Manitowoc Foodservice's (MFS) CEO Hubertus Muehlhaeuser on Q1 2016 Results - Earnings Call Transcript

| About: Manitowoc Foodservice, (MFS)

Manitowoc Foodservice Incorporated (NYSE:MFS)

Q1 2016 Earnings Conference Call

May 12, 2016 10:00 AM ET

Executives

Rich Sheffer - VP of IR & Treasurer

Hubertus Muehlhaeuser - President & CEO

John Stewart - CFO

Josef Matosevic - COO

Analysts

James Picariello - KeyBanc Capital Markets

Schon Williams - BB&T Capital Markets

Joe Grabowski - Robert W. Baird

Robert Wetheimer - Barclays Capital

Larry De Maria - William Blair

Operator

Good morning, ladies and gentlemen. My name is Sally and I will be the conference operator today. At this time I would like to welcome everyone to the Manitowoc Foodservice First Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] This call is being recorded today, May 12, 2016. A replay of this call will be available beginning at 1:00 PM Eastern Time today until midnight, Friday, May 28, 2016 by dialing 855-859-2056 or 404-537-3406 and entering the access code 2900595. You may also listen to a replay of this call over the internet beginning at noon Eastern Time today and running through noon Eastern Time on June 11, 2016. You can access the internet replay by visiting the Investor Relations page at www.mtwfs.com.

Thank you. I will now turn the call over to Rich Sheffer, Vice President of Investor Relations and Treasurer. Please go ahead.

Rich Sheffer

Thanks Sally. Good morning and welcome to Manitowoc Foodservice’s 2016 first quarter earnings call and webcast. Joining me on the call today is Hubertus Muehlhaeuser, our President and CEO, John Stewart, our Chief Financial Officer and Josef Matosevic, our Chief Operating Officer. Before I turn the call over to Hubertus, I need to review our Safe Harbor statement with you.

Any statements in this call regarding our business that are not historical facts are forward-looking statements and our future results could differ materially from any implied projections or forward-looking statements made today. Our actual results may be affected by many important factors including risks and uncertainties identified in our press release and in our SEC filings. We do not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or other circumstances.

Now I’d like to call turn the call over to Hubertus.

Hubertus Muehlhaeuser

Thanks, Rich, and good morning, everybody. I’m very pleased to be speaking with you for the first time since our successful spinoff from the Manitowoc Company was completed a little over two months ago. Our organization remains laser focused on continuing to deliver the operating improvements that we have announced last fall. As you saw in our press release this morning, we delivered a 710 basis point improvement in our adjusted EBITA margins over last year’s first quarter and an organic net sales growth of 3.1% based on constant currencies.

We remain on-track with our simplification and right-sizing initiatives and did benefit from these efforts this quarter. We expect to see expanding benefits later this year as more will flow through to our bottom-line. Within simplification, we are making very good progress with our implementation of 80/20, a journey that began 10 months ago. We have developed and trained our cross function global team and have begun to transform the culture to apply the 80/20 principles. We have made a lot of progress on the pricing portion of the project as prices for second tier products have been increased and we have further reduced discounts for second tier customers. We are continuing to develop our road maps for our product line and customer line strategies and will begin to roll these out later in the year.

We’ve also made very good progress on our strategic sourcing project. For example, we have now selected our metal suppliers and have completed sourcing contracts for telecoms and industrial gases. The team is close to selecting suppliers in other categories as well, which we will discuss in the future. All those new contracts will provide benefits in line with our expected savings goal.

Finally, we are continuing to see improvement in our KitchenCare aftermarket business. On-time delivery rates remain high with experienced improved warehouse management with our partner and we are now implementing plans to help us better manage our inventory levels. Our customers have been very pleased with these steps. They are the steps that we have taken to simplify our business to date. We have received positive feedback that we are more nimble now as a in independent company and our culture is evolving toward a lean and customer focused mentality.

Let’s move to our right-size initiatives. We have successfully completed the production transfer on the large portion on the ice machine product lines to Monterrey, Mexico from Manitowoc, Wisconsin. Our Cleveland, Ohio plant shutdown remains on schedule to be completed in the second quarter. The product transfers to the three receiving plants are completed. We will begin to see the savings associated with the plant closure and product transfer as we move toward the later stages of Q2 and into Q3. I would like to sincerely thank and compliment our teams for a very smooth ride so far, a great improvement from plant closures that we have done in the past, very well done.

Let’s move onto our top-line results. Our organic sales increased 1% in the quarter. As we detailed in our press release, organic sales adjust for the disposal of our Kysor Panel business in December 2015. This business had 25.5 million of sales that were included in our first quarter last year. Organic sales also adjust for acquisition of the remaining 50% of our Welbilt/Thailand joint venture in October of last year. This business had 2.2 million of sales that were not included in our first quarter sales last year. Foreign currency translation had a negative 2% impact on our first quarter sales this year. So on a constant currency base, organic sales increased 3.1% in the first quarter. The National Restaurant Association, NRA, reported mixed same-store sales and customer traffic in the U.S. for the quarter.

However, they also reported that a majority of restaurant operators made capital expenditures for equipment, expansion or remodeling during the quarter, which makes six consecutive quarters where majority of operators made capital expenditures. The NRA reported a positive outlook for capital expenditures as well with nearly 60% of restaurant operators reporting that they plan to make capital expenditures within the next six months. Similarly, Technomic reported that U.S. total same-store restaurant sales grew 2.2% in the first quarter of 2016 over a year ago. With quick service restaurants, or QSRs, growing 2.7% and fast-casual growing slightly at 0.5%

Let's look at the performance of our three reporting segments. In the Americas, organic third-party sales increased by 0.6% during the quarter while EBITA margins increased an impressive 820 basis points compared to last year's first quarter, driven by savings from right-sizing initiatives, improvement in KitchenCare operations and operating efficiency improvements. In EMEA, third-party sales grew 7.3% in the quarter driven by new product introductions, KitchenCare recovery in the region and pricing realizations from the 80/20 simplification initiative. First quarter EBITA margin in EMEA increased by 460 basis points over last year's first quarter, this was driven by savings from simplification and right-sizing initiatives and better product mix due to new product introductions.

In APAC, organic third-party sales decreased by 5.1%, mainly due to lower QSR new store openings in China in the quarter. First quarter EBITA margins in APAC decreased by 170 basis points. This was primarily driven by unfavorable pricing for ice machine exports, partially offset by savings from right-sizing initiatives. As we look forward to the balance of 2016, we are reaffirming the guidance that we first provided in the Manitowoc 2015 fourth quarter earnings release. We continue to expect organic sales growth of 2% to 4% and adjusted EBITA margins of between 16% and 17% for the year. It is important to note that sales growth will be weighted to the second half of the year in 2016. We have a full innovation pipeline with over 20 new product introductions slated for this year, many of them are anticipated to begin rolling out as we go through our third and fourth quarters and we will talk more specifically about these later in the year as they begin showing up in our sales line.

We expect that these sales increases, coupled with our simplification, right-sizing and lean initiatives, will also drive higher adjusted EBITA margins in the second half as we enjoy the benefits of higher volumes and utilization on a smaller manufacturing footprint, coupled with higher efficiencies in our plants. We are committed to reinvesting and strengthening our winning brands, correcting shortcomings of the past and partnering with our customers to design and develop future breakthrough products, solutions and technologies. On this improvement and changed journey, our customers are as excited as we are about the changes that are happening in the business and our mid and long-term opportunities, especially because of our industry-leading technologies.

Already this year we have won two national restaurant show Kitchen Innovation Awards with our Merrychef eikon e2s high speed ovens and with our Multiplex beverage dispenser for nitro-infused coffee, we have won Energy Star Partner of the Year awards for sustained excellence in six product categories. We've also received two awards from McDonalds, the first for equipment innovation of the year for our Multiplex BIC manual fill beverage machine and the second for equipment cost savings excellence award with our Delfield refrigeration, Manitowoc beverage and KitchenCare blended beverage products.

I will now turn the call over to John Stewart who will review additional details from our financial statements and discuss the new guidance items we are introducing for 2016. John?

John Stewart

Thanks, Hubertus. As you review our first quarter financial statements, it is important to note that our first quarter reflects two months of carve-out financials and one month of standalone financials as we completed the spinoff on March 4. Some aspects of our SG&A and the carve-out financials are based on allocations. For example, in all of 2015 and for the first two months of 2016, corporate costs were allocated from our former Manitowoc parent based on headcount, revenue or other reasonable methods to arrive at a distribution of the combined Companies costs to MFS. But they are not meant to be a precise representation of how we would have looked had we been a standalone independent Company in the periods prior to spin off. Also in 2015, we were a net lender on an inter-company basis to our former MTW parent. As such, the interest expense that began in March 2016 compares with prior year interest income on our inter-company balances. These balances were settled prior to our spinoff.

As part of completing the spinoff, we absorbed $3 million of separation expenses in the first quarter. We expect these costs to be much smaller than this in the second quarter and essentially zero after that. We also issued $1.4 billion of debt in the quarter, which was used to fund a $1.36 billion dividend to our former Manitowoc parent so it could, in turn, refinance its balance sheet and complete the spinoff. As part of the debt issuance, we paid a $41 million of debt issuance costs, which will be amortized over the lives of these debt instruments.

Our effective tax rate in the quarter was 20.3% compared to 31.7% in last year's first quarter. The decrease resulted primarily from a $2.9 million in tax related discrete balance sheet adjustments in the quarter related to the spinoff. A couple of additional comments about our balance sheet, first, earned in cash this quarter was $55 million, of which $27 million was in transit between our accounts receivable securitization facility and our operating accounts right over the quarter end. Immediately following quarter end, our cash balance returned to our expected $25 million to $30 million level as the cash in transit cleared and was used to reduce debt and make our first required interest payment on term loan B.

Our inventory levels increased by $18 million in the quarter, this was principally driven by a deliberate decision to build inventory as part of our Ohio plant closure so that as we transfer production from Cleveland to the three receiving plants, we ensure that we could satisfy our customers lead times during the transfer. As the products transferred to the new receiving plants are qualified by our customers for required quality and these plants ramp up their production volumes, we will adjust our safety stock to more normalized levels later in the year. In addition, we intentionally added inventory for U.S. products sold in EMEA and for Mexico products sold in the U.S. to ensure we satisfy customer order lead times. We expect these levels will remain higher on an ongoing basis.

We are reaffirming our previous guidance on amortization expense of between $30 million and $33 million, depreciation expense of between $21 million and $24 million and capital expenditure of between $23 million and $27 million. As we disclosed in our press release this morning, we are introducing interest expense, tax rate and adjusted diluted EPS guidance. Based on our existing sales and adjusted EBITA guidance, we expect to generate cash for debt reduction of between $120 million and $140 million in 2016. As we factor that anticipated debt reduction into our assumptions, we now forecast interest expense to be between $78 million and $82 million in 2016.

In addition, we incurred $41 million of debt issuance costs, which we capitalized on our balance sheet as a reduction of the debt facilities to which they relate. We anticipate incurring approximately $5 million of debt issuance costs amortization for the full year and that will be reflected in the other income expense line on our P&L. Our effective tax rate is anticipated to be between 27% and 30% for 2016. This is based on our expected geographic mix of earnings and excludes any potential discrete items that may arise during the year.

Finally we have introduced an adjusted EPS guidance range of between $0.62 and $0.72 per share for 2016. This excludes separation and structuring expenses that have been incurred in our first quarter and may be incurred during the balance of the year. And finally, before I turn the call back over to Hubertus, let me point out a typo you might have noticed in the headline of our press release. The 710 basis point increase is, of course, in our EBITA margin, as Hubertus said earlier, not our EBITDA margin. For your information, our EBITDA margin was a 690 basis point increase, with that Hubertus?

Hubertus Muehlhaeuser

Thanks, John. To reiterate our earlier comments, we have a strong pipeline of product innovation for the second half of 2016 and anticipate a departure from our normal seasonality, which would have had stronger second and third quarters. This year we expect to have stronger third and fourth quarters on both the top and the bottom lines. To conclude our prepared remarks, 2016 is a transition year for us as we begin life as an independent Company with a focus on delivering and delevering. That is, we are focused on delivering the operation improvements through excellent execution of our simplification and right-sizing initiatives, which will drive improved profitability and cash flow. And we will focus on delevering our balance sheet using our improving cash flow to reduce debt. Through delivering and delevering, in 2016 we will continue our journey along the path toward industry benchmark margins and have the capital structure to finance the future growth of the business.

Rich Sheffer

Operator, this concludes our prepared remarks. We will now open the call up for questions.

Question-and-Answer Session

Operator

[Operator instructions] Your first question comes from the line of James Picariello with KeyBanc Capital Markets. Your line is open.

James Picariello

So can you talk about the mix in the quarter with respect to cold equipment sustaining its strength hot equipment still a little weaker and how you're thinking about that mix the rest of the year? And then just as a follow on to that, what visibility do you have bridging the comment second half weighted volume for the full year?

Hubertus Muehlhaeuser

Okay let me take the mix question. Obviously for the full year we are expecting our mix to be stable in line with 2015. For the first quarter, we have of course a seasonality where we have a bit of lower sales on our cold side. And so it would be a little bit over weighted towards the hot side versus the cold side in the first quarter. When it comes to volume and sales for the outer years, we guided to 2% to 4% sales increase and we expect to be in line with that sales increased based on the rollout of our new product introductions that are just weighted towards the second half of the year and that are within our budget.

James Picariello

And then on the operational improvement front, clearly the benefits showed through in the quarter. With respect to the right sizing and supplication initiatives, can you maybe bucket how those savings are flowing through? I believe at your analyst day you did talk about a $50 million savings number. Is that still the right number to think about? Yes, I'll keep it there.

Hubertus Muehlhaeuser

Yes. Let me take the first and then John gives the details on the second part of the question. I think we're doing a fine job with the simplification and the right sizing. But you should note that the right sizing benefits really will start flowing through in Q2 and then later in the year because we do not get to see, obviously, be benefits from our Cleveland, Ohio plant shutdown. We do see, however, benefits on the simplification. We're very pleased with the progress that we're making on 80/20 and I think we've done a fairly intelligent move here. We have reduced more than 6,000 SKUs so far, however, managed not to lose too much sales because we managed to move those products from B products into A products, so that the miss on that one is really minimum. And on top of that, we have achieved nice pricing on those products as well that we keep. John?

John Stewart

That's right, Hubertus. We've reaffirmed our expected savings of $50 million this year. When I bucketed it back at the investor conference I indicated that would be the number. I also indicated it would be weighted more towards the latter half of the year. And that continues to be the case with obviously the major contributor or a major contributor coming from the close down of our Cleveland, Ohio facility. In the quarter, we've achieved somewhere in the range of 7 million to 8 million of the 50 million. So that gives you an indication of how the back half weighting will occur.

Operator

Your next question comes from the line of Schon Williams, from BB&T Capital Markets. Your line is open.

Schon Williams

I wonder if we could just talk about some of the seasonality here. I mean Americas backed up quite a bit from where we were in Q4. Normally Q1 is seasonally weaker for Americas but this is a bit more than I expected. Was there a could you talk about was there a lot of pre-build in Q4 ahead of some of the consolidation? And is does that explain some of that? Or maybe just a little bit of color there.

Hubertus Muehlhaeuser

No. I think seasonality wise Q1 is the weakest quarter in terms of sales, specifically for our sales mix being geared and more heavily towards the cold product. And if you look how the industry grew, I think we grew in line with the industry. We're at 2% so I think that's fine.

Schon Williams

And then wonder if you could just talk about there's been a lot of chatter at one of your primary customers about some new RFPs for equipment related to breakfast. I don't know. Can you give any color on are there any large products that you are bidding on right now the sizable projects, and then any kind of large rollouts that you would call out for 2016 kind of across the business?

Hubertus Muehlhaeuser

As we stated, we're very confident that with the product introductions that we see, we're going to win nice business, which is part of our budget for 2016. But please understand that at this point in time we do not want to talk about specific customers nor the specific jobs that we are about to win or have won. Okay?

Operator

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

Joe Grabowski

This is Joe Grabowski on for Mig this morning. I just wanted to kind of build on the sales guidance. Sales up 3% in the first quarter ex FX but the comparison was much easier in the first quarter. Comparisons get difficult throughout the year and the fourth quarter comparison is the most difficult. So just was hoping you could talk a little more about the new products that are rolling out and how the lift from the new products will offset the more difficult comparisons you have in the back half.

Hubertus Muehlhaeuser

Well, I mean more or less the same question that we just had and I know that Josef wants to chime in a second as well. I think what you’re going to see at the NRA show that we’re going to mentioned in a second is that we have very, very interesting product coming to the market when it comes to the nitro infused coffee. And we’re expecting a very nice sales pick up for that one. We do have a very, very interesting new holding technology that we’re bringing to the market. And that would help a lot of our large QSR customers. And that’s not only one, that’s for several large QSR’s that are very interested in that product. And so we firmly believe that this is going to help driving the sales in the later year. And then, Josef, do you want to add anything to that?

Josef Matosevic

I think, Hubertus, you got it covered pretty well. I think one of the areas that we have done a much better job here over the last few months is just really listening and clearly understanding where our customer base is going. And based on that, feeding it back into our product innovation and NPI process to be more agile, flexible and start launching those productive in the third and fourth quarter into the market. So there’s, the products are in the pipeline and as Hubertus said, we should see a pretty stable path moving forward.

Hubertus Muehlhaeuser

Yes. And as I said, it is in our guidance of the 2% to 4% net sales increase for 2016.

Joe Grabowski

And then kind of switching to the EBITA margin, 14% in the quarter, guidance for the year 16% to 17%, I appreciate that the consolidation savings are going to ramp up as we go through the year. But also you kind of mentioned in your prepared remarks the corporate cost of $15 million they were probably elevated because of the first two months of the year being part of MTW, as you explained. In the fourth quarter, you guys kind of talked about $30 million of independent company costs, and was just wondering if that is still the right number. And as we kind of go forward now as an independent company, do we think of the corporate cost kind of more in the $7 million, $8 million range or maybe just kind of maybe some thoughts around that.

John Stewart

I think the important comparison here is if you look at the guidance we gave in the Q4 Manitowoc call, we were comparing division against pro forma division. And so we added $30 million in to 2015 to make it comparable with what we thought 2016 would look like. So now we’re comparing standalone business to historical carve-out financials. In our historical carve out financials for 2015, our corporate costs on an allocated basis were around $25 million. We believe our total corporate costs are going to be around $30 million in terms of the comparison point. And therefore, the increment is around $5 million. And so that hasn’t really changed from our February guidance. It’s just we’re comparing against different numbers now, standalone to carve-out.

Joe Grabowski

I’m going to sneak in one more quick one, we’ve seen a pretty steep increase in steel prices the last couple of months. Can you talk about how that might impact price cost dynamics and margins the rest of the year?

Hubertus Muehlhaeuser

Josef is going to take that one.

Josef Matosevic

Yes. I think that’s a great question. And we have been, obviously, very close to this and our impact will not be showing in any negative way for any concern. So I think we will be cost neutral here. We have put some things in place prior to it knowing there could be a little fluctuation in the system, so no cost impact to us.

Operator

Your next question comes from the line of Robert Wertheimer with Barclays. Your line is open.

Robert Wetheimer

My first question would be just on the inventory. I mean obviously you’re going to have some extra inventory as you shift plants. You also mentioned a little bit more inventory to reduce customer lead times. I’m sure it curious what you saw operationally that made you do that? Were you missing out on sales? I mean, I’m just a little bit curious about the comment and what’s going on behind it.

Hubertus Muehlhaeuser

Well the first one I think you mentioned is the safety stock that we have purposefully built up. That also led to a very smooth transfer of the manufacturing and of the products that is one element. And the second element is the seasonality element mainly on ice. And Josef wants to say some words about that.

Josef Matosevic

Yes. That’s a great question. One of them, obviously to purely protect customer delivery and time due to the numerous activities we have going on to strengthen our product cost through right-sizing and efficiencies. But the second big one is we, one of those lessons learned from the past. Even we don’t have a cyclical business but we have a seasonal environment here. And we have, quite frankly, missed quite a few custom orders in sales and we want to do a much better job moving forward. So that drives the second element of the inventory -- ramping up for future sales.

Robert Wetheimer

And then if I may, on the steel price question -- so it sounds like you got ahead of some of this increase and that's wonderful. Assuming that comes out you in '17, I'm just curious if maybe you're -- I don't know whether you're saying you're buying different grades of steel or buying differently than what is rising or whether you managed to get ahead of it and push it out in the next year.

Josef Matosevic

I think it's the latter, so we hedged for the last -- actually this year and the following two years for a three year period. And this will protect us from the steel prices.

Hubertus Muehlhaeuser

We're thinking ahead.

Operator

Your next question comes from the line of Eric Carlson with [Bowden Home]. Your line is open.

Unidentified Analyst

You mentioned nice pricing earlier in the quarter. Could you talk about what that means in terms of growth pricing and also net pricing after discounts? Thank you.

Hubertus Muehlhaeuser

Well net pricing was around 40 basis points, we would say and the volume impact we had was 200 basis points. And my comment on the nice pricing referred to that we did, of course, use pricing as part of our 80/20 initiative and have not lost sales for that but could increase volume and the pricing impact -- that was my comment earlier on.

Unidentified Analyst

And could you describe how good you think he pricing discipline is in the company right now and if you think there's more to do on pricing discipline that could benefit us going forward?

Hubertus Muehlhaeuser

Well I think we have this discussed in the last year already. The discipline is needed around one pricing and discounting and I think we have addressed sloppy discounting practices significantly, specifically for those smaller customers where we have stopped all the discounting completely. And I think that discipline on the discounting and the increased pricing is showing in the first quarter bottom-line. And we intend to do that going forward and we're going to tend to keep that discipline.

Operator

[Operator Instructions] And your next question comes from the line of Larry De Maria with William Blair. Your line is open.

Larry De Maria

Two questions, first a couple of times you mentioned that obviously second half was going to benefit from new product rollouts. Can you give us some examples of what kind of products? Are they upgrades? How big and broad? Are they numerous products? So first, can you give us some examples of what to expect in terms of new products? And then secondly, can you talk about the channel? I guess there's some concerns about what is in the channel and we just have -- curious about what you guys are seeing, what kind of inventory is there -- I guess specifically with respect to ice machines but more broadly as well. Thank you.

Hubertus Muehlhaeuser

Let me take the first question on the products because I think I answered that already. We are seeing from our innovation pipeline that we're rolling out very interesting hot holding cabinets. It's a completely new technology for us and for the customer that saves the customer money in terms of waste reduction and longer holding times and while increasing the quality. So we're actually very excited about what's coming to the market and we're going to see that appearing in a lot of the QSR's as we go through the year. The second innovation that we are bringing and that you will be seeing in operator stores in the year -- later in the year -- is the nitro infused coffee. It's absolutely fantastic. And again, if you come to NRA show and if you have been to our analyst conference you have to taste it. It is currently the best cold coffee on the market -- nitro infused coffee on the market. It's just fantastic and that is going to show up. Another very interesting product that we have is the manual filled beaker -- was mentioning that we won a nice prize with McDonald's for that. So this is going to be rolled out on a global scale and so we believe that with those innovations, we're going to see nice sales pick up in the second half. And then, Joe, you might want to talk about the inventory levels at our leaders.

Josef Matosevic

Yes, in terms of your channel question, Larry. I want to make sure I answer the right question. Could you be a little bit more detailed what exactly you're referring to, to the inventory levels or hedging…

Larry De Maria

Obviously a lot of your products go through distributors. And I'm just curious what's it like in the channel when you're not selling direct to a customer -- to an end-user customer. Is that -- is it normal levels? Obviously we're starting a little bit light on sales this year so curious what the inventory in the channel with distributors look like.

Josef Matosevic

Okay. I appreciate the clarification. So as we stated a few minutes ago, they are a little higher. And they were largely driven on three different factors. One of them being that we are very close to having a promotional activity that will kick in here in Q2 and some will kick-in in Q4 that drives one element of it. Second element drives the potential new orders we are targeting for Q3 and Q4 and leveraging our supply chain with long lead time items. And third component is strengthening of our product cost by right-sizing our business to a capacity levels where we can operate more efficient and more effectively. Those are the kind, Larry -- the three components that drive the overall inventory as it stands today.

Larry De Maria

So a little bit elevated. Okay. Thanks for the clarification. And then just a follow up, as far as the new products go that Hubertus mentioned, sounds like you have orders for one of them, but as far as the coffees and hot holding cabinets, do we have orders for those already that should hit in the second half? Or do we have to go out, get the orders, produce and deliver to hit the numbers in the second half? Thank you and I'll leave it there.

Hubertus Muehlhaeuser

Well we have some in. We definitely have it in the budget. But you will understand that I will not disclose with which customers those are. What is also important to note is we have product introductions of more than 20 this year. But we have, of course, brand new products that we introduced last year. So if you take the MerryChef eikon e2s -- our order books are full with that product that are going to roll out in the second half of the year. And the same goes for our converse-oven, which is un-doubtfully the best and most efficient convi-oven on the market. And rest assured that our customers understand that because they make the products. So you see that market share increase in the second half of the year. On top of that, what you also going to find in the Chicago show is we have a brand-new pearl clamshell grill. So that hits two very, very large QSR customers of ours and then we're also pretty excited with that one. And last but not least, our Frymaster low oil volume fryers are also making their way into the QSRs. So again, a very full pipeline this year, coupled with a very, very new product introductions of last year make us very confident that we are going to achieve our sales guidance.

Operator

There are no further questions at this time. We do have a question that just came in. Your next question comes from the line of Eric Carlson with Bowden Home. Your line is open.

Eric Carlson

You mentioned earlier in the call, you missed out on some orders because too long lead times and you're now correcting that with a little bit more inventory. I was wondering, is it possible to quantify the loss of those orders that you thought you would have gained had you had shorter lead times?

Hubertus Muehlhaeuser

We could but we don't want to. I think you should stay with the 2% to 4% and then you basically are fine with that. So we don't want to disclose how much we lost last year because of that. Okay?

Operator

And your next question comes from the line of James Picariello with KeyBanc Capital Markets. Your line is open.

James Picariello

Just on the balance sheet -- and maybe I missed the quantification of this but how are you thinking about free cash flow generation for the full year? And do you have a targeted debt reduction in mind for the year or maybe a targeted leverage number over a certain timeframe? Any color there would be helpful.

John Stewart

Well I think in terms of the free cash flow for the year, you should think really in terms of our targeted debt pay down that I mentioned in my prepared remarks -- $120 million to $140 million of debt pay down. While were not guiding on free cash flow, obviously the type of cash that we're going to use the pay down our debt -- I'm sorry, the second part of your question?

James Picariello

Oh just the targeted net debt to EBITDA leverage over a certain timeframe -- but that was it.

John Stewart

Okay. So in terms of giving a target for an absolute debt leverage, we haven't come out with a target. First off, we expect to stay in compliance with our debt covenants, which you would expect given our cash flow generation. That would reduce our maximum leverage from 6.25% down to 4% and about by 0.25% a term per quarter beginning the third quarter this year. So this year is a focus on repaying debt, delivering our balance sheet. And remember what I said before and Hubertus has certainly emphasized, we want to get back into the M&A game and we want to pursue M&A opportunities. And we hope that we will be able to pursue those as we move into 2017 and beyond.

Rich Sheffer

James, just one clarification on John's comments, he was talking about the leverage target. Those are the requirements within our current credit facilities. We are currently ahead of those and plan to stay ahead of those as we roll forward.

Operator

[Operator instructions] And there are no further questions at this time. Mr. Sheffer, I'll turn the call back over to you.

Rich Sheffer

Thanks Sally. I'd like to invite everyone to visit our booth at the National Restaurant Association show at the McCormick Center in Chicago on May 23 and 24. Please call me at 727-853-3079 or email me at richard.sheffer@mtwfs.com to arrange a time to meet us and have a tour of our booth. We will be featuring our newest innovative products at the show and I'm confident that you'll leave with a better understanding of why we are the innovation leader in the commercial food service equipment industry, Hubertus?

Hubertus Muehlhaeuser

Thanks, Rich. So thank you, again, everybody, for joining us today and we look very much forward to seeing many of you hopefully everybody in Chicago at the NRA show. Have a great day and goodbye.

Operator

Thank you, ladies and gentlemen, for your participation. This concludes today's conference call. You may now disconnect.

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