Welbilt, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Well-Built Incorporated 2020 Q4 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star then one on your telephone. If you would like to withdraw your question, you may press the pound key. If you require any further assistance, you may press star zero and an operator will come back on to assist you. I would now like to hand the conference over to your first speaker today. Mr. Rich Sheffer, please go ahead.

Good morning and welcome to Wellbill's 2020 fourth 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 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 FCC 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 fourth quarter results, I want to share some details on the current market environment. Looking at the MillerPulse weekly same-store sales graph on slide 3, You can see the recovery in the restaurant market since the historic drop that began the second week of March. QSR same-store sales have consistently been positive since early July. Most QSRs have 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. Same-store sales at casual dining restaurants began the quarter down 15% to 20% compared to prior year. The lost momentum beginning in November bottomed out down nearly 40% in December. They've recovered much of the ground they lost since the first of the year and are now down just slightly more than 20% compared to last year. We expect conditions to begin improving for casual restaurant operators. If temperatures warm up enough to allow outdoor dining in colder areas, We make further progress on vaccinating the population. The National Restaurant Association estimates that 110,000 restaurants, or 16% of the pre-COVID population, have closed their temporarily or permanently. They also reported their restaurant employment remains 2.5 million below pre-COVID levels, the majority of this in those operations that rely on indoor dining or service. QSRs have also reduced headcount as they have been closing their indoor dining rooms and shifting to a takeout and delivery only model. In EMEA, most countries still have restrictions on dining away from home, but more are allowing takeout and delivery compared to last spring. Market expectations are that most of these restrictions will start to be eased beginning late this quarter through the second quarter. In APEC, there's a split between countries that are operating with few to no restrictions like Australia and China, those that are still significantly impacted by the pandemic, primarily Southeast Asia and India. Increased distribution of COVID vaccines globally will help these markets reopen. We've heard several QSRs publicly comment during their recent earnings calls that they will begin to focus on new builds in 2021 as their same-store sales have recovered and they see a share growth opportunity due to the continued weakness in casual dining. Given our strong position with most of these chains, we expect to benefit as this market segment starts to expand again. Looking at other end markets, we've seen increased interest from C-stores about expanding their food and beverage offerings. We have new programs with a number of major C store chains and are optimistic that this will expand as the markets continue to recover. Moving on now to slide four of our presentation to review our financial results. Our net sales declined 16.2% in the fourth quarter with organic net sales decreasing 17.6%. This continued the gradual improvement that we have seen since the first two months of the pandemic. With sales still down in the mid-teens percent, we delivered an adjusted operating EBITDA margin of 18.8%, which is a 20 basis point increase from last year's fourth quarter. Along with the increased margin, we delivered $37.7 million of free cash flow in the quarter, a 10% increase compared to last year's fourth quarter. This operating performance was made possible by the progress the Weldwell team made on the transformation program over the last year and by the cost containment actions we took in March. On slide five, sales in America decreased 15.1% in the quarter from the prior year. Sales to QSRs increased year over year in the fourth quarter, driven primarily by an increase in non-repeating large chain rollout sales. The majority of this attributable to the rollout of Mary Chef high-speed ovens. That is the continuation of that program with a global customer that launched in Q3. We also saw an uptick in sales of Garland clamshell grills for the large QSR. In the general market, sales decreased in the quarter, but we did begin to see some momentum building in the C-store segment and roll-ups of Mary Chef ovens, CombiTherm combi ovens, and fresh blend smoothie machines. We remain very excited about the C-store segment. Other areas within the general market, such as casual restaurants, education, healthcare, travel, and leisure end markets, We're softer in the quarter due to the impact from rising COVID cases. Finally, kitchen fare aftermarket sales decreased primarily due to the absence of any bulk parts buys from master parts distributors in this year's Q4. Looking at EMEA on slide six, sales decreased 15.6%, organic net sales down 21.1%. Large chain sales were impacted by strong QSR sales last year. Declines in the general market were similar due to the re-imposition of local dine-out restrictions. As I previously mentioned, the impact wasn't as bad as what we experienced in the spring as kitchens were allowed to remain open for takeout and delivery in most countries. We did have a continuation of the small rollout for CREM with the European governmental entity during the quarter. On slide 7, sales in APAC decreased 21%, with organic net sales down 23.1%. We had sales growth in Australia again this quarter and saw sales growth in Japan and Malaysia for the first time since the beginning of the pandemic. Sales in China decreased due to tough comparisons from two rollouts in last year's fourth quarter and the shift of a coffee customer to EMEA that was included in APEC results last year. We still view the China market as fully recovered. However, Southeast Asia, the Philippines, and India are still being highly impacted by the pandemic. Moving to slide eight, the progress we have made on our transformation program, once again, positively impacted our results for this quarter. We delivered approximately $5 million of end-period savings in the fourth quarter, which is a $20 million run rate. Looking at our various initiatives, our procurement team has implemented many new agreements with current and new suppliers and is continuing to work on implementing the remaining opportunities presented by our key responses. most of which are now going through the product qualification and testing processes. We continue to see savings from our procurement activities ramp up in the quarter, which kept us positive when netted against commodity inflation that began to increase in the fourth quarter. More of the early benefits are now beginning to flow from the balance sheet, where they are initially capitalized into inventory and onto our P&L. We will continue to see some inventory obsolescence and transitional costs as we shift suppliers along with the recent escalation of logistics costs. Those should now be fully offset by the savings we are now generating. We are continuing to develop our own site-led value analysis, value engineering, or BABE initiatives, but the RFQ process didn't provide the right solution for our businesses. These VAV initiatives have identified additional savings opportunities to supplement the RFQ process and is a great example of how we are transforming the culture of our company, the one that embraces continuous improvement. This will help us keep a full pipeline of savings opportunities moving forward. We remain confident that we will clean our procurement activities close to our original timeline when they lag in actual dollar savings until the business returns to pre-COVID levels. We've continued to make progress at 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 most of our sites globally as we are deploying our lessons learned broadly to accelerate improvements. Some of these productivity gains have been substantial by dealing with lower volumes and inconsistent production shifts that work against us in some facilities. These productivity gains have led to leaner operations and a smaller workforce, with headcount reductions that began in Q4 of 2019 and continued into 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-19. expect the pace of capital spending will increase in 2021 allowing us to catch up on these planned savings we are working on additional plant consolidations currently this one in shreveport louisiana where we have had two plants that support our frymeister and merco businesses we're in the process of consolidating one of those plants into the other one expect to have this completed during the first half of this year as i mentioned we did see a step up in transformation program savings in the fourth quarter with in-period savings increasing to approximately $5 million, which is a $20 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 will cost saving the dollar terms along with the all-in EBITDA margin target of 23% will be delayed due to the pause experience related to the pandemic, creating uncertainty of 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 nine, we introduced the newest version of Kitchen Connect and launched our new common controller, into our first product lines last quarter. As a reminder, Kitchen Connect is our open cloud-based digital platform that brings the benefits of connectivity to commercial food service operators in a stable, secure digital environment. And because it is an open cloud-based solution, we can share data with other kitchen management platforms to connect competitors' equipment to well-built 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 several existing products with new controllers and will offer kits to operators who want to retrofit their equipment with a 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. Wellville's integrated approach to having a leading cloud-based data management system with the only controller that uses the same operating logic across all of its brands. puts Wellbuilt at the leading edge for digital platforms in our industry. Since our dual launch last quarter, we have had several chain operators express interest in adopting Kitchen Connect along with Wellbuilt equipment into their operations. We are currently working with these customers on field testing within their operations. More on this in future quarters. The last item I want to cover is an update on our Ghost Kitchen efforts. On slide 10, you can see one of our standard ghost kitchen designs that was developed by our pit kitchen team to help the operators of these kitchens adopt an efficient modular layout that is digitally enabled by Kitchen Connect. Demand for ghost kitchen 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, have agreements in place with multiple ghost kitchen operators for their planned store openings in 2021. This is yet another example of 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.