Welbilt, Inc.

Good morning. My name is Samantha and I will be your conference operator today. At this time, I would like to welcome everyone to the Well-Built, Inc. 2020 Q3 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Rich Sheffer, you may begin your conference.

Good morning, and welcome to WellBuild's 2020 Third Quarter Earnings Call and Webcast. Joining me on the call today is Bill Johnson, our President and Chief Executive Officer, and Marty Agard, our Chief Financial Officer. Before we begin our discussion, please refer to our safe harbor statement on slide two of the presentation slides and in our earnings release, both of which can be found in the investor relations section of our website, www.wellbuilt.com. Any statements in this call regarding our business that are not historical facts are Our forward-looking statements and our future results could differ materially from any express or implied projections or forward-looking statements made today. Our actual results may be affected by many important factors, including risks and uncertainties identified in our press release and in our SEC filings. We do not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or other circumstances. Today's presentation and discussion will include both GAAP and non-GAAP measures. Please refer to our earnings release for our non-GAAP reconciliations and other important information regarding the use of non-GAAP financial measures. Now I'd like to turn the call over to Bill.

thanks rich and good morning before we get into our third quarter results i want to share some details on the current market environment looking at the miller pulse weekly same store sales graph on slide three you can see the recovery in the restaurant market since the historic drop that began the second week of march it's notable that qsr same store sales are now above prior year levels Most QSRs had more than 50% of their sales come through their drive-through windows prior to the crisis and now are also embracing delivery. As a result, they have been more resilient than casual dining restaurants, who pre-crisis saw the majority of their sales tied to dine-in traffic. Main-store sales at casual dining restaurants began the quarter down 30% compared to the prior year and proved to being down 20% by the end of the quarter. We're not expecting to see much improvement in the near term due to the recent rise in COVID-19 cases, causing some reopenings to be rolled back in portions of the U.S. and the NBA. The colder weather that is now impacting northern regions will also impede additional improvement. Until new COVID-19 case counts begin to fall again and diners regain confidence in eating meals indoors at restaurants, it will be difficult to see additional recovery in same-store sales for casual dining restaurants. The National Restaurant Association estimates that 100,000 restaurants, or 15% of the pre-COVID population, have closed. They also reported that restaurant employment remains 2.3 million below pre-COVID levels. The majority of this is in those operations that rely on indoor dining or service. USRs have also reduced headcount as they have been closing their indoor dining rooms and shifting to a takeout and delivery-only model. Given the current state of the market, it is possible that operators will defer new equipment purchases temporarily while they recover financially from the crisis and get clarity on the new demand environment. In this case, we would expect to see an increase in kitchen care after market sales as operators spend more time on repairing existing equipment rather than replacing it. However, food service equipment are income-producing assets for operators, and the cost of repairs, lost sales while the equipment is down, and the food safety concerns that hang over the industry will likely keep extended equipment lives in check. We've had several QSRs publicly comment recently that they will begin to focus on new builds over the next several quarters as their same-store sales have recovered and they see a shared growth opportunity due to the continued weakness in casual dining. Given our strong position with most of these changes, we expect to benefit as this market segment starts to expand again. Looking at other end markets, the education market is seasonally strong during the summer months. As they do, the majority of their plans, remodels, and upgrades from school is not in session. As expected, we did see this market seasonally slow in late August as project work was completed in time for the anticipated return of students. Healthcare remains stable and is likely to stay that way for the foreseeable future, although there is the potential for some remodel and upgrade projects at long-term care facilities once the pandemic ends. We have seen C-stores and government and correctional segments continue to spend on expanded sanitation. We have also seen a strong focus on beverage offerings in the C-store market, especially for our fresh blend smoothie machine, as well as the growing interest in our crème coffee machines. We have many units and tests with a number of major C-store chains and are optimistic that this will drive new revenue opportunities for us in 2021 and beyond. Moving on now to slide four of our presentation to review our financial results. Our net sales declined 27.3% in the third quarter, with organic net sales decreasing 28%. Year-over-year monthly sales decreases improved each month during the quarter, and the 27.3% decline was almost half compared to that of the second quarter. Despite the continued high level of sales decreases, we delivered an adjusted operating EBITDA margin of 15.3%. This was down 470 basis points from last year's third quarter, but was a 570 basis point sequential improvement from this year's second quarter. This operating performance was made possible by the progress we've made on the transformation program over the last year and by the cost containment actions we took in March. We delivered $32.1 million of free cash flow in the quarter and improved our total global liquidity. On slide five, sales in the Americas decreased 28.8% in the quarter from the prior year. We had 16 million of non-repeating large-chain rollout sales in our prior year comparison, with only 3 million in new rollout volume in this quarter, which accounted for the majority of the sales decrease attributed to QSRs in the quarter. Notable within this quarter's rollouts was the first shipment of Mary Chef high-speed ovens to a new global customer. These first shipments occurred late in the quarter, and we expect sales to this customer to gradually ramp up as they replace all of their existing ovens over the next several years. In the general market, the sales decreases were a little less in the third quarter due to the healthcare, C-Store, and education end markets performing better than some other end markets. We did see demand for Manitowoc ice machines improve, which also supported general market sales. The level of kitchen care aftermarket sales decreases ease later in the quarter as the distribution consolidation and inventory destocking related to the merger of the two largest master parts distributors neared completion. Looking at EMEA on slide six, sales decreased 21.6% with organic net sales down 25.8%. Large chain sales were weak with sales to our large carbonated soft drink customers remaining very low. Large chain sales were also impacted by strong QSR sales last year. We had a smaller decline in the general market due to a couple of small rollouts, one for Creme with a European governmental entity, another for Mary Chef with a UK grocery store chain. We also saw better sales in the UK during the quarter as they reopened for dining out which was supported by the government through their Eat Out to Help Out program that subsidized 50% of the cost of a meal up to 10 pounds for individuals who dined out. The program was successful as there were 64 million meals eaten at a discount in the first three weeks, but unfortunately the program has ended. Even more unfortunately, many areas of the UK and Europe are seeing spikes in COVID cases are reimposing localized restrictions. On slide seven, sales in APEC decreased 26.9% with organic net sales down 27.3%. Sales in China and Australia, the first areas to be impacted by COVID last winter, increased year over year with China benefiting from a large project. Excluding that project, China's sales would have decreased slightly. Other areas of APEC, Southeast Asia, the Philippines, Japan, and India, to name a few, were impacted later and remained weak during the quarter. Moving to slide eight, we're continuing to make really good progress on our transformation program. Our procurement team has implemented many new agreements with current and new suppliers and is continuing to review the majority of the remaining RFQ responses, most of which are now going through the product qualification and testing processes. We're starting to see the savings from our procurement activities begin to ramp up, but some of the early benefits are currently capitalized into inventory, while our P&L is reflecting some inventory obsolescence and transitional costs as we shift suppliers. We've also been developing our own site-led value analysis, value engineering, or VAVE initiatives, but the RFQ process didn't provide the right solution for our businesses. These VAVE initiatives have identified additional savings opportunities, supplement the RFQ process, and is a great example of how we are transforming the culture of our company into one that embraces continuous improvement. We remain confident that we will complete our procurement activities close to our original timeline, but may lag in actual dollar savings until the business returns to pre-COVID levels. We have continued to make progress with the five North American manufacturing plants that are currently part of the transformation program and have seen productivity gains emerge at not only these sites but in most of our sites globally as we are deploying our lessons learned broadly to accelerate improvements. Some of these productivity gains have been substantial despite dealing with lower volumes and partial production shifts that hurt cost absorption and lead to higher transitional costs. These productivity gains have led to leaner operations in a smaller workforce with headcount reductions that began in Q4 of 2019 and continued in each quarter of 2020. We anticipate some additional productivity-related headcount reductions continuing through 2021. We've taken delivery and installed some new fabrication equipment. However, the pace of capital spending for additional fabrication equipment has been slower than originally anticipated due to the impacts of COVID. Slowdown in capital investment combined with temporary plant shutdowns and furloughs that we enacted in the second quarter and continue to a lesser extent in the third quarter will slow the pace of recognizing manufacturing savings by a few quarters. We did complete the transfer of all coffee machine manufacturing from our Creme Shanghai plant to one of our existing manufacturing plants in China during the third quarter. We are now in the process of shutting down the Shanghai plant and should be fully accepted by the end of the year. We did see a step-up in transformation program savings in the third quarter, with end-period savings increasing to approximately $4 million, which is a $16 million run rate. We remain fully committed to delivering the 500 basis points of margin improvement from the transformation program and expect to complete all the planned execution actions that will drive the savings by the end of 2021. However, the timing of realizing the full $75 million of cost savings in dollar terms, along with the all-in EBITDA margin target of 23%, may be delayed due to the pause experience related to the pandemic, creating uncertainty when sales and manufacturing volumes return to pre-COVID levels. Before I turn the call over to Marty, I want to share some recent developments from some of our other strategic initiatives. On slide 9, I'm pleased to announce that we launched our newest version of Kitchen Connect, We launched our new common controller into our first product lines. Kitchen Connect is our open cloud-based digital platform that brings the benefits of connectivity to commercial food service operators and helps them in five key areas. Facilitates new menu downloads and updates. It provides visibility into the service needs of the equipment. Assists with asset management and tracking. Helps them measure what they produce and how they are utilizing their kitchen equipment. And finally, it tracks quality management metrics such as oil filtration in fryers or cleaning cycles in combi ovens. Kitchen Connect 3.0 provides enhancements on all of these key features in a stable, secure digital environment. Because it is an open cloud-based solution, we can share data with other kitchen management platforms and connect competitors' equipment to Wellbill's Kitchen Connect. Our new common controller connects to Kitchen Connect 3.0 and is now being integrated into new products across all of our brands. We will also be retrofitting existing products with the new controllers and will offer kits to operators who want to retrofit their equipment with new controller to take advantage of our integrated digital platform. Operators increasingly demanding digital capabilities when choosing what equipment they will use in their kitchens. Wellvo's integrated approach of having a leading cloud-based data management system with the only controller that uses the same operating logic across all its brands puts Wellvo at the leading edge for digital platforms in our industry. Moving to slide 10, we launched our newest Compotherm combi oven product line, The Max, in the Asian and European markets two weeks ago. The Max is for those customers who need a combi oven that is larger than our minis It has more features and performance, but don't need all the premium features and performance of our flagship C4 combi ovens. The Max is born digital with our new common controller and connects to Kitchen Connect 3.0, while being priced to be competitive with other mid-tier combi ovens in the market. We had several hundred people attend our live launch event in China, and many more joined virtually for our launch events in Europe. The last item I want to cover is an update on our ghost kitchen efforts. On slide 11, you can see one of our standard ghost kitchen designs that was developed by our Fit Kitchen team to help operators of these kitchens adopt an efficient, modular layout that is digitally enabled by Kitchen Connect. Demand for ghost kitchens is expected to grow rapidly with an estimated 1,000 ghost kitchen openings over the next four years, and America is representing approximately $100 million of equipment. We estimate that we have some equipment in the majority of ghost kitchens in operation today and have installed 25 well-built ghost kitchens so far this year, where the majority of the equipment in the kitchen is well-built equipment. This is yet another example where our leadership and digital capabilities will help us grow in an emerging market segment. With that, I'll turn the call over to Marty.