Welbilt, Inc.
Q4 2016 Earnings Call Transcript

Published: 15 Feb 2017

[Operator:]

Good morning. My name is [Virgil]. I will be your conference operator today. At this time I would like to welcome everyone to the Manitowoc Foodservice Q4 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be question and answer session. [Operator Instructions]. This call is being recorded today, February 15, 2017. A replay of this call will be available beginning at noon Eastern Time today until midnight, Wednesday March 1, 2017 by dialing 855-859-2056 or 404-537-3406 and entering access code 48470675. You may also listen to a replay of this call over the Internet beginning at noon Eastern Time today and running through noon Eastern Time on January 15, 2018. Thank you. Mr. Sheffer, Vice President of Investor Relations and Treasurer, you may begin your conference.

[Rich Sheffer:]

Thanks Virgil. Good morning and welcome to Manitowoc Foodservice's 2016 fourth quarter earnings call and webcast. Our last as Manitowoc Foodservice as we will officially become Welbilt on March 6th. Joining me on the call today is Hubertus Muehlhaeuser, our President and CEO, John Stewart, our CFO and Josef Matosevic, our COO. 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. Today's discussion will include both GAAP and non-GAAP measures. Please refer to last four pages of our earnings release for our non-GAAP reconciliations. We can find a copy of the earnings release in the Investor Relations section of our website www.welbilt.com. Now I'd like to turn the call over to Hubertus.

[Hubertus Muehlhaeuser:]

Thanks, Rich, and good morning everybody. I’m pleased to be speaking with you about our successful conclusion to 2016, our first year as an independent company. As you saw in our press release this morning, we delivered a 17.3% adjusted operating EBITDA margin which is an 80 basis point improvement over last year's very strong fourth quarter on a comparable basis. This brings us to a full-year adjusted operating EBITDA margin of 16.7% which was an impressive 380 basis point improvement versus 2015, and completes one-third of our 1000 basis points margin improvement journey. We remained fully on track with our simplification and rightsizing initiatives. After announcing the $100 million savings program in the fall of 2015, we achieved $12 million of savings in 2015, $57 million in 2016 and expect to complete the program in 2017. In addition to this $100 million program, we have further margin improvement opportunities which will help us achieve our aspirational 1000 basis point margin improvement journey as we improve our adjusted operating EBITDA margin to the mid to high 20s. John will discuss in detail the move to adjusted operating EBITDA in a few minutes. As a reminder, our simplification and rightsizing initiatives are comprised largely of six categories. Within simplification, we include 80/20, product cost take out, lean implementation and strategic sourcing. Within rightsizing, we include manufacturing capacity reduction, and headcount reductions. While we won't quantify savings for these individual categories, we will discuss them qualitatively to show our implementation progress. Within simplification we are continuing to make very good progress with our implementation of 80/20. We made further progress on the pricing portion of the project this quarter as prices for B products have been increased and we have remained steadfast in maintaining the reduced discounts levels for B customers that we had previously adjusted downwards. We continued with our rollout of our product line and customer line simplification strategies this quarter and realized additional savings from these actions. Although these actions resulted in a small amount of loss sales again this quarter, by small I mean it was a low single-digit millions, this was more than offset by the benefit from the 80/20 pricing actions. We also made more progress on SKU rationalization this quarter as we reduced another 7% of our equipment SKUs bringing the total reductions to approximately 16% since the inception of the 80/20 project. On our strategic sourcing project, the first phase initiatives that we completed in 2016 were successful in offsetting the majority of commodity inflation increases, and provided year-over-year cost improvement. The team is now working on the next phase of the project for 2017 which adds additional supply categories to those the team completed in 2016. Moving on to our rightsizing initiatives. We are very pleased to report that the Seles Burke production transfers have been successfully completed and the plant was shutdown in January as expected. Thanks to our operations teams for their excellent execution of this important project. With the completion of Seles Burke we have now reduced 15% of our original 20% of excess manufacturing capacity. We anticipate further announcements in 2017 and beyond to address the remaining 5% of excess manufacturing capacity. Moving onto our top-line results. Organic sales and constant currency increased 5% in the fourth quarter, with a very strong fourth quarter last year. All three segments grew in the quarter with a strong grows of Merrychef, eikon, e2s high-speed ovens and beverage systems propelling 27% growth in EMEA, improvement in Fabristeel product sales driving 5% growth in APAC and better KitchenCare sales offsetting lower equipment sales to deliver 1% increase in the Americas. We also continue to see solid improvement in our America sales, to our general market customers which continues to provide a growing sort of balance to our large QSRs and fast-casual end market exposure. The National Restaurant Association reported that restaurant sales were soft in 2016. NRA's restaurant performance index was below 100 in all three months of the fourth quarter, which indicates a slight contraction. However, the expectation index for conditions over the next month was over 101 each month during the quarter which indicates that restaurant owners and operators are expecting improving conditions in 2017. According to Technomic, the foodservice industry is expected to grow 1.7% in 2017. We believe these expectations for slight expansions in the restaurant markets will occur in 2017, but at a slow pace with month-to-month volatility. I'll make additional comments about our name change and our brand strategies after John’s review of our financial outlook. John?

[John Stewart:]

Thanks Hubertus. As we have said in our press release this morning we have made two evolutionary changes and how we will provide guidance going forward. First, we are moving our organic sales guidance to be in constant currency. We have made this change to remove the impact of foreign currency translation from our sales guidance. The past year has shown it is both very volatile and can’t be accurately predicted with any certainty over even a three-month period, much less a 12 months period. Second, we have moved our margin guidance to adjusted operating EBITDA to be better aligned with the competitors in our industry and to industrial companies more broadly. Please note that we aren’t doing this to move the goal post on our aspirational margin targets. Last year when we were using adjusted operating EBITDA we stated that our aspirational margin target was mid-20s percent. Now with adjusted operating EBITDA our aspirational margin target becomes mid-to-high 20s percent after adding approximately 120 basis points to the target for depreciation. An observation on our 2017 guidance which would normally be assumed but given the current political environment is worth restating this guidance is based on current laws globally, and excludes any projections related to proposals from the current administration, our Congress or other proposals made by foreign governments that have not yet been enacted. For example, new border taxes, tariffs, tax rate changes or interest non-deductibility, none of these are considered in our guidance and we'll address them if and when they may be passed into law. Looking at our initial 2017 guidance, our organic net sales and constant currency guidance is down 1% to up 2% .On currency, the annualization of last year's currency headwinds would've approximately 150 basis point negative impact on our 2017 sales growth guidance at today's currency rates. On organic sales there are two adjustments to 2017 sales to put our guidance on an organic basis. The first relates to small parts and service business in China that we divested at year-end 2016. The second is KPS’s, its Latin American distribution business that we retain for just over a year post to KPS divestiture in 2015. December 2015, while KPS's new owners were setting up their own Latin America distribution. So, on an organic basis these two divestitures related items combined for approximately 1% of revenue in 2016 that will go away in 2017. In addition to these organic adjustments we are expecting 80/20 product line simplification to reduce 2017 sales by just less than 1% from products that we are discontinuing in 2017. Since these are discontinuations and not divestiture related we are not making organic adjustments for these. There could be more topline pressure from 80/20 as we identify additional products that will be discontinued during the year. However, these product line simplification efforts will continue to be positive for margin. Overall, we are entering 2017 with similar market conditions that existed during most of 2016. As Hubertus mentioned while we don't believe the restaurant industries in a recession, it has been experiencing slower than normal growth. Although conditions are expected to improve in 2017, the timing of that improvement is uncertain, so we haven’t included that in our initial guidance. On the positive side we expect continued growth in the general market which makes is cautiously optimistic for 2017. Moving to adjusted operating EBITDA margin guidance, we are expecting continued solid execution of our simplification and rightsizing initiatives and we believe that we will fully achieve the $100 million of savings that we announced in the fall of 2015. With that said, we have consistently stated that are multiyear journey to mid to high 20s adjusted operating EBITDA margin would not be a straight line. Each year the work gets a little harder as we move from harvesting the low hanging fruit to the tougher stuff. As Hubertus mentioned, we’ve delivered a third of the journey in our first year. However, you should extrapolate that the remaining two-thirds will take only two more years. Our margin progression in 2017 will be affected by inflationary headwinds from some purchase material increases especially for commodities like steel, as well as from base and incentive compensation increases. We expect to be able to offset most but not all of these inflationary pressures in our forecast. And bearing that in mind, our forecasted improvement and adjusted operating EBITDA margin is for an increase of between 60 and 210 basis points. Looking at our interest expense guidance of $85 million to $90 million, please note that our 2017 forecast includes 12 months of interest expense whereas 2016 included only 10 months of expense as our new capital structure wasn't put in place until the spinoff was completed in early March. Our guidance range includes a 100 to 150 basis point assumed benefit from our expected term loan B repricing which we expect to complete in early March immediately following the expiration of the 1% s soft call premium. Our effective tax rate, our ETR increased to 30.7% in the fourth quarter. This was impacted by a geographic shift in our taxable income from lower rate international to higher rate U.S. source income. This moved our 2016 full year ETR to 24.1% which is 270 basis points higher than our year to-date ETR at the end of third quarter. Our full year ETR of 24.1% included discrete tax benefits of 3.4% excluding the discretes our 2016 ETR would have been 27.5%. Our 2017 ETR range will climb to be between 29% to 32%. We are not anticipating a repeat of the discretes that helped our ETR in 2016. The 2017 ETR is driven by a continuation of the geographic shift and where our taxable income will be earned, towards higher tax jurisdictions, as well as an increase in U.S. source income similar to what we saw in the fourth quarter. We are projecting that our 2017 diluted shares outstanding will be approximately 140.8 million. Our share count will of course continue to grow due to anticipated ongoing equity grants. Moving to our capital structure. I want to highlight our debt repayment for you. We did achieve a $67 million net debt reduction in the fourth quarter bringing our net debt reduction to $132 million in the three quarters since March 31. This was consistent with our free cash flow generation of $134 million during those same three quarters, in part due to the remittance of intercompany balances, our international subsidiaries own to the U.S. Absent that, our debt reduction would have been less on our total free cash flow as we can only use cash in the U.S. for debt reduction. For 2017 our debt reduction guidance of $100 million to $120 million is lower than our implied free cash flow as we will only be able to remit newly created intercompany balances for our international subs in 2017. One last point on our cash flow. Our business, well, not cyclical, it’s seasonal. And our first quarter is typically our softest quarter of the year both from a sales and profitability standpoint. We’re further impacted in the first quarter by some large cash outflows. Year-end customer rebate payments, a semi-annual interest payment on our high-yield notes, and our first material annual cash bonus payments in a few years. The combination of all of the above will actually lead to an increase in debt in the first quarter before we begin delivering again over the remaining three quarters of 2017. And with that, I’ll turn the call back to the Hubertus.

[Hubertus Muehlhaeuser:]

Thanks John. I’d like to discuss last week’s announcement of our name changed to Welbilt. Why Welbilt? Well, it was a logical choice for us as it still retained a solid reputation and recognition in the global food service industry despite not being extensively used since it changed its name to a [notice] in 2000, which itself was acquired by Manitowoc in 2008 and became then Manitowoc Foodservice. Welbilt was the industry consolidator and the leader in the food service equipment industry in the last century. Having a quiet many of our current leading product brands after it had been founded by the Hirsch Brothers in 1929. Interestingly enough, the rebranding from Welbilt to Enodis that occurred in 2000 was a recognition of the company’s strategy at that time to move from selling individual appliances to selling solutions in entire systems or untying the knots in the kitchen, the original meaning of the Latin word Enodis. The missing pieces in the strategy at the time, why the technologies needed to connect the dots between the appliances to really gain the advantage of an entire kitchen system. Today we feel very strongly that now is the time when the Internet of things would enable our customers to gain the advantages that our full kitchen solutions with connected hot and cold-side product can deliver. Welbilt brand promises stand for relentless reliability, pragmatic innovations and intelligent connectivity. Another key component to our name change and branding change is that we will begin the process of simplifying our nearly 30 brands by refocusing on our 12 leading product line brands. We will sharpen our product line strategies and investment plans focus principally on these leading brands. As we implement this strategy our marketing efforts will also become more customer focused and effective and this will further help on the simplification journey of all business. We have gone live with a Welbilt name and branding at last week's [Indiscernible] show in Orlando and had enormously positive feedback, positive, because our customers are inspired by our vision to become a system supplier. Positive, because our distribution partners in the general market really missed the iconic brand name of Welbilt and a frequent comment heard was, this feels natural and just right. And finally, it’s very positive for employees since this marks the final cut of the last tie to the Manitowoc Company. Also remarkable, our innovations that we introduce at NAFEM, 27 innovation since the NRA show last May and that included 12 new product introductions already for 2017 with many more innovations to be introduced later this year. Noteworthy, where the introductions to our MercoMax hot holding cabinets for the general market, our new multi-beverage dispenses, as well as our new Garland clamshell growth that will drive growth in 2017. We currently have the freshest and most competitive product line-up that we've had for a long time, I’d like to say that we ever had. Before we conclude our prepared remarks I'd like to share the 2017 priorities with you. First, we will continue to drive out simplification and rightsizing agenda, not only will we complete our original 100 million program, we will also identify additional opportunities to achieve and further deliver on our 1000 basis point margin improvement journey and will position ourselves to begin growing revenue at or above the industry by 2018. Second, we will continue our delevering journey by using all available U.S. cash for debt reduction. Third, we will continue to bring innovations to the market and the table refresh our product lines and drive system solutions in the kitchen. Last but not least, 2017 will also be the year where we will begin to seek smaller bolt on acquisitions. And with that, I'll turn it back to Rich.

[Rich Sheffer:]

Virgil, this concludes our prepared remarks. We’ll now open the call up to for questions.

[Operator:]

[Operator Instructions]. Your first question comes from James Picariello from KeyBanc Capital Markets. Please go ahead.

[James Picariello:]

Hey, good morning, guys.

[Hubertus Muehlhaeuser:]

Hey, James. Good morning.

[James Picariello:]

So, on the core sales guidance were down 1% to plus 2%, just to confirm make this crystal clear, the 1% impact from divestitures is that included in the range or excluded?

[John Stewart:]

That’s included in the range.

[James Picariello:]

Included in the range. Okay. So ex the divestitures flat to plus 3%. And then can you just talk about, maybe what's factored in here in terms of new products getting shipped tied to some of the QSR deferrals that you talked about, in the second half of 2016 what's baked in there and then just overall what your core growth expectations are by region?

[Hubertus Muehlhaeuser:]

Well, I mean as we’ve said, we don't see the restaurant industry in a recession, but we see it on a slow growth pace right now. And that is because we still see softness on the QSR side, but we see very positive signs on the general market, and that is the reason why Technomic calls the industry a bit short of 2% growth and that is also why we basically said, we don't guide to gaining market share but we want to be at the market growth. On our new product introductions one thing is noteworthy and I've said this in my prepared remarks, we have a great product line up right now and all the products that we basically rolled out or started to roll out with little bit of delay to the QSR will continue to be rolled out in 2017 and will add nicely to our sales line. On top of that we have now the general market versions ready of those America holdings and that was what I also mentioned in the prepared comments. And those who rolled out in the in the general market as of 2017 and we've presented those at the NAFEM and we had very good reception. So our guidance that we have put out right now includes all these factors, a kind of a slow growth restaurant industry but also good product introductions.

[John Stewart:]

And James, let me just clarify since your question asked about organic, we are removing those dispositions from our 2016 base and then giving you organic guidance, so it's after removing those from the 2016 base.

[Rich Sheffer:]

So James, its Rich. Well, further on John's so when you're looking at the sales growth the new base for 2016 on our organic basis will be $1,442 million.

[James Picariello:]

Okay, understood. I mean just as a follow on in terms of demand, what was the strength in EMEA particularly and is there a visibility in the carryover this year?

[Hubertus Muehlhaeuser:]

Well, I think in EMEA you see really good management happening there and I can only applaud our team there. I mean, Phil Dei Dolori is doing an outstanding job with his team. He is now also responsible for APAC and they're really driving sales, plus we have a very, very competitive line-up of products. And if you see the Merrychef this is a product that is competing, its competitor TurboChef in every category. I mean this is a very, very strong product and this is a reflection of the strength of that product. Joe, do you want to add something to that?

[Josef Matosevic:]

James, we are very excited about Europe and Asia. Everything we have put in place here throughout 2016 and focusing on core brands and strengthening of core brands through innovation engineering. The excitement in the market in terms of general market but also at quick-service restaurant has been very positive, feedback has been strong. So we continue to anticipate solid growth and solid performance in Europe and Asia. But the base of course in Europe and Asia is a bit smaller than in North America, that's the reason why we don't see that strongly in the top line. And then we continue to be positive about Europe. And APAC I must say is kind of you know that all the QSRs you're seeing right now and you read this every day the large QSR restructuring their Asian businesses and they are seeking new equity ownership. The general market is very strong. So we're also positive on that. And that what we have said all along with the products that we have in brands that we have in the European market Merrychef, Convotherm, Convotherm is extremely strong and this is the runway that we are now basically using and seeing in our growth numbers.

[James Picariello:]

Got it. And if I could just talk about margins very quickly. Can you just sort of talk about how are you thinking about price cost for this year? Can price fully offset inflation and then how would this compare with the net benefit realized in 2016? Thanks.

[Hubertus Muehlhaeuser:]

Yes, John?

[John Stewart:]

Well, James I think it is fair to say that pricing will offset inflation, but there are other moving pieces as we look to our EBITDA causal track. We are getting pricing from two fronts we're getting pricing both in 80/20 and in the base business. We took our annual increases in the fall of 2016 and what we've obviously expected to continue to replicate those in 2017. However, there are other headwinds affecting margins and I called out a couple in my prepared remarks. You'll recall we benefited in Q3 of this year from a reversal of the incentive come from accrual to the payout rate that we're going to have this year which is somewhere in the 75% to 80% range for 2016. We're obviously going to assume that we'll get that up to 100% in 2017 and so we have incorporated that if you will high-quality negativity in our bridge. And you get the annual merit impacts and the other cost impacts. And it’s worth mentioning FX effects are EBITDA as well and that's embedded in our guidance as well.

[James Picariello:]

Thanks.

[Operator:]

Your next question comes from Larry De Maria from William Blair. Please go ahead.

[Larry De Maria:]

Hi, thanks. I guess I dig into this little bit more. Obviously reiterated your $38 million of cost reductions and you are on target for your $100 million. And then you have some more that you said you're targeting and it should come through. But at mid point we're only looking at $20 million of incremental EBITDA growth, which obviously seems underwhelming, can you -- maybe you started to talk about in the last question I guess but just maybe bracket out the actual headwind and the dollar amount, so we can get comfortable that either maybe this is conservative or not I guess?

[John Stewart:]

Well, I'll bracketout the couple of components. I don’t want to get into a blow-by-blow of all the items in our margin causal track, but the totality of our base compensation, incentive compensation and total wage and benefit inflation is the better part of $20 million that we’re absorbing next year. The FX impact is probably somewhere in the mid-single digit millions that is baked into that. There is inflation in materials that is between mid to high single digits, and then you have a series of other volume mix related the impact. One of which I would call out which is our increased bias towards the general market which obviously helps us offset the QSR softness that we've seen. That comes at a bit of a price in terms of the rebates and allowances that go along with that growth in the general market. So that's another negative in terms of low single-digit millions.

[Hubertus Muehlhaeuser:]

And I also think we don't want to provide further transparency of that because as we said this 100 million that we have announced was a last time as a company that we have announced savings number because it doesn't make sense to have the savings and then the headwinds because then you are in a constant explanation of savings and headwinds we rather give you full year guidance that we basically feel that if you see that we go up to 210 point basis improvement as the maximum of our range, I think what we're saying that it is absolutely in the possibility but we have to basically say that is a range and that's a reason we give a range at the year beginning.

[Larry De Maria:]

Yes, I know all that's fair, but also at the same time every conference call and conference you guys have been you called out all the tailwinds and now we’re hearing more about that the headwinds, and keep talking about 38 million plus incremental savings and now it's a lot lower than what you've talked about. So in a [figure] transparency may we should talk the headwinds and tailwinds. Maybe…

[Hubertus Muehlhaeuser:]

Larry -- okay. I don’t go. Okay, good, sorry.

[Larry De Maria:]

Okay. And then we’ve also talked about sales going from the fourth quarter -- from a third quarter to a fourth quarter and then fourth quarter to 2017, especially I think around the hot hold equipment, can you tell us where that stands, if it's still coming, if that's getting pushed out, if that's how the order of magnitude, how important that is in your guidance et cetera, because obviously the organic is not robust either? Thank you.

[Hubertus Muehlhaeuser:]

Well it is -- okay, it is coming and we said that and it is material for ourselves for 2017. It is coming at the pace for 2017 that we've now expecting after it started lower in 2016, but those products are really very, very good and [Indiscernible] meet them as through the general market. So this is coming as expected. And perhaps let me reiterate on the tailwinds and the headwinds, I think it's very important to say that this $100 million that we have put out, we are firmly confirming that we're going to achieve this year. And we basically told you that we have announced more things that we can do to overachieve that and that is the reason why the guidance range goes even a bit out of this 100 million and that's what we have said. So we hope we have been transparent enough there.

[John Stewart:]

I think one other point on the sales growth. I think it would be fair to say from our first roll off of our budgets we really challenged the numbers that are in there for new products and we've tapped them down a bit to reflect the fact that we spent 2016 addressing some slippage in the pace of those orders And so we are trying to take an approach here for as those orders come through it give us a possibility to potentially revise in a positive matter. We've said we've been conservative in this initial guidance and we'd rather take that approach and frankly taken some lessons learned from the progress through 2016.

[Hubertus Muehlhaeuser:]

Because also the reason why we widen the guidance little bit for range.

[Larry De Maria:]

Now make sense in that. I'll leave it there, but thank you for that. Maybe just if you could talk about the Nitro Coffee, I think as of January 1st you can get the new contracts are possible just how that's progressing and then I'll hang up. Thanks a lot.

[Hubertus Muehlhaeuser:]

It is progressing very nice and perhaps Joe you can without naming the customers of course perhaps you can comment on that a little bit.

[Josef Matosevic:]

Nitro is going according to plan. It's well received with our customers to custom up interest is expanding quite heavily and rapidly not just in the U.S., but international. We are in the process of launching this product now in Europe and in Asia with additional new customers. So well on track, well received and great performing product.

[Larry De Maria:]

Thanks. Good luck guys.

[Hubertus Muehlhaeuser:]

Thanks.

[Operator:]

Your next question comes from Mig Dobre from Baird. Please go ahead.

[Mig Dobre:]

Yes. Good morning, everyone. Just maybe picking up a little bit on Larry's question, we're kind of looking at the puts and takes here for the EBITDA guidance for 2017, I guess if I'm to look at this and look at your initiatives that you already announced basically you're pretty much done, you're going to be done in terms of your capacity reduction goals in terms of the SKU rationalization in 2017 as well, But based on your guidance there is still a lot of room for improvement, getting to mid-20s and higher in EBITDA. What I don't really understand at this point is with all the effort that you've done and all the cost reduction that you’ve undertaken in the last two and half years, what's left to be done to actually generate more margin expansion absent just an acceleration in the end market?

[Hubertus Muehlhaeuser:]

We have three people that would like to answer that question; John, maybe he wants to answer that. Why don’t you go first, [Indiscernible].

[John Stewart:]

Well, I’ll take the first crack at it. Let’s get back to my comments about the low hanging fruit and the mid hanging fruit here. We are – I’d say 2016 marks the end of the low hanging. It was obvious that you recall when Hubertus and Josef arrived on the first day. Within a few weeks they announced the restructure that was the $100 million program. And we made it very clear at that point we had to deal with an excess manufacturing capacity issues. We have dealt with the majority of that, not all of it, but we’ve dealt with the majority of it. At the same time we’ve launched all of our initiatives that are under simplification and rightsizing. So, as we get to the end of that initial program which was announced as a three-year program under former parents we will go to ongoing annual EBITDA guidance and we expect to continue delivering savings programs not announced with big dollar numbers, but just in terms of annual EBITDA margin improvements, and we are well into the middle of the tree, but with plenty of room yet to go. Remember, it takes longer, a third and the first year, two-thirds won't come in the next two years, that will maybe take a longer period but we see no reason why we can’t continue moving up the tree.

[Hubertus Muehlhaeuser:]

Absolutely, and we’re adding aspects, and coming back to the SKU reduction, I mean, it’s not fair to say that this journey is behind us. I think we are in the first third of that reduction, there’s going to a lot more to come where we have been very, very fast and very strong and decisive was on the rightsizing however there's more to be announced. And then you remember that on top of the 100 million you announced Sellersburg reduction which has been done and there is more to come. We have bit of more than 5% of absolute reduction that we still going to come. And as we have always said, once we have done in these large changes then comes the more harder work which is kind of rolling out of the lean manufacturing on the remaining capacity, improving the product cost. And now Joe, you want say.

[Josef Matosevic:]

Mig, good morning. I thing the overarching comment is in our lean journey we have addressed two out of the eight types of ways in our journey and there is still significant amount of room and runway for us to address the other six elements. So as we continue to rollout our product line focused structure this would be address over the next couple, three years systematically with new processes, new system to position our product cost to be even more competitive in the market. But the overarching comment to make is two out of the eight types of ways that been addressed, six more to go, that’s where the runway comes in.

[Hubertus Muehlhaeuser:]

And in my prepared comments this morning I was talking about the move to the product line, simplification, moving from 30 brand and down to 11, 12 branch, this is a major saving. We could have spelled out saving on that which we don’t do, but this is going to help us, also in the optimization more focus on the investments is going to drive growth but it’s also going to take complexity out of our business, and it’s going to help in saving costs.

[Mig Dobre:]

Okay. As obviously your assembly in these plans going forward, I'm sure we’re looking forward to get a little more detail as to how that’s going to play into financials longer-term. Maybe if I’m shifting gear now to organic growth, and I'm sorry if I'm not -- if I didn't get the point correctly, but are you effectively saying that you have 200 basis points of headwind, 100 from the divestiture and 100 from your 80/20 baked into your guidance?

[John Stewart:]

That’s true, but to be clear, the guidance has been adjusted for the divestitures and exact same way we adjusted KPS and Welbilt from out of our 2015 number. We have adjusted KPS Latin and the China parts and service business out of our 2016 base. But then what we’re saying is embedded in the organic guidance, we’re not adjusting for is just less than 1% of 80/20 sales loss that we’re going to absorb in 2017. Calling it out this year because frankly in 2016 for the first phase of 80/20 mostly focused on pricing and very, very modest low single digit still lost, in 2017 we are taking some of the tougher 80/20 decisions outside an example of a stove business in the UK that were essentially walking away from. It was not a profitable business, so we’re shutting down and walking away from the brand, that’s 80/20 an action and as from our competitors who have done this for many years, some of our competitors, it will have a topline impact but it delivers bottomline. It is not – it were absorbing it within our organic guidance.

[Mig Dobre:]

Sure. The essence of my question and it’s been asked already. We’re all trying to understand two things, how you’re thinking about your core market growth for 2017? What the industry is going to grow? And then what you're going to be able to do against that and exactly what new product introductions are going to be contributing. We’re trying to understanding these buckets basically?

[Josef Matosevic:]

So, let me try. The midpoint of our range negative one to plus two, so you’ve got a midpoint there and if you accept the fact from that midpoint that were also eating 1% of 80/20, that takes you up pretty close to what we’ve said the Technomic projection of 1.7% is for the foodservice industry. So we feel we’re in line when you adjust for 80/20.

[Hubertus Muehlhaeuser:]

Absolutely. And we told you the products that we basically have. First, we have one of the most precious and up-to-date and most competitive product ranges already because we have innovated really, really well in the last two years, plus we’re bringing 27 new product introduction this year, 12 of them this year already at the NAFEM show and we spelled out the most prominent ones which is hot holding for the general market and which is clamshell growth that we have completed beefed-up and more innovations around the beverage side which is a high-growth segment.

[Mig Dobre:]

Absolutely Hubertus, but where exactly is that reflect that on the top line in terms of growth, that's the part that I’m confused about?

[Hubertus Muehlhaeuser:]

We can’t dance around that, we have said we’re going to grow with the industry. We see the industry is 1.7. We’ve told you what the headwinds are that we’re going to have – absorb in the SKU reductions and that’s kind of where we start the year.

[Rich Sheffer:]

So, Mig, this is Rich. I think if you look back at last year as we were anticipating new product introduction and those driving sales., We played a game where we it was in our forecast based on our customer conversations, but those goal post kept moving. This year we’ve taken the approach that until we actually have the orders it's not going to do our forecast. We’re taken a more conservative approach out of the gate as those come in and we get purchase orders on these new products, so we think we probably will, we will reflect that in our guidance in future quarters.

[Hubertus Muehlhaeuser:]

And then, I think we've also been very clear that we are in a multiyear journey here and we're still in correcting issues of the costs. We’re building a great company and I said it in the prepared remarks, we are preparing ourselves for a vast industry gross for 2018, but in 2017 we still have a pretty hefty rightsizing and simplification agenda which we want to drive. And so therefore we want to be cautiously realistic on the sales side. We give a wide range. We’ll be don't put any big hopes into our guidance right now, because we would like to be more conservative perhaps learning from last year.

[Mig Dobre:]

All right, guys. Appreciate the color. Thank you.

[Operator:]

Your next question comes from the line of Eric Carlson from Bowden Home. Please go ahead.

[Eric Carlson:]

Thanks for taking my questions. I had a longer term question on your guidance, if you look at the long-term margin guidance for the company, is it possible to get the announced actions of rightsizing and optimizing the business or is there a lot of further work in other areas that you would have to do to achieve it over time?

[Hubertus Muehlhaeuser:]

Well, I thought John had provided that answer. I think if you look at the rightsizing, I think we are well on that journey. We have announced 20% and the majority of that is done. There is still 5% absolute to do. If we look at the SKU reduction we are in the beginning of that journey so there's a lot more to come. And then Josef commented, on our lean manufacturing journey, we’re probably I don't know, we’re third into the journey right now, and there is there is still more to come. Plus we’re not shy of ideas and as we move in this journey we understand that we want to have to improve year-over-year in order to achieve our 1000 basis point promise, and we’re going to add further elements, further clarity to the savings that we have. We discuss this as well, Eric,, there are no product line strategies are going to come. There’s going to be product platform strategies that we’re going to rollout. We’re going to be a lot better able to have similar parts between the different product lines and within the product line taking out of a couple of brands is going to sharpen, so there’s more element to come and we will not be sure in providing the teams ideas of where we can further improve.

[Rich Sheffer:]

Eric, this is Rich, I think as a reminder if you look at our investor presentation that's on our website we have a page in there that calls out the six pillars that will lead us from – lead us on our 1000 basis points journey. We’re really has been working on the first two pillars mostly this past year. We’re starting to move into some of those middle pillars and the last ones are further out and it’s going to take all six of those to get us to our aspirational margin targets.

[Eric Carlson:]

Very clear, very exciting. One more question if I may. MerryChef seems to be on the roll to say the least, could you help us understand that the little bit better if we start with the 2016 performance, was the growth relatively food based or was the one particular rollout in Europe or something that that boosted the MerryChef growth?

[Hubertus Muehlhaeuser:]

Well, let me start and Josef is going to comment on that. I think what you're seeing there is the tremendous success that we have with the E2S which is a high-performance, high-speed oven which goes extremely well in a coffee shop environment, in convenient stores environment and that has a huge scalability because if you win a contract with h one of those chains obviously you sell them by 1000s and not the 100s. And that is what we're seeing here. And that product in itself is just from energy consumption for food quality, for speed of cooking. It is just so more efficient than its key competitors that customers see that and they make the total cost of ownership calculation and they like the product and they take it. On top of that, we are refreshing as we go, the entire line of e2s' and so you’re going to have an e5s as well. So, it's going to be a scalable size of these Merrychef and High Speed Ovens and we've just introduced another one now to the show at the NAFEM and there is more to come. It's a little bit the same program lineup that you have with the Convotherm Ovens where you have different type of models, complementarity to each other for different application. Joe, anything to add on that?

[Josef Matosevic:]

And in terms of trends to your question, Eric, was that a specific roll out? No, it was not a specific rollout, it has expanded throughout the general market and quick serve restaurants and also internationally. So, the topline was not driven on one particular rollout and there is more to come in terms of continuation growth on this particular product. Our backlog is relatively strong and remains strong throughout the first and second quarter of this year.

[Rich Sheffer:]

And we also get very positive reception of that product here in North America where there is another company that still has a high market share. And I think, once the general market really understands what that product can do --.

[Josef Matosevic:]

The differentiation.

[Rich Sheffer:]

Exactly. You're going to see more of that happening.

[Eric Carlson:]

That was extremely promising. Thank you, very much.

[Operator:]

Your next question comes from Jon Fisher from Dougherty & Company. Please go ahead.

[Jon Fisher:]

Thank you, good morning. A couple of questions, I guess, getting into the new shine on the cash flow statement. We could start with CapEx, I guess I was surprised at the CapEx guidance. Why, if you are in a phase of cutting excess capacity, cutting skews, kind of shrinking to grow, why the significant increase in CapEx '17 versus '16. I mean, and I'll throw out the other question. Just looking at the pattern of depreciation and amortization on the cash flow statement, I get some surprise that '17 calls for a decline from the trend that we'd seen '15, '16 where we've seen gradual increase. So, if you could kind of explain the movements there that causes the DNA to step down and I would appreciate that.

[John Stewart:]

So, I think on CapEx, first we guided in essence of 23 to 27 throughout the year of 2016 and then we ended the year at only, I put on comment only $16 million. Part of the reason for that reduction was that we are being very considerate about the timing and the detail surrounding the individual projects and so we've chosen to slow off some of those projects for very deliberate reasons. At the same time, our guidance for 2017 brings it back up to the same original range that we add for 2016. And so, we can obviously we don’t believe we can run the business on a $16 million CapEx budget because we are still investing for potential future growth and to support the innovation. Josef, do you want to add to that?

[Josef Matosevi:]

Yes, John, your last comment it is right on the head. When we look at our strategic plan in our road map for new product introduction, new product development, that's what drive 70% of our investments and stays in line with exactly what they said in 2016, we will do in terms of NPI and NPD.

[John Stewart:]

And to your second question on depreciation, it’s a slightly averse of slightly lower range by about a $1 million or so versus 2016. And that just reflects the lower finishing 2016 CapEx but it will pick back up again as we spend in 2017. And amortization essentially unchanged, 30 to 33, mid point's 31.

[Jon Fisher:]

Okay. And then, just to the extent on I think a couple of others we've tried to give it thus, I guess I'll give it a shot too. Do you have any intention of breaking out like how successful Nitro, Combi Ovens, Merrychef, from a contribution to in absolute dollars or a contribution to growth. How contributive those key products are to the topline right now?

[John Stewart:]

No. we don’t, we said this all along, we don’t want to give product line on sales or profitability numbers. We give you the totality of how much we do in hot side and on the cold side and we also told you that the hot side tends to be higher margin and the cold side is a little bit of a lower margin. However, in totality, we believe that our aspirational targets of now, mids to high 20s EBITDA margins are fully intact and are achievable with the structure and the products that we basically have.

[Jon Fisher:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Walter Liptak with Seaport Global. Please go ahead.

[Walter Liptak:]

Okay, great, thanks. Good morning, guys.

[John Stewart:]

Hello.

[Walter Liptak:]

I want to ask about if the industry growth rate of 1.7%, that's a global number, I believe. I wonder if there was, if they broke it out America's versus EMEA versus APAC for that growth rate.

[Rich Sheffer:]

Hi Walt, this is Rich. That growth rate actually is more US centric, trying to get forecast of growth rates for overseas markets is very tricky. They really, there is really not very good data sources. Given that we're still majority sales in the America's, it's a very good proxy for our overall growth.

[Walter Liptak:]

Okay. And do you take the -- sorry, okay, sorry. The growth rate in EMEA APAC obviously was a little bit better than we expected. And so, I want to just clarify that it sounds like that's not market related, that that's execution, new products, market share gains, is that right?

[Rich Sheffer:]

That is execution absolutely. That is execution, I mean, Europe doesn't grow by 27%.

[Hubertus Muehlhaeuser:]

We wish to.

[Josef Matosevi:]

Its execution will but also our efforts and new product introduction and to differentiation, we have created with the new products.

[Hubertus Muehlhaeuser:]

Yes.

[Walter Liptak:]

Okay. As we're thinking about 2017, is that the same sort of regional impact from new products or you're expecting more in North America's one?

[John Stewart:]

No, I think we're going to give you that backwards looking around forward looking. We don’t want to break down the sales guidance into the bi-region sales guidance. But our guidance is obviously a totality here. It's fair to say as Josef already commented the great work that EMEA is doing in areas like Merrychef, we expect that to continue. So, it's more project and execution driven than region driven.

[Hubertus Muehlhaeuser:]

Yes.

[Walter Liptak:]

Okay, great. And then just switching gears a little bit to the question about the $38 million and some of the headwind. I just want to make sure I understood the answer. I think you said that you're absorbing $20 million of compensation increase and if that's right, is it bonus comp or is it salaries going up and then what is that on a percentage basis?

[John Stewart:]

Well, I'll let you do the -- oh, you mean the underlying merit percentages. Our merit percentage is what most companies would have. It's in a 3% range. But the intensive comp is in getting it to a 100% accrual. We did not pay out for 2016 accrual that will pay out in Q1 of 2017, it's not going to a 100% bonus. It's going to be as I mentioned, somewhere in the 75% to 80% range. We are assuming it's going to be a 100% in 2017 and therefore the step-up element from 80 to 100 or 75 to 100 is a chunk of that 20. And then base inflation is another chunk. And then you've also got annualization of head count, especially on the corporate side, we added a lot of corporate headcount to get as a free standing company. By the end of Q2 of 2016, we've obviously got some annualization impacts of that headcount as we've now got to a steady state.

[Walter Liptak:]

Okay, great. And then if I could ask a last one. On R&D and engineering expense, how did that end for the year and are there are there any moving parts within that, have those groups been impacted yet through the way that you're doing product development, usually become more efficient on new product development, basically using 80/20?

[John Stewart:]

Well, I'd say on engineering and R&D and you got to look at the two together. Our engineering cost for in total $49 million for the year versus some $48 million in 2015, and those included R&D of about $36.5 million in 2016. But only $26 million in 2015. So, there is a big step-up in R&D during the year.

[Hubertus Muehlhaeuser:]

And we would like to of course keep the high rate of R&D expenses and spending. And we want to reallocate it from dead wood so to say into interesting product. So, rather than spending on EPA and then mission levels for product that we don’t need, we rationalize those but we're inventing and bringing new product to the market, which is the reason why we'd like to continue to be the innovation leader and also the highest spender on innovation on a dollar base and a percentage base in the industry.

[Walter Liptak:]

Okay, great. All right, thank you guys.

[Operator:]

Your next question comes from the line of Dean Graves with Eaton Vance. Please go ahead.

[Dean Graves:]

Good morning. You guys, Hubertus you mentioned earlier on this call and you guys mentioned over the last couple of calls that you'll begin making smaller bolt-on acquisitions this year. I wondered if you could just give us a framework with respect to size, what the total magnitude those might be, realizing that someone unpredictable, but just a general idea. And then Hu, can you also comment on where that might go medium term or do you think you'll is there an opportunity to do larger acquisitions in the medium term relative to your near term aspirations?

[Hubertus Muehlhaeuser:]

Well, as said, our priorities for this year have continued to deliver on our simplification rise as the entity lever. So, we're going to use US cash predominantly for the repayment of our loans. However, we have stranded cash of course in Europe that we would like to use in Europe and in Asia. And then, so therefore these smaller bolt-on acquisitions, they will not go out of the range that we can really afford out of our free cash flow. So, it's going to be really smaller in size. Total enterprise value acquisition not higher than a $100 million for sure, or a bit lower. So, call it between the $20 million $30 million up to $80 million, something like that. We did discuss in the last calls extensively on where we see we have some gaps and some needs and where we see the interest and we continue to basically look around for companies in that area. And to be very honest, with our new presence in the market, people see that and they're coming to us. So, we have a pretty full pipeline right now, and we're very bullish that we can make something happen in 2017, however, only at the right price. And so, we will not be paying crazy prices. And then, your second question was for larger industry consolidation. I mean, we have said this all along, we would like to be the consolidator rather than the consolidatee. Right now, our balance sheet doesn't provide for very large acquisition, so we want to continue doing our homework. But it's definitely beneficial to our shareholders in the mid-to-longer term to think about them, larger getting together of strong groups. And I continue to repeat what I've said in the other calls. This combination of two strong Americans doesn't necessarily create the shareholder where you want it really cross Atlantic getting together. I mean, strong European, strong Asian with us, that would be make sense and then create a true global player, which we still don’t really have in our industry. Does that answer the question?

[Dean Graves:]

Yes, that's good. Thank you, Hubertus.

[Operator:]

Your next question comes from Mig Dobre from Baird. Please go ahead.

[Mig Dobre:]

Yes. Thanks for taking my follow-up. Just a couple of clean-up items. Is there any color that you can provide us with regards to either in terms of revenue or in terms of profit dollars, probably revenue would be the easiest? The amount of revenue that is actually imported from Mexico and sold in the United States at this point?

[John Stewart:]

So, we've obviously looked to this as every other company I'm sure is doing. I would not like to call it out at a country level. What I would say is that we are a modest net importer when you look at a matrix of all I mean in the US. We are modest net importer to the US to the tune of somewhere less than 10% of our sales, or somewhere between mid-single digit and 10% of our sales, net importer to the US. Obviously, we have a matrix of countries that we both sell to and buy from. And the major ones are Canada, Mexico, the UK and Germany.

[Mig Dobre:]

Okay.

[Hubertus Muehlhaeuser:]

That was also --.

[Rich Sheffer:]

And the majority of our business in North America and the majority of our people sit in North America and that was like that and that will come to be the resale. So, I mean, that’s I think very important to know.

[Mig Dobre:]

And I recognize that policy changes are quite uncertain at this point but in terms of your internal planning, are you in your processes contemplating any changes or adjustments to manufacturing footprint in response to potential changes in legislation?

[Rich Sheffer:]

As John has said and then Josef would also comment on that. We have looked at that but we feel that the moves that we've made absolute economic sense under any legislation, to be very honest. And so, we continue to do that and we have of course also more to come. And we do what is right for the business. So, we will not change our strategy in that regard. And with the growth that we're going to see also outside of North America, we will also basically see that our manufacturing footprint is going to grow outside. And it's going to grow with its size of our business in North America.

[John Stewart:]

And I would just stress what I already said in the prepared remarks. We will address these issues as and when they become law and we will enact whatever contingencies we have to act to deal with them if they are negative to us.

[Hubertus Muehlhaeuser:]

There is no need to become hectic right now or to make the base, make fast changes or something to anything.

[Mig Dobre:]

Sure, okay, understood. And then my last question is on the fourth quarter margin in the America's. Definitely a good year but the fourth quarter was a little bit lighter than what we had modeled and margin wise maybe a little bit lighter than some of the other quarters in the year as well. Is there anything to kind of call out for this quarter specifically in the America's or it's just kind of a one-off event?

[John Stewart:]

I think I'd repeat the observation I made earlier about the impacts in 2017 on rebates being modest headwind for us. As our general market business grows and they are predominantly US based general market. As that becomes a bigger piece of our pie, it is on the face of a bit margin dilutive but it is obviously an area where we see great potential growth. So, as the mix changes from the general mark -- towards the general market on a way from the QSR is that there will be a slightly dilutive impact from that.

[Rich Sheffer:]

Yes. And I think it's fair to say that it was a year-over-year on your profitability improvement. I mean, this is it was positive and we remember we had a very strong Q4 of 2015. And despite that, we basically grew. So, margin story is very intact.

[Hubertus Muehlhaeuser:]

Josef, anything to add from your side?

[Josef Matosevi:]

Nothing.

[Hubertus Muehlhaeuser:]

Okay.

[Mig Dobre:]

All right. Thank you, guys.

[Operator:]

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

[Rich Sheffer:]

Thanks, Virgil. This concludes today’s 2016 fourth quarter earnings call. Thank you again for joining us this morning and have a great day.

[Operator:]

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