Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Welbilt, Inc. (NYSE:WBT)
Q4 2019 Earnings Call
Feb 25, 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 2019 Fourth Quarter Earnings Conference call. [Operator Instructions].

I would now like to hand the conference over to Mr. Rich Sheffer. Please begin.

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

Good morning and welcome to Welbilt's 2019 Fourth Quarter Earnings Call and Webcast. Joining me on the call today is Bill Johnson, our President and Chief Executive Officer; Marty Agard, our Chief Financial Officer; and Josef Matosevic, our Chief Operating 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. As you saw in today's earnings release and on slide 3 of our presentation, we delivered a 70 basis point margin increase in the fourth quarter despite facing a continuation of weaker demand from our large chain customers globally and now a slowdown in the general market in both the Americas and EMEA. These end-market slowdowns led to an organic net sales decrease of 5.5% in the quarter. The foreign currency translation headwind, 0.5%, resulted in a 6% decrease in net sales.

Welbilt has benefited from many large chain rollouts beginning in late 2017 that continued through mid-year 2019 before the market paused. These rollouts can vary in size, with small ones being $5 million to $10 million in sales, and large ones being $30 million to $40 million. So they tend to create lumpy comparisons as they launch as well as when they end. Without new rollouts to replace those that have ended, we expect to have tough comps through the first half of 2020 before we lap the 2019 slowdown.

We've worked hard to improve our position within many of the North American buying groups and general market dealers over the last few years, allowing us to outgrow in a low but steady growth environment. Demand in the general market usually remains strong in the fourth quarter of each year as the buying groups and dealers work to hit their annual growth targets. It appeared that would be the case in this fourth quarter as well, with indications and commitments from dealers supporting another normal fourth quarter demand for product.

It came as a surprise to them and us that the overall demand from their end customers slowed so much that they weren't able to deliver the growth that was anticipated. We believe this is more of an air pocket than a protracted slowdown, but it certainly impacted our quarter relative to guidance. We are expecting conditions to remain soft early in 2020 before recovering as the year progresses.

Operationally, adjusted operating EBITDA decreased $1.5 million or 2.1%, but the margin increased 70 basis points. We did take steps to adjust our cost base to better match our production volumes during the fourth quarter, with our overall headcount reduced by approximately 300 people or 5.5% of our total headcount. I will let Marty dive deeper into margin variances in his comments.

Moving to slide 4. Our transformation program remains on schedule for achieving the key objectives we outlined at our Investor Day last May. Our procurement team has been very active in initiating sourcing events that will cover all of our addressable material spend. Majority of the RFQs have been issued, and we have been receiving and vetting responses, with more responses coming in each week. These responses corroborate our estimates for our targeted procurement savings. We have now begun to implement new sourcing agreements with both current and new suppliers and delivered a small net savings from these activities in the fourth quarter. We remain confident that we will receive our targeted savings from procurement very close to our original time line.

We have continued to make great progress in our Wave 1 and Wave 2 North American manufacturing plants and see them on schedule with their planned activities. We have started to take delivery of new fabrication equipment at the plants and will install, test and go into production with most of this equipment during the second quarter. We've continued to improve the layouts of our assembly lines, and where we've done that, we've seen efficiencies and lead times improve significantly. These steps contributed to the headcount reductions I mentioned, but most of the reductions in the fourth quarter were volume related.

As we finish installing the new fabrication equipment and continue implementing line flow changes over the next two quarters, we expect to further reduce the cost of these operations. We began work on the next two North American manufacturing plants in January, which signifies that we have moved into the third wave of our transformation program. We are applying learnings and people from the first three plants that should allow us to move faster with these plans. We remain on track to deliver the targeted savings we envisioned. The first three plants from Wave 1 and 2, plus our procurement team, have identified additional savings above their original plans, which gives us higher confidence of achieving our targets.

As a reminder, it is a 12 to 15-month process to go from identifying and implementing our new processes and ideas, to completing the work to implement these changes, seeing the lower cost run through inventory and the balance sheet, and finally, the income statement. This is why we are only expecting to see a meaningful savings benefit begin to ramp up in the second half of 2020, reaching our previously established target of approximately $30 million of annualized run rate savings for the fourth quarter of 2020.

We are fully committed to delivering the transformation program savings that we have been discussing with you since early 2019. We will not cut back on our efforts for investment in achieving these improvements, even though we have hit a short-term air pocket in the demand environment. We do expect our end markets to begin improving in the second half of the year, and we'll be positioned to run that growth through more cost-efficient and leaner operations. As this happens, we are confident that our margin gain will be amplified.

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 review our top line results within the segments. Starting on slide 5 with the Americas, sales decreased 5.4% in the quarter from the prior year. As Bill discussed, we were surprised, as were our dealer partners we conferred with, when anticipated fourth quarter demand failed to materialize. We have been striving to cultivate improved relationship at both the buying group level and in the dealer level and see this as strongest than they have ever been, and we are confident of announcing further expansion through new primary product categories in 2020.

We remain fully committed to the dealer channel and its partnerships as we have seen up to 15% growth on a year-over-year basis in some key relationships. We saw continued slowdown in projects with large chain customers that began in the third quarter. This still appears to be a pause in equipment investments by some large customers, and the lack of large chain rollouts in this year's fourth quarter has resulted in a negative comp versus last year. Last year's fourth quarter included rollouts of Multiplex nitro coffee beverage units, Frymaster fryers with a large QSR and Delfield refrigerated prep tables with two large casual dining chains. We believe some new rollouts will begin again in the second half of 2020 as we have multiple brands that have been in long-term testing that we expect to move forward this year, but do expect total sales from large chain rollouts to be down on a year-over-year basis. Finally, KitchenCare aftermarket sales declined in the quarter, mainly from a decrease in bulk-buy orders compared to last year.

Looking at EMEA on slide 6. Third-party net sales decreased 17%; organic net sales decreased 14.9%; while foreign currency translation was a 2.1% headwind. We had a tough comp from strong rollouts in last year's fourth quarter for Convotherm Combi Ovens in the marine sector; Merrychef high-speed ovens and Frymaster fryers with a large chain; Crem coffee machines with a large distributoR; and Multiplex beverage system with a large soft drink distributor. Overall economic softness in the region also led to lower general market sales in the quarter.

Moving to slide 7. Third-party net sales in APAC increased 7.2%; organic net sales increased 7.7%; while foreign currency translation was a headwind of 0.5%. We are continuing to win with local and regional chains in APAC across multiple product categories, which is reflected in the general market sales growth. Sales to large global chains decreased slightly in APAC this quarter, although Crem did win some chain business with their newest product, the Unity full-automated machine. We continue to have confidence in our innovation program.

To share a few highlights here. First, with Fresh Blend. We're in testing with a couple of large convenience store chains and expect to see incremental wins within these products soon. The new Unity coffee machine from Crem is a great example of how innovation practice will continue to provide growth opportunities. In addition to the large global chain customer adopting these machines in the local stores in China, we are also in field trials with several U.S. customers that are progressing well. In addition to new Crem EX3 Barista-style expresso machine won the 2020 iF DESIGN AWARD, we remain excited about Crem's potential globally.

Our commitment to our customers was also evident with two recent awards. McDonald's U.K. awarded Welbilt with the U.K. Supplier of the Year for 2019 and Subway awarded our Merrychef ovens with its European Equipment and Decor Partner of the Year. These are testaments to both the great equipment we design and sell and to the high level of service we provide to our customers.

I will now let Marty get into the operating details of the quarter and our initial 2020 outlook. Marty?

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

Thanks, Josef, and good morning, everyone. I'm going to start with some comments on the adjusted operating EBITDA margin drivers shown on slide 8. Looking at volume, mix and net pricing, we saw these net to flat with positive pricing offset by lower volume, the favorable pricing related to March's list price increase that we put through in the Americas. We also had a benefit from the January price increases that we implemented in EMEA and APAC.

Material costs, including tariffs, were flat this quarter compared to prior year. We were paying tariffs in Q4 of 2018 that we later got an exclusion for, but this was offset as we received a new tariff exposure in the last round of tariffs in September.

Other manufacturing expenses, mainly labor, overhead and warranty, were a 30 basis point headwind this quarter. This was mainly driven by absorption challenges from the lower volume environment, along with a smaller impact from some specific warranty issues.

In the face of the volume headwinds, we did take actions to reduce our cost structure during the quarter, reducing headcount by approximately 300 or 5.5%. So the overall impact was less than experienced in the third quarter. We have fine-tuned productivity measures and targets in our plants to help isolate volume-driven headcount actions as well as our productivity-driven headcount reductions to ensure we clearly see the efficiencies being delivered by the transformation program while we also adapt to the staffing adjustments required by the demand environment.

SG&A on an adjusted basis and excluding FX was a 100 basis point contributor to margin expansion in the quarter. The biggest driver here was the reduction for incentive compensation in this year's fourth quarter compared to an increase in the accrual for incentive compensation in last year's period. If you're reading the face of the income statement, SG&A is also elevated by the inclusion of the transformation program investments and costs related to certain concluded litigation. You can track the specifics through the non-GAAP reconciliation schedules.

Moving to slide 9. Free cash flow was $34.3 million in the quarter, bringing our full year free cash flow to $74 million. This is a decrease of $32.5 million for the full year from 2018 driven primarily by a reduction in accounts payable due to timing and an increase in capital expenditures. Cash increased by $12.9 million during the quarter, while our overall debt balance decreased by $23.8 million. Our leverage ratio finished the year at 4.5 turns and remains within, but at the high end of the range we shared at May's Investor Day.

Finally, on slide 10, I'd like to make a few comments on our initial 2020 guidance that we provided in today's earnings release. Beginning with sales, we have set the range between minus 2% to up 1% for the year with little to no impact forecasted for foreign currency translation. We are forecasting a slow start to the year with sales down in the mid- to high single-digits percent in the first quarter and also down in the second quarter before returning to growth in the second half of the year. We have tough comparisons from last year's first quarter in both Americas and EMEA where we had rollouts that represented approximately 7% of sales, against which we cannot count on our current pipeline to replace in 2020.

In addition, we are expecting the current soft market conditions in both segments' general markets to linger until midyear. We also expect sales to be weak in APAC in the first quarter due to the disruption caused by the coronavirus. Our plants in China have been slowly coming back up to speed in the region but are still operating below full-staff levels. At this time, we only have good visibility to lost or deferred sales in China isolated to the first quarter but are closely monitoring our supply chain for potential disruption that could spill into the second quarter and spread from China to the Americas and EMEA due to component or finished goods shortages.

Few more specifics on the segment sales. In the Americas, we expect large chain sales to remain choppy in the first half of the year against tough comps from 2019 but expect both large chains and general market to improve in the second half and are optimistic some projects in the pipeline will get launched then. We did put our price list increases through here in Q1 and expect to begin seeing price realization by the second quarter.

In EMEA, we are expecting sales to be relatively flat for the year with a very tough comp in the first quarter due to last year's large chain rollouts and ongoing soft general market conditions. We are expecting to return to growth by midyear as the comps get easier and the general market stabilizes. We expect APAC to get off to a tough start due to the disruption from the coronavirus on the China end market. We currently expect growth to return by midyear and get the region back to even for the full year.

Our full year adjusted operating EBITDA margin guidance ranges between 18.3% and 19.3%, which would be a 30 to 130 basis point improvement over 2019. Looking at the drivers, we're expecting net pricing to overcome the impact of lower volume and be a positive driver for the year. That said, due to the lower volumes and related absorption challenges, we may be unfavorable in the first quarter before turning positive on this driver for the balance of the year.

We expect material costs and tariffs to be positive for the year, although a bit lumpy quarter-by-quarter due to the impact of 2019's second quarter favorable ruling and recovery on tariffs. By the second half of the year, we expect to see the procurement savings from our transformation program start being visible here. Other manufacturing costs are expected to be a headwind in the first quarter as we work through high-cost inventory stemming from the fourth quarter's low absorption that will roll off the balance sheet and through the income statement as the inventory is turned. We're expecting that headwind and other manufacturing costs to subside by the second quarter and turn positive by midyear as we start to realize the benefits from improvements being made in our plants through our transformation program.

We're expecting SG&A to be a headwind in 2020 as we restore our incentive compensation to target levels following 2019's below-target attainment. In addition, we are planning to increase the investment in our common controller project as some of our product lines will begin to transition to the new controller in 2020, and we continue to build out a very functional portal for customers to leverage for maintenance and operational benefits. And we will make some small incremental investments in our IT systems as we continue on our journey to rationalize our systems infrastructure.

Overall, you'll notice the net midpoints of our guidance ranges across margin drivers is up 75 basis points compared to 2019. Overall, we are expecting our first quarter margin to be particularly weak, down slightly from a weak Q1 last year before margins progress to about even with the prior year in the second quarter and then deliver solid year-over-year growth in the second half as top line growth is expected to return and we begin realizing the savings from our transformation program.

Moving down the P&L from there. Our guidance range for adjusted diluted EPS is $0.68 to $0.75 per share. The biggest item to discuss here is our expectation for a much higher effective tax rate in 2020. Our overall base rate is expected to be comparable to 2019's 26% rate, but we expect a 13% impact from a valuation allowance related to limitations on the deductibility of interest expense that was enacted with the Tax Cuts and Jobs Act of 2017. As our income grows through the execution of our transformation program and interest expense decreases as we delever the balance sheet, this valuation allowance should diminish in the following years, reducing our effective tax rate back to statutory levels, and ultimately, we expect to capture the deductibility of this interest.

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

Questions and Answers:

Operator

[Operator Instructions]. Your first question today comes from the line of Jeff Hammond of KeyBanc. Your line is open.

Jeffrey Hammond -- KeyBanc -- Analyst

Hey, good morning guys.

William C. Johnson -- President and Chief Executive Officer

Hey Jeff.

Jeffrey Hammond -- KeyBanc -- Analyst

Just -- So it looks like you're kind of getting -- you got $700,000 of savings in the fourth quarter. Can you just talk about like the cadence through the year and what you think the incremental savings are going to be on an all-in basis? And then just in general, given this kind of soft patch, does this kind of enable you to kind of accelerate anything in terms of the savings or kind of get through some of the inefficiencies you talked about before?

William C. Johnson -- President and Chief Executive Officer

Yes. So I would say -- Marty can comment on more specifics on the margin, but the glide path that we kind of laid out is we're in the middle of, in this first and second quarter, of still doing a lot of the transformation in the factories, and we won't realize those benefits until all the things that we put in place start to materialize. With the exception of some of the procurement stuff, I mean, there's a little bit of that starting to bleed through as we've -- we're probably through about 1/3 of the RFQs that -- of the total spend that we have, and we're working through those action items right now. And over the next several months, we'll get through the other 2/3 and put actions in place and figure out which suppliers we're going to keep and which ones we'll be moving to, to adjust the cost basis. But our plans are not changed from what we've set out in May of last year. The glide path for us is exiting 2020 with the $30 million run rate improvement and exiting 2021 with the $75 million run rate. Any...

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

Yes. I think that's right. Just to fill in a little bit on the cadence through the year. I would say in the first half, while we're still enacting the procurement benefits and managing headcount and, to some degree, taking cost out related to volume, we will see small pickups. We've done a few things that are starting to flow through, but they'll be very small, won't really break out in these margin bridges that we do. The third quarter is really that transitional quarter.

To the extent we get a little bit of the volume back in the sales, some of the headcount actions we're taking now should start to show up and some of the procurement stuff should also be starting to come through. The question is how full it is, how quickly it gets through inventory. So it's a little hard to say, but there should be some positive benefits in the third quarter. And then by the fourth is when we really expect to see this stuff come in, having made its way to the balance sheet and into the -- as a real contributor.

William C. Johnson -- President and Chief Executive Officer

But I would also say, Jeff, we did a good job of taking -- the teams did a good job of taking headcount down in the fourth quarter with falling volumes. We continue to look at that. And we're taking a really close look at what's volume-related, what's efficiency- and productivity-related. And we're driving both of those so that we don't cloud the issue with the kind of the soft patch that we're in.

Jeffrey Hammond -- KeyBanc -- Analyst

Okay. Did you quantify the incremental savings you're going to get from transformation all-in for the year?

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

We didn't actually put a number on the whole year. I'd say small, almost de minimis in the first quarter, still very low in the second. The third, somewhere between that and the $7 million kind of run rate, $7.5 million fourth quarter run rate. So I think, I don't know, $2 million, $3 million, $4 million in the third quarter. So on the year, that's going to end up in the teens, I imagine here. Okay. And then just on the SG&A, sizable lift, I think you mentioned some investments and, I think, incentives. Can you just give a little more color on why that's such a big headwind?

William C. Johnson -- President and Chief Executive Officer

Yes. I mean we -- one of the first things I did when I got here was to look at our strategic innovations. And one of the big projects was the common controller. And that's been a heavy lift for us both in end of 2018, beginning of -- and throughout 2019 and kind of peaks in 2020 before we start realizing the cost savings from that. And what we're launching is a common controller with a common user interface across all of our platforms, which will give us an advantage cost-wise from the supply base but also a step-function improvement and for our customers, in terms of the user-interface training they have to do, so just the way the equipment connects to the KitchenConnect and all of the things digital that people are trying to do. So we're really excited about that, but it's been, as you can imagine, a heavy lift for us to get there. But this year, we kind of peak and then savings start coming through. It's probably the biggest single driver of that.

And then I would say the other investment is on the SG&A side is our Crem -- with our Crem acquisition, we're launching Crem into the U.S and so we've had to add resources to do that, and we're starting to gain some traction with customers. We've got a lot of beta sites out there with Crem units on beta, and we're hoping this year to start seeing that as a growth vector for us.

Jeffrey Hammond -- KeyBanc -- Analyst

Okay. Thanks guys.

Operator

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

Mircea Dobre -- RW Baird -- Analyst

Thank you and good morning everyone. Just looking maybe to start with headcount actions that you've taken in the fourth quarter. I believe I've heard that you said that most of the -- virtually all of this has to do with lower volumes. So my interpretation is that the headcount savings that you're getting here are, one, incremental to the things that you've announced before as part of your three year strategy. And then I'm looking for some level of quantification on the savings, but also the permanence of these savings, meaning as volumes start to come back, let's say, your outlook is correct and things get better in the back half of the year, do you plan on rehiring these folks? Or are these costs kind of coming back into the P&L? So I'll start there.

William C. Johnson -- President and Chief Executive Officer

Yes. So I think there's -- it's a double-edged sword with volume, right? It's -- and with it coming down, you've got to get the people out, but we would anticipate, as volume comes back, not -- and all the actions that we're taking on the transformation program, not to need as many people when volume does return, right? And we're keeping track of that.

And I would say right now, because we're through the first three plants, we've implemented a lot of things, but most of the savings on fabrication and the like will be in the second -- by the end of the second quarter of this year. A lot of those savings as it relates to transformation -- transforming the factories will come more toward the second quarter -- first and second quarter of this year as we take out people for that. But -- and to kind of quantify, I would say, probably 10% of what we took out in the fourth quarter or so was from some efficiency gains, and the rest was kind of tracking to volume.

Mircea Dobre -- RW Baird -- Analyst

Right. But what are the dollar savings associated with this? Can you share that with us? I mean 5% of headcount is not -- it's a pretty healthy number.

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

I guess I'd say not really. I mean this is part of the -- to the extent a lot of this is offsetting volume, there's a little bit that will play out going forward. We took these actions later in the quarter. We continue to take some now here in the first quarter. So we really have not attributed any of this stuff to posted, recorded transformation savings in our concluded quarters. But we do expect, as the second quarter comes around, that we will about -- we are outpacing just the volume effects, and some of these do start to reflect productivity gains. And so that'll start to be savings that shows up in our second quarter from a production standpoint, goes into inventory and comes out in the third quarter. To the extent we continue to do headcount actions and/or see volume coming back, and we're able to be more productive with the existing workforce, then that'll really start to materialize the key incremental transformation savings that we're talking about. And over time, we'll try to quantify that for you a bit. But so far, the actions we've taken and what was in the fourth quarter and what will be in the first quarter is, for the most part, volume, and what is productivity gains is too small to really try to parse out.

Mircea Dobre -- RW Baird -- Analyst

Okay. Going back to incentive comp, can you give us a sense for where you were in 2019 versus your plan? Or put differently, what the headwind in dollar terms is in 2020 versus 2019?

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

Yes. I would kind of say it's -- we have -- in 2018, it was a pretty good payout. 2019 was roughly half of what was in 2018.

Mircea Dobre -- RW Baird -- Analyst

And the headwind in 2020 versus '19? I mean by my math, it's something like $10 million, am I off?

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

You're not way off. I would think of it in the 50 basis points range on the margin, plus or minus. So you're a little higher than that, but it's in the right ZIP code.

Mircea Dobre -- RW Baird -- Analyst

Okay. So for the final question for me. I mean, look, when I'm looking at the midpoint of your guidance, I think I'm coming up with something like $300 million of EBITDA. You've done $286 million in 2019. So you're basically saying $14 million additional EBITDA on a modest, at the midpoint, organic revenue decline. So I'm trying to figure out the moving pieces here as to how we get $14 million worth of benefit because you said you had about, call it, $3 million, $4 million of savings in Q3. You have about $7 million in Q4. So we can do the math as to what that is, we have a headwind from incentive comp, which maybe it's a little bit below $10 million. Can you help us with some of the other moving pieces to get comfortable with how we get to this $14 million figure?

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

Yes. I mean I think even with the -- we do think over the course of the year from a margin standpoint, we'll get a bit -- a little bit of lift from pricing that is in excess of volume effects. So in the guidance that we gave, there's a little bit of positive impact from net -- for the most part, net pricing. And we also think that, certainly, by the second half, the material cost and tariffs will kick around, and that's going to drive margin, we would think, in the middle point of the range, 100 basis points.

Similarly, manufacturing costs, we will get through this first quarter that is really carrying the burden of the fourth quarter's impact and should see some gains there. We like how the plants are driving productivity gains. And as soon as we get a little bit of volume back, I think that's going to show up big time. And then we give some of that back into SG&A. We talked about the incentive comp and quantified that a bit, but then there's also the common controller investments and some of the Crem and other SG&A investments we're making, the IT stuff. So when you add all that together, we do think there's a midpoint of the range again, 75 basis points of margin expansion, admittedly back-half weighted, but that's where that comes from on really sort of flat sales.

Mircea Dobre -- RW Baird -- Analyst

All right. Good luck. Thank you.

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

Thanks Mig.

Operator

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

Lawrence De Maria -- William Blair -- Analyst

Thanks. Good morning everybody. Curious initially about this -- the weakness in the market besides difficult comps and, I guess, specifically around the general market. I'm curious what are the reasons you're seeing, other than sort of uncertainty out there, why we're seeing this kind of constant market underperformance, none of this from you guys, but the market underperforming expectations. What are the reasons you're specifically seeing? And what gives you confidence in this second half recovery?

William C. Johnson -- President and Chief Executive Officer

Yes. I mean I think there's a number of things out there ranging from just -- you got to remember, there's not a lot of new bricks-and-mortar going up. A lot of this is renovations, replacement-type business. And so it's -- there's been pauses in some of that spending by some of the larger chains or all the chains, actually. And there's been some CEO changes at some of the large customers, which caused projects to be put on hold until they review and they kind of get their strategy set. I mean I think there's some of that. The general market tends to lag kind of the chain business. And the chain -- we started seeing the change slowdown in the third quarter and then follow that by softness with the general market in the fourth quarter.

So I think there's just a -- it's just across the board. I mean it's hard to point to any one sector that's outperforming. We're doing well. Everything is just kind of generally soft. There is a lot of projects that are in the works that I think, as we said a couple of times now, the -- we think the second half, we kind of start seeing some of these projects come out. And some of them are on the little-bit-larger side of things. They're not the kind of the smaller ones. There are a couple of decent rollouts that we're banking on in the second half to -- that should -- we should win. And in the general market, just -- hopefully, it starts to recover a little bit in the second half. We'll be lapping kind of the 2019 comps at that point. So [Indecipherable].

Lawrence De Maria -- William Blair -- Analyst

Okay. So got it. You bring up a good point. If I could just follow up with two questions here. First, on the replacement cycle. There's a kind of belief in the market that maybe we're entering a period of good replacement demand given the age and the previous kind of bolus in spending on equipment about eight years ago. Could you comment on how you think that plays out over the next few years, if that is, in fact, a tailwind given potentially the age of the fleet? And then secondly, just for clarification, could you talk specifically about what you're expecting negatively 1Q coronavirus? And if I understand it correctly, you're expecting to recover all of that in the second half. So a net neutral for the year. Is that correct?

William C. Johnson -- President and Chief Executive Officer

So two questions there. The coronavirus, let's start with that one. It's a bit unknown in terms of what the impact will be. I mean we obviously know through the first couple of months here, it's had an impact on our sales and our expected sales in the first quarter for Asia. It hasn't really impacted our ability to manufacture anywhere else in the world, even though from a supply chain perspective, we get parts and pieces from China, but we had enough inventory to kind of cover that. And we have had enough time, we think, to kind of work on second suppliers and getting alternate suppliers in place for any kind of shortfalls that we anticipate happening. We really don't know what we don't know at this point in terms of will the revenue that we lost in the first quarter return or not in the second half or second quarter. So I think we're just kind of monitoring it just like everybody else in the world and putting actions in place to make sure that we don't cause problems in other main action sites around the globe. So I think kind of a pragmatic approach. I'm sorry, I forgot your first question.

Lawrence De Maria -- William Blair -- Analyst

Just talking about the replacement cycle from the previous kind of bolus of sales from eight years ago or so.

William C. Johnson -- President and Chief Executive Officer

Yes. So the replacement cycle. I think we've always talked about this bubble coming, and we do believe there is a bubble coming. I think it can get extended by a year or two, just by people extending their repairs. And so I don't know, we may be seeing a little bit of that instead of an eight year cycle, maybe it's a 10-year cycle. But the finance -- we're kind of coming up on the 10-year, 12-year cycle of '08, '09, '10 time period where sales were started to pick back up on. So we'll see. I think it could be a nice tailwind for us at some point here in the next 12 to 18 months.

Lawrence De Maria -- William Blair -- Analyst

Okay. Thanks and good luck to you Bill.

Operator

Your next question comes from the line of David MacGregor of Longbow. Your line is open.

David MacGregor -- Longbow -- Analyst

Hey, good morning everyone. Bill, you've been talking -- in talking about the coronavirus, you mentioned that you're getting second suppliers in place. I think, Marty, in your comments, you talked about your supply chain is OK for the first quarter. Second quarter, I guess, there's some risk. Can you put some magnitude around that second quarter risk for us?

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

I don't know that we -- I think it's relatively small at this point. And for what we know, we have some piece parts and things like that, for example, go on fryers and maybe for grills [Indecipherable] Ice. But we've had some time now to kind of prepare for that. So I think we're in OK shape. I would say probably the -- if I had to point to the one big concern I have is just our ability to build an Ice kind of prebuild for the summer months, our busier months, we probably are going to have to run a little harder in the second quarter to -- we normally build up stock in the first quarter for the summer months on Ice. We're being limited a little bit in our ability to do that. But I think we'll be OK.

David MacGregor -- Longbow -- Analyst

Okay. And I guess there's been quite a bit of talk on the call here today about things will get better in the second half. And is there specific items you're seeing in the backlog that gives you confidence in saying that? Or is it just there's a lot of bidding activity? Or maybe you could just talk about what you're seeing in terms of bidding activity and backlog that would give you confidence in saying that you expect that second half recovery to come through.

William C. Johnson -- President and Chief Executive Officer

Yes. Well, I think as we look at our rollouts and our chain business and things like that, we obviously can't comment on any specific rollouts or specific customers, but we see most of the activity is centered around the second half of the year and things we've been working on for a year. So I mean it's not like things have just kind of popped up. So these are things that have been pushed, and we know the chains want to do them. Just a question of them pulling the trigger on it and moving forward. So -- and like I said, there are some pretty sizable ones that they need to do and want to do and have good paybacks for them or it's a menu-expansion item for them. So we know they're going to do them. It's just a question of when. I think the general market will have been down through two to three quarters at that point. So we're expecting to see some rebound there because it is -- a lot of it is replacement, repair business.

David MacGregor -- Longbow -- Analyst

So in order to have a normal third quarter, you would need to see those orders in hand by when, the end of March, or the end of April?

William C. Johnson -- President and Chief Executive Officer

Sometime in the second quarter, we'll have a pretty good read on the second half.

David MacGregor -- Longbow -- Analyst

Okay. And then I wanted to ask you as well about the aftermarket business. And you mentioned it was negative in the fourth quarter. I guess given the fact that volumes are down, should we expect that repair activity picks up and that aftermarket business has a better second quarter? Or -- interested in just how you're thinking about that. And maybe it is and just the OEMs are losing share to the generic parts, and that's just a function of maybe some of the consolidation that's happened in the space. But can you just talk about expectations for the aftermarket business and [Indecipherable]?

William C. Johnson -- President and Chief Executive Officer

Yes. So I think the -- with -- the two largest aftermarket OEM houses merged since last year. And so they're going through their inventories and looking at what the effect is on the industry. And so I think we saw a little bit of a pause in that in the fourth quarter and what would normally be our bulk buys that they do, kind of year-end bulk buys. The -- I think in 2020, their stated objectives are to make sure they have increased service level and improved service level, which I think will lead toward more inventory rather than less inventory on hand for them. So everything they're telling us is positive in terms of their inventory levels. They're also not going to do their consolidation from multiple distribution warehouses until the fourth quarter of 2020. So I think through 2020, we'll see a little bit of an impact but kind of not as big an effect as we thought when we first heard that the two merged. So I would expect the first quarter to be -- it's always our softest quarter when it comes to parts and that -- they did do a bulk buy in the fourth quarter. It kind of carries them through the first quarter. So we'll see it recover probably in the second quarter and then be normal for -- throughout the year in there.

David MacGregor -- Longbow -- Analyst

You wouldn't expect it to be slower in the second half as they consolidate those warehouse operations?

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

I don't think so because what they've stated is they want a higher service level than what the -- Parts Town wants a higher service level than what Heritage had in their plans. And so I think the inventory levels are going to remain high, if not a little bit more in terms of what they're used to carrying.

David MacGregor -- Longbow -- Analyst

Okay. Last question for me is just if you could just talk about kind of the influence of ghost kitchens and the emergence of that whole phenomenon in the marketplace and how you think you're positioned for that.

William C. Johnson -- President and Chief Executive Officer

Yes. I think it -- we get a lot of requests, and we do bids on these kind of things, these projects. We had a big one that moved out last year, if you remember, right, that was kind of had a big effect on our third and fourth quarter of last year. So they're still pretty speculative. There are some players that are kind of forming and models that are building out there. We participated in just about every bid that's out there, for these ghost kitchens. I think as they figure it out, they'll become more and more prevalent, and I think Welbilt is pretty well positioned to do a kind of a turnkey solution for a lot of these kitchens and a lot of these projects, and we'll see. But I think it's the story that everybody likes to talk about, that there's not a lot of buying going on in the marketplace.

David MacGregor -- Longbow -- Analyst

Okay. Thanks a lot Bill.

Operator

Your next question comes from the line of John Joyner of BMO. Your line is open.

John Joyner -- BMO Capital Markets -- Analyst

Hey, good morning.

William C. Johnson -- President and Chief Executive Officer

Hey John.

John Joyner -- BMO Capital Markets -- Analyst

So can you give a little bit more color on the, I guess, the magnitude of the organic declines in the quarter between the general market chains and aftermarket, particularly within North America? I mean I'm trying to understand -- I know you have, say, aftermarket was down, but I'm just trying to understand if it was down, say, double digits or what the case may be, just a little bit more flavor of how it broke out.

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

Yes. John, this is Rich. So aftermarket was down kind of low, mid-single-digit in -- as a percent in Q4. I think the -- going to the general market, we had expected pretty strong pickup there with the year-end buys. That actually turned out to be a couple of percent down. So that was a big driver of the change in how we saw the fourth quarter rolling out, but the biggest drop was still the softness in the large chain business, which was down in the neighborhood of 20-ish percent in the fourth quarter.

John Joyner -- BMO Capital Markets -- Analyst

Okay. And then -- that's helpful. And then what about the -- in terms of your outlook? I mean can you kind of give similar color?

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

In terms of 2020's outlook, yes, the large chain stuff, I think we commented in the prepared remarks, will be down in Americas year-over-year, I would say low single digits, and that being offset by what we think is a little bit of that recovery in the general market over time. And we do have some good things going on with the buying groups. So we think that's -- that'll offset that, gets us back to flat.

William C. Johnson -- President and Chief Executive Officer

And some of our buying group activities like we saw significant growth in 2019 from primary categories that we added in 2018 and 2019. So we anticipate more of that and -- coming in 2020.

John Joyner -- BMO Capital Markets -- Analyst

Okay. Excellent. And then maybe just one more. You mentioned that you learned, I guess, some things from the initial waves of your transformation programs and that you're implementing into the current waves. What are those exactly?

William C. Johnson -- President and Chief Executive Officer

Yes. So I think probably the biggest thing is, is to be more aggressive on the reductions and know that the efficiencies are there to be had. And because everywhere that we've worked -- put it, on the assembly line or the fabrication processes, we've improved the efficiency significantly. So I think -- and it's -- we can do it fast. We understand what needs to happen. So I think rather than having all the people there while you're doing that is to be more aggressive on the headcount reduction, get it out, get more people out upfront so that you get savings quicker. And then we were also able to transfer a lot of the engineering knowledge from plant to plant, and we learned that you need -- we needed to hire the engineer sooner rather than later, that it had a real doubling effect in terms of the effectivity of how these things roll out, if we could get the engineers in there sooner, rather than kind of waiting to hire people.

So I think we got staffed up in these later plants last year, a couple of months, three, four months before we got the transformation teams in there, and that's really helping us accelerate and move faster. So those are the three big ones.

John Joyner -- BMO Capital Markets -- Analyst

Okay. Great. Thank you for the time.

Operator

Your next question comes from the line of Rob Wertheimer of Melius Research. Your line is open.

Robert Wertheimer -- Melius Research -- Analyst

Thank you and good morning folks. Maybe you feel like you've been fairly clear on this, and you've given a decent amount of detail. But in the general channel, are you pretty confident that there was just sort of an evaporation in purchasing willingness as opposed to any kind of a share issue that happened in the quarter?

William C. Johnson -- President and Chief Executive Officer

Yes. We're very confident we haven't lost share.

Robert Wertheimer -- Melius Research -- Analyst

And then I don't know, I mean, do you -- was there anything to denote the nature of why people sort of stopped buying? Was it just a -- and we've talked about it -- you've talked about it a little bit already, but just general confidence that seized up or customer business trends, or what do you think the real underlying driver for that miss was? Thanks.

William C. Johnson -- President and Chief Executive Officer

Yes. It's hard -- because it's a very diffused marketplace, it's hard to put your finger on any one thing. But I can tell you right now that this coronavirus is having an effect on people and their decision-making and I just think, as we stated earlier, some of the replacement, repair business is being extended, and it's just a general slowness that we see in the marketplace. When I talk to dealers and reps and customers, it's -- there's a lot of different reasons, but everybody is pretty slow right now.

Robert Wertheimer -- Melius Research -- Analyst

Okay. Thank you.

Operator

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

Walter Liptak -- Seaport -- Analyst

Hi, thanks. Good morning guys. Kind of a follow-on to the last question. As you're thinking about the first quarter, it sounds like it will be down quarter-over-quarter for sales and EBITDA margin. Are you thinking that for a year-over-year basis, too?

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

That is a year-over-year comment that we talk about mid- to high single digits. That's the first quarter against a year ago. Yes.

Walter Liptak -- Seaport -- Analyst

Okay. Great. And sequentially, are you expecting both sales and EBITDA margin to be down?

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

Yes.

Walter Liptak -- Seaport -- Analyst

Okay. Great. I wonder if I can get some numbers on capex, G&A and 2020 free cash flow?

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

From a capex standpoint, something in the $40 million range. We spent $34 million in '19. So it'll be probably between those two numbers, let's say.

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

G&A should be up from 2019 levels with the increase in capex that's going on. Free cash flow, while we don't specifically guide to it, we believe that it should get back to similar levels to where it was prior years other than '19. So I think some of the transformation investment spending starts to come down, we start to drive the savings through. You should see it back in that $100 million range, and certainly, over 100% conversion of net income.

Walter Liptak -- Seaport -- Analyst

Okay. Great. And the last one for me is the warranty issue. I wonder if you can just give us a little bit more idea about the dollar magnitude and is there any more overhang from that in the first quarter?

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

I won't break out the dollar amount. It wasn't substantial, and it was isolated to one brand, just a couple of pieces related to it.

William C. Johnson -- President and Chief Executive Officer

No overhang.

Walter Liptak -- Seaport -- Analyst

Okay, great. Thanks. All right. Thanks guys. Good luck this year.

William C. Johnson -- President and Chief Executive Officer

Thanks Walt.

Operator

Your next question comes from the line of George Godfrey of CL King. Your line is open.

George Godfrey -- CL King -- Analyst

Thank you and good morning Bill and Rich. Two questions. The first one is thinking back to the May Investor Day and the 500 basis point margin uplift on adjusted EBITDA going from 18% to 23% in the second half of 2001 [Phonetic], what would be a minimum organic revenue growth level that you would need in order to achieve that number?

William C. Johnson -- President and Chief Executive Officer

Well, I think what we said, our guidance here was that we're going to be at $30 million run rate at the end of this year, which is exactly what we said in May. And you can see that there's -- we're talking on our guidance of minus 2% to kind of plus 1% range, and we think that we can achieve that $30 million run rate with that kind of flat -- flattish-type sales, which is consistent with what we told you in the Investor Day. So it certainly makes it more challenging, but we can do it.

George Godfrey -- CL King -- Analyst

Okay. So that was my point. So 0% to 1%, or call it, flat, you feel like the levers are in your control without increased organic revenue to get to that 500 basis points is my question.

William C. Johnson -- President and Chief Executive Officer

Yes. That's how we establish the ranges.

George Godfrey -- CL King -- Analyst

And then following up on the free cash flow question. I understand you don't provide any guidance. Are there any adjustments that'll be necessary in that 2020 figure like you had determination of the securitization program of $96 million to get to your $74 million? Is that $100 million in 2020 or whatever it is relative to adjusted EBITDA, are there any add-backs or adjustments to get to that number?

William C. Johnson -- President and Chief Executive Officer

No. There are not -- that AR securitization was a kind of a onetime thing. We don't expect to reimpose anything like that. So we do have -- the single-biggest thing to kind of watch through there is the transformation cost as they wind down later in the year. That'll really start to kick in next year, but there won't be anything, on-balance-sheet, off-balance-sheet kind of stuff to deal with.

George Godfrey -- CL King -- Analyst

Perfect. Thank you for taking my questions.

Operator

[Operator Instructions]. And there are no further questions in queue. I turn the call back to Mr. Johnson for concluding remarks.

William C. Johnson -- President and Chief Executive Officer

Before we end today's call, I would like to thank our APAC team for their efforts to get our plants in the region back up and running while dealing with the coronavirus. The entire management team really appreciates your efforts.

Next, I want to reiterate that 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 to growth by improving our go-to-market approach to deliver more dollars of sales and by improving operations and, therefore, margins. Despite the short-term headwinds we are currently experiencing in some of our end markets, we are positive on the long-term growth prospects for the commercial foodservice industry. Our resolve to continue executing our transformation program has not wavered, and I believe our investments in this program will become apparent to investors as we move into the second half of 2020 and beyond.

I have confidence in this team to continue delivering profitable growth and delevering the balance sheet. This concludes today's 2019 fourth quarter earnings call. Thanks again for joining us this morning, and have a great day.

Operator

[Operator Closing Remarks].

Duration: 60 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

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

Jeffrey Hammond -- KeyBanc -- Analyst

Mircea Dobre -- RW Baird -- Analyst

Lawrence De Maria -- William Blair -- Analyst

David MacGregor -- Longbow -- Analyst

John Joyner -- BMO Capital Markets -- Analyst

Robert Wertheimer -- Melius Research -- Analyst

Walter Liptak -- Seaport -- Analyst

George Godfrey -- CL King -- Analyst

More WBT analysis

All earnings call transcripts

AlphaStreet Logo