very competitive product line with a very, very strong leadership team and so we're very happy with their progress and it’s a global progress that we have. We see them growing in all positive growth.

[Larry De Maria:]

Okay. Thank you.

[Hubertus Muehlhaeuser:]

Thanks Larry.

[Operator:]

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

[Walter Liptak:]

Hi, thanks, good morning guys.

[Hubertus Muehlhaeuser:]

Hi Walter, how is it going?

[Walter Liptak:]

Great. Thank you. Wanted to ask about just a follow-on on the NexGen question and just make sure I just understand this, it sounds like this year sort of a building year with NexGen and then next year you will be getting revenue, so I wonder if we can get a little bit better idea of the cadence of when revenue will start hitting and are there any costs associated with NexGen that you have got to make investments this year that are you may get a pay back in 2019, 2020?

[Hubertus Muehlhaeuser:]

Second question, there are no costs associated with that that we have to make an investment, it is not that and then in terms of the sales impact, it is some of our second half revenue mix is going to be with NexGen, they are already, I mean some of their dealers are already customers of course, but the larger impact is going to be felt in 2019, and I think we don't want to go more specific on the guidance of that one. Because as we don't guide to product lines, we also don't want to guide to specific customer segment with its customers, all quarters.

[Walter Liptak:]

Sure. And then I wanted to ask about the top line and you sounded and one of the first questions, little bit cautious because of the visibility into the general market and it made me wonder with the strength you had in new product rollouts with the large chains was that up significantly, was the general market down this quarter and if it was down, do we start to see it turn in the second quarter or is it in the second half of where the general market turns positive?

[Hubertus Muehlhaeuser:]

Rich?

[Richard Sheffer:]

Walt, you are right. The sales into the large chains were strong in Q1 drove the sales. I would call the general market kind of flattish maybe up slightly, but roughly flat. That’s where we expect as the year progresses that we're going to start to see that pick up.

[Walter Liptak:]

Okay, great. Thank you.

[Richard Sheffer:]

Thanks Walt.

[Operator:]

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

[Jon Fisher:]

Good morning. Thank you for squeezing me in here. Just a follow-up question on Crem, are you still expecting that to contribute about 5 points to overall revenue growth this year?

[Hubertus Muehlhaeuser:]

That’s correct. We’re still expecting that and as I said as we now work through the transaction given it just closed on 2019, we will give further information as we go out, but that’s still our expectation, as well as the $0.02.

[Jon Fisher:]

Okay, great. And then as far as some of the new rollouts that you had during Q1, have any of those new product roll-outs included in two naturals or should we still anticipate the possibility for new customer relationship for that product line this year?

[Hubertus Muehlhaeuser:]

Now, we are in roll-out with one very large coffee chain now since a couple of quarters, but there is no other large rollout with the chain on nitro right now. Nothing signed yet we’re in advanced discussions with others, we will see how that plays out.

[Haresh Shah:]

But most of the drivers are in there with the large chains were on the hot side as we called out.

[Jon Fisher:]

Okay, thank you. And then EMEA, right, excuse me, Asia-Pac aside from KitchenCare still strong volume growth on the equipment side or are we starting to see deceleration from challenging comps take effect in Asia Pacific?

[Haresh Shah:]

The APAC was really the lower Fabristeel, we have a project-based business there. So that was lower than those projects are, it is not just shipping equipment, it is completing projects and then once they are roll-in recognizing that revenue, so it becomes a little bit lumpy, one projects finalized and then it was a lower KitchenCare there.

[Hubertus Muehlhaeuser:]

Yes, hot side was up a little bit. I would say cold side was roughly flattish there.

[Jon Fisher:]

Okay. Thank you very much.

[Hubertus Muehlhaeuser:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Robert Barry with Susquehanna. Your line is open.

[Robert Barry:]

Hi guys, appreciate you taking the follow-ups. I just did want to follow-up on a comment about the market getting better and I was curious if you have seen any hard evidence ahead of benefits from the tax rate changes where the new depreciation rule is actually impacting demand?

[Hubertus Muehlhaeuser:]

We'll we always said if the tax reform gets through it is going to have a positive impact and I think this is what we're hearing right now. So, I think some of that I mean strengthening of the general market in the second half is for sure alluded to that because as you know the project have a lead time, but then there were a lot of project that took a T [ph] in the first half of the year right now that then been basically come to us than in Q2 and in Q3. I think some of that comes because of the tax reform absolutely.

[Robert Barry:]

Got it. And then just a housekeeping item on the tax, I saw you took the rate up, is that just for this year or is that a new kind of mid-term rate? 26 to 28?

[Haresh Shah:]

There are a lot of moving pieces right now. So, legislation keeps changing. We are continuing to – that is based on what we know now. There is interpretive guidance coming out. So, I would say, this is where we are now and as the legislation and the rules finalize over the years, we will give more readouts.

[Robert Barry:]

Got it. Okay, thanks again.

[Hubertus Muehlhaeuser:]

Thank you.

[Operator:]

I will now turn the call back over to Rich Sheffer.

[Richard Sheffer:]

Thanks Tiffany. This concludes today's 2018 first quarter earnings call. We hope to see many of you at the National Restaurant Association show in Chicago on May 21. Thanks again for joining us this morning and have a great day.

[Operator:]

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