Welbilt, Inc.
Q1 2016 Earnings Call Transcript
Published:
- Operator:
- Good morning, ladies and gentlemen. My name is Amy and I will be the conference operator today. At this time I would like to welcome everyone to the Manitowoc Foodservice Q2 2016 Earnings Conference Call. This call is being recorded today, August 11, 2016. A replay of this call will be available beginning at noon eastern today until midnight, Thursday, August25, 2016 by dialing 855-859-2056 or 404-537-3406 and entering the access code 518233389. You may also listen to a replay of this call over the internet beginning at noon eastern today and running through noon eastern on September 10, 2016. You can access the internet replay by visiting the Investor Relations page at www.mtwfs.com. I will now turn the call over to Mr. Rich Sheffer. Your may begin.
- Rich Sheffer:
- Thanks, Amy. Good morning and welcome to Manitowoc Foodservice’s 2016 second quarter earnings call and webcast. Joining me on the call today is Hubertus Muehlhaeuser, our President and CEO, John Stewart, our Chief Financial Officer and Josef Matosevic, our Chief Operating Officer. A copy of our press release is available on the investor relations page of our website www.mtwfs.com. We also posted a non-GAAP reconciliation table organic third part net sales and constant currencies by segment on that website page as well. Before I turn the call over to Hubertus, I need to review our Safe Harbor statement with you. Any statements in this call regarding our business that are not historical facts are forward-looking statements and our future results could differ materially from any implied projections or forward-looking statements made today. Our actual results may be affected by many important factors including risks and uncertainties identified in our press release and in our SEC filings. We do not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or other circumstances. Now I’d like to call turn the call over to Hubertus.
- Hubertus Muehlhaeuser:
- Thanks, Rich, and good morning, everybody. I’m very pleased to be speaking with you speaking with you about our continued delivery of the operating improvements that we have announced thus far. As you solve in the press release this morning we delivered a 16.1 adjusted up very EBITA margin which is 190 basis point improvement over last year's second quarter. This achievement marks for consecutive orders of year-over-year margin improvement which coincides with the new management team taking over. We remain fully on track with our simplification and rightsizing initiatives and continue to expect these actions to deliver $50 million of savings this year against the three-year $100 million program that we announced last fall. As a reminder our simplification and rightsizing initiatives are comprised largely of six categories. With simplification we include 8020 but our cost takeout lean implementation and sourcing. Within rightsizing we include manufacturing capacity reduction and headcount reductions while we will not quantify savings for these individual categories we will discuss them qualitatively to show our implementation progress. Within simplification we're continuing to make good progress with our implementation of 80/20. Our class functional team is begun to transform the culture by applying the 80/20 principle. We made sure the progress on the pricing portion of the project this quarter as prices for second tier products have been increased and we have further reduced discounts for second tier customers. It is a very important to note that we are maintaining our pricing in discounting discipline despite some market intelligence that certain competitors are not -- now aggressively buying market shares. In our view we cannot eat market share. We will remain very disciplined and continue to focus on our margin improvement goals. We are finalizing our road maps for our product line and customer line simplification strategies and we will begin to roll these out June 2 half of 2016. We also made good progress on the SKU rationalization this quarter as we reduced another 3% of our equipment SKUs bringing total reductions to approximately 8% of our beginning equipment SKU count. As we made progress on SKU production and 80/20 into complexity out of the plan we are also implementing the manufacturing. We are on the very early stages of adopting the manufacturing principles in our already generated early successes and reducing product cost. As our 80/20 project progresses, our ability to generate more efficiency than our plans through lean will also increase. In our strategic sourcing progress we're making good progress in consolidating our pots replication supplies and have also just consolidated flight and MRO suppliers. The team is continuing to work on other categories which we will discuss in the future call. We anticipate that all of those new contracts will provide benefits in line with our expected savings goal. Customer feedback on our simplification remains very positive. Many members of our executive using team including myself of our so we visited and received first-hand feedback on the front line of our end customers and distribution partners. The feedback that we are receiving is a very, very encouraging. They like the new focus and dedication and they also see improvements in our product quality and they encourage us to continue on the path of simplifying our business to become the more nimble and entrepreneurial organization. That's moved to our right size initiatives. We have successfully completed the previously announced manufacturing capacity reduction. These included the transfer of a large portion of the ice machine product assembly from Manitoba Wisconsin to our Monterey facility, the transfer of the manufacturing from our Cleveland Ohio plant to three other North American manufacturing plants, and the subsequent shutdown of the Ohio plant. These were completed within the planned timeline and budget and we are done with minimum customer disruption. These two actions resulted in the excess capacity reduction in around about 10%. This morning we announced the next phase of our manufacturing capacity reduction with a plan transfer the manufacturing at our center spurred Indiana plant, Tijuana and Monterey couple of Mexico, and the subsequent closure of our center spurred facility. We expect this to be completed by early 2017. In May we also announced the transfer of the manufacturer products made at our Singapore plant from Thailand and China and the Singapore plant subsequent closure. We expect the Singapore plant closure to be completed by the end of the third order this year. As I mentioned in the press release we expect to incur approximately 3 million over structuring it senses to complete these new transfers enclosures. These additional rightsizing measures will bring total manufacturing capacity reductions to 15%. We anticipate further announcement in 2017 once the heavy lifting from this year's actions is successfully completed as we track towards our goal to a 20% overall capacity reduction. Moving onto our topline results. On a constant currency basis our organic sales were flat with the prior-year quarters. As we detailed in our press release organic sales adjust for disposal of the Kaiser Panel system business in December 2015, and our acquisition of the remaining 50% of our Welbilt/Thailand adventure in October 2015. Foreign currency translation had a -1.3% impact on our second-quarter results this year. The National Restaurant Association, NRA reported that restaurant sales have been on even during the first six months of 2016. NRA's performance index dipped in both may and June the economic reported that use sales restaurant group 1% in the second quarter of 2016 over a year ago with the queue of ours growing 8% and full-service restaurants growing 2.5%. We see this trend of weakness in the QSR market continuing for the rest of the year. Let's look at the performance of the three reporting segments. Let's start with the Americas, in the Americas organic third-party sales and constant currency decreased by 0.8% during the order, primarily due to in the QSRs corporate I market. Our margin in the Americas is however a much better story. Operating EBIT A margin increased 340 basis points compared to last quarter despite lower sales. This improvement was driven by savings from our supplication and rightsizing initiatives, improvement in KitchenCare operations, operating efficiency improvement and the sale of KPS. In EMEA third-party sales in constant currency grew 5.7% in the quarter driven by strong sales at our Merrychef eikon e2s high speed ovens that were introduced last year, KitchenCare improvement in the region and pricing realizations from the 80/20 simplification initiative. Second quarter operating EBITDA in EMEA margin increased by 420 basis points over last year's second quarter. This is driven by savings from simplification and rightsizing initiatives , better product mix due to our new product introductions and operating efficiency improvement. In APAC, organic third-party sales in constant currency decreased by 5.3% mainly due to lower QSR and new store openings in China and softer general market sales in the quarter. Our second-quarter operating EBITDA margin in APAC decreased by 390 basis points. This was primarily driven by the negative impact of lower sales volumes of its cost absorption and restructuring costs partially offset by savings from our simplification and rightsizing initiatives. As we look forward to the balance of 2016, we remain on track to deliver our full-year adjusted operating EBITDA guidance of between 16% to 17%. We have however adjusted our organic net sales and adjusted EPS guidance, slightly. We have a couple of different things happening within our sales guidance. On the positive side, we saw the full innovation pipeline with over 20 new product introductions slated for this year. Many of them are anticipated to begin generating sales during our third and fourth orders. We have begun shipping our new nitro infused coffee beverage system as part of the global rollout by a large coffee chain and should begin shipping out our new hot holding cabinets soon. However, we have seen softness in orders for equipment by QSR so far this year and that has continued into the early part of the third quarter. We're also seeing a delay on the timing of new product rollouts versus previous expectations. Finally we are expecting a negative impact on foreign-currency translation from the weakness in the British pound since the Brexit vote. These issues have led us to reduce our organic sales slightly by 1% so we now expect our organic net sales growth between 1% and 3% for the full year. Let's put in dollar terms this is an adjusted of approximately both $50 million at both ends of prior 2% to 4% guidance range. The adjustment to the organic sales guidance has $0.02 an impact on adjusted EPS, so our new adjustment EPS guidance ranges is between $0.60 to $0.70 per share. It is important to note that we continue to expect growth in our second-half, but we now see the majority of this happening in the first quarter. We remain committed to reinvesting and strengthening our win brands, correcting the shortcomings of the past and partnering with our customers to design and develop future breakthrough products solutions and technologies. We continue to win awards, recognizing our technology and product leadership. In the second quarter alone received a Blue Flame Award for Frymaster's Integrated Oil Quality Sensor. Our Convotherm [indiscernible] awards in the quarter for design and space-saving. Finally our manageable ice machines placed first in four separate categories in convenience store brand perception studies. I will now turn the call over to John who'll redo additional details from our financial statements. John?
- John Stewart:
- Thanks, Hubertus. To follow-up on Hubertus's discussion of our additional rightsizing actions we announced today, you probably noticed that we did not include any discussion of savings associated with these actions. That was in line with our prior stated intentions to stop quantifying individual savings initiatives going forward, the savings from the initiatives that we announced today will be included in our overall 2017 adjusted operating EBITDA margin guidance that we will provide with the fourth-quarter earnings release but it will not be quantified separately. As you review the second quarter financial statements there are a couple of items that I want to highlight for you. The first item is interest expense, this of course is our first standalone quarter with our new capital structure, and a $27 million of interest expense this quarter should start coming down in the near-term as we continue to focus on delevering. We did pay down $38 million of debt in the second quarter, 25 million of the debt pay down was on the $975 million term loan B in the quarter, reducing the principal to $950 million by the end of June. We also use cash generated outside of the U. S. to pay down approximately $30 million in a foreign line of credit. As a reminder we were a net landowner in the company basis to former entity parent last year, as such this last year's interest expense compares to prior year interest income on our inter-company balances, these balances were set to a spin-off. Our effective tax rate in the quarter was 21.4% compared to 31.5% in last year's second quarter. The decrease resulted primarily from a geographic shift in where our earnings are generated comfortably as a result of the rightsizing initiatives that we have completed to date. In addition to our updated organic sales and adjusted EPS guidance that Hubertus discussed earlier, we did make minor changes to a couple of items in our guidance this quarter. First, we adjusted our interest in and forecast to now be between $82 million and $86 million, this represents a $4 million increase in the prior range and this change is primarily due to the fine tuning of the timing of our debt pay down forecast. We also reduced our effective tax rate guidance to now be between 26% and 29% for the full-year which is a 1% reduction in the range. This reduction was made to reflect our updated expectations on the geographic split of where we expect to generate taxable earnings this year. It is important to note that this range excludes $2.9 million of discrete items recognize during the first half of 2016 and is in some additional discrete items to the balance of the year. If we include these discrete items already recognized, the range to be between 23% and 26%. The change to the interest expense an effective tax rate guidance offset each other so the entirety of our Tucson adjustment to our adjusted EPS range that is due to the adjustment in our organic sales guidance. Finally, we adjusted our depreciation expense to be between 17 million and 20 million which represented $4 million reduction in the guidance range and is primarily due to the timing of this year's capitals vending. Our capital spending will be second half weighted and that is the laying the start of the depreciation expense related to those assets. Our capital spend forecast is unchanged for the depreciation expense will run slightly higher towards the end of the year from the run rate in the first half. With that I will turn the call back to Hubertus.
- Hubertus Muehlhaeuser:
- Thanks John I have a few more comments made regarding our sales. We see our new product contribution pipeline helping us to deliver the sales growth that we forecasted. While this is not a long backlog business we are very tuned into our customers needs for innovative technology and products solutions that help them reducing their operating costs. We understand the timing tide and duration of the test marketing and how they plan to transition from store test to broader adoption of equipment to satisfy their changing manual needs. It is those close customer relationships that help us to see the relationships -- opportunities later in the year but also some of the older delays that we include and further we work with major customers as we rethink the entirety of the kitchens to adapt to changing demand and cost trends. We are partnered with one major QSR to launch our first significant fitKitchen project. This project is move from the study and proposal face to the kitchen design phase but we cannot comment on who the customer is in particulars the specifics of the design needs we see as early validation that the model of being a full-line supplier with an integrated Road back down is a right long-term model for partnering with our key customers. We also will not comment on the financial implication of this important project when other than to confirm that it is included in our full-year guidance that we provided today. To conclude our prepared remarks, 2016 remained a transition year for us as we focus on delivering and delivering. That is we're very focused on delivering the operational improvement through excellent execution of our simple vacation and rightsizing initiatives which will drive improved profitability and cash flow. And that we will focus on the delevering of our balance sheet using our improving flow to reduce debt. We have demonstrated progress on delivering the operating improvements now for four consecutive quarters and we began to deliver this past quarter. To continue delivering and delevering we will proceed on a Mark to your journey along the path to an industry benchmark margins and having the capital structure to finance the future organic and inquisitive profitable growth of our business. Amy, this concludes our prepared remarks. We will now open the call up for questions.
- Operator:
- [Operator Instructions] Your first question today comes from the line [indiscernible] of Robert Baird. Your line is open.
- Unidentified Analyst:
- Yes, thank you. Good morning gentlemen.
- Hubertus Muehlhaeuser:
- Hi Mick, How is it going.
- Unidentified Analyst:
- Very well, thank you. And certainly very nice work on the margins, I do have a few questions though and maybe first we can start with a little more clarification on your guidance, on the top line in particular, as I am looking at it the guidance imply something to the tune of $90 million $100 million more revenue in the back half than what you have seen in the front, there has been a chains in terms of demand progression from QSR, so we know that that is a negative? But also know that you have new product coming in in the back half and so maybe can you separate out sort of the incremental bump that you're going to get from new product overall and what this QSR soft and our is going to be.
- Hubertus Muehlhaeuser:
- Were basically saying that we need to reduce our sales guidance and that is due to two factors maybe the weakness in the QSR business in the first half of the year and is reflected in because of that -- the second element of that is rollouts that will happen in the second quarter, however some of them will drag into 2017 , it's kind of a shift by 1 to 2 months for the different product categories got some are on track and some are coming a bit later, that was the common I'm trying to make because we expect an respective course for testing and that is sometimes take longer for the QSRs to adhere for the plant, that is the second reason, the third reason I think it's also important is the impact of Rex it, -- Brexit, that drag down the correction of 15 million to ourselves guidance is really made up of a little softer QSR in the first half, the rollout coming one to two months per category a little bit later, and thirdly a big portion of it is currency translation.
- Unidentified Analyst:
- Okay. I appreciate that.
- John Stewart:
- Maybe John just to build on what Hubertus said, our growth, just as we have said all year long, the expectations for growth are not only that cast driven, but we fine-tuned it to say we expect more of the growth in the fourth quarter, reflecting what we have seen so far in the third quarter and it is those new products that are going to be the drivers .
- Hubertus Muehlhaeuser:
- This is also one thing this is also meant and over market intelligence we see some of our competitors very aggressively buying market share and we will not do this. This year is for us a year of transition, it is about improving our product quality and product Quat cost to work on the margin and we are willing to leave some dollars on the table if they do not provide the right business margin for us and we're happy that some other competitors take them for lower margin we will not do this year. We are setting those up for profitable growth in 2017 and beyond, this year as I topline growth year and we said this all along.
- Unidentified Analyst:
- Sure. I appreciate and related to this as we think about margin being that you are stressing the fourth order being stronger than the third is it fair to assume that margin will follow volume as well. It is fair to assume.
- Hubertus Muehlhaeuser:
- And, also, you should remember that one of our major initiatives in sophistication and rightsizing, the closure of the Queensland plant only came towards the end of the second quarter and therefore we will start to see the full benefit of that facility closure in Q3 and Q4. Furthermore we will start to see the beginnings, albeit small, of the Singapore plant closure in Q4. Pleasure the quality and product cost improvements for the product we've world into Concorde and that will also show up in the second half of the quarter for the product.
- Unidentified Analyst:
- Okay great. And maybe the last one before go back into the queue, maybe you can comment a little bit on how you are thinking about cash flow for the full year, I am also trying to get a little more comfortable with the progression of working capital, especially in the back half of the year, I am looking at inventory specifically and I remember your comments about building a little bit of inventory because of the Cleveland transition that is now behind you. How should we think about the back half.
- Hubertus Muehlhaeuser:
- Okay, so for cash flow what I focus on is the metric that we have guided to which is the debt paid on which we remain at a forecast of between 120 and 140 and 140 million for the year, we pay down 25 in the quarter, as I mentioned earlier and we obviously have plans to make up the balance to hit that range during the second half. Again, just as cash follows the sales to the extent we are more fourth quarter than third quarter and there will be more debt paydown and more cash in the fourth quarter, in terms of the inventory levels, we're obviously now beginning the process of reducing the temporary inventory buildup that we have for buildup to ensure customer transitions and services that trend -- affected by the transition, " we were just up with the masses our plan with the board a few weeks ago and they have now inherited all of the past inventories from the Cleveland facility that was close. Obviously they will not be buying a lot of parts in the near future as they worked to reduce that inventory, so it will be a gradual process. We will expect inventory for the year-end to be below where we are at the moment we would take the hit if we need to and to ensure that we have extra inventory and that is one that we're going to have to keep an eye on as we go three-year more plan we must ensure that we have to satisfy a customer lead time.
- Unidentified Analyst:
- Am sorry to pressure on this but you do not has special -- specific working capital that you can share with us.
- Hubertus Muehlhaeuser:
- We do not have specific working capital reduction targets , other than I will say inventories going to be lower than where it is today.
- Unidentified Analyst:
- Okay. Thanks.
- Operator:
- Your next question today comes from James Picariello of KeyBanc Capital Markets.
- James Picariello:
- Hi guys, good morning. So just going back to the competitive landscape, you obviously made it clear that there is some increase pricing competition, people willing to buy market share, can you kind of address the business mix where you are seeing that in terms of the hot versus cold side of things. If possible maybe could you quantify the business that you walked away from in the second quarter for the first half? And any color there would be helpful.
- Hubertus Muehlhaeuser:
- I don't think anyone has said more color , is happening on both sides, and it is happening more in the general market, not so much on the QSR market, as we have said Committed very clear last year that the new Manitowoc has higher quality products got a very valuable brand and we're not giving our product under power away. And that is, I think where we want to be there because our journey of profitable growth means that we basically have to improve our profitability this year in order to position us for strong sales growth based on profitable sales next year. And if you listened on my comments on the fitKitchen product that we do for one large QSR, it is exactly those projects that we are preparing this year that set us up for good growth, organic growth, profitable growth for years to come.
- James Picariello:
- Okay. That is helpful, I know you guys do not want to quantify the incremental savings but I just want to clarify, you guys previously communicated 50 millions in savings and this year is 38 to 40,000,000 next year, the two announcements that you made today, the two additional plant closures, does that represent incremental savings beyond the 38 that you previously signed up for.
- Hubertus Muehlhaeuser:
- Yes it does. It absolutely does. So that is and met with you guys through the last several months, these initiatives will stand on their own, they will have their own benefits, we want to embedded into the margin guidance, so what you'll see in Q4, February of next year, We will give you guidance that includes the 38 million of remaining from the $100 million plus the effect from the Seles Burke and thing is for the last Singapore closure, plus everything else basically coming out from the annual budget project, so expected to be a fully inclusive margin guidance next year but definitely higher than just 38 million.
- James Picariello:
- That's very helpful, let me squeeze one more in regarding EMEA eight, the margin definitely include some nice improvement in the quarter, how sustainable is that margin expansion in the low double digit teen range looking out there for the EMEA.
- Hubertus Muehlhaeuser:
- I think we have strong product there, we have to manufacturing abilities in the UK they are a bit hammered by the weak pound right now but that also poses opportunities for us volume wide, very strong product and rounding around Mary Schaff, that competes head-on had with some of our competitors we have better technologies in the same goes with out of Germany, we feel that we have superior technology superior brands there and we feel very confident that we continue the margin expansion in the EMEA region.
- James Picariello:
- The EMEA products that will benefit the EMEA margin will benefit the [INAUDIBLE] in the United States.
- Hubertus Muehlhaeuser:
- Which we are already seeing this year to the extent. As said, as we are preparing ourselves for the successful 2017, you will see a lot more of those products going into the U. S. in 2017, also into QSRs.
- Hubertus Muehlhaeuser:
- Got it. Thanks guys.
- Operator:
- Next question from the line of Larry De Maria of William Blair.
- Larry De Maria:
- Hi, thanks. Good morning
- Hubertus Muehlhaeuser:
- Hi.
- Larry De Maria:
- I visited structure in my knowledge is not a big headline number I said that we should expect I mean should we be expecting some of the small announcement every quarter now, the high level 10% the addressed for hundred million dollars in address for execution will we get the next 10% to get to the 20% reduction and what would the timeframe be to address that.
- Hubertus Muehlhaeuser:
- Please note that so far with this announcement we are at 15% capacity reduction on completion it is going to be mostly completed by the end of next year, perhaps going into January 2017. Then, what you see if you make the quantification, we said 20% is the target are going to go around 25% debt reduction that we will announce and this will come during the year of 2017.
- John Stewart:
- And Larry I would just add, I think it is important to remember what Roberto said in our prepared remarks, the savings initiative has six different -- categories the manufacturing capacity reduction is just one of the six, so we are targeting multiple different areas some of which capacity reductions will generate announcements others are just embedded into the base business and are part of this continuous improvement mentality that we have adopted. Different to the past that John said that we do not want to quantify individual initiatives but rather given annual profitability guidance to not confuse people and we are basically reporting on the quality progress update on the initiatives.
- Larry De Maria:
- Got it. I understand. Thank you. Obviously there been a lot of headlines about the [indiscernible] opportunity, could you just help us quantify maybe the timing and the rollout and maybe even just a ASP on the nitro quality because of its front of house it could be decent investment, could you give us more quality around Metro coffee specifically.
- John Stewart:
- Good morning Larry. We are currently in stages of multiple generations of the nitro coffee. Infused equipment, Jen one collagen 1 1/2 and Jen two, we as a final testing of Jen one and Jen 1 1/2 and clearly 2017 will finalize Jen to so point being as we complete the testing we will start phasing in the production and start shipping more quantitative unit into the field so you will see an increase here quarter by quarter . NASDAQ we have started already and will be as we progressions in the next quarters and then well into 2017. Larry, I would just add that we have done some qualifications in the customer and the potential payback for the customer and I know that we have mentioned before that lending For example can have a payback of under three months . Certainly as we have modeled some of these with customers, it is significant below that in terms of the return for the customer in terms of the potential payback.
- Larry De Maria:
- Thank you to clarify.
- John Stewart:
- The payback for the customer. The other thing to know, I think it is important to set the stage for the future, as technology develops you will be able to dispense not just coffee that other areas of the product as well and beverage solutions, this is truly a breakthrough technology that we possess and we fully expect the letters of this technology very quickly. You will hear us talking a lot more about knocked Metro in the future ahead.
- Larry De Maria:
- Where should we think about that
- John Stewart:
- I don't think that we disclosed is a price, Joe did we.
- Josef Matosevic:
- No, I don't, there is multiple [indiscernible] going on right now with the customer and as we continue the testing phase, customization could impact the price but you know anywhere between 5500, 6000, 6500, is probably in that range, chair would you say, and that is a good range for launch pricing I think it will reduce is a build in scale.
- Larry De Maria:
- Okay. That is perfect, that is what I was wondering, thank you very much.
- Operator:
- Next question from Eric Carlson of Bowden Home [ph]
- Eric Carlson:
- Thank you for taking my questions gentlemen. Just to understand the guidance a little bit better, if we make a simple bridge hear from the prior guidance to the new guidance, We're talking about, if we just take the midpoint We're talking about a 50 million reduction in absolute terms, my thinking is that Bridgetown probably constitute 78 million of that if we assume it is 5% of your sales and it's down 10% year-over-year, it's about 7 million, is that the roughly ferry equation.
- Josef Matosevic:
- To get the model Brexit for the back half of the year, obviously at the end of June end of December, but I see this down again this morning we model the Adjusted at 131 and it is down below 130 today, so it is obviously a moving target but Brexit probably in the five, six, 7 million range depending on which exchange range you use.
- Eric Carlson:
- Understood. Can you talk to other headwinds that use, general slowness in the queue in the North American channel, and secondly delay, a bit of wants to lay for new products.
- Josef Matosevic:
- I mentioned, even a fourth one which was the aggressive pricing, that we are seeing in the market and the fact that we will not participate in that and therefore to be on the cautious side we basically said we reduced by 1%.
- Eric Carlson:
- It makes perfect sense. Just to give if we don't take out the Brexit impact were down to 8 to 10,000,000 reduction, the three headwinds they only add up to the 8 to 10,000,000, is that --
- Josef Matosevic:
- There's lots of gives and takes in getting to that but there are other offsetting puts and takes. That's what I was really getting to, one of the things that were better than expected, with such a small reduction in constant currency sale. I will tell you, part of it is just our execution that you heard about today in terms of improvements, while holding onto the sales and improving the margins 80 8020 being a great example where we can basically -- honestly say the sales of impacted and have been by less than we expected, so the power of our plans and it supports everything Hubertus said earlier. In fact that the reason we also call it a solid quarter because everything I was under our control was better than budgeted and customer ordering, customer rollout to sometimes cannot control for my sharing here with you and we see that this could be a 15 million headwind for us this year.
- Eric Carlson:
- Very good. I think I understand it better now. Thank you. Could you also help us understand the price per share and aggressiveness that you mentioned, how broad-based is that, what type of products and so one does that relate to.
- Josef Matosevic:
- That is the same question that we just heard, we do not want to give detailed color there and it is also not across the board, it is not even a handful of competitors that it is one or two perhaps that step out there, and again we will not entertain were here with them.
- Eric Carlson:
- Can you characterize it is pretty broad-based across character awards.
- Josef Matosevic:
- In fact it is for the product categories that where there is one or two competitors have, yes. Since we are a full liner and we have a very, very broad category and the others have not, we do not see a tremendous problem in there for us. We just are acknowledging it . It is interesting because in the past we would have probably responded to that and would have broader market share at low profitability which we will not do this year.
- Eric Carlson:
- Okay. Very good. And one for John perhaps, I notice we have a pretty good other income this quarter , $3.6 million, if you could just help us understand exactly what is that spirit other expense you mean?
- Josef Matosevic:
- Other intermittent expense , yes, there is a bunch of things in there, but debt insurance costs amortization is probably the major components. We also have currency gains and losses and there was a small loss from the disposal of an asset. So to be clear error, that actually was expense this quarter, so -- on
- Eric Carlson:
- Okay so that was a negative. So foreign currency , amortization --
- Josef Matosevic:
- Currency was about half of it and amortization was about half of it, so obviously amortization and death issue new cost will be a permanent feature in that bucket going forward.
- Eric Carlson:
- Understood. And then just one question on the debt costs, I think that your interest costs guided for increase for the year versus prior expectations, on?
- Josef Matosevic:
- Yes. As I mentioned we basically have built a very detailed model now of both our debt paydown assumptions and all of the subcomponents because it is not just our term loan B, we have revolvers and swing lines we have the overseas facilities, we have looked at the H paydown date instead of using. And dates, all of that fine-tuning of the forecast has resulted in the increase in the interest payments . It is not an increase in underlying rates. I think the way to look at that, Eric, is as if we are expecting , the growth expectations of the business has shifted a little bit more towards the later portion of the year . That shifted our assumptions that when we will be able to pay down the debt. So that has increased the interest assumptions that we built into the model.
- Eric Carlson:
- Makes sense. And the debt reduction guidance of $120 million $120 million-$140 million to my right in thinking that is not a net debt reduction number that is a growth -- gross debt reduction number.
- Josef Matosevic:
- It is a net debt, but you are basically the same. It is a net of our ending point at the end of Q1 once we have established our capital structure.
- Eric Carlson:
- Okay. So it's a net debt production number.
- Josef Matosevic:
- You can reduce the gross net debt rate using cash but it does not change the net that decision. As we generate cash we're going to pay it down to the extent that we possibly can. The first month of our being separate our balance sheet was less clean than we had hoped coming out of the spin so we need to take on some additional debt on a short-term basis . So, to get the business stabilized, if you look at March 31 balance as the beginning point, our goal is to pay down between $120 million or $140 million at that point.
- Hubertus Muehlhaeuser:
- If I clarified further, the guidance is on the term loan B . It was 975 to start and by the end of the year. At the midpoint of the guidance we would be at 845.
- Eric Carlson:
- Okay. Very good. One question on the visibility as well because all the growth is lower and it is also pushed back to the end of the year, so I would love to understand the visibility you have now in Q4 sales at this stage.
- Hubertus Muehlhaeuser:
- Joe wants to say, as I said we do not give quarterly guidance here, per se. As I said in the call we know exactly which QSRs these are not exactly what products these are our we do know the quantities, so we do have visibility on that, yes. But I do not think that we were going to share that now and in terms of sales impact for Q4 or Q3, Joe. The way that we should be looking this year into the remaining two quarters is we are very disciplined and highly committed to you as a management team and the company to really speak to a strategic objectives and clean up our balance sheet, strengthen our brands and continue to fix our capacity and fix this business and get this right. In return, we are very close to the customers, working with them and feel confident enough, with enough market intelligence to continue to deliver with a more competitive product cost reduction and as was mentioned earlier we need to grow profitably , without any sacrifice on quality for our margin so we do not expect any deterioration in the top line in any significant way . In fact, a lot of good will come out of this as the QSR change that we are starting to work through some of their issues there will be a stronger position in return our business model will kick in and we will be in a stronger position. Yes, we have been said, we've been asked this question several times over the last few months and I've always responded with we do not have a target. One is, we are a business that plans to get back into the M&A world in 2017 with both on acquisitions. We cannot predict when those will happen and therefore it is impossible to give a guidance for a target debt leverage because even if we hit the target drive fast the target the moment that we do M&A especially small bolt on M&A is it's almost certainly to be debt funded. We will break the target. So, that is the key reason. I think also, I just remind you that from both a debt to EBITDA target level from a covenant standpoint, we are supposed to be at no higher than 6 1/4 at the end of Q2. We are comfortably below that at 5.5, we are supposed to have interest coverage of greater than to cut we are comfortably above that at 3.25. So we see no issue with being fully compliant with our covenants and we will generate enough jet capacity to ensure that we can find any of our M&A goals and issue a target that level.
- Eric Carlson:
- Just one follow-up in regard to M&A, is there a product area or a mix where you have a hole in your line or your thinking that something he, part of the industry to you would be looking at.
- Hubertus Muehlhaeuser:
- Yes, definitely. We share that are ready, we believe that we have a couple of product holes in Europe in EMEA, so we're actively looking at the right targets and we are fitting our pipeline there. The same goes for Asia where we feel that we might want to add one of the other company to strengthen product area there. And then also, overall I mean there are product areas that we are the most complete food liner of food service equipment but there are areas that we are not yet active in and we are also looking at those. But, to understand I do not give you now a detail of which company we're looking at or which product category. But I think you see that I am talking a lot about that in 2017.
- Eric Carlson:
- Thank you.
- Operator:
- At this time there are no further questions. I turn the call back over to Mr. Sheffer.
- Rich Sheffer:
- Thank you, Amy. This concludes today's 22nd team -- 2016 second-quarter earnings call. Thank you so much for joining us and have a great day.
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