Welbilt Inc.’s (WBT), CEO William Johnson on Q2 2020 Results – Earnings Call Transcript


Welbilt, Inc. (NYSE:WBT) Q2 2020 Results Earnings Conference Call August 4, 2020 10:00 AM ET

Company Participants

Rich Sheffer – Vice President of Investor Relations

William Johnson – President and Chief Executive Officer

Martin Agard – Executive Vice President and Chief Financial Officer

Conference Call Participants

Jeffrey Hammond – KeyBanc Capital Markets

Mig Dobre – Baird

Todd Brooks – CL King

Joel Tiss – BMO Capital Markets

Lawrence De Maria – William Blair

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Welbilt 2020 Q2 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today. Mr. Rich Sheffer, you may begin.

Rich Sheffer

Good morning and welcome to Welbilt’s 2020 second 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 2 of the presentation slides, which can be found in the Investor Relations section of our website, www.welbilt.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 expressed or implied projections or forward-looking statements made today.

Our actual results may be affected by many important factors, including risks and uncertainties identified in our press release and in our SEC filings. We do not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or other circumstances.

Today’s presentation and discussion will include both GAAP and non-GAAP measures. Please refer to 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.

William Johnson

Thanks, Rich, and good morning. Our people demonstrated a strong sense of resiliency during the second quarter as they remained focused on executing our strategy while dealing with the most difficult conditions ever faced by our industry. We made great progress on our Transformation Program, trained customers, dealers, reps and consultants on how to develop a ghost kitchen and how to improve safety with our enhanced sanitation features that are available with many of our brands.

We’re well on our way to developing a continuous improvement culture that is a key success factor in high performing companies and we’ll emerge as a stronger company once this crisis abates and business conditions begin to normalize.

Before we get into our second quarter results, I want to review Welbilt’s business responses to the COVID pandemic and give you a little more color on the current environment for the commercial foodservice industry.

Starting on Slide 3, you can see some of our responses to the crisis, also which we shared with you last quarter. I’m not going to cover each individual item on the slide, but would point out that our early recognition of the magnitude of this crisis created an urgency within Welbilt to create meaningful responses across our entire company that allowed us to remain profitable and maintain a stable liquidity position in the quarter.

Now that we are in the third quarter and have a little better understanding that the impact from the pandemic will not be over in a couple of quarters, we are taking a narrower set of cost reduction actions in the third quarter to further adjust our cost structure. These actions were made possible by the progress we’ve made on our Transformation Program and are helping us permanently lock in the productivity improvements achieved to date.

On Slide 4, we have provided some detail on the current market environment. Looking at the MillerPulse weekly same-store sales graph, we can see the recovery in the restaurant market since the historic drop that began in the second week of March. Notable that QSR same-store sales are now above prior year levels. Most QSRs who had more than 50% of their sales come through their drive-through windows prior to the crisis have also now embraced delivery. As a result, they have been more resilient than casual dine-in restaurants. So pre-crisis, saw the majority of their sales tied to dine-in traffic.

We have seen improved interest and activity around restarting some equipment rollouts prospectively speaking more about the next quarter. Casual dine-in restaurants have recovered from seeing same-store sales drop 82% compared to prior year at the end the March to now being down 30%. With the recent rise in COVID-19 cases and some reopenings rolled back in certain location, same-store sales have plateaued since late June. Until no COVID-19 case counts begin to fall, reopenings begin again and diners can regain confidence in eating meals in restaurants, it will be difficult to see additional recovery in same-store sales for casual dine-in restaurants.

Used equipment hasn’t been a big part of the commercial foodservice equipment market historically due to reliability, warranty and food safety concerns. In addition, the industry does not have the infrastructure to refurbish and sell used equipment in significant volumes. Most used equipment dealers are localized in their geographic footprints and wouldn’t even be considered to have a regional presence.

We’ve not seen any discernible impact from used equipment in the market. However, it is possible that it could mute the demand for new equipment for a period of time and we’ll continue to be ready to respond if we see it happening. It’s also 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 KitchenCare aftermarket sales as operators spend more on repairing existing equipment rather than replacing it. However, foodservice equipment are income producing assets for operators and the cost of repairs, lost sales while equipment is down and the food safety concerns that hang over the industry will likely keep extended equipment lives in check.

On Slide 5, we have an updated view of both demand drivers and our end market exposures. On the demand side, you can see that the replacement demand, whether coming from equipment or parts, drives approximately 60% of our annual sales. This has been a long-term driver of stability in the commercial foodservice equipment industry as the equipment in kitchens are income-producing assets for the operators and have average useful lives of eight to 10 years. We expect that increased emphasis on take-out and delivery will drive new builds and remodels for the dark ghost kitchens. We also expect that remodeling will occur to implement new equipment for safety and sanitation protocols in kitchens.

New builds are the next biggest driver of demand. New builds for many end markets are expected to be very low for a while, as the industry gradually recovers from the pandemic although QSR spending may start up again seeing as many change to fully recover to or are above prior year sales levels.

The final driver is demand driven by menu changes. This can be in the form of adding new menu items or categories into an existing kitchen that requires different equipment to produce. Operators are also increasingly revamping their menus to improve speed of service and to improve quality of both take-out and delivered foods. These require equipment that can be used across multiple menu items, have faster cook times, and that can extend holding times of prepared food, while maintaining the original quality it had when freshly cooked.

The next chart on the slide is our end-market exposure. Starting with the exposure within the restaurants, our largest exposure is to QSRs and Pizza restaurants. These operators gets the majority of their revenue through drive-through, take-out and delivery, making them the least impacted by the pandemic with most back to or above same-store sales from a year ago.

Our next largest exposures is to fast casual and to the large casual chains. These operators have traditionally relied for dine-in as a larger percentage of their revenue base, but have adopted take-out and delivery for a portion of sales. They’ve been more impacted than the QSRs but have been focusing on improving their take-out and delivery operations and options. Many have mitigated a portion of their lost sales during the dine-in bans and ongoing reduced capacity orders.

The smallest exposure in the restaurant sector would be the other casual operators. These would include fine dining, independent operators and bar and grills. The majority of these rely on dine-in for nearly 100% of their revenue and have been the most severely impacted operators in the restaurant sector.

Moving to non-restaurant operators. Our four biggest exposures are to education, C-store, healthcare and government and correctional facilities. In education, we have continued to see some demand as schools are focused on making the changes necessary to keep students and staff safe when they reopen. Healthcare has remained strong and should maintain a strength for the foreseeable future. We have seen C-stores and the government and correctional segments spend on expanded sanitation. The weakest sector is travel and leisure, which is still flat on its back, with a 4% of our end market exposure, it is one of our smallest segments.

Moving to Slide 6 of our presentation to review our financial results. Our net sales declined 51.7% in the second quarter with most of the decline being organic due to the impact from COVID-19 pandemic on our global end markets. As we previously reported, April sales declined 60% which was the worst month of the quarter. With May sales declining 56% and June improving to 40% decrease.

Despite previously unimaginable sales decreases, we delivered an adjusted operating EBITDA margin of 9.6%. 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, some of which were also enabled by the Transformation Program. This also helped us deliver positive free cash flow in the quarter and keep our liquidity stable with the first quarter.

On Slide 7, sales in the Americas decreased 52.4% in the quarter from the prior year. As with all of our regions, Americas sales were weakest in April and improved sequentially each month. We did have strong large chain rollouts in our prior-year comparison. Those costs will begin easing in the third quarter. Sales decreases were a little less than the general market in the second 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 in the second half of the quarter, which also supported general market sales.

Looking at EMEA on Slide 8. Sales decreased 56% with organic net sales now 55.1%. Large chain sales were highly impacted as some were totally shut down in certain countries for much of the quarter. In particular, sales to our large carbonated soft drink customers were very low. In the general market, the declines were smaller with Crem outperforming in the quarter. Crem has won some new customer business, which has started shipping already in the third quarter, and should have them close to their original expectation in the second half of 2020.

On Slide 9, sales in APAC decreased 39.7% with organic net sales down 38.1%. Sales gradually improved sequentially through the quarter led by China, Japan and Australia who were the first to be impacted by the pandemic and the first to begin to recover. Other areas of APAC were impacted later. Southeast Asia, the Philippines and India, to name a few. These areas were closed for some or most of the second quarter and impacted APACs overall results.

Moving to Slide 10. We are continuing to make really good progress on our Transformation Program. Our procurement team has issued the majority of the planned RFQs and we have been receiving embedding responses. Responses continue to support our estimates for our targeted procurement savings. We have now begun to implement new sourcing agreements with both current and new suppliers and delivered another small net savings from these activities in the second quarter.

We’ve also been developing our own site-led value engineering initiatives for the RFQ process that didn’t provide the right solutions for our businesses. This is a great example of how we are transforming the culture of our company to one that embrace this 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 continue to make progress at the five North American manufacturing plants that are currently part of the Transformation Program.

We continue to improve the layouts of our assembly lines, and where we’ve done that, we’ve seen productivity and lead times improve significantly. These steps contributed to headcount reductions beginning in Q4 of 2019 with more in Q1 of 2020, some additional reductions coming over the balance of the year. We’ve taken delivery installed from new fabrication equipment, however, the pace of capital spending for additional fabrication will slow over the next few quarters as we focus on liquidity management. Slowdown in capital investment, combined with temporary plant shutdowns and furloughs will slow the pace of recognizing manufacturing savings by a few quarters.

We remain fully committed to delivering a 500 basis points of margin improvement from the Transformation Program and expect to complete all of our planned activities 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 all-in EBITDA margin target of 23% may be delayed due to the uncertainty of when sales and volume levels return to pre-COVID levels.

With that, I’ll turn the call over to Marty.

Martin Agard

Thanks, Bill and good morning everyone. I’m going to start with Slide 11 and the discussion of our adjusted operating EBITDA margin results. As you might expect, the drop in volume had impacts throughout our system and these margin drivers. Volume, which we measure at the gross profit level and is netted against the impact of net pricing drove a decline of 1,670 basis points in the second quarter. This reflects the 52% decline in sales versus prior year, only slightly mitigated by positive net pricing as our January price increases have mostly held up in the quarter.

Material costs, including tariffs, was a 250 basis point headwind this quarter compared to prior year. This comparison reflects a 60 basis point benefit we received in last year’s second quarter from a favorable ruling on the application of the Section 301 tariffs on certain products that were being imported from China. In addition, we faced some new tariffs that began to impact us in 2019 and finally we saw inbound freight rates increase in the quarter due to capacity adjustments as carriers responded to feared COVID disruptions.

On the positive side, mitigating some of these headwinds, we did benefit from some early procurement wins we’ve achieved through our Transformation Program and see a growing breadth of components coming into our plants at lower cost than a year ago. As our production patterns return to normalcy, we are confident these procurement savings will contribute to margin expansion.

Other manufacturing expenses mainly labor, overhead and warranty were a 250 basis point impact to margin this quarter. We are pleased with how quickly and aggressively we adjusted our production expenses to match the volume declines we experienced this quarter. As Bill mentioned, we implemented one to three week temporary plant closures at the end of March and had sporadic temporary closures at some plants throughout the remainder of the quarter to match production with demand.

We implemented a reduction in force, again at the end of March. It was mostly a pull ahead of actions we planned to take later this year as a result of the improvements we’ve made in our plants through our Transformation Program. This helped us reduce direct labor almost dollar for dollar with what were sharp declines in demand and thereby maintained the productivity improvements we’ve made so far despite the lower volume. But there is a degree of fixed cost we could not impact proportionately to volume, causing the margin deleveraging.

We are continuing to execute the Transformation Program related labor strategies across our plants in Q3 and remain encouraged by the progress we see. We’re also critically reviewing our other plant cost to ensure we are adjusting to demand and creatively revisiting our structural costs. We expect to continue to take additional restructuring actions in the second half of the year as each plant progresses in its individual Transformation Program.

SG&A on an adjusted basis was down from prior-year quarter by $24 million or 1,180 basis point contributor to margin in the quarter. Like our actions within the manufacturing footprint, on SG&A, we also took early and aggressive actions to contain spending as the pandemic’s impact emerged in March. Those actions enabled us to show real favorability in most of the SG&A categories in the quarter.

Employee-related expenses, marketing expenses, travel and professional fees were all favorable. As a reminder, if you’re reading the face of the income statement, SG&A includes the Transformation Program investments that are excluded from our adjusted operating EBITDA. You can track the specifics through the non-GAAP reconciliation schedules.

Moving to Slide 12. Free cash flow was a positive $3 million in the quarter. Remember that we define free cash flow as cash provided by operating activities, less capital spending, but historically have included unique adjustments for our accounts receivable securitization program that was terminated in March of 2019.

While the 2020 free cash flow has no unique adjustments, 2019 was adjusted for the cash receipts on beneficial interest in sold receivables of $85 million that was reflected as a use of cash in the operating section of the cash flow statement, as well as a source of cash in the same amount in the investing section as we collected the balance of the receivables that were sold prior to the program terminating the prior quarter. This is the last quarter where this adjustment will be in the prior year’s quarterly results.

One last reminder on our free cash flow is that it is traditionally a seasonal use of cash in the first quarter as we paid customer rebates to payout annual incentives, build inventory and experienced seasonally lower volumes. We then generate seasonally stronger cash flow in the remaining three quarters. We have averaged approximately $100 million of free cash flow each year since our spin-off, which is a testament to the strong cash flow generation ability inherent in our business. We demonstrated that ability again this quarter by generating positive free cash flow despite seeing sales decline by over 50% in the quarter.

In addition to generating positive EBITDA, we are managing working capital successfully with few, if any, collections challenges and selectively extending payables terms with the support of our vendors. Inventory did rise during the quarter with finished goods up due to some delayed and canceled orders by customers, extra inventory in support of two sourcing changes between our plants and due to the buildup to support increasing ice machine sales.

Raw materials also increased due to materials in transit as demand dropped, coupled with our carrying higher levels of safety stock to manage risk. While we are not providing a free cash flow forecast today, nor expecting it to achieve the levels of the last four years, we believe we’ve seen the toughest quarter in terms of the pandemic and this adds to our confidence relative to our liquidity.

So touching on liquidity, which we define as cash and short-term investments plus availability on our revolver, we ended the first quarter with $298 million of total liquidity, which is roughly even with where we were at the start of the quarter and as of June, 30 a year ago. Cash and cash equivalents plus restricted cash decreased by $9 million during the quarter, while our overall debt balance decreased by $10 million. We were in compliance with the liquidity EBITDA and capital expenditure covenants in our amended credit agreement with significant headroom.

Finally on Slide 13, I’d like to share a few updated thoughts on 2020. First, we withdrew our 2020 guidance in March and we’ll not reinstate it until conditions have sufficiently stabilized. The only guidance we are providing today is that we expect third quarter sales to decrease between 30% and 35% with understandably less clarity than our traditional guidance.

We don’t have a fourth quarter nor a full year sales estimate at this time, but we expect that the second quarter will prove to be the worst quarter we’ll experience in this crisis. The last thought to share on 2020 is that we are not abandoning our key strategic initiatives but we will balance our transformation investments along with our digital and new product innovation initiatives against what we can afford in the current environment.

As Bill stated, we remain confident that transformation actions are on track and the savings will be realized, but due to the top-line uncertainties and how that interacts with fixed manufacturing costs and SG&A, we cannot, at this time, set a reliable target for achieving the end goal of 500 basis points margin expansion from the 2018 base. But, just trust, we have not lost sight of that goal.

That concludes my comments and operator we’ll now open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Jeffrey Hammond

Hey, good morning gentlemen.

William Johnson

Hey, Jeff.

Martin Agard

Hey, Jeff.

Jeffrey Hammond

Hey. So, just want to understand a little bit better the guide. So I think you said June down 40%, maybe just talk about the exit rate in June and into July, where we’re kind of plateauing versus that 30% to 35% decline. Just trying to square that up.

William Johnson

Yeah, so we came up with a 30% to 35% for the quarter, we see July is in line with that.

Jeffrey Hammond

I’m curious if you’d extend that to pricing and as volumes hopefully do kind of normalize here and gradually recover, just how would you expect the interplay there with the industry pricing?

William Johnson

I think we were — we’ve been positively impacted by pricing. Marty’s comments on the call earlier, pricing was definitely a factor in the second quarter results. So I think — look, it’s going to get — if this continues longer, this drags out the tougher pricing becomes of course, the more hungry everybody gets. But right now, the price increases that we went in January seem to be holding up as expected.

Jeffrey Hammond

All right. Very good. Thank you.

Operator

Your next question today comes from the line of Mig Dobre with Baird. Please proceed with your question.

Mig Dobre

Yes. Good morning. Good morning, Bill, Marty. I guess — Bill, did I hear this correctly that you’re saying that orders in July are consistent with that 30% to 35% down guidance that you provided?

William Johnson

Yes.

Mig Dobre

Okay. So it still got better versus June though that’s I get your point, right.

William Johnson

Yes.

Mig Dobre

And, thank you the breakdown that you provided on Slide 5. For one point its very helpful. And I guess my first question, if you’re thinking about this outlook that you provided for Q3 and you look at the orders that you’ve received thus far in July, and we’re kind of looking at these pie charts that you’ve given us here in terms of your business breakdown.

I recognize you’re not going to be able to give me a perfect granularity here, but I guess, I’m wondering, how do we think about the moving pieces here? QSR and Pizza, how are they trending year-over-year? Is it fair to say that this portion of the market is — maybe only down modestly and you kind of have casual and retail — rather travel and leisure and others that are down significantly. I mean, can you give us some color here. I think that would be very helpful.

William Johnson

Yes. I think, if you look at it in terms of what has a better opportunity for rebound or what is rebounding faster, I would say QSR, pizza, C-store, Healthcare and parts are probably the kind of the four verticals there that give you the most opportunity for rebound. Then you kind of have the next tranche of verticals, which would be correctional, government, education are kind of in that mix tier of kind of rebound. The ones that are just kind of flat on their back right now are casual, travel and leisure.

Mig Dobre

Let me see if I can ask this question a little different. On a go-forward basis, OK, if we’re, say thinking that we can get again sequential improvement into Q4 or into 2021, my question is should we think about that improvement being generated still by areas of your business that are currently doing better, meaning is there enough upside still to generate recovery in QSR and Pizza, and those similar verticals? Or will we have to count on some of the more depressed end markets coming back in order for things to get less bad or improve?

William Johnson

No, I think, the ones that have opportunity for improvement is enough to generate what we’re kind of looking at to get us to the guidance levels in the third quarter. And I think they’re going to be the ones leading and there is some argument that the QSRs maybe taking share from some of these restaurants going forward that are going to end up closing. And so there may be more rollout opportunities, more expansion opportunities as they continue to win shares. I think it’s yet to be determined how much of that share they actually take from some of that segment. But I think it’s — those are the guys and of course we’re really — we have a very strong position in that segment.

Mig Dobre

Okay. It does. And lastly, related to this, on the parts business, maybe a little more color would be helpful in terms of where parts have trended through the quarter? And do you expect this business to be able to get back to growth mode at any point over the next say 12 months or so?

William Johnson

Yes. So the second quarter was a really, really tough quarter for KitchenCare. The overhang from the Parts Town-Heritage merger created an enormous inventory build at the Parts Town operation. And so the second quarter was really slow for aftermarket parts. Now their sales actually rebounded but they had to burn off that overhang, and most of that I think will be gone by the end of the third quarter. They burned off a big chunk of it in the second quarter.

And so some of the improvement as I said with Jeff, going into the third quarter from the second quarter is the rebound of that aftermarket piece, and we’re continuing to work our strategies in terms of how we can generate more sales there. We’re working to become more digital and use our partnership with our suppliers there to help generate more leads and help drive our aftermarket business and kind of get it to the levels where we want to get it too.

Mig Dobre

Okay. And then if I may squeeze one last one. I’m wondering if there are any variances that you are seeing between the hot side and the cold side of your business. Obviously there is seasonality on the cold side of the business. So I’d kind of love to hear your thoughts? And do you think that there is different sets of actions, cost actions that are required at one side of the business versus the other as you look back half going forward? Thank you.

William Johnson

Yes. So there is some seasonality there in terms of, the hotter the better for the ice business and it’s been a pretty hot last several months and so you saw our inventory was up a little bit and we got some work to do there, but a lot of that has to do with the bill for ice coming into the seasonal high periods here in the summer months. There is a little bit of, some of the colder side product is — has less of a margin profile than the hot side.

Anything that touches the food tends to have a higher margin. So when it’s hot side, it’s in direct contact with the food where the cold — lot of the cold stuff is storaged. So it tends to be a little more price sensitive than the hot side, but both have been doing well and the cold side is — has been holding up quite nicely. I’m very pleased with the ice business in our Delfield operation up in Michigan.

Mig Dobre

Thank you.

Operator

Your next question today comes from the line of David MacGregor with Longbow Research. Please proceed with your question.

Unidentified Analyst

Hi. Good morning. It’s Tong [ph] on for David MacGregor. Thanks for taking my question. I guess to start off, are you still seeing — are you still having trouble getting service and installation crews into the businesses, especially those located in recent hot spots like Florida and Texas?

William Johnson

I haven’t heard any more difficulty. I mean I think as the restaurants open up and if they have problems, certainly, I would say the best indicator that we have is the repair part businesses improving. So that means that the service level — somebody is got to get in there to put those parts in. So I would say that would be my only indicator on the aftermarket service side of it.

Unidentified Analyst

Okay. Thanks. And then on the first quarter all, the discussion of used equipment came up and at the time, I believe, Bill said that it would most likely take a quarter or two to see any meaningful impacts as the permanently closing restaurants go through bankruptcy, liquidation, etc. Now that we’re in August, can you provide us an update on what you’re seeing there and how things are playing out in the used equipment market?

William Johnson

It’s a non-event really for us. We don’t see any impact, we are unable to quantify if there is an impact. You know it’s the people who are supplying the used equipment, the ones that is going out of business are the most likely buyers for the used equipment as well as independent chain small independent restaurants and stuff. So I think for us it’s a non-event and I have — I watch it pretty closely and listen pretty closely to everybody in the industry and I haven’t heard anybody that said that there is a lot of used equipment being purchased right now.

Unidentified Analyst

Okay. And then lastly, if I may, can you provide some color on any supply chain challenges that you experienced during the quarter and to the extent that you can, where does the risk to the supply chain stand today as you look ahead?

William Johnson

Yes. Every now and then you run into a supplier who has maybe a peak in their COVID cases and they have to shut down for a couple of days or to clean a facility or whatever. So I would say that at this point, it’s — those types of disruptions that kind of push lead times out a week or two, maybe if there is misses, but in terms of suppliers that are just shut down and causing us a lot of aggravation, we really don’t have any — we’ve been able dual source through this RFP process and the Transformation Program that we’ve been undergoing and really improve our supply base where needed where we had critical risk. But I can’t point to any event throughout this whole crisis where our suppliers have been fantastic. They are really helping us meet our customer expectations.

Unidentified Analyst

Okay. Thank you very much for the color.

William Johnson

Sure.

Operator

Your next question comes from the line of Todd Brooks of CL King. Please proceed with your question.

Todd Brooks

Hey, good morning gentlemen. Just a few questions for you. First, you made some positive commentary about early to suffer markets in Asia showing some sequential improvement in Q2. So I’m just wondering, if you look at China, Australia, and Japan, do you feel like that’s instructive for what the recovery curve should look like in the European and North American businesses as you are kind of planning the business going forward?

William Johnson

Yes. I think it’s certainly a proxy for us to look at. Europe is a bit of a — there is culturally differences the way people kind of attack these the virus and the way the government’s react. And I think the EMEA area, EMEA has taken probably the most aggressive approach to shutting things down and keeping it shut down more so than any of the Asian or even US regions. So I think you’ll see — I think EMEA is still just going to lag everybody because of the way they’re doing things. Now, it’s interesting, they also have got some creative programs.

In the UK they just announced Eat Out to Help Out program where the government subsidizes, if the family of four goes out, they will give a GBP10 note for each person up to 50% of the meal, so that if somebody goes out and they have a GBP80 meal the government will pay GBP40 of that, so you get — it’s driving traffic to restaurants, which I think is a real creative way and hopefully that that helps the recovery in that country.

But I think solutions like that will drive recovery faster than just waiting for people, because the big problem is people just need to feel safe and need to get to a restaurant right and getting to that restaurant and if there is a financial reason like that to drive people to the restaurant I think you’ll see it recover faster. But, I think you probably see the US look more like China and the Asian regions, and I think Europe will lag a bit.

Todd Brooks

Thanks. That’s helpful. Second question. If you look at – and this goes back to the pie chart on Page 5. If you look at maybe the 11% of the business that’s in the more challenged buckets of the restaurant industry. What are your latest thoughts on kind of survival rate and door contraction as we head toward the back side of the pandemic?

William Johnson

Yes. I mean it’s all over the map, right. We know it’s going to be – that those particular verticals are going to be really challenged, and I think they’re going to have to rethink in the cases of like hotels and travel and leisure, they’re really going to have to rethink how they prepare food, present it and those kinds of things. So that’s why I think there is kind of the long pole in the tent. In terms of closures, restaurant closures, you can read the same data that I do. They’re talking 15% kind of range of restaurant closures, which I don’t know exactly what the number is at this moment, but that’s kind of number they’re talking about over the next 12 months.

Todd Brooks

Okay. Great. And then just a final question. The working cap performance was strong on the receivable side. You called out a couple of reasons for the inventory increases in the quarter between raw materials and some canceled orders or delayed orders. If you’re looking at Q3 from a cash flow standpoint, do you expect inventory will be a substantial contributor to cash in Q3?

Martin Agard

It will be a contributor. I don’t know if it will be substantial and the receivables will grow again as the revenues coming back. So I think working capital will be probably more neutral in the third quarter relative to how supportive it was in the second quarter.

Todd Brooks

Okay. Great. Thanks very much.

Operator

Your next question today comes from the line of Joel Tiss with BMO Capital Markets. Please proceed with your question.

Joel Tiss

All right. Thank you for taking my question. So I’ll just — on those charts on Page 5, are those the up-to-date, is that where we are sort of now or is that more historical view?

William Johnson

It’s more of a historical view kind of a look at just a snapshot of where our markets are. And I think that’s what Mig was trying to get at is where are these things trending? Are they going to get — the pie is going to get bigger or smaller? And I think — as I said, I think there’s — I think the QSR, pizza QSR has a chance of kind of growing and taking share from some of the other sectors in the near to medium term.

Joel Tiss

And where would cafeterias fit in there? Or that’s not even big enough to get mentioned?

William Johnson

It’s probably not big enough. It probably falls into — like cafeterias, like school cafeterias?

Joel Tiss

Yes. And office cafeterias and things like that.

William Johnson

Like the education and stuff like that has — it’s probably sprinkled throughout.

Joel Tiss

Can you speak a little bit about the kind of smaller competitors and maybe more generically being under a lot more pressure than you guys or then the bigger competitors and kind of the opportuinities that setting up for you and for the industry?

William Johnson

Well, I think we’re all under pressure. I don’t think, whether you’re big or small I think everybody feels a lot of pressure when you’re markets are down 50% kind. And I think everybody is managing the best they can in this environment, and I think the teams here at Welbilt and leadership has done an exceptional job at this point of managing that downturn. But for sure there will be opportunities I think for competitors going forward to look at — are they going to survive long term and are those products or regions that you want to look at. But I think right now everybody has just got their head down, trying to keep their factories open, keep people safe and do all the right things. But I think it’s a little too early to make a call on any of the competitors at this point.

Joel Tiss

And do you think there’s going to be like — can you help us think about this. Like do you think there’s going to be a lag on restaurant closures as like the PPP money runs out and things like that. Like we are hearing some of that from other industries like maybe truck drivers that kind of stuff. So I just wonder like how do we think about the lag or the potential for a lag for that?

William Johnson

Yes. I think probably they are holding on right now and the problem comes when you start up and then shut down, start up and shut down. And they’ll just let them start up and keep operating, I think they can — they have obviously even at reduced levels they’ll have a much better chance. But when you got rehire all your people, kind of got to load up your food and get your — get ready to operate for a day or two and if you operate for a week and then the government shuts you down, and you operate for a month and shut you down, you lose all that food and spoilage and it’s all that — all their working capital basically.

And that’s what’s going to kill them is if we start and stop, start and stop all the time. So it’s better from that just be shut down than it is to start and stop, start and stop. So I think that’s what we got to watch out for and that will drive more stress on them than just being shut down.

Joel Tiss

All right. That’s super helpful. Thank you so much.

Operator

Your next question comes from the line of Larry De Maria with William Blair. Please proceed with your question.

Lawrence De Maria

Hi. Thanks and good morning everybody.

William Johnson

Hey Larry.

Lawrence De Maria

Hi guys. First question, kind of following on Joel, by the restaurants and help of them, what do you see in the legislative front domestically to help restaurants. I think there is a restaurant act out there. Obviously the debating, not necessary close and another stimulus. What’s out there that you guys are maybe hoping for and actually see realistic that could help the industry?

William Johnson

Obviously, any kind of stimulus helps, but I think the program I mentioned earlier about the UK driving people into restaurants by giving the restaurants vouchers to essentially pay half the meal prices. I think that’s really something our government should look at and different regions should look at to try to help these restaurants. It’s just getting people there, I think once people get there, they’ll feel safe because of the restaurants. The ones that I’ve been to, you don’t even have a menu anymore, you have — you scan a QSR code and pull the menu up on your phone.

So, there is the everybody’s wearing a mask. It’s the restaurants are cleaner than I’ve ever seen them in my lifetime. And I think once people just get over the initial fear and get out of the restaurants, I think if we could figure out ways to drive traffic to the restaurants. I think people will become more comfortable. So those are the kind of actions I think we need to be thinking about and promoting to our governments.

Lawrence De Maria

Besides the domestic, the stimulus has been debated. It doesn’t sound like there — you guys are very hopeful that there is something in the pipeline specifically right now, right?

William Johnson

And I don’t know of anything else in the pipeline other than that.

Lawrence De Maria

Okay. And obviously you guys had rolling plant closures in the second quarter. What’s the outlook for your kind of production plans and factory closures or openings in the second half? Now are we beyond the worst, obviously we would be on the worst, but continue to move toward having them open. And are you thinking about structural capacity coming out at this point or is it just more about the more efficient with what’s you’re having your footprint now?

William Johnson

Well, so there is a lot of things that play into it right. From an operations perspective, it’s easier to run a full plant than it is to try to run partial shifts and partial lines. So what you want to try to do is, build up of demand and even if that means you have to shut down for a week, I believe you can run for two straight weeks that’s better than running three partial weeks in terms of manufacturing costs.

So we watched that and we put all the tools in place now so that we can look at how many hours we need per week per customer per order per job and we can do a good job of managing our earned hours and what we need to run the factories with. There are some countries where in order to qualify for some of the employee pay programs, you have to stay down for at least a week to two weeks. So you can’t do it every day at a time, so that factors into your decision making.

Then of course just the order rate itself. We went down where we had two shifts. We’ve went down to single shift operations. So we’ve done all of this — all the things that you could do from that capacity planning. I think as we look at our factories and as we look at our office space even, I think there is a lot of room. We’ve learned a lot of lessons about men working from home and video conferencing and things like that, and I think we’ve learned that you can be very successful doing it.

So I think as we go forward, we’re going to have to look at office space and how much do we really need if people are going to be working from home more often than they used to be. But I think there’s some opportunities there for some cost out and certainly, as we said, there are some things that we were looking at in the third quarter and we’ll talk about it in the third quarter call from maybe a little bit from a capacity standpoint, but nothing radical at this point.

Lawrence De Maria

Okay, thanks. If I could just sneak one more or last. The – you’ve mentioned Parts Town-Heritage that is kind of sunsetted. Any more consolidation in the aftermarket or distribution channel that’s likely in the near term that could be headwind or is that more or less run its course, but obviously macro environment…

William Johnson

I think it’s pretty run its course. I mean all the — those were the two biggest ones right. So anything else would be pretty small deal.

Lawrence De Maria

Great. All right. Thank you and good luck.

William Johnson

Yes.

Operator

Your next question comes from — sorry, the line of Walter Liptak with Seaport Global. Please proceed with your question.

Walter Liptak

Hi. Thanks. I apologize, if I missed this, but Marty did you talk about what you thought the restructuring cash costs might be in the second half of the year?

Martin Agard

Yes. It will pick up from what we showed in the second quarter, but not as high as the first quarter. I would say somewhere in the middle of that range is probably where the restructuring stuff and the transformation costs, those two pieces adding together will run in the third and fourth quarter. So they’ll continue to be a spend on both of them, but it won’t get back up to the first quarter levels. But it won’t be as quiet as the second quarter was.

Walter Liptak

Okay, got it. And just when we think about it a normal year, which is hard to do this year, there is usually fourth quarter, some of the buying groups distributors start hitting their volume levels to get rebates, and that impacts pricing. How does — how do things look for this year, and you kind of alluded to maybe there could be more pricing competition, I don’t know if you were talking about the fourth quarter — leading to the fourth quarter or if you think that will have no impact this quarter?

Martin Agard

Now I was alluding to the fourth quarter. I think just in general, I think the longer this stretches out the hunger your people get for the business. I think the fourth quarter buys that we historically see in this industry will be muted, because it’s just the uncertainty in the cash position of dealers and distributors. I’m not — we’re not anticipating big buys from dealers and distributors at the end of the year.

Walter Liptak

Okay. Great. Thank you.

Operator

And that’s all the time we have for questions today. I will now turn the call back to Mr. Johnson for any closing remarks.

William Johnson

Thank you. Before we end today’s call, I would like to thank our employees once again for stepping up to the challenge presented by the COVID-19 pandemic. The entire management team really appreciates your efforts.

Next, I want to reiterate that I believe Welbilt will emerge from this crisis as a stronger company that is structurally leaner and more efficient. We will focus on opportunities where we can use our competitive advantages of innovation and digital leadership to help our customer succeed and grow.

We will continue to win new business as opportunities arise by leveraging our culture of innovation and customer service. We will return to delivering profitable growth and delevering the balance sheet as this crisis abates. This concludes today’s 2020 second quarter earnings call. Thanks again for joining us this morning and have a great day.

Operator

Thank you for your participation on today’s call. You may now disconnect.

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