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Welbilt, Inc. (NYSE:WBT)
Q1 2020 Earnings Call
May 5, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Welbilt, Inc. 2020 Q1 Earnings 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] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Rich Sheffer. Please go ahead, sir.

Rich Sheffer -- Vice President Investor Relations, Risk Management and Treasurer

Good morning and welcome to Welbilt's 2020 first 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 C. Johnson -- President and Chief Executive Officer

Thanks, Rich, and good morning. I'm extremely proud of the way our Welbilt team has stepped up to the challenges we are currently facing. We not only received 100% participation in our voluntary salary reductions, many of our people have volunteered in their local communities, while our plants have donated personal protective equipment to their local hospitals and first responders. Positive attitude to do whatever it takes for as long as it takes gives me confidence in our ability to emerge as a stronger Company once this crisis abates and business conditions begin to normalize.

Before we get into our first quarter results, I want to share Welbilt's business responses to the COVID-19 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. I'm not going to cover each individual item on this slide, but will 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. First and foremost was ensuring a safe work environment for our employees who couldn't work from home, while making sure we had the IT infrastructure to support those that could work from home. We quickly reduced discretionary spending in early March, while we fine-tuned our plans to implement broader cost reductions later in the month.

Our early start in working with the banks and our revolving credit facility allowed us to be near the front of the line and complete the amendment in a timely manner. Marty will cover the specifics of our cost reduction actions and the revolver amendment during his comments.

Coming out of this pandemic, there are certain trends that will accelerate in the short term and may have longer-lasting impact on the industry over the course of the next several years. We began working with customers to help them adapt to the new social distancing paradigm that will likely be with us for a long time. One of the outcomes of this crisis is likely to be an increased focus on ghost kitchens. Today, as a result of the pandemic, nearly every restaurant has been transformed into a ghost kitchen. The number of ghost kitchens in the U.S. is expected to increase between five times to 10 times by 2024 compared to today and Welbilt has seen as a leader in modular design, menu management, integration with apps, speed cooking, and mobility. As the industry resets, more companies may decide to eliminate the dining room altogether to capitalize on longer-term off-premise trends. Also important today, operators of these ghost kitchens are having both hot and cold equipment that have common connectivity. We are actively increasing our focus on this important and growing market segment opportunity to establish Welbilt as the preferred supplier to ghost kitchens.

We're also increasing our marketing emphasis on the enhanced sanitation features that are already designed into our equipment today, so customers are aware of the health and safety benefits they get from owning Welbilt equipment. One example is the features in our Manitowoc ice machines that can be outfitted or retrofitted to enhance sanitation. Our optional Luminice growth inhibitor generates gaseous ozone to combat contamination in our ice machines. We also have an automatic cleaning system that provides regular scheduled cleaning of the ice machine with sanitizing chemicals. We are seeing growing interest from customers in these features. Our Fresh Blend smoothie machine features disposable pumps that are attached to each bag of concentrate so they are replaced each time a new bag of concentrate is put in the machine. This eliminates the cross-contamination from having one permanent pump that competitive machines use. We also automatically clean the blending chamber after each smoothie is made, adding to the benefits of our smoothie machine. We have other features that are currently in development that will continue to help Welbilt positioned as the recognized industry leader in providing enhanced sanitation solutions in the commercial foodservice industry.

Another area where we are focused is how to continue providing the best service in the industry when we can't be with our customers in person. We are focused on providing a variety of online classes and seminars for kitchen operators to work with our culinary team to better understand how to get the most out of our equipment in their kitchens. Likewise, we have conducted many online sales training sessions with our reps and dealer customers, provided how-to classes for our aftermarket service dealers. These online classes have been well attended and we received very positive feedback. I believe online training will become more the norm even when people are able to travel again.

On Slide 4, we have provided some details on the current market environment. Looking at the MillerPulse weekly same-store sales graph, you can see the historic drop that began in the second week of March and bottomed by the end of the month as restaurants were ordered to close for dine-in and populations were quickly put on stay-at-home orders. Notable that the QSRs were less impacted in casual dining chains. Most QSRs have more than 50% of their sales come through their drive through windows, prior to the crisis and have also embraced 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. With the broader outlook still unclear, including the speed with which the industry returns and changing customer sentiments toward restaurants and foodservice usage, the industry appears to have moved off the bottom as April progressed as consumers have begun to receive government stimulus checks and have started to get fatigued with the stay-at-home orders. As more stimulus checks are sent to consumers and stay-at-home orders are eased, we believe the conditions will gradually improve. However, we are also aware that there will be a reduction in the number of restaurants post-crisis and an increased level of used equipment that could impact the demand for new equipment for a period of time. Used equipment hasn't been a big part of the commercial foodservice equipment market historically due to reliability, warranty, and food safety concerns. However, it is possible that it could mute the demand for new equipment for a period of time.

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 they spend more on their repairing existing equipment rather than replace. 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.

Moving to Slide 5 of our presentation, we delivered a 50 basis point margin increase in the first quarter, despite sharp drop in demand from the COVID-19 pandemic. We originally expected sales to decrease in the high-single digits when we provided guidance on the last earnings call. This was due to tough comps from large chain rollouts in the Americas and EMEA in last year's first quarter and from the COVID-19 impact in our APAC region. As the crisis moved to the Americas and EMEA, we saw incoming orders decrease quickly at mid-March, but didn't see as many order cancellations as we anticipated.

On Slide 6, sales in Americas decreased 9.4% in the quarter from the prior year. We originally expected a soft quarter due to the tough comps from last year's large chain rollouts and we're running slightly ahead of our expectations through February, but weakened quickly in the second half of March.

Looking at EMEA on Slide 7, sales decreased 21.2%, with organic net sales down 19%. Similar to the Americas, we had originally expected last year's large chain rollout to create a tough comp on this year's first quarter. We were running ahead of our expectations through February, but weakened quickly in March.

On Slide 8, sales in APAC decreased 10.1%, with organic net sales down 8.9%. We came into the year expecting growth in the first quarter in APAC and we were on target in January. China shutdown from late January into mid-February impacted China sales the most, but also other parts of the region who are supplied by our Chinese manufacturing plants and February turned out to be the worst month of the quarter for the region. We did see incoming orders gradually improve in March and turned out to be better than February, but the region is still substantially below prior levels in April and full recovery will take some additional time.

Moving to Slide 9, we continue to make progress on our Transformation Program. Our procurement team has issued the majority of the planned RFQs and we have been receiving and vetting responses. Responses continue support our estimates for our targeted procurement savings. We've now begun to implement new sourcing agreements with both current and new suppliers and delivered another small net savings from these activities in the first quarter. 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'll continue to make great progress at the five North American manufacturing plants that are currently part of the Transformation Program. We'll continue to improve layouts of our assembly lines and where we've done that, we've seen efficiencies and lead times improve significantly. These steps contributed to headcount reductions beginning in Q4 of 2019 and more in Q1 of 2020. We've taken delivery and installed some 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 the 500 basis points of margin improvement from the Transformation Program, but the timing will be slower than our original expectations by a few quarters. We will emerge from the crisis with leaner manufacturing plants and lower material costs.

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

Martin D. Agard -- Executive Vice President and Chief Financial Officer

Thanks, Bill and good morning, everyone. I'm going to start with some comments on the actions we took to address the financial impacts from COVID-19 shown on Slide 10. Beginning with the actions to protect our gross profit, we began temporary plant closures at the end of March. These initially lasted one to three weeks. We are continuing to look at conditions every week and planning additional temporary closures as necessary. We also implemented a reduction in force across several plants. Many of these were to lock in the productivity improvements we had been achieving as part of the Transformation Program. As volume returns to those plants, we'll bring back fewer employees due to the improvements we've been making over the last year. We've also implemented furloughs in many open plants to better align their cost structures with reduced production volumes.

We've taken many actions to address our SG&A cost structure. The first to be implemented in early March were hiring and discretionary spending freezes. By the end of the month, we had implemented all of the other actions shown on the slide. As we disclosed in early April, we executed a reduction in force that we think is a bit of an acceleration of the transformation efforts in the SG&A space and has a long-term savings impact. The current year impact from all the cost actions we have taken is approximately $40 million.

Moving to actions to support our free cash flow, we began pursuing opportunities provided by the CARES Act, including funding deferrals and tax refunds, which I'll cover in more detail in a few minutes. We've reduced our original capital budget of $40 million to now be between $24 million and $28 million. We are also managing working capital, focusing on accounts receivable collections and customer request for extended terms, while working with our vendor partners to extend our payables terms with them to keep these in balance. We are also working to reduce raw materials and finished goods inventory levels, in line with current demand, while being mindful of maintaining service levels to our customers on critically needed equipment and protecting availability of materials.

Moving onto the adjusted operating EBITDA margin drivers shown on Slide 11, volume mix and net pricing were down a 170 basis points in the first quarter with lower volume, partially offset by positive pricing. The favorable pricing was driven by last March's list price increase and the January list price increase that we put through in the Americas. We also had smaller benefits from January price increases that we implemented in EMEA and APAC. Material costs, including tariffs, was a 180-basis point contributor to margin expansion this quarter compared to prior year. This reflects some of the Q4 2018 challenges we had that rolled through inventory and adversely impacted Q1 of last year and some early procurement benefits we've achieved through our Transformation Program. Other manufacturing expenses, mainly labor, overhead and warranty, were 130-basis point headwind this quarter. This was mainly driven by the absorption challenges from the lower volume environment, along with some capitalized variance carryover from the fourth quarter.

In the phase of the current volume headwinds caused by the COVID-19 pandemic, we did take actions to reduce our cost structure with the temporary plant closures, furloughs, and reductions in force that I previously mentioned, but that will mainly serve to soften the absorption impacts of the low demand in Q2. We are continuing to monitor our plant activity levels closely to reduce our labor and overhead variances as much as possible.

SG&A on an adjusted basis and excluding FX was 180-basis point contributor to margin expansion in the quarter. We were favorable 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.

We had three charges in the quarter that are highlighted on Slide 12. The first was for the impairment of trade names and trademarks in EMEA. With the COVID-19 pandemic as the triggering event, it was determined that the carrying value of those intangibles exceeded their fair value by $11.1 million, resulting in this charge. The second charge is $3.7 million for the previously mentioned restructuring action taken in the Americas and at corporate in the first quarter and the current quarter impact from actions initiated in EMEA and APAC in the fourth quarter of 2019. The third charge is $3.1 million and is related to the trade compliance issue that we've disclosed for the last few quarters in our filings. This involves a fairly distant historical research effort and we are working to conclude our review and settle this issue as quickly as possible. All three of these charges are excluded from our adjusted operating EBITDA and from our adjusted net earnings.

Next on Slide 13, I'd like to highlight a few of the CARES Act opportunities we are pursuing that will provide liquidity improvements and some tax benefits. First is a federal income tax refund of $7.4 million on our 2019 return for favorable changes in the CARES Act for the interest deduction limitation and NOL carryback rules. We've already filed for that refund. We are also allowed to defer the payment of the employer portion of social security taxes, which we estimate to be a $4.7 million benefit to liquidity in 2020. Next, we are planning to pursue the employee retention tax credit opportunity, but haven't quantified that savings yet. And lastly, we are taking advantage of the ability to defer 2020 minimum required funding payments on our U.S. pension plan to either late December or early January.

Moving to Slide 14, free cash flow was a $78.1 million use of cash in the quarter compared to the $68.9 million use of cash in last year's first 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 $196 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 investing section and a further $96.9 million from the increase in accounts receivable, resulting from the termination of the securitization program last year that was reflected in the operating section of the cash flow statement.

One last reminder on our free cash flow is that it is traditionally a seasonal use of cash in the first quarter as we pay customer rebates, payout annual incentives, build inventory and experience 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. While we are not providing a free cash flow forecast today nor expecting it to achieve the levels of the last four years, it is another factor we considered when reviewing the adequacy of our liquidity.

Moving to total liquidity, we ended the first quarter with $300 million of liquidity, which is an increase of $57 million from last March. We define liquidity as cash and short-term investments plus availability on our revolver. Cash increased by $17.8 million during the quarter, while our overall debt balance increased by $102.8 million. We did draw $30 million on our revolver in March to increase our cash balance in the U.S. as a precautionary measure, but otherwise did not draw on our revolver for non-working capital needs. Our leverage ratio finished the quarter at 5.06 turns, well within the 5.5 times covenant ratio in place as of quarter end.

On Slide 15 is a summary of the revolver amendments we completed on April 17. The leverage ratio and interest coverage covenants are suspended for the next four quarters. They are replaced by minimum EBITDA and maximum capital expenditure covenants that will be tested quarterly and a minimum liquidity covenant that will be tested monthly. So, our liquidity measure excludes cash held in China and we will refer to this metric from time to time as covenant liquidity, while most references will be to our traditional liquidity measure that includes all cash. As of the end of April, our liquidity position is not materially different than the March 31 level reported here and so we are clearly well ahead of the minimum liquidity covenant.

Beginning with the second quarter of 2021, the leverage ratio and interest coverage covenants are reinstated at modified levels with the minimum liquidity covenant also in effect that quarter. Overall, this amendment provides substantial covenant headroom over the next seven quarters, and was structured to help ensure our continued access to the revolver through the duration of this crisis. We continue to believe that we have sufficient liquidity resources to meet our working capital and cash requirements.

Finally on Slide 16, I'd like to share a few thoughts on 2020. First, we withdrew our 2020 guidance in March and will not reinstate until conditions have sufficiently stabilized. We can share that our preliminary April sales, pending final accruals and adjustment, decreased right around 60%. And with limited visibility, we are planning for our May sales to decrease between 55% and 60%. We don't have a June estimate nor a third quarter estimate at this time.

We did model multiple stress test scenarios to get comfortable with the sufficiency of our liquidity and with the amended financial covenants. I will share some of the assumptions we used, but I want to be very clear, stress test modeling is not guidance and you should not use it as such. We looked at various sales decrease scenarios where sales decreased in excess of 60% in the second quarter, nearly as much in the third quarter, and were still down modestly in the fourth quarter. Based on historical information, we estimated that our cost of sales is 75% to 85% variable and that our SG&A is 30% to 40% variable. I would comment that the deeper the sales decline, the more bedrock fixed cost we run into and we moved to the lower end of these variable cost ranges. And in our stress models, we incorporated some of this dynamic to add a level of conservativeness. We stressed our working capital, so receivables terms expansion outpaced payables extension and sales declined, inventory was held fairly stable, and we brought down capital spending to be in line with our current forecast, since that is entirely within our control. After reviewing the results of these multiple scenarios, we are quite comfortable with our liquidity and the headroom for our covenant compliance.

The last thought this year on 2020 is that we are not abandoning our key strategic initiatives, but we'll balance our pace in advancing the Transformation Program with our digital and new product innovation initiatives against what we can afford in the current environment. We can't do everything at once or as fast as we'd like, but we will continue to prioritize among these initiatives to maximize the positive impact on our business.

That concludes my comments. Operator, we'll now open the call up for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Tim Thein of Citi. Your line is open.

Tim Thein -- Citigroup -- Analyst

Thank you and good morning. The first question is on North America. And some of our channel contacts noted us that quoting activity seems to have stabilized and maybe picked up a bit in recent weeks, pretty much a similar path basically of what you've shown in the slide for restaurant comps. I'm curious from your lens, if that's consistent with what you're hearing from your own sales team both in terms of equipment and aftermarket activity. Thanks.

William C. Johnson -- President and Chief Executive Officer

Yeah, Tim, we are hearing that from our sales guys. There is a pickup in service calls, as people are starting to restart their kitchens up and open up the dining rooms in certain states. But yeah -- and then there are certain sectors where we're seeing increase in activity. In the healthcare field, we're seeing a lot of activity in that particular vertical right now. So, there is some additional quoting activity going on. I would agree with you.

Tim Thein -- Citigroup -- Analyst

Okay. And then second, Bill, just it relates to what you're experiencing and what you've seen in APAC here in your earlier comments in terms of how March orders trended versus February. I know that you're a bit heavier with the large chains there. But anything you'd call out that may or may not make the experience you've observed in China different than how you'd expect activity to potentially play out in the Americas and Europe?

William C. Johnson -- President and Chief Executive Officer

They certainly are related in terms of the way they're playing out. In April, we saw the APAC region get a little better than they were in March, still down year-over-year kind of in the 30%, 40% range for the month in APAC. If we look at April, as we said in the call here, we're down about 60%. So, as we go in the next few months, hopefully, it starts to come back because that was kind of the same level that we saw APAC at in February down kind of 60%, 70% and it's kind of recovered now and getting steadily better every week as it goes along.

Tim Thein -- Citigroup -- Analyst

All right. Got it. Thanks a lot. I'll turn it over.

Operator

Your next question comes from the line of Mig Dobre of Baird. Your line is open.

Mig Dobre -- Baird -- Analyst

Yes, good morning guys. Thank you for taking my questions. So maybe sticking with trends into April, I'm sort of curious here, you're down 50%, but you are obviously still selling something. So, what sort of demand has been out there in April? What types of products, what sort of customers, what's essentially creating the base of your business in spite of the unprecedented disruption that we've all seen during the month of April?

William C. Johnson -- President and Chief Executive Officer

Yeah, I think this is where Welbilt's mix helps us a little bit because the cold side, we're certainly seeing better order rate. The order patterns there have continued to be a little stronger than the hot side. The hot side cooking is down more than the cold side. So I would say, if there is anything there, people need the cold for storage purposes and I think that's a little bit better for us than the hot side.

Mig Dobre -- Baird -- Analyst

Okay. Can you also maybe talk about -- give us an update on your business mix. I'm sort of curious as to where you are right now in terms of QSR versus casual dining or other portion of the restaurant market and restaurants versus institutional? And I'm curious if you've seen divergence in institutional versus restaurant customers or if the downturn has been truly broad based in that regard?

William C. Johnson -- President and Chief Executive Officer

Yeah. So the QSRs have held up a little bit better than the casual dining, of course, because the casual dining was shut down completely and then they had to figure out how to do off-premise stuff and that's taken them a little bit longer than the QSRs and the QSRs were able to keep their drive throughs open and then the delivery services. So they had a little bit of a head start on the casual dining. So I would say that casual dining is down kind of 70%, 80% and QSRs are kind of down in the 25%, 35% range from their order patterns. And then on the institutional side of things, we're certainly seeing more business start to pick up on the contract side. And on the institutional side, as I said in healthcare, it seems -- there seems to be some really good activity going on in that particular vertical.

Mig Dobre -- Baird -- Analyst

Okay. Can you remind us of your business mix?

William C. Johnson -- President and Chief Executive Officer

In terms of product?

Mig Dobre -- Baird -- Analyst

No, in terms of QSR versus institutional.

William C. Johnson -- President and Chief Executive Officer

Okay. Yes. QSRs are 25% to 30% of our overall business. And then the general market makes up the rest with about 15% to 20% for spare parts.

Mig Dobre -- Baird -- Analyst

And institutional?

Rich Sheffer -- Vice President Investor Relations, Risk Management and Treasurer

So, hey this is Rich. When we look at our end market breakdown just by market type, so 60% restaurants, half of that are going to be the large chains, predominantly QSR. The rest, the other half is going to still be some QSR, maybe a third of the remaining restaurants are going to be QSR-like, which are going to be still more related to take-out and drive-through windows and that type of exposure. The remaining 20% then would be where all the casual and bar restaurant and fine dining, the ones that are going to be the most impacted. So, 40% of restaurants are open, business decreased, but still open and doing OK in this environment. That remaining third then are going to be the ones that are more impacted.

On the 40% non-restaurant, it's a big mix of convenient stores, which are still doing pretty good, healthcare, office, whether private industry or government offices, where they have their own cafeterias. You've got the travel industry exposure, hotels, cruise ships and then you get into some of the stadium projects and entertainment venues like that as well. So, schools is another piece that's in there. So you get into some of the government space. So, schools actually are holding in pretty well right now. They still got budgets to spend and we're getting some lift from projects for schools that will be going on over the next one to two quarters. And then you get into the military and prison systems within the government exposure and those also are still going OK.

Mig Dobre -- Baird -- Analyst

I appreciate the color, Rich. Lastly for me, maybe a question for Marty, as you've conducted your stress testing on the financial model, I'm curious what sort of revenue levels do you think you'll be breakeven on EBITDA, given all the cost actions that you've undertaken? Thank you.

Martin D. Agard -- Executive Vice President and Chief Financial Officer

Yeah. So the short answer I guess would be probably in that 65% to 75% down in sales. This is somewhat unchartered and for all the actions we took and we articulated during the prepared remarks, there's so many moving parts. It's a little hard to see just how effective we are going to be. We got that early start. In the later part of March, we were going through plant-by-plant and so we've really pulled a lot of strings and worked hard on this. We have not closed April yet. So I can't really get a sense of how effective we are going to be. But as we think through the fixed and variable percentages and some of the ones we gave you and we play that through, we get down to sort of breakeven EBITDA in that somewhere north of 60% and probably somewhere short of 75% down in sales.

Mig Dobre -- Baird -- Analyst

Very helpful, thank you.

Operator

Your next question comes from the line of Jeff Hammond of KeyBanc Capital Markets. Your line is open.

Brad Vanino -- KeyBanc Capital Markets -- Analyst

Hey, good morning. This is Brad on for Jeff. Just going back to some of the post quarter detail, I think you discussed some gradual improvement toward the end of April, stimulus checks and things of that nature rolled in. But I guess that doesn't appear to fully align with your view on May where the declines are expected to be more or less the same as April. So, is there maybe a little bit of conservatism in that number or kind of what are some of the offsets there? And then have you seen any early on benefit of safety in the pullback restaurant restrictions within the last week or so?

William C. Johnson -- President and Chief Executive Officer

I'll start. We've seen an increase in quoting activity that doesn't necessarily equate to an increase in order activity, until we start getting orders. There might be a little bit of conservatism in the May numbers, but we're in uncharted territories right now. And so -- and I think we're still looking at kind of that 50% to 60% down range in May and I wouldn't say we've seen anything meaningful coming out of April yet in terms of orders. We've certainly seen more quoting activity, but orders yet to be determined.

Martin D. Agard -- Executive Vice President and Chief Financial Officer

Yeah. I would only add that April, while it was down big and we faced some order cancellation, we did have some of the carry-in orders and longer-term projects that managed to survive and get shipped and stuff. So April probably had a little bit of a carry in benefit and May I think we have to expect a little bit of a lag and turning quoting activity into orders. So the two end up in the same kind of zip code in comparisons to last year, but even though the underlying business feels like it's starting to get a little bit better.

Brad Vanino -- KeyBanc Capital Markets -- Analyst

Okay, no, that makes sense. And then, I wonder if we could dig into the used equipment market here for a second. You referenced the NRA study suggesting 15% of capacity could be taken out of the system or kind of 100,000 restaurants, give or take. Certainly a lot of equipment is going somewhere. So I want to understand, historically, who are the traditional buyers of that used equipment? I'd imagine it's the independents, but have you seen change go that route before? And then what's the traditional flow of that equipment? Like does it go through the traditional general market or other specialized used dealers?

William C. Johnson -- President and Chief Executive Officer

There are specialized used dealers for that for the most part that specialize in it. And typically on the chain side, the chains will use equipment from the location shut down -- 0ne of their locations shuts down, they'll use that equipment in another chain location. I think what we're going to see -- we're in uncharted territories here, but it's going to take a while for these restaurants to go through bankruptcy and closures, liquidation. So I think it's a quarter or two before we kind of start to see any impact -- meaningful impact on the used equipment market.

But there is a lot that has to do with warranty, service, these things have to go on a specific spot, in a lot of cases, have to be specific dimensions. So, there's a lot of variables that go into making the decision, not just on kind of the initial equipment. Food safety is a concern with used equipment. We also offer a lot of financing programs to our customers to help them if that's an issue. But I would say most of that equipment will end up in the general market in the independent side of things.

Brad Vanino -- KeyBanc Capital Markets -- Analyst

All right. I'll leave it there. Thanks for the time.

Operator

Your next question comes from the line of Larry De Maria of William Blair. Your line is open.

Larry De Maria -- William Blair -- Analyst

Hi, thanks, good morning everybody. Just curious -- it sounds like, obviously, you guys have liquidity shored up, given the actions you've taken and the cost cutting, etc. Are you considering at this point or is there any pressure from the lending group, etc. to consider asset sales or calling off some of these assets either now or is that on the docs for the future? Just curious how you're thinking about the need to monetize some assets potentially from underperforming ones?

William C. Johnson -- President and Chief Executive Officer

I think we've shored up the liquidity position and we're happy with our profile and our businesses and I don't see any need for that.

Larry De Maria -- William Blair -- Analyst

Okay, thank you. And for pricing, obviously, it sounds like some of the price increase has helped. Are they -- you maybe said this, I missed it, but are they expected to hold into the second half or maybe cutting price doesn't help much in this kind of market? So just curious about your expectation, what are you seeing in the market with some of the new orders that are coming in, in terms of the pricing?

William C. Johnson -- President and Chief Executive Officer

Yeah, I mean, we're not seeing a lot of pricing pressure right at this moment. Of course, we're kind of right in the throes of nobody's buying anything anyways at an appreciable amount. But right now, I would say the pressure on pricing is small.

Martin D. Agard -- Executive Vice President and Chief Financial Officer

Hey, Larry, just -- and one other -- it's Marty, one other point of clarification, just from a bridge standpoint. In the first quarter we had sort of almost two price increases layered in the year-over-year comparison. We did last year's in March and this one at the start of the year. So, that comparison will be a little bit more muted when we only have one price increase in the year-over-year comparison, just keep that in mind.

Larry De Maria -- William Blair -- Analyst

Got it. Then, just last thing from me. Thanks, Marty. This talk of ghost kitchens, which you referenced earlier in the call and prepared remarks, is this something that given the excess capacity now, are we thinking that this is a retrofit opportunity because some of the restaurants are in tune for the high volume or is this a greenfield opportunity or -- and what is the time frame you think this starts to play out as we move beyond kind of the initial storm?

William C. Johnson -- President and Chief Executive Officer

Yeah. So I think it's a mixture, right? It's been playing out before the virus. We've had a lot of activity, because the cost to serve is so much lower. They don't have the dining room and they don't have the waiting staff and things like that. So, there is -- they were struggling with trying to figure out what was the best model pre-COVID. I think that what they're finding out is -- and consumers have changed some of their behaviors, right? So they're more willing to go pick up at off-premise or accept delivery and accept the additional cost of that delivery. So I think that's what's changed kind of people's thinking is that in this kind of post-COVID environment, their business model start working better in terms of where they can apply the cost and get value for it. So, we are seeing some activity now. We'll design some kitchens from the ground up for people. Some will do retrofits to existing kitchens. So, I think it's all taking shape as we speak right now and I think you'll see it. I think that's a trend -- a macro trend that's with us to stay for a while.

Larry De Maria -- William Blair -- Analyst

Okay, thanks and good luck. I appreciate it guys.

Operator

Your next question comes from the line of Walt Liptak of Seaport Global. Your line is open.

Walt Liptak -- Seaport Global -- Analyst

Hi, thanks, good morning guys. I wanted to ask about China and I understand it is still down a lot, still down 30% or 40%. And similar to the last question, are you seeing any changes in behavior there, like the food safety issue? Are they getting past that? Or are there like anything new that's going on in China that might get replicated in either Europe or the U.S.?

William C. Johnson -- President and Chief Executive Officer

I would say it's just -- it's slow to open, right? The dining room, the social distancing is continuing. Food safety is certainly a big concern for everybody, sanitation. And I think those things until we have a vaccine in place or the ability to address this virus with other medications, you're going to see that kind of activity and I think that's kind of the new norm for us right now. And we're working with the restaurants to maximize their outputs.

Walt Liptak -- Seaport Global -- Analyst

Okay. And...

William C. Johnson -- President and Chief Executive Officer

And I think one of the -- I would say this too, Walt. One of the other things is we're seeing a reduction in menus, right? So with simplification of menus really to accommodate the take-out piece of things and delivery which -- when you do that, it kind of lowers the overall cost, the operating cost for the restaurants.

Walt Liptak -- Seaport Global -- Analyst

Okay, got it. Yeah, thanks for that insight. Wanted to ask you about -- you brought up kind of the extending some of the receivables. And I wonder if you've done a bad debt review, if you've seen an uptick in bad debt because maybe some of these restaurants in bankruptcy or if there -- if that's something that's still going to come?

William C. Johnson -- President and Chief Executive Officer

No, I mean, most of the stuff we sell, we sell through -- almost all of it we sell through the channel. And we're watching the channel, but we haven't had any problems with collections. As Marty said in his remarks, from an AR and AP standpoint, we've kind of tried to balance those two things out. So, we think we're covered there, but nothing on the collection side yet that's alarming.

Walt Liptak -- Seaport Global -- Analyst

Okay, that's great. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Michael Lipsky of Knighthead Capital. Your line is open.

Michael Lipsky -- Knighthead Capital -- Analyst

Hi, thank you for taking the question. I appreciate the granularity within the restaurant, 60% customer segment, QSR being half of that. My question if we modeled fast casual as 10% of total sales and then the other 20% of restaurant being conventional restaurants, would that be the correct breakdown within restaurants, QSR 30%, fast casual 10% and the rest 20%?

William C. Johnson -- President and Chief Executive Officer

I would say fast casuals probably between 5% and 10%.

Michael Lipsky -- Knighthead Capital -- Analyst

Got it. Okay and then my other question is, we have very good granularity on the US opening up state by state. We have different reopening orders. I was wondering if you had that type of granularity on when Europe or Asia, where they are in the cadence of opening restaurants to dine-in and just some color around that that you're seeing.

William C. Johnson -- President and Chief Executive Officer

Yeah. So we do track each of the countries just like we do in the U.S., and it varies by region. Of course, Italy is the hardest hit. Italy and France and Spain are kind of the hotbeds in Europe and they have extended their restaurant openings until I think the end of May is when they're looking at potentially reopening their restaurants for foot traffic. A lot of them shut down and wouldn't even allow delivery in Europe. And I think Europe took a much more aggressive approach than in the U.S. In the U.S., we kept a lot of the drive-throughs open almost the entire time, where they shut down, for example, in the U.K., they shut down a lot of the fast QSR business completely and are just now kind of getting some of that reopened back up. So I would say that in Europe, our business took a sharper downturn faster just because they shut everything down completely in Europe. And then in Asia, they are allowing some foot traffic back into restaurants and it's maybe three, four weeks ahead of where we are in the U.S.

Michael Lipsky -- Knighthead Capital -- Analyst

Okay. All right, thank you for that.

Operator

There are no more questions in the queue at this time. At this time, I'd turn the call over to Bill Johnson.

William C. Johnson -- President and Chief Executive Officer

Before we end today's call, I'd like to thank our employees once again for stepping up to the challenges presented by the COVID-19 pandemic. Entire management team really appreciates your efforts. Next, I want to reiterate that I believe Welbilt will emerge from this crisis 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 customers' success and growth. We will return to delivering profitable growth and delevering the balance sheet as this crisis abates. This concludes today's 2020 first quarter earnings call. Thanks again for joining us this morning and have a great day.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Rich Sheffer -- Vice President Investor Relations, Risk Management and Treasurer

William C. Johnson -- President and Chief Executive Officer

Martin D. Agard -- Executive Vice President and Chief Financial Officer

Tim Thein -- Citigroup -- Analyst

Mig Dobre -- Baird -- Analyst

Brad Vanino -- KeyBanc Capital Markets -- Analyst

Larry De Maria -- William Blair -- Analyst

Walt Liptak -- Seaport Global -- Analyst

Michael Lipsky -- Knighthead Capital -- Analyst

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