Welbilt, Inc.
Q2 2018 Earnings Call Transcript

Published: 12 Aug 2018

[Operator:]

Good morning. My name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Welbilt Inc. 2018 Q2 Earnings Conference Call. [Operator Instructions] Richard Sheffer, Vice President of Investor Relations Risk Management and Treasurer, you may begin your conference, sir.

[Richard Sheffer:]

Thanks, Jody. Good morning and welcome to Welbilt's 2018 Second 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 Josef, 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. Today's call will have two sections; first, we will discuss our second quarter earnings and updated outlook and have a Q&A session; following that Q&A session, we will have additional comments on today's leadership announcement from Cindy Egnotovich, the Chairperson of the Welbilt Board and from Hubertus. We will have a second Q&A session for questions related to the leadership announcement, so please hold those until the second Q&A session. Now, I'd like to turn the call over to Josef.

[Josef Matosevic:]

Thank you, Rich and good morning, everyone. Before I begin my comments on the quarter, I would like to take the opportunity to extend a very genuine thank you to Hubertus for bringing me on as his first high-up [ph] when he joined Welbilt and entrusting me with leading to restructuring of the operation and building a very strong customer relationship we enjoy today. Hubertus has been a wonderful mentor to me and even more importantly, a friend. Hurbertus, I wish you and your family all the best. I would also like to thank the Board for the trust in me to lead this great company during this transition. I'll look forward to working closely with them. Shifting now to our earnings. We are pleased to be speaking with you about delivering another quarter of organic net sales and adjusted operating EBITDA growth. As you saw in our press release this morning and can see on Slide 3 of our earnings call presentation, organic net sales accelerated to 6.5% this quarter. The biggest driver of the organic sales increase was volume driven by continued new product roll-outs with multiple large chain customers in Americas and an increase in general market sales. APAC also contributed with higher sales from both large chains and general market customers. We also had external growth this quarter following the mid-April close of the Crem acquisition. This contributed 5% of growth in the quarter. We are also very pleased with our EBITDA performance in the second quarter. We generated $11 million of savings again this quarter through the execution of our simplification and rightsizing initiatives and both volume and net pricing were positive. The two headwinds to margin we discussed last quarter continued this quarter

[Haresh Shah:]

Thanks, Josef, and good morning, everyone. Looking at Slide 6, I will make a few comments on our topline results within the segment. Starting with the Americas, organic net sales increased 7.9% primarily driven by the ongoing roll-outs of new products for large chain customers and an increase in general market sale. This drove the increases in both hot side and cold side product sales. As Josef mentioned, KitchenCare sales decrease again this quarter as expected and this was a primary driver of the mixed impact within our margin. In EMEA, organic net sales decreased by 1.8% this quarter, albeit on a small base. This decrease was primarily driven by tough comps from hot side and cold side products roll-outs last year. In APAC, organic net sales increased by 10% as we didn't have strong sales into both large chains and the general market. Looking at Slide 7, the National Restaurant Association reported that restaurant same-store sales and capital expenditures were positive each month of the quarter with the strongest growth rate in June. Based on these two metrics, we estimate that the U.S. market grew approximately 1% in Q2 and our results demonstrate that we clearly outgrew the market again this quarter. According to the expectations index, same-store sales and capital expenditures are expected to remain positive 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 8. As Josef mentioned, our simplification and rightsizing initiatives generated another $11 million of year-over-year savings in the quarter. Our simplification and rightsizing initiatives are comprised of seven categories. Within simplification, we include KitchenCare improvement 80/20, product cost and platforms, purchasing in supply chain improvements and lean manufacturing. Within rightsizing, we include manufacturing and capacity reductions and headcount reductions. As a reminder, we won't quantify savings for these individual categories, but we will discuss them qualitatively to show our implementation progress. Overall, we continue to see significant runway remaining to enable the completion of our 1,000 basis-point margin journey. Within simplification, we are still in the early stages of purchasing and supply chain improvements and lead manufacturing. We are near the midpoint of the product line simplification of 80/20 and our product cost and platforms and are in the latest stages of KitchenCare improvements and the customer line simplification component of 80/20 as it relates to pricing. In rightsizing, we are in the latest stages for both manufacturing capacity and headcount reductions, having already complete 75% of the capacity reductions we originally targeted. As we mentioned last quarter, we are consolidating two separate plants in Shreveport, Louisiana into one plant. This consolidation is expected to be completed by the middle of next year and restructuring cost related to this project are expected to be small. When finished, we will have completed a 20% capacity reduction that we originally targeted. However, as we continue to make progress on our simplification initiatives, they will create additional rightsizing opportunities in the future. In the second quarter, the majority of the savings we achieved came from the continued benefits from 80/20 and from product cost take-outs. We have started to implement lean manufacturing in a systematic way with the first wave of plants this year and we'll continue this process over the next few years as we deploy the Welbilt production system to all of our manufacturing plants globally. On Slide 9, I have a few comments on some of the second quarter adjusted operating EBITDA margin drivers. Crem had a 20 basis-point diluted impact on the margin. As we previously mentioned, Crem's margins are slightly below our corporate average. While dilutive to margins, we do expect them to be accretive to earnings and EPS. Adjusting for this 20 basis-point impact, our margins from organic operations increased 10 basis points in the quarter. Reviewing other drivers of our margins, our simplification and rightsizing initiatives had a positive 290 basis-point impact. Material cost inflation was a 90 basis-point headwind which was offset by net pricing in the quarter. We did increased prices in June and expect to start benefiting from that in the third quarter which should help offset the impact from the Section 232 tariff by raw materials and from rising freight cost. The last item to comment on is the net 160 basis-point headwind from volume and mix. Volume was positive and we expect that to remain the case throughout 2018. As Josef mentioned earlier, mix was negative in the quarter, largely driven by lower KitchenCare sales and the tail end of the ramp up cost from the roll-out. We expect mixed improve as KitchenCare sales return to growth in the second half of the year. Moving to Slide 10, we generated $15.1 million of free cash flow this quarter. While this is less than we generated in last year second quarter, the decrease is mainly due to higher accounts receivables from the strong organic growth we experienced this quarter. Free cash flow was also impacted by acquisition and integration cost. We expect free cash flow to be positive for the remainder of the year and there are free cash flow conversion ratio will still be 100% or better this year. Our total cash balance decreased by $49.9 million in the quarter due to the cash used to close the Crem acquisition. Debt increase by $159.7 million for the same reason. Interest expense was $23.1 million in the second quarter, compared to $21 million last year. Primarily due to the increased debt from the acquisition and rising short-term interest rates. Finally on Slide 11, we are increasing our 2018 guidance for organic net sales growth, adjusting our guidance range for adjusted operating EBITDA margin and reaffirming our adjusted diluted net earnings per share guidance range. I'd like to make a few comments on these items. First, our organic net sales range is 2% to 5%, up from 1% to 4%. We expect gradual improvement in the general market during the second half of 2018. As we complete the several roll-outs that begin in the first half, we expect to see sustained growth from our large chain customers as they are now investing in new equipment for their kitchens. In addition, some of the fitKitchen projects we have added to our pipeline during the last two years will begin their initial roll-out in the second half of 2018. We narrowed our adjusted operating EBITDA margin range by 50 basis points and it is now between 19.1% and 20.1%, a reduction of 40 basis points to the range. This reflects a 20 basis-point diluted impact from the Crem acquisition and another 20 basis-point impact from the new Section 301 tariffs that were imposed in early July. We are anticipating more impact from Section 232 tariffs and raising freight costs, but expect to offset most of this with pricing. We are also expecting an increase in incentive compensation expense back to target levels, continued investment into our digital strategy and for some other general inflationary increases. This leads to maintaining our adjusted diluted EPS guidance range of $0.80 to $0.90 per share. This range assumes $141 million fully diluted shares outstanding, higher interest expense, higher amortization and depreciation and a 28% to 30% effective tax rate. That concludes my comments. I will now turn the call over to Hubertus.

[Hubertus Muehlhaeuser:]

Thanks, Haresh, and thanks, Josef. Last quarter, I provided a deep dive on our three pillars of growth

[Richard Sheffer:]

Thanks, Hubertus. As a reminder, please keep your questions during this Q&A session to our earnings only. After our Q&A session, we will deliver additional comments relating to this morning's leadership announcement and you'll have the opportunity to ask questions about that following those comments. Jody, we will now open the call up for questions.

[Operator:]

Certainly. [Operator Instructions] Your first question comes from the line of Larry De Maria of William Blair. Your line is open.

[Larry De Maria:]

Thanks. Good morning and best of luck, Hubertus. Congratulations. This relates to the guidance. Obviously first half, you had very good organic sales, over 5%. But second half, you keep talking about growth, but at the midpoint, we're under 2% organic growth in the second half. So first question is can you help us delineate the mixed message you're sending and why should growth decelerate so much?

[Hubertus Muehlhaeuser:]

Larry, there are two components, I think. First overarching is what we've consistently talked about. This is not -- as you know -- a backlog business. So, there is short-term visibility. That's the overarching and then as you look at the first half, our strong growth was the large roll-outs. Those roll-outs will end, they have been in flow, so we do expect some continuation of the strength there from QSRs and general market picking up which will help drive KitchenCare and help with the profitability. So I think really, Larry, it comes back to us looking at the roll-outs that we had and then continue. The roll-outs will have to end, but we don't see major roll-outs will continue quarter-after-quarter.

[Larry De Maria:]

Okay. That's fair, but 1.9% at the midpoint of second half is still relatively mundane organic growth, considering the industry is doing a bit better, I guess. Right? Is there anything else in there or is it just maybe some conservatism on the market, or?

[Hubertus Muehlhaeuser:]

Larry, I think the reason why there is a range, is because there isn't visibility in this industry that we don't have the benefits of backlogs that look out over two quarters. I think we're being appropriately conservative in looking at the guidance while we debated at the guidance range internally leading up to this earnings release and call. The lack of visibility in the food service industry prevents us and I think others in this industry from getting overly optimistic when looking at guidance going forward. That's really what's going on here.

[Larry De Maria:]

Okay, thank you. And then, I guess somebody else has got [ph] the margins, but just on the Section 301 cost that are the headwind, do you read this as transitory and we can adjust the supply chain by the end of the year to get that back in? Or do you have to have incremental price increases for next year to cover that? How do you think of Section 301? Because that was an incremental cost above what you previously talked about covering.

[Haresh Shah:]

Larry, this is Haresh. We did adjust our margin guidance for what we anticipate on what we know now. As everybody know, these things change almost on a daily basis, so we will be able to -- we baked in what we think the impact will be. As things change, we will continue to update it. From a pricing perspective, you're right on, Larry, that's going to be part of next year. I don't think we'll be able to get more of that. The pricing we did in June will help us with the 323s as well as the freight. I think that's what we'll come in and Larry, if things change, it's going to impact everybody as we're aware of. So we'll keep you guys updated. And we don't want to make in terms of manufacturing decision and Josef and I have spent a lot of time talking about this. We don't want to make short-term decisions on things, to your point, that will change.

[Larry De Maria:]

Okay, thank you.

[Hubertus Muehlhaeuser:]

Thanks, Larry.

[Haresh Shah:]

Thanks, Larry.

[Operator:]

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

[Jeff Hammond:]

Hi. Good morning, guys.

[Haresh Shah:]

Good morning, Jeff.

[Jeff Hammond:]

If you could just talk about the margins, could you give us a sense of how big the mix headwind was for both the KitchenCare and the roll-outs and if there's any kind of lingering headwind into the second half?

[Josef Matosevic:]

Good morning, Jeff. Josef. There are three key components to the margin. One of them as you stated was mixed and it was primary on the cold side of the business. The other one was the tariffs and the third piece and it is probably the largest piece was the customer changes during the roll-out phases that we had to adapt, so to say, on the fly. Do I expect this to continue like Haresh mentioned earlier? Tariffs is unknown at this point, but we have done everything we could to position us to at the most accurate date to date. The roll-outs will stabilize the half, stabilize the quality is good so we don't expect this to continue in the second half. And the mix, we feel very confident about the mix. We will see an improvement of the mix.

[Hubertus Muehlhaeuser:]

Adding to that of course as you know, KitchenCare was really down as we have mentioned in the prepared note in the first half and we see that they burn through all the inventories, so the second half, we're going to have a very, very healthy mix of KitchenCare. And as you know, we don't disclose margins for that, but they're significantly higher than our whole goods margin. So that's going to be a very positive driver as well.

[Jeff Hammond:]

Okay. Then just maybe going after growth in the second half a different way. It seems like KitchenCare is going to exhibit better growth, the general market is getting better. Maybe just quantify how big these roll-outs were on the first half that gives you a little bit of pause, that the growth is not better on the second half.

[Josef Matosevic:]

Let's look at the second half. Sales guidance also from a perspective or a customer line simplification. We do reserve a little bit of caution in there that we want to walk away from unprofitable business. And as you know in this industry, it usually happens in Q3 and Q4, and we don't think that this year is going to be any different to that. So therefore, in our topline guidance, there is a small point of that walking away from unprofitable business because of customer line simplification in there.

[Jeff Hammond:]

Okay. That's helpful, guys. Thanks.

[Haresh Shah:]

Thanks, Jeff.

[Operator:]

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

[David MacGregor:]

Congratulations on the organic growth. I wanted to explore that a little bit if I could. Could you start by just helping us understand how much of the organic growth was price versus volume?

[Haresh Shah:]

The price component is in the slides. So we had the -- I'm sorry, I'm just flipping to it there. We had the pricing, was a 90 basis-point improvement for the quarter which really offset the inflation and then the mix, as we said earlier, the volume was positive and offset by the mix. So we don't really want to get into that further other than what the drivers were in the mix.

[Hubertus Muehlhaeuser:]

David, I think said in another way looking at that was on the margin impact looking at the sales impact, volume was far and away the largest driver of the organic growth in the quarter.

[David MacGregor:]

Right.

[Josef Matosevic:]

And it is volume in these three different areas that I outlined. It is really volume growth with the QSRs that came back strongly and several roll-outs, and it's also volume growth in the general market where we also have nice, nice volume growth. Because of this shift that the customer may keep coming back to us.

[David MacGregor:]

On that 90 basis points on your EBITDA slide associated net pricing, if you assume a fairly high incremental margin on pricing deltas, it looks like it was maybe about 100 basis points if my math is correct. I guess I just want to explore with you, you had a year-end price increase and another on in June which is obviously late in the quarter -- fairly substantial price increases and it looks like traction may have been fairly limited. I guess couple of thoughts there. Number one, how did your competitor's decision to postpone their second quarter price increase impact the ability to achieve pricing traction? And I guess secondly, are you seeing an increase in discounting trends? Was it more pronounced in Q2 than what you would have expected?

[Hubertus Muehlhaeuser:]

I think the discounting I mentioned in my earlier comments, I don't want to talk about discounting. It's kind of -- and the second half always that you have a little bit of unprofitable business and that we will walk away from that. But we don't see significant discounting going on. The second one is to the price increases, all our competitors have followed now price increases. So it's not that we're the only ones. Everybody is increasing pricing and there is -- if you look at the media, there's a very clear understanding because of all this sweep and tariff discussion that there is price increases coming to us. So therefore, I think the pricing -- and then we see that is going to stick. Josef, you want to add something to that?

[Josef Matosevic:]

Just the finishing touch here, Hubertus. David, the price increase was in the general market sector.

[David MacGregor:]

Right. Just a follow up then on NexGen. Given you said that starts in July. Was there any significant challenging [ph] impact to second quarter volumes?

[Josef Matosevic:]

There was slight increase, David, and as you know, we are extremely excited about that journey. It will take them some time collectively to switch over as a large organization and once that kicks in, I believe we will see positive trends towards our growth curve.

[Haresh Shah:]

Yes. In the second and back half of '18 and then to '19.

[Hubertus Muehlhaeuser:]

And we have baked this in very gradually into our guidance as well.

[David MacGregor:]

Great. And with all the right-sizing and simplification works as you've been doing, you're confident you got the capacity to support that incremental volume?

[Hubertus Muehlhaeuser:]

Absolutely, David.

[David MacGregor:]

Okay. Thanks very much.

[Josef Matosevic:]

Josef. Has increased productivity a lot in the last year, I can tell you. So we have capacity to satisfy those needs.

[David MacGregor:]

Good to hear. Thank you.

[Operator:]

Your next question comes from the line of Mic Dobre of R.W. Baird. Your line is open.

[Mircea Dobre:]

Yes, good morning. Hubertus, congratulations. Good luck. I guess it was hard for you to keep away from tractors, I get that.

[Hubertus Muehlhaeuser:]

You're right.

[Mircea Dobre:]

My question I guess, I want to go back to this whole organic growth discussion and I guess I'm as puzzled as the other folks asking because your comps are easier in the back half than they were in the front half and I understand the roll-out activity that you talked about, therefore it makes sense. What I'm struggling with when I'm looking at your guidance range, your implied organic guidance range in the back half, it's actually wider now than it was at the start of the year. I would think that given that you have visibility, you would be narrowing rather than widening the range because -- correct me if I'm wrong -- but it's not like the environment has gotten more uncertain. What are we missing here?

[Hubertus Muehlhaeuser:]

I think we answered that already, Mic, in all honestly, because the question was asked three times now. I think we are seeing that the trends in our industry in the second half is that there is more compensation and therefore, there is unprofitable business that we don't want to go after. In our guidance range, we assume that we're going to walk away from a part of the business and that's the conservatism, I think that you can expect from Welbilt because we promise what we deliver and we deliver what we deliver promise. And if, in all honesty, if this is not the case and we don't have to walk away from business, of course we're going to have the next call and then Josef and Haresh and team, they might revisit the topline guidance and might narrow it further down or increase it. But we'll cross the bridge when we get there, because as Rich have said, it is a short visibility business and therefore we want to stay prudent and we want to stay conservative, but we feel absolutely positive that we're going to be, of course, within that range.

[Mircea Dobre:]

Okay. So you're [indiscernible] concern with your competitors' actions on pricing? That's the issue? It's not so much the market itself?

[Hubertus Muehlhaeuser:]

I don't want to go into competitors' action, really. No, it's more our customer line simplification and has nothing to do really, with our competitors. It is just customer line simplification. We want it to go up to higher margin business -- mid to high margin business and that's it. Okay?

[Haresh Shah:]

And there is this uncertainty on the 301. Again, we're adjusting some of that from a margin perspective, but Mic, as you know, these things are changing daily. I think it's prudent for us to look at what we can and not over-promise and under-deliver. We'll stay focused on that.

[Mircea Dobre:]

All right. And then my follow-up on margin, going back to this bridge on Slide 9. On that volume mix, 160 bips headwind, I thought you basically said that essentially, the mix KitchenCare and the roll-outs more than offset the volume benefits. As you look at the back half, is this fair to expect this volume mix bar here to turn positive to support the margin? Is that what keeps us there?

[Hubertus Muehlhaeuser:]

Yes.

[Haresh Shah:]

Yes.

[Josef Matosevic:]

A big yes.

[Hubertus Muehlhaeuser:]

A big yes from four people around the table here. Rich, unless you want to say something?

[Richard Sheffer:]

I think maybe you summarized that well. I don't want to repeat what you said, but we did have the headwinds there from a mixed perspective. We see that changing. I think a question earlier from David on the volume from a topline, yes, we absolutely had higher volumes. So, Mic, we agree.

[Mircea Dobre:]

Would you venture to quantify it?

[Richard Sheffer:]

I don't think we want to do that at this point. We'll keep the volume in mix as a component and then Q3, we expect that trend to change. I don't want to get further into that.

[Mircea Dobre:]

All right. Thank you.

[Richard Sheffer:]

Okay. Thank you, Mig.

[Operator:]

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

[Walter Liptak:]

Hi. Thanks. Good morning guys and congratulations, Hubertus.

[Hubertus Muehlhaeuser:]

Thank you.

[Walter Liptak:]

I want to just go a little bit further with this discussion about the walking away from discounting. What I remember is in the fourth quarter last year, there was $40 million in business and I think traditionally, the business, there is always fourth quarter discounting and it had been pretty clear and probably pretty clear what your customers too, that you're not price-discounting or going after market share volume discounts at the end of the year. If we think that as a step further, does that mean that the growth in the third quarter should be stronger and then the fourth quarter, you're anticipating walking away from some business again?

[Hubertus Muehlhaeuser:]

All right.

[Haresh Shah:]

I don't want to get into quarterly guidance because we don't provide it, but in our models, we see a stronger Q3 than Q4. I don't want to get more than that, but yes, we expect to be better in Q3 than Q4.

[Hubertus Muehlhaeuser:]

And please remove the word discounting from your vocabulary, because this is really a total cost of ownership industry where there's rational pricing and our customers understand it and the competitors understand it. Okay?

[Walter Liptak:]

Great.

[Hubertus Muehlhaeuser:]

And we know, 80/20, discounting doesn't...

[Walter Liptak:]

Absolutely. It's all about 80/20 as you know.

[Haresh Shah:]

And I think, Walt, from your perspective, we've talked about this, a lot up on the 80/20 so we continue to make focus on improvements with the focus that we've been driving at and we still have good opportunity, continue to do that, we don't see any structural impediments that will continue and back to a question that was asked earlier about capacity. As we implement these things, we'll create additional opportunities for us to reduce and simplify.

[Walter Liptak:]

Okay. That sounds great. Just a follow-on on pricing. With the general market picking up, is it possible that some of that was a pull forward, had a price increase? When do the price increase become effective because the channel is filled up, ahead of the price increase?

[Hubertus Muehlhaeuser:]

Josef, why don't you take it?

[Josef Matosevic:]

Yes. We don't see any pull forward in this activity at all. Our growth is very much tied into our overall strategy and gets our differentiation; we currently re-enjoy this and we will continue to enjoy this with execution of our strategy. I don't see no pull forward.

[Walter Liptak:]

Okay, great. And any channels so expected with NexGen ramping for the back half of the year?

[Hubertus Muehlhaeuser:]

Could you repeat one more time?

[Walter Liptak:]

I guess in the back half of the year, next year, I think as a buying group, there might be some channel fill. It can't be the distributors. So I wondered if it has actually been meaningful enough or how does that play out with working with NexGen?

[Josef Matosevic:]

Yes, Walt. I fully expect here as the conversion continues as I mentioned earlier into systems that switched over into our brands that we will see a gradual improvement on our topline and eventually enjoy full switch over that would carry all into the next year. I do expect a pick up.

[Hubertus Muehlhaeuser:]

The NexGen deal is a big, big win for us and that was really Josef mainly bringing that home and that's going to be continuously driving our topline over the next years.

[Walter Liptak:]

Okay, great. All right, thank you, guys.

[Hubertus Muehlhaeuser:]

Thanks, Walt.

[Operator:]

Your next question comes from the line of Joel Tiss of BMO. Your line is open.

[Joel Tiss:]

Hey, guys. How is it going?

[Hubertus Muehlhaeuser:]

Hey, Joel. Good morning.

[Joel Tiss:]

I just wondered, is there any just following on the NexGen? Is there any mixed issue with NexGen at all? Is that part of what's going on? Did they have a little bit better buying power than some of the other channels or customers?

[Josef Matosevic:]

We don't have any mixed issues in that area, Joel.

[Hubertus Muehlhaeuser:]

And the differentiation that they get is not really in price. You have other means of giving better terms when it comes to delivery priority shipment and customer service. That's really the differentiation that they get and that they enjoy with us. Treat it as we did the number one customer. That's really a differentiation, but there's no drag on the margin.

[Joel Tiss:]

Okay. And is there any further color you can give us around customers, like what are they really excited about in the future and what are they buying more? Cold side or hot side, or more sort of technologically enabled? Just a little more flavor on exactly what they're stepping up on. Thank you.

[Josef Matosevic:]

Hey, Joel. Clearly the excitement is as we talked about it a few times now into our fitKitchen concept and really been able to connect the kitchen as one operating unit into digital transformation. That is a big excitement and it creates more interest based in element of educational component that we have to work through and understand the whole service component into distribution component, but if you would ask me for the top three between the fitKitchen, the digital strategy and just creating the operating philosophy of connected kitchen, that's where I believe the market is trending. Hubertus, you want to add some to it?

[Hubertus Muehlhaeuser:]

Absolutely. I think if you compare the equipment and you look at the solutions, you see that what we're talking about is reality and we can sell this as of now whereas some others don't talk about it, but then they just don't have the ideal solutions ready at hand and that's where we have our competitive advantage and that's why we are ahead and this is why we are outgrowing the industry and the numbers speak for themselves.

[Joel Tiss:]

That's very helpful, thank you.

[Hubertus Muehlhaeuser:]

Thank you.

[Operator:]

[Operator Instructions] Your next question comes from the line of Jamie Clement of Buckingham Research. Your line is open.

[James Clement:]

Good morning, gentlemen. Thanks for taking my questions.

[Hubertus Muehlhaeuser:]

Hi, Jamie, good morning.

[James Clement:]

Hey. Hubertus, late last year and I think earlier on this year, I think you laid out at day's dawn what you're seeing in terms of testing activity with some of your large chain customers that some restaurant chain and CapEx that had been diverted to the front of the house, so to speak, was potentially poised to go back to the kitchen. The risk of sounding snarky or anything like that, all of this talk about pricing and volume and tariffs and all those kind of things -- isn't that precisely what's happening now? Isn't there real strong evidence that the spending is going back to the kitchen right now? That's why you had a quarter like the one you did?

[Hubertus Muehlhaeuser:]

Of course. Look at our numbers. I think the tariffs and sales [ph] -- but the more short-term related stuff that's more affecting the general market, which is the reason perhaps why the general market wasn't excited in the first half. But the QSRs are buying. Now the numbers, that's the reason why we have these several roll-outs in the first part of the year and despite those very large roll-outs, of course leveling off right now as we have said, we have continued growth in the second half albeit on a smaller level with the QSRs. But the QSRs are going back to normal, so to safe, steady growth and the general market is now coming back. These are the trends that we're really seeing.

[James Clement:]

Okay. That's very helpful. Other thing, just on the questions about your implied organic guidance range in the back half. Hubertus, maybe you can talk about some other industries that you've worked in. In this one, that 1% number that folks were looking at six, eight, nine months ago, those folks haven't changed that number either, so it's not as if any of you guys really have a lot of visibility into all this. Right? You're just making your best guess. It's not like there's a tremendous amount of data that you're working with here. Right?

[Hubertus Muehlhaeuser:]

No. there's very few data and you the nail on the head. This is exactly why we basically said that we want to guide conservatively now and only go up a couple of -- 1% basically in our guidance range because of the small visibility. Josef, you want to add something there?

[Josef Matosevic:]

And the in-depth discussion with the customer?

[Hubertus Muehlhaeuser:]

Yes.

[Richard Sheffer:]

I just want to make a note that it sounds like those that are on the call over the internet, that it dropped. They must have lost the bridge. So why don't we hold a second till I get a notification that the internet participants are back online.

[James Clement:]

By the way, just correct me if I'm wrong here and maybe you don't remember all these, but the people projecting the 1% are the same people that are projecting 3% growth for 10 consecutive years. I'm not sure how much rigor really goes into their work.

[Hubertus Muehlhaeuser:]

You're right.

[James Clement:]

Okay, thanks very much.

[Josef Matosevic:]

It's a very heterogeneous short side.

[Haresh Shah:]

Exactly. That ties back to our comments. This is a short cycle. Josef is out there talking to the customers. That's where we get our insights. We're aligned with you, Jamie.

[James Clement:]

Okay. Appreciate that.

[Hubertus Muehlhaeuser:]

Thank you, Jamie.

[Richard Sheffer:]

Jamie, we don't want to cut you off because you have more.

[James Clement:]

No. Thank you so much for your time. Appreciate it.

[Hubertus Muehlhaeuser:]

Okay. Now we got to hand -- we're back on with the internet folks, so we can continue with the call.

[Richard Sheffer:]

Okay. So Jody, are there any other questionnaires?

[Operator:]

There are no further questions on the queue.

[Richard Sheffer:]

Okay, thanks. At this time, I would like to introduce Cindy Egnotovich, Welbilt's Chairperson of the Board to share a few comments regarding today's leadership announcement. Cindy?

[Cindy Egnotovich:]

Thanks, Rich, and good morning, everyone. I'd like to begin my comments by reminding everyone about where we started three years ago with Manitowoc Foodservice. It was a difficult environment that Hubertus came into as the company was preparing to be spun-off. Under his leadership, his team developed a clear strategic vision with ambitious targets for profitability and growth. The years since the span have been the best the company has seen in a long time. Not only this profitability increased faster than expectation, but also the innovation strategy has proven to be successful and has driven possible growth. Customers came back and now recognize Welbilt as the innovation leader in our space. The team has also worked on a cultural transformation and create a truly high performance culture demonstrated by 12 consecutive quarters of EBITDA improvement and now the outgrowth of the industry. Hubertus has a symbol that informed a very strong and diverse team that ensures the continuation of our strategy. He also pepped in active dialog with the board on strategy. So the board not only understand the strategic direction, but is fully supportive of the strategy and the ambitious target. Hubertus' departure will trigger a well-prepared succession in process as we have a strong bench of internal candidates. Choosing Josef Matosevic to be the Interim President and Chief Executive Officer was a logical choice since he has demonstrated his leadership abilities as Chief Operating Officer since Hubertus' first day. We have a very strong leadership team within the business which gives the board confidence that the company will continue to be well-managed during the transition period. We also firmly believe that Welbilt is a very attractive employer for external candidates, given Welbilt's emergence as the leader in the industry. We will conduct a deliberate process but feel confident that we will be able to name a successor in a not too distant future. Hubertus will stay on until the end of August to help in the first weeks of the transition process. On behalf of the Board, I wish Hubertus much success in the next steps of his career.

[Hubertus Muehlhaeuser:]

Thanks, Cindy, for your kind words and I also like to thank the entire board for the insight into the food service industry that have profoundly influenced our strategic direction. I also like to thank my management team for their leadership in transforming our business. They are the most diverse, ambitious and focused team I have ever had the privilege to work with. The development of talents throughout the organization and the tremendous results we are going to deliver the last three years, sends a testament for what this team has accomplished. A big thank you also to the thousands of our employees around the planet. Without your energy, commitment and support, we would have never achieved this amazing transformation to position Welbilt for superior profitable growth in a steadily growing market. Also a word to our customers. Josef and I have spent hundreds of hours listening to you and we have taken your input to transform into a more customer-focused organization. Under Josef's leadership, you can rest assure that you will remain our number one priority. And finally to our shareholders and the investment community at large, you were skeptical in the beginning, but many of you have now become Welbilt's fan. Thank you for your continued support for this management team under Josef Matosevic and the Board's leadership. While I'm excited to be joining another company in [indiscernible] Industrial and going back to where I came from, namely the agricultural and then construction industries, I will always keep Welbilt and it's people in my heart. And I also look forward to continuing to do my kitchen shakes [ph] wherever I travel around the world. Now, I would like to turn back the call to Rich.

[Richard Sheffer:]

Thanks, Hubertus. Jody, this concludes our prepared remarks. We will now open the call up for a brief question-and-answer session.

[Operator:]

Certainly. At this time I would like to remind everyone. [Operator Instructions] Your first question comes from the line of Rob Wertheimer of Melius Research. Your line is open.

[Rob Wertheimer:]

Hi. Good morning, everyone. Congratulations, Hubertus.

[Hubertus Muehlhaeuser:]

Thank you.

[Rob Wertheimer:]

I really just wanted to see if you all could speak generally about -- obviously you've been a company in some transition and some positive transition. Can you talk a bit about just the depth of management around you and then customer relationships and kick outs and so forth? Who and how has managed that? Thanks.

[Hubertus Muehlhaeuser:]

Yes. Very well. I think when we started this journey exactly three years ago in August, I do remember that the first meeting I had, the evening before I started was with Josef, he was sitting on a beach in clear water looking out into the see. He was about to leave because he was afraid with Manitowoc [ph] and he had all the right ideas in mind. I said, 'Why don't we connect you? Stay as Chief Operating Officer and we turn this company around together?' From then, a very, very successful partnerships started. So he really was my first pick and as you know, in all our investor conference is I always mention him, you see him part of these calls since the very first day. So Josef has been a key driving force in turning around this company operationally, but also from a customer point of view. And I think that's the second thing. We had been on the road together for hundreds in hours and I think it was hundreds, but for him was thousands of hours. So he has a lot of all these customer relationships and when you talk to people and from NexGen or from Seafile [ph], from CPG. When you talk to all the key accounts, they know him, they value him, and then so I think there's utmost continuity that you're going to have there. And then I think if you look at the rest of the team, we have put a lot of emphasis of getting the right channels into the team here, into the company and we've done that. As you know, Haresh was groomed internally, so he's also being with us right from the first month and understands the strategy. Rick Caron has been here for his entire career. They're nearly 30 years. Very, very strong. And then don't forget our general market leaders in the Americas Bob Wonder, veteran in the industry [indiscernible] person that joins Welbilt at the time in Manitowoc [ph] many, many years ago. They really drive the business. So I think the job of a CEO is to pick the best people which we have done early in the process; secondly, to get with those people a convincing strategy together; and then to get the organization around. I think what we have is a very stable, strong-benched team at very clear strategy that's fully endorsed and developed by that team and endorsed by our thousands of employees around the world. So I really think that we are in a very, very good spot and if Cindy has that, we got to announce the permanent success in due course. I don't think it's going to be a very long process. We feel very, very confident that we have very good people in house. And also on the process side and Cindy might want to add something to that, I think it's just good governance when a CEO leads, that you basically reflect that back, look what the candidates are, also allows the next turn of candidates to have a look into that. We've done the same process with Haresh where he is going to the outside and the inside and we've got a similar process with our General Counsel, Joel Horn, who is by the way also an industry veteran, already had been the General Counsel of [indiscernible] and then we've done the process for HR. We went to the outside and now here with Josef as same process. Cindy, you want to add something to that?

[Cindy Egnotovich:]

Hubertus, I think you said it well. The Board has a very good, established succession plan in process. We're following that process, we're comfortable with it and at the end of the day, the important thing is we define and find the right candidate to lead this organization going forward. We've looked internally, we will look internally, we done this in the past where we looked externally also and we're just following our process at this point in time.

[Rob Wertheimer:]

Thank you very much, to both of you. Cindy, thank you for joining and Josef, look forward to working with you. Thanks.

[Josef Matosevic:]

Thank you very much.

[Operator:]

Your next question comes from the line of Mic Dobre of R.W. Baird. Your line is open.

[Hubertus Muehlhaeuser:]

Hey, Mic, again?

[Mircea Dobre:]

Yes. My follow up. Yes. This question is actually for Cindy. I appreciate you being on the call here with us. Two items. When Hubertus first came in as CEO, this was a company that was essentially fix or operator type story where a lot of operating improvement have to be delivered and obviously we've seen that. Maybe there are still some more left to be done. But from my perspective, it looks like the story has pivoted here to one of growth and I'm wondering if the board is looking at the business. What are some of the characteristics that you're really looking for in a CEO going forward? Is it more of a growth-focused mentality? Is it still following by the bootstraps improving internal operation, and what does that mean vis-à-vis as to how you're thinking about potential candidates? Is it industry insiders? Is it people from the outside -- how do we frame that?

[Cindy Egnotovich:]

A very good question and certainly, that has been a lot of discussion within the Board as we think about just the overall leadership of this organization. You're absolutely right. We started this company and we have a lot of operational issues and a lot of firefighting to do. Most of that is behind us, but we still have some opportunities there also. But as we think about the leader going forward, first and foremost, the Board believes in the strategy and that strategy today is still focused on a little bit of the firefighting, but certainly looking at turning the company into a growth company. First and foremost, being able to execute a well-established strategy, one; an individual that has shown the capability or has the capability to turn a company from firefighting to growth and managing a growth environment; and the third, I don't want to underestimate this one. We continue to develop the culture for this company and as we go forward, we want to make sure that whoever we bring in has a people philosophy both internally and with our customers and continue what we believe we've established is a very good people culture.

[Mircea Dobre:]

Okay. That's helpful. Thank you. And then my follow up is actually unrelated to the CEO discussion. It's more of a big picture question. If you're thinking about growth and opportunities for the company from a Board's perspective and you look at a balance sheet, I think we're still levered 3.9x net debt to EBITDA. What are your perspective as to optimal capital structure and how that essentially should evolve down the line and how that impact the company's opportunity to deploy capital in the future?

[Cindy Egnotovich:]

What I will say is obviously, we have a lot of the discussions around the board table with management, but we're going to turn that over to Haresh who could better-explain our thought process in that area.

[Haresh Shah:]

Yes. Thanks, Cindy. And Mic, we've had this discussion before. We are going to look at every opportunity that we have in our capital structure. Rich, as you know is our treasurer. Him and I spend a lot of time together, so we will work through it. We have talked about our longer term goals, our near-term or longer term from a leverage perspective that we are using every available dollar initially that was in the U.S. to pay down debt. Now that we've acquired Crem, we'll use international cash for the debt that's out there. So I don't think our plans of change, Mic, we do speak to the board every quarter on where we are, what our plans our, so expect us to continue to take opportunities as we go whether it's a debt or whatever opportunities there are.

[Mircea Dobre:]

All right. Thanks for taking my questions.

[Haresh Shah:]

Thanks, Mig.

[Hubertus Muehlhaeuser:]

Thanks, Mig.

[Operator:]

[Operator Instructions] Your next question comes from the line of Joel Tiss of BMO. Your line is open.

[Joel Tiss:]

A little bit maybe off-topic, but for Hubertus, I just wonder if you could frame for us quickly the opportunity that you see at CNH? Is it more about simplifying the structure or..

[Josef Matosevic:]

No. Joel, this is not the appropriate question at this point in time. We had the Welbilt call and look very much forward to the opportunity at the NHI and I think we're going to have lots of chats as of September 17 when I join them. Okay?

[Joel Tiss:]

Okay. All right. Thank you.

[Josef Matosevic:]

Thank you.

[Operator:]

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

[Larry De Maria:]

Thanks for the color on the characteristics of the sea [ph] going forward. Cindy, from your perspective and from the Board's perspective, what are some of the things you might be -- you think about that would -- that the company could do differently going forward? Obviously, as mentioned [indiscernible] execution, or maybe transitioning a bit more towards growth, but still a lot of woods chopped for margins. So curious to what you think the company should be doing differently in the future and now that may translate it to hiring a new CEO that may have some different characteristics and qualities that Hubertus had? Thank you.

[Cindy Egnotovich:]

As I said in my opening remarks, the Board is fully supportive of the strategy and the vision for the company. Any discussion around our strategy, we just basically went through our strategic plan. We're fully supportive. I don't see anything differently that we need to do. Certainly, putting a new CEO in place gives us the opportunity to look at, 'Is the market changing? Is the environment changing in making sure that the skill set aligns to that?' But from a strategy standpoint, from a vision standpoint, the Board sees nothing we need to be doing differently just because of this transition period.

[Hubertus Muehlhaeuser:]

And if I may add my perspective on that, I think you need to look into somebody that can do bottom line and topline improvement. Our strategy has all along been in the first two years fixed and improve the bottom line and keep the share. And then in the outer years and we are now in the first year of this strategy [ph], continue on the bottom line and outgrow the industry. We have a profitable growth strategy that addresses both elements and the new CEO coming has needs to have the competence that the interim has really is kind of somebody that understands the bottom line, but has a strong focus on the topline as well.

[Larry De Maria:]

Okay. Thanks, Hubertus. Is the Board comfortable with the pace of the margin expansion at this point? Or do we think that maybe we could accelerate it? Or are we comfortable with the pace because obviously, things have slowed down this year for a bit of transition.

[Cindy Egnotovich:]

The Board is very comfortable with the pace. If you look at the objectives here and the ambitious goal that has been set, I think that's the important thing to keep our eye on that and keep moving in that direction. But we're very much comfortable with the pace at this point in time. And again, we want to make sure we're doing the things short-term by keeping our eye on long-term goals and strategies. So that requires some pace.

[Larry De Maria:]

Okay. Thanks and good luck, Hubertus. We'll talk to you at SNH [ph].

[Hubertus Muehlhaeuser:]

Absolutely. I look forward to that.

[Operator:]

There are no further questions on the queue. I will turn the call back over to Richard Sheffer.

[Richard Sheffer:]

Thanks, Jody. This concludes today's 2018 second quarter earnings call. Thanks again for joining us this morning and have a great day.

[Operator:]

This concludes today's conference call and you may now disconnect.