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Welbilt, Inc.  (NYSE:WBT)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Adam and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Welbilt 2018 Fourth Quarter Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Rich Sheffer, you may begin your conference.

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

Good morning and welcome to Welbilt's 2018 Fourth Quarter Earnings Call and Webcast. Joining me on the call today is Bill Johnson, our President and Chief Executive Officer; Haresh Shah, our Chief Financial Officer; and Josef Matosevic, our Chief Operating Officer. Before we begin our discussion, 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 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 the last seven pages of our earnings release for our non-GAAP reconciliations and other important information regarding the use of non-GAAP financial measures. You can find a copy of the press release and the presentation slides for this earnings call in the Investor Relations section of our website, www.welbilt.com.

Now I'd like to turn the call over to Bill.

William C. Johnson -- President and Chief Executive Officer

Thanks, Rich, and good morning. As you saw in today's earnings release and on Slide 3 of our presentation, we had strong to line results in Q4 finishing 2018 on a high note. We delivered 11% growth in the quarter with 6% coming organically and another 6% from the Crem acquisition. Foreign currency translation was a 1% headwind. Operationally, we had another solid quarter at delivering savings from our Simplification and Right-Sizing initiatives. We benefited from higher organic sales volumes in EMEA and APAC and improved net pricing. As expected, these positive contributors were more than offset by higher incentive compensation expense, less favorable mix compared to 2017, material cost inflation. Crem acquisition delivered more profit dollars, but was dilutive to margins by 30 basis points. Our Q4 adjusted net earnings were lower than prior year primarily due to higher tax expense as well as lower adjusted operating EBITDA and higher interest expense driven by rising rates.

Finally, free cash flow was very strong in the fourth quarter, our strongest quarter of the year. As a percentage of net income, free cash flow exceeded 300% in the quarter driven by seasonally improved working capital. I'd like to share a few thoughts with you after completing my first 100 days with Welbilt. First, I've met many of our customers to reinforce our commitment to our strategy and channel partners. They really like our products and customer service focused organization and appreciate the changes we've implemented to make us easier to do business with. I feel very confident in our ability to consistently deliver profitable growth going forward. Second, I visited all our plants in Americas and Europe to see firsthand the state of our operations and to confirm the validity of our margin journey. I saw what I expected to see. A couple of plants were really good, but most have room to improve.

We are currently working on an in-depth operational review to confirm the size of our long-term profit improvement opportunity to fine-tune our execution plans. As we said in the earnings release, we plan to have an Investor Day at our headquarters in Tampa on May 14th to share the results of this review. We will provide more details in the near future. While Haresh will be covering the details from the guidance we issued today, I'd like to share our view of the market backdrop that we expect to see in 2019. Beginning in the Americas, we expect that the general market will grow 1% to 2%. We believe that our annual price increase that will be implemented March 1st and the ramp up of business with the dealers in NexGen following our mission into the buying group will help us outgrow the market. We expect that large chain operators will continue to invest capital into their kitchens in 2019, but are up against very large rollouts from the first half of 2018.

We expect that KitchenCare will rebound from a soft 2018 that was impacted by excess inventory in the channel and consolidation among channel partners. In EMEA and in APAC, we expect the general market will grow 2% to 3% in 2019. We believe that we will outgrow the market due to strong demand for our Merrychef and Convotherm ovens in both regions, but both regions have uncertainty over their respective economic backdrops, Brexit in EMEA and a slowing Chinese economy in APAC. We see the opportunity to continue expanding our customer relationships and increase our share in the general market and with large chains. Overall, we are positive about growth prospects for both regions. Earlier this month, we met with many of you at the NAFEM Show in Orlando. We heard similar market sentiments from both our dealer customers and our industry participants that attended. The show itself was very well attended and our booth was incredibly busy all three days of the show.

Beverage equipment drew big crowds. We launched Crem to the North American marketplace at the show. Interest in Crem was extremely strong and we expect to begin taking orders in the region in the second quarter. There was significant excitement around our automated Fresh Blend smoothie machines not only from convenience store operators, but also from large chains who wanted an automated beverage machine that can be placed in front of the counter rather than behind the counter. This will help them drive increased revenue without increasing labor cost. Our strategy of being the leader in kitchen connectivity and automation was on display at the show as well. We provided live demonstrations of KitchenConnect's ability to connect multiple families of equipment in the field and how that helps improve operating efficiencies in the kitchen and reduce labor.

We also demonstrated our fitkitchen design capabilities that utilize augmented reality. This helps our customers visualize their new kitchen designs before physical models and prototypes are built. It significantly speeds up the process and reduces project cost. We are continuing to invest in our capabilities so we can continue to be the best partner for our customers as they reinvent their kitchens with connectivity and automation.

With that, I'll turn the call over to Josef for a summary of our segment results.

Josef Matosevic -- Executive Vice President and Chief Operating Officer

Thank you, Bill, and good morning, everyone. I will make a few comments on our topline results within the segments. Starting on Slide 4 with EMEA. Third-party net sales increased 45.4% in the fourth quarter, organic net sales increased 21.9% while the Crem acquisition contributed 27.4% growth. We saw increased sales of Merrychef high-speed ovens with a large chain, higher Convotherm sales in the marine sector, better Frymaster and Garland grills sales in the region, and improved Multiplex beverage sales. Specific to Merrychef, there was a large chain who wanted to make a menu change, but was concerned about it creating a bottleneck at their drive-through window.

They engaged in a fitkitchen light project with us where we demonstrated that by adopting our Merrychef ovens into their kitchens, they could eliminate three individual pieces of equipment while increasing their speed of service. After adapting our Merrychef ovens, they made the menu change and speed of service at the drive-through window increased. This truly represents the value Welbilt brings to its customers. Moving to Slide 5, third-party net sales in APAC increased 28.3% in the fourth quarter. Organic net sales increased 16.4% while the Crem acquisition contributed 14.3% growth. We had stronger sales to large chain of Garland grills, Lincoln conveyor ovens, Frymaster fryers, and Merco hot holding cabinets. We also saw growth in Fabristeel project sales.

Looking at the Americas on Slide 6, third-party net sales increased 0.2% in the fourth quarter with organic net sales increasing 0.6%. Our 2018 price increase drove higher general market sales in the quarter, which were partially offset by tough comps from strong large chain and KitchenCare aftermarket sales in last year's fourth quarter. From a product standpoint, we saw stronger sales of Multiplex beverage equipment, especially our new automated Fresh Blend smoothie machine. We also continue to benefit from increased sales of Merrychef high-speed ovens. We had lower Manitowoc Ice machine sales this quarter as the entire ice market has been soft this year. Importantly, we have maintained our overall market share this year, which gives us confidence that we will see the sales rebound as the market wise machines improves.

I will now let Haresh get into the operating details of the quarter and our 2019 outlook. Haresh?

Haresh Shah -- Executive Vice President and Chief Financial Officer

Thanks, Josef, and good morning, everyone. On Slide 7, I have a few comments on some of the fourth quarter adjusted operating EBITDA margin drivers. As we previously mentioned, Crem's margins are currently slightly below our consolidated average and was dilutive by 30 basis points this quarter. However, they were accretive to both earnings and EPS for the full year. Reviewing other drivers of margin. Our Simplification and Right-Sizing initiatives had a positive 160 basis point impact. We benefited from additional 80/20 pricing in the fourth quarter where we strategically raised prices on B products and limited discounts and rebates. We also drove savings from product cost takeout and lean efforts as we are increasing our focus on operational improvements within our plant. Material cost inflation was a 120 basis point headwind, which was partially offset by 70 basis points of positive net pricing in the quarter and as a result, price cost was a net 50 basis point headwind.

As expected, we saw continued impact from the Section 301 tariffs in the quarter. We also reflected the increased cost from our compressor supplier issue here. The good news is that the additional costs we absorb to ensure our supply of compressors are not expected to continue into 2019. Volume mix was a net 70 basis point headwind in the fourth quarter. Volume was positive again this quarter while mix was negative largely driven by lower KitchenCare aftermarket sales. The last item to comment on is the 240 basis point headwind from compensation. You may recall that in last year's fourth quarter, we had a large adjustment to reduce incentive compensation expense as our annual short-term incentive bonuses were well below our original targets. In this year's fourth quarter, there was an increase in expense related to our annual incentive bonuses as we performed very well on our organic sales and free cash flow metrics.

In addition, in 2017 we were only accruing for two grants of our three-year long-term incentive compensation cycles as it was our second year as an independent public company. Now in 2018 we have been accruing for three grants of our three-year long-term incentive plan as the program has now matured to a sustainable level. Moving to Slide 8, we generated $80.3 million of free cash flow this quarter, a 36.3% increase over last year's fourth quarter. This was largely driven by improvements in both accounts payable and inventory in the quarter. As a percentage of net income, free cash flow was over 300% in the quarter and over 140% for the year. Our ability ***@@Part 2*** ***@@Part 3*** for the year. Our ability to generate very strong free cash flow each year allows us to delever our balance sheet and supports growth investments for the business. We paid down $58.3 million of debt in the quarter while our cash and short-term investments increased by $9 million.

Finally, on Slide 9, I'd like to make a few comments on the 2019 guidance that we provided in today's earnings release. Beginning with sales, we expect to grow organically by 2% to 5% in 2019. We are expecting growth in all three regions with stronger growth in EMEA and APAC. In EMEA, we expect higher general market sales to drive the growth with continued momentum from our Merrychef and Convotherm ovens. In APAC, we also expect higher general market sales with continued market penetration by our Merrychef and Convotherm ovens and our Frymaster fryers. We also expect strong organic growth from Crem in the region. In the Americas, we are expecting modest growth as we have tough comps in the first half from the large chain rollouts in 2018. We expect higher sales in the general market as conditions in the dealer channel begin to gradually improve and from the continued ramp up of sales in NexGen. We also expect to benefit from the recent price increases.

Finally, we expect KitchenCare aftermarket sales to begin growing again in 2019 following a soft 2018. Our adjusted operating EBITDA margin is expected to be between 18.5% and 19.5%. We expect the 30 basis point dilutive impact from Crem in the first quarter before we reach the anniversary of the acquisition. We are expecting our Simplification and Right-Sizing initiatives to generate between 125 basis points and 175 basis points of contribution to margin improvement. We expect this improvement to be primarily driven by product cost takeout and lean activities, additional 80/20 product line and customer line simplification efforts, and strategic sourcing improvements. We expect volume mix to be positive by 25 basis points to 50 basis points in 2019 after being negative throughout 2018. We expect price cost to be neutral in 2019. As you know, we raise prices in June in response to the Section 232 tariffs and the resulting impact on raw material prices.

We will have our 2019 price increases in place by March 1st. This price increase will address the Section 301 tariff impact in components that are imported from China and other price increases we are experiencing from our supply chain as they pass along a portion of the increased cost they are continuing to absorb. We have done a good job in managing these inflationary pressures and will remain vigilant should additional tariffs get implemented. Finally, a few details on the FX, Crem, and other category; which is expected to be a 75 basis point to 100 basis point margin headwind. In addition to FX and the Q1 impact from Crem, it includes our investments into our KitchenConnect and common control initiatives, which we view as strategically vital to our long-term growth. It also includes an expected increase in healthcare costs and our planned merit increases for our employees.

Our adjusted diluted EPS guidance range is $0.71 to $0.81 per share. This range assumes 141.8 million fully diluted shares outstanding and a 28% to 30% effective tax rate. It also assumes interest expense will be between $92 million and $97 million in 2019. Our interest expense forecast is based on current interest rates, which are higher than a year ago. Also it does not include any potential savings from refinancing of $425 million of high yield notes as the timing and potential savings are uncertain due to current market conditions. We are willing to be patient until market conditions improve sufficiently before we consider refinancing these notes. Before we move to Q&A, I would like to call your attention to some balance sheet and cash flow statement revisions that we identified in connection with our fourth quarter closing procedures. Please refer to our press release for additional information.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) And your first question comes from Jeff Hammond of KeyBanc Capital Markets. Jeff, your line is open.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Hi. Good morning, guys.

William C. Johnson -- President and Chief Executive Officer

Hi, Jeff.

Josef Matosevic -- Executive Vice President and Chief Operating Officer

Good morning.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

So, just maybe a little bit more on the Americas. If you frame kind of the 2% to 5%, how do you kind of see the ranges within Americas; kind of at the lower end or maybe a little more color there?

William C. Johnson -- President and Chief Executive Officer

So coming into 2019, we have some pretty tough comps on the chain -- large chain business in the first half. We think that's going to be overcome by KitchenCare that we have easier comps on KitchenCare and then general markets. And then we also have the pickup in the NexGen business that we had -- we gained last year kind of at the end of the second quarter, third quarter and most of that's going to be kind of rolling in throughout 2019.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then just on the margins, I mean you had 25 basis points to 50 basis points of volume mix. Are you -- what are you putting in your guidance in terms of mix expectations given I guess KitchenCare gets better, but are you still seeing kind of this negative mix dynamic on the equipment?

Haresh Shah -- Executive Vice President and Chief Financial Officer

I think, Jeff -- this is Haresh, we expect our mix to be positive. We did have some headwinds, especially KitchenCare was probably our largest one. So, we're expecting mix as well as our volume combination to be -- to be positive.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then just lastly on the -- the headwinds you had in the second half around your compressor supplier, some of the rollout costs, should we think -- like that stuff going away, should we think of that as in the Simplification and Right-Sizing or does that fall somewhere else?

William C. Johnson -- President and Chief Executive Officer

It just kind of, it falls out of material cost. It was kind of a one-time event that happened in the third and fourth quarter.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Right. But I'm just looking in the bridge from '18 to '19, all that goes away. So, where are we picking that up in the margin bridge?

Josef Matosevic -- Executive Vice President and Chief Operating Officer

It's in price cost that's neutral what you're seeing in the guidance because it's in the material cost line item.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay. I'll get back in queue. Thanks.

Operator

And your next question comes from Mig Dobre of Baird. Mig, your line is open.

Mircea Dobre -- Robert W. Baird -- Analyst

Yes. Good morning, gentlemen.

William C. Johnson -- President and Chief Executive Officer

Hi, Mig.

Haresh Shah -- Executive Vice President and Chief Financial Officer

Good morning.

Mircea Dobre -- Robert W. Baird -- Analyst

I do have a number of questions on margins. First, I'm looking to understand how confident are you on the 125 bps to 175 bps of margin from Simplification and Right-Sizing and can you give us a sense for exactly what's involved in delivering these numbers?

William C. Johnson -- President and Chief Executive Officer

Yes. I mean we're working on that as we speak, Mig. We're going to have an Investor Day on May 14th where we'll outline all the components of that for you in greater detail. But yes, we're very confident about it and we'll give you the details in May.

Mircea Dobre -- Robert W. Baird -- Analyst

Well, I mean I can appreciate the longer-term aspect of the meeting, but you're providing guidance today for 2019. So sorry to press you on it, but I think it's a fair question. If you're doing something for 2019, it seems to me like this would be a good time to talk about it.

William C. Johnson -- President and Chief Executive Officer

Well, I mean what we're doing is we are focusing in on some of our factories and really getting into the 80/20 initiatives and the lean initiatives and we're going to drive the business at multiple locations in 2019 to improve their efficiency in operating and lower their cost.

Mircea Dobre -- Robert W. Baird -- Analyst

Maybe if I'm asking this question differently. When you're looking at the various buckets that you have in here, is it fair to say that you're most confident vis-a-vis your Simplification and Right-Sizing or is this as much subject to changes maybe some of the other ones?

William C. Johnson -- President and Chief Executive Officer

No, I think that's the one that we really know we could control, right? I mean it's the most important one where we have direct control over and we are not subject to kind of the markets and things like that. So, that's why we have a high level of confidence in it.

Mircea Dobre -- Robert W. Baird -- Analyst

Okay. Then on volume mix, 25 bps to 50 bps. I mean if I'm looking at this bucket, you essentially had a call 130 basis point drag by my math in 2018 from volume mix even though your volume was positive. So, your volume is going to help in 2019 and you're saying that mix is going to help as well. If KitchenCare kicks in, then mix should be very positive, if you would, versus the headwinds that you had in 2018. I'm trying to sort of square all of that with 25 basis points to 50 basis points, which to me looks relatively modest relative to the headwind you had in 2018.

Haresh Shah -- Executive Vice President and Chief Financial Officer

Yes. I think Mig, that's a good question. We talk about in the past the short-term visibility. So going back to the last comment when you asked about the margins, we feel good about the areas we can control. The other areas, there is a short-term visibility so we want to be conservative in our guidance and at this point without having heavy backlogs, I think this is a good range to put out there.

Mircea Dobre -- Robert W. Baird -- Analyst

And just so that I understand, is this related to the assumptions that you're making surrounding KitchenCare and demand through the year? Is that the swing factor here?

Haresh Shah -- Executive Vice President and Chief Financial Officer

Yes, KitchenCare is a swing factor in that, absolutely.

Mircea Dobre -- Robert W. Baird -- Analyst

Okay. And then on neutral price cost, also to clarify this, you're saying that you're going to increase prices again in March. Is it fair to assume then that you're maybe going to start the year a little bit slower from a margin standpoint on a year-over-year basis? And then as you're looking at 301 tariffs, what exactly is embedded in your guidance right now? Is it just the current tariff run rate or are you assuming the potential for a 25% tariff hike?

William C. Johnson -- President and Chief Executive Officer

So, it's a good question. We're assuming the current -- to answer your second question first, we're assuming the current 301 tariffs. But yes, we will start the year out a little slower on the margin side just because the price -- pricing actions don't kick in until March 1st. And the reason we did that was we had a price increase in July of 2018 to cover the first round of tariffs and we announced the second -- our price increase for '19, but there's a 60-day kind of period that we give the customers.

Mircea Dobre -- Robert W. Baird -- Analyst

So, you've already announced it and it just hasn't kicked in yet?

William C. Johnson -- President and Chief Executive Officer

That's correct.

Mircea Dobre -- Robert W. Baird -- Analyst

Okay. And based on what you now -- given mix and sort of near-term trends, you're starting the year slower, but is it fair for investors and analysts to expect margins to be up on an aggregate basis in the first half of the year or even in Q1 or are we talking about a very back-end loaded year?

Haresh Shah -- Executive Vice President and Chief Financial Officer

Yes. We're not going to guide by the quarters, but if -- Q1 we expect to be a little bit slower as we talked about and then Q2 last year we had some of the headwinds. So, directionally those are the couple items that we're facing.

Mircea Dobre -- Robert W. Baird -- Analyst

Okay. That's helpful. So, things pick up in Q2 then. And then maybe last question for me. When we're looking at the FX, Crem, and other; you're saying that FX is neutral so I guess that would be a neutral impact on margin as well, correct me if I'm wrong? Crem, the dilution here should be relatively modest then I guess to get to 75 bps to 100 bps, most of this comes in this other category, which you're saying is investment in increased employee related cost. Is there a way to sort of quantify as to what maybe investment versus just your natural sort of cost inflation on the labor side?

William C. Johnson -- President and Chief Executive Officer

I mean we don't break those out, Mig, but I mean what I think is important is that when it comes to innovation in the future, there's a couple -- and automation, there are some significant projects we're working on that we're investing in that may not have immediate returns, but over kind of a 12 to 36-month period we see as incredibly strategically important and so we're investing in those.

Mircea Dobre -- Robert W. Baird -- Analyst

I appreciate that. But I guess from a longer-term perspective, we can talk about this in May maybe, there's a lot that you're doing in Simplification and Right-Sizing. But I guess the skeptics argument would be that a good chunk of that gets taken away by either investments that you have to make in the business or the fact that your labor inflation is there. So as you're thinking about the longer-term margin potential here, do you feel that you can offset on a longer-term basis some of these natural drags that occur in your business? And that will be all. Thanks.

William C. Johnson -- President and Chief Executive Officer

Yes, absolutely. And we've also taken the opportunity in 2019 to cut back on a number of projects to make sure that we're focusing on the relatively few strategic ones that we really think are important in the next couple of years so -- and we will cover that more in May for you.

Mircea Dobre -- Robert W. Baird -- Analyst

All right. Thank you, guys.

William C. Johnson -- President and Chief Executive Officer

Thanks, Mig.

Operator

And your next question comes from David MacGregor of Longbow Research. David, your line's open.

Robert Aurand -- Longbow Research -- Analyst

Hi. Rob Aurand on for David this morning. I know the fourth quarter is typically seasonally when discounting picks up, but in light of the tariff situation, would you say discounting was not as pronounced this year as in the past?

Josef Matosevic -- Executive Vice President and Chief Operating Officer

Yes, that's correct. We did not participate in any discounting and just stayed course and stayed very disciplined on finishing the year strong as we can and position ourselves for a good 2019.

Robert Aurand -- Longbow Research -- Analyst

Okay. And there had been some kind of insinuations that I guess under the leadership of Bill that you might look to get more aggressive in the market. Is that something that's already taking place or been communicated or can you comment on that?

William C. Johnson -- President and Chief Executive Officer

Yes. I mean what we're continuing to do to drive our profitable growth has positioned Welbilt as the best value option with our customers and that's equipment performance, durability, innovation around what they need, total cost of ownership, ease of doing business with. And rather than focusing on discounts, we believe that we can deliver superior value with our -- with all of our product offering and our broad product breadth.

Robert Aurand -- Longbow Research -- Analyst

Okay. And just lastly on pricing, I know you said you're raising pricing March 1st, I know you had a competitor raise at the start of the year. I know you don't want to talk about the competition, but can you just talk about the pricing environment in general? Is everything sticking? Are you confident that yours will stick?

William C. Johnson -- President and Chief Executive Officer

Well, it's a pretty complex environment that we work in. We have chain -- large chain customers, we have the general market so you kind of have to look at it market-by-market. But in general with these tariffs and with just material prices, it's a story that as -- that when we go out to our customers, we have a legitimate reason to increase prices. So, it's a pretty good environment from that perspective. We typically realized somewhere between 60% and 70% of an announced price increase depending on the markets and I would say that's in the general markets if we're pretty successful. Chains are a different -- chains have multi-year kind of contracts and so you kind of have to take those one-by-one.

Robert Aurand -- Longbow Research -- Analyst

All right. Thank you very much.

Operator

And your next question comes from Jamie Clement of Buckingham Research. Jamie, your line is open.

James Clement -- Buckingham Research -- Analyst

Good morning, gentlemen.

William C. Johnson -- President and Chief Executive Officer

Good morning.

Haresh Shah -- Executive Vice President and Chief Financial Officer

Good morning, Jamie.

James Clement -- Buckingham Research -- Analyst

Bill, you mentioned early on in your prepared remarks first 100 days in visiting all the plants, I think you said a couple of the plants were really top notch and some of the other ones could use some improvement. When you think about areas of improvement, can you talk about kind of the mix between process and cultural kind of stuff on one side versus kind of more like capital infrastructure stuff on the other side?

William C. Johnson -- President and Chief Executive Officer

Yes, sure. So when you look at the factories that are running really well, they have both, right; they have excellent processes and excellent culture. So it's hard to separate and say that one is preferred over the other, I think they kind of go hand in hand. The thing that's really exciting to me is, and I didn't comment on this in my opening comments, but I really am impressed with the General Managers of our businesses, the people who are out there with the customers every day, customer-facing people; customers have enormous respect for them, they understand their businesses really well. What we need to do is we need to help them on the process side of things, simplification side of things. We've had in some of our products too many SKUs creep into the -- and drive complexity and that complexity needs to be reduced. But they just need some help in getting through that and then once you get through that, they'll be able to maintain that going forward. So, that's the process side. The culture side of things, we have a really strong customer culture here where we put the customer first and we -- in some cases to our detriment, we design whatever they want and I think we just have to have a little more discipline around that process.

James Clement -- Buckingham Research -- Analyst

Okay. All right. Second question and this will be my last one. Your EMEA results in the quarter organically excellent. As you talk to customers in Western Europe where it seems like there's been a little bit of macro weakness here and then obviously UK around Brexit and that kind of thing, I mean how concerned are you about the region?

William C. Johnson -- President and Chief Executive Officer

I think we're watching it quite closely. We're seeing a lot of activity in front of this Brexit deal. People are making bets on it. We have some factories in the UK that we're concerned about getting supply in and maintaining supply, and so we're taking contingency actions to make sure that we can supply our customers. But I would say we're watching it pretty closely, but we also have -- we had a good quarter in EMEA and the teams in EMEA and APAC really delivered in the fourth quarter for us. There were some large chain rollouts that helped in that, our Merrychef product helped, the mix there between Merrychef and Convotherm helped us a great deal in both regions.

James Clement -- Buckingham Research -- Analyst

Okay. Thanks very much for your time. I appreciate it.

William C. Johnson -- President and Chief Executive Officer

Sure.

Operator

And your next question comes from Joel Tiss of BMO. Joel, your line's open.

Joel Tiss -- BMO Capital Markets -- Analyst

Hey, guys. How is it going?

William C. Johnson -- President and Chief Executive Officer

Good Joel.

Joel Tiss -- BMO Capital Markets -- Analyst

I just wonder if you could spend a minute and give us just some of the nuances between the different end markets; between retail, QSR, chains, institutional; and just to get a little more sense of how those pieces fit in 2019?

William C. Johnson -- President and Chief Executive Officer

Yes. We see -- as we said, we see the general market kind of up in the 1% to 2% range. We think we're going to outperform the general market there because of our -- the two product lines we picked up with NexGen. And part of our being the best value option is really when we get in with a group or buying group, we work hard to kind of expand our footprint in there and we're working to do that and hopefully we'll be more successful this year with that. So, we kind of see the general market as we'll get our fair share of whatever the market gives and then we'll get a little bit more just with some of the actions we've already taken and some of the things that we're working on. We have in the first half some pretty strong headwinds. We had two big rollouts in the first half of '18 that aren't duplicating themselves in 2019, but there will be other rollouts in 2019 that's just timing and they may not be as big as the ones we did in '18, but we think we can offset that with some of the general market. And then the KitchenCare comps, we were really disciplined in the fourth quarter to try not to pull any spare part business in from '19 into '18 so that we had the full year of 2019 for aftermarket parts. So, I see that getting better. We're working with our master distributors in that part of the business and they're excellent partners and we continue to drive from generics to OEMs and the percentage of OEM parts that are bought versus generic. We are working very closely with these master distributors to drive that whole value process with customers -- with end users.

Joel Tiss -- BMO Capital Markets -- Analyst

Okay. And then on Ice, I didn't hear if you said anything if the slowdown in 2018 was going to continue into 2019 or just any sense of where that stands now?

Josef Matosevic -- Executive Vice President and Chief Operating Officer

Yes. 2018, the entire market was down. We did maintain share and we do expect that to comeback, Joel, in '19.

Joel Tiss -- BMO Capital Markets -- Analyst

Okay. All right. Thank you very much.

William C. Johnson -- President and Chief Executive Officer

Thanks.

Operator

And your next question comes from Larry de Maria from William Blair. Larry, your line's open.

Lawrence De Maria -- William Blair -- Analyst

Hi, thanks. Good morning.

William C. Johnson -- President and Chief Executive Officer

Hi Larry.

Lawrence De Maria -- William Blair -- Analyst

Just a follow-up, I fell off so sorry if I'm repeating something. But I'm just curious you stood at 17% (inaudible) EBITDA margin, '18 kind of throwaway year and we're looking for the upright at 20.5% (Technical Difficulty) Now we're looking to '19...

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

Sorry. Larry, we are having trouble hearing you. There is a lot of background noise.

Lawrence De Maria -- William Blair -- Analyst

Sorry. Now you can hear me better now. Just curious why are we not making more progress in margins in 2019, if it's investments -- maybe you can quantify some of the payback on that. But just curious why we're not looking at 17% as the base case and growing margins from there?

William C. Johnson -- President and Chief Executive Officer

Yes. So, I mean we're going to talk a lot about this in May, Larry. But I think what we're doing is we're doing the operational review and putting our execution plans together and we'll talk about that in May. But our intention is to continue to grow margins. I don't think -- I certainly am not coming off the fact that we believe that we can get to the mid-20%s on margins long term.

Lawrence De Maria -- William Blair -- Analyst

Okay. What would long term mean to you at this point, three years, four years?

William C. Johnson -- President and Chief Executive Officer

Well, we'll talk about it in May. We'll give you a little more of that road map in May.

Lawrence De Maria -- William Blair -- Analyst

Okay. And then secondly, you talked about 2% to 5% organic and I think from what we can tell the industry is looking to grow 3%, 4% and you have Crem in the USA, you have NexGen, aftermarket getting better, price getting better. So curious why we're not having more outperformance in the guidance for 2019, maybe it's conservative or maybe it's just a smaller amount than we're projecting. So, can you talk about why we are not getting more outperformance versus....

William C. Johnson -- President and Chief Executive Officer

Well, I mean the part you left out is we have some pretty strong headwinds and rollouts to overcome.

Haresh Shah -- Executive Vice President and Chief Financial Officer

Larry, also we did state that we see the market growing based on the data we have in real terms 1% to 2% versus the 3% to 4% that you cited. If it grows 3% to 4%, that would be a wonderful thing for us.

Lawrence De Maria -- William Blair -- Analyst

Okay. So, that was the upside. (Technical Difficulty) upside versus what you guys are looking for and your 1% to 2% includes price or not?

William C. Johnson -- President and Chief Executive Officer

Yes.

Lawrence De Maria -- William Blair -- Analyst

Okay. All right. Thank you.

Operator

And our next question comes from George Godfrey of CL King. George, your line's open.

George Godfrey -- CL King -- Analyst

Thank you and good morning. Thank you for taking my question. And Larry's question there was just exactly what I want to hit on. If I look at the midpoint of the adjusted EBITDA today at 19% and we want to get to a mid-20%s adjusted EBITDA over the next several years, call that 26%, that's 700 basis points. Is the real four years a reasonable timeframe or does that have to get pushed out? Can you do a 175 basis points a year every year for four years or is that too aggressive a target?

William C. Johnson -- President and Chief Executive Officer

Yes. We're going to discuss it in May and I'd like to leave that discussion for when we have our Investor Day.

George Godfrey -- CL King -- Analyst

Okay. Do you have a target leverage ratio and net debt to exit the year this year at?

Josef Matosevic -- Executive Vice President and Chief Operating Officer

We ended 2018 at just a little over 4.5% and then we would like to be at 4% or under by the end of the year, end of '19.

George Godfrey -- CL King -- Analyst

Got it. And then my last question, the refinancing of the $425 million in notes, you said you're being opportunistic. Can you be more specific on exactly are you looking for lower rates, different structure? What opportunity are you looking for? I would think you'd just want to get those repriced as quickly as possible.

Josef Matosevic -- Executive Vice President and Chief Operating Officer

Yes. We don't have a gun to our head, that's the key here. We'll look at the different structures and better rates, but I'll turn it over to Rich to talk a little bit more.

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

Hey George. The market for high yield notes really shut down in the fourth quarter last year and while it's reopened, it's been a bit -- little bit choppy and we want to see rates come down, we want to see the markets become less volatile before we decide to pursue that or will consider pursuing it. So stay tuned, we'll announce when we go so that everybody is aware and can adjust their models.

George Godfrey -- CL King -- Analyst

Understood. Thanks, Rich. Thanks for taking my questions.

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

You're welcome.

Operator

(Operator Instructions) And your next question comes from Jeff Hammond of KeyBanc Capital Markets. Jeff, your line's open.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Hi guys. Just a couple of quick follow-ups. Just to understand the interest expense run rate, you've been running at $22 million to $23 million. What's driving the increase there?

Haresh Shah -- Executive Vice President and Chief Financial Officer

Jeff, we've seen pretty significant increase in short-term rates. We've seen one month LIBOR go up to 2.5 bps. If we go back a year or two years ago, the pace of increase of short-term rates has been about double the expected increases. We've done a good job in repricing our term loan to get the spread down in the face of these rising rates to manage it as best we can, but it's really a factor of we did take increased debt for Crem as well, but it's rising rates is really the driving factor right now.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

But it doesn't look like you saw the impact from that in 4Q, would you -- is it the step -- the step up happens in 1Q or...?

Haresh Shah -- Executive Vice President and Chief Financial Officer

Well, it really depends on the pace of what happens with LIBOR for here right now. The forward curve actually predicts two more rate increases for the year. If they happen, it's within our guidance range; if they don't happen, that would be a wonderful thing.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then appreciate the color on leverage. Within that, how are you thinking about free cash flow for the year? How much debt do you think you can pay down? And then can you just speak to the AR securitization and your plan on that going forward?

Josef Matosevic -- Executive Vice President and Chief Operating Officer

Okay. Yes. I think, Jeff, if you look at historically over the last couple of years, '17 and '18 now, the way we look at is we are able to convert 100% -- at least 100% of net income to free cash flow. So, that's how we think about it. We are not guiding a number, but that's how we think about it when we look at our financials. And then from a at least seasonality of it, the first couple of quarters we increase our borrowings and then we have strong free cash flow and debt paydown and you can see we paid down $58 million in just Q4 alone. So, I think we have a good opportunity. The first half is always more of a drain on cash and then we come back strong. And then I'll let Rich talk about securitization.

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

Yes. So on the securitization program, that one that we have matures on March 3rd. When -- if we decide to replace it, and we haven't done so at this point, we will announce the details around it. But I don't see that we would replace it with an exact replica of the current program so some of the accounting on the -- or the presentation on the cash flow would go away. But we are reviewing our options on that now and we'll talk about it more once we make a decision and get it -- and if and when we get a new program in place.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay, great. Thanks guys.

William C. Johnson -- President and Chief Executive Officer

Thanks, Jeff.

Operator

And your next question comes from Jamie Clement of Buckingham Research. Jamie, your line's open.

James Clement -- Buckingham Research -- Analyst

Yes. Hi guys. Real quick. I don't think I saw anything explicit on CapEx guidance, but would you expect 2019's number to be radically different than kind of what we saw in 2017 and 2018?

William C. Johnson -- President and Chief Executive Officer

A little bit higher because we are going to be investing in some of our facility improvements and on the execution side of things. So it's not anything alarming, but I would say it'll be a little bit higher would be my expectation.

James Clement -- Buckingham Research -- Analyst

Okay, Thanks very much. Appreciate it.

Operator

And this concludes our Q&A session. I will now turn the call back over to Bill Johnson for closing remarks.

William C. Johnson -- President and Chief Executive Officer

Thank you. To conclude today's call, I believe Welbilt has the right strategy to focus on profitable growth and can drive significantly more dollars to the bottom line. We expect to drive our profitable growth by improving operations and therefore margins and by improving our go-to-market approach to drive more dollars of sales. The operational review we are conducting now will focus on sizing the opportunity and developing concrete action plans and achievable timelines to capture that opportunity. I have confidence in this team to continue delivering profitable growth and delevering the balance sheet. I'm excited for the opportunity to share our plans with you at our Investor Day on May 14th. This concludes today's 2018 Fourth Quarter Earnings call. Thanks again for joining us this morning and have a great day.

Operator

And thank you for joining today's call. You may now disconnect.

Duration: 49 minutes

Call participants:

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

William C. Johnson -- President and Chief Executive Officer

Josef Matosevic -- Executive Vice President and Chief Operating Officer

Haresh Shah -- Executive Vice President and Chief Financial Officer

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Mircea Dobre -- Robert W. Baird -- Analyst

Robert Aurand -- Longbow Research -- Analyst

James Clement -- Buckingham Research -- Analyst

Joel Tiss -- BMO Capital Markets -- Analyst

Lawrence De Maria -- William Blair -- Analyst

George Godfrey -- CL King -- Analyst

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