Welbilt, Inc. (WBT) Q4 2020 Earnings Call Transcript

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Welbilt, Inc. (WBT)
Q4 2020 Earnings Call
Feb 25, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Welbilt, Inc. 2020 Q4 Earnings Call. [Operator Instructions]

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

Richard J. Sheffer -- Vice President of Investor Relations And Risk Management And Treasurer

Good morning, and welcome to Welbilt's 2020 Fourth Quarter Earnings Call and Webcast. Joining me on the call today is Bill Johnson, our President and Chief Executive Officer; and Marty Agard, our Chief Financial Officer. Before we begin our discussion, please refer to our safe harbor statement on slide two of the presentation slides and in our earnings release, both of 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. Before we get into our fourth quarter results, I want to share some details on the current market environment. Looking at the MillerPulse weekly same-store sales graph on slide three, you can see the recovery in the restaurant market since the historic drop that began in the second week of March. QSR same-store sales have consistently been positive since early July. Most QSRs have more than 50% of their sales come through their drive-through windows prior to the crisis and now are also embracing delivery. As a result, they have been more resilient than casual dining restaurants, who precrisis, saw the majority of their sales tied to dine-in traffic. Same-store sales at casual dining restaurants began the quarter down 15% to 20% compared to prior year.

The loss momentum beginning in November bottomed down nearly 40% in December. They've recovered much of the ground they lost since the first of the year and are now down just slightly more than 20% compared to last year. We expect conditions to begin improving for casual restaurant operators as temperatures warm up enough to allow outdoor dining in colder areas and we make further progress on vaccinating the population. The National Restaurant Association estimates that 110,000 restaurants or 16% of the pre-COVID population have closed temporarily or permanently. They also reported that restaurant employment remains 2.5 million below pre-COVID levels. Majority of this in those operations that rely on indoor dining or service. QSRs have also reduced headcount as they have been closing their indoor dining rooms and shifting to the takeout and delivery-only model. In EMEA, most countries still have restrictions on dining away-from-home, with more allowing takeout and delivery compared to last spring.

Market expectations are that most of these restrictions will start to be eased beginning late this quarter through the second quarter. In APAC, there's a split between countries that are operating with few to no restrictions like Australia and China to those that are still significantly impacted by the pandemic, primarily Southeast Asia and India. Increased distribution of COVID vaccines globally will help these markets reopen. We've heard several QSRs publicly comment during their recent earnings calls that they will begin to focus on new builds in 2021 as their same-store sales have recovered and they see a share growth opportunity due to the continued weakness in casual dining. Given our strong position with most of these chains, we expect the benefit of this market segment starts to expand again. Looking at other end markets, we've seen increased interest from C-stores about expanding their food and beverage offerings. We have new programs with a number of major C-store chains and are optimistic that this will expand as the markets continue to recover.

Moving on now to slide four of our presentation to review our financial results. Our net sales declined 16.2% in the fourth quarter with organic net sales decreasing 17.6%. This continued with a gradual improvement that we have seen since the first few months of the pandemic. The sales are still down into the mid-teens percent. We delivered an adjusted operating EBITDA margin of 18.8%, which is a 20 basis point increase from last year's fourth quarter. Along with the increased margin, we delivered $37.7 million of free cash flow in the quarter, a 10% increase compared to last year's fourth quarter. This operating performance was made possible by the progress that Welbilt team made on the transformation program over the last year and by the cost containment actions we took in March. On slide five, sales in the Americas decreased 15.1% in the quarter from the prior year. Sales to QSRs increased year-over-year in the fourth quarter, driven primarily by an increase in non-repeating large chain rollout sales.

The majority of this attributable to the rollout of Merrychef high-speed ovens, that is the continuation of that program with a global customer that launched in Q3. We also saw an uptick in sales of Garland clamshell grills with a large QSR. In the general market, sales decreased in the quarter, but we did begin to see some momentum building in the C-store segment and rollouts of Merrychef ovens, Convotherm combi ovens and Fresh Blends smoothie machines. We remain very excited about the C-store segment. Other areas within the general market, such as casual restaurants, education, healthcare, travel and leisure end markets were softer in the quarter due to the impact from the rising COVID cases. Finally, KitchenCare aftermarket sales decreased primarily due to the absence of any bulk parts buys from master parts distributors in this year's Q4.

Looking at EMEA on slide six. Sales decreased 15.6%, with organic net sales down 21.1%. Large chain sales were impacted by strong QSR sales last year. Declines in the general market were similar due to the reimposition of local dine-out restrictions. As I previously mentioned, the impact wasn't as bad as what we experienced in the spring as kitchens were allowed to remain open to takeout and delivery in most countries. We did have a continuation of the small rollout for Crem with the European governmental entity during the quarter. On slide seven, sales in APAC decreased 21%, with organic net sales down 23.1%. We had sales growth in Australia again this quarter and saw sales growth in Japan and Malaysia for the first time since the beginning of the pandemic. Sales in China decreased due to tough comparisons from two rollouts in last year's fourth quarter, the shift of a coffee customer to EMEA that was included in APAC results last year. We still view the China market as fully recovered.

However, Southeast Asia, the Philippines and India are still being highly impacted by the pandemic. Moving to slide eight. The progress we had made on our transformation program once again positively impacted our results for this quarter. We delivered approximately $5 million of in-period savings in the fourth quarter, which is a $20 million run rate. Looking at our various initiatives, our procurement team has implemented many new agreements with current and new suppliers and is continuing to work on implementing the remaining opportunities presented by RFQ responses, most of which are now going through the product qualification and testing processes. We continue to see savings from our procurement activities ramp up in the quarter, which kept us positive when netted against commodity inflation that began to increase in the fourth quarter. More of the early benefits are now beginning to flow from the balance sheet, so they were initially capitalized into the inventory and onto our P&L.

We will continue to see some inventory obsolescence and transitional costs as we ship suppliers, along with the recent escalation of logistics cost. Those should not be fully offset by the savings we are now generating. We are continuing to develop our own site-led value analysis, value engineering, or VAVE, initiatives for the RFQ process didn't provide the right solution for our businesses. The VAVE initiatives have identified additional savings opportunities to supplement the RFQ process and is a great example of how we are transforming the culture of our company, the one that embraces continuous improvement. This will help us keep a full pipeline of savings opportunities moving forward. We remain confident that we will clean our procurement activities close to our original time line when they lag in actual dollar savings until the business returns to pre-COVID levels.

We've continued to make progress at the five North American manufacturing plants that are currently part of the transformation program and have seen productivity gains emerge in not only these sites but most of our sites globally as we are deploying our lessons learned broadly to accelerate improvements. Some of these productivity gains have been substantial by dealing with lower volumes and inconsistent production shifts that work against us in some facilities. These productivity gains have led to leaner operations and a smaller workforce, with headcount reductions that began in Q4 of 2019 and continued into each quarter of 2020. We anticipate some additional productivity related headcount reductions continuing through 2021.

We've taken delivery and installed some new fabrication equipment. However, the pace of capital spending for additional fabrication equipment has been slower than originally anticipated due to the impacts of COVID. We expect the pace of capital spending will increase in 2021, allowing us to catch up on these planned savings. We are working on additional plant consolidations currently. This one is in Shreveport, Louisiana, where we have had two plants to support our Frymaster and Merco businesses. We are in the process of consolidating one of those plants into the other one and expect to have this completed during the first half of this year. As I mentioned, we did see a step-up in transformation program savings in the fourth quarter with in-period savings increasing to approximately $5 million, which is a $20 million run rate. We remain fully committed to delivering the 500 basis points of margin improvement in the transformation program. We expect to complete all the planned execution actions that will drive the savings by the end of 2021.

However, the timing of realizing the full $75 million of cost savings in dollar terms, along with the all-in EBITDA margin target of 23% will be delayed due to the pause experienced related to the pandemic creating uncertainty of when sales and manufacturing volumes will return to pre-COVID levels. Before I turn the call over to Marty, I want to share some of the recent developments on some of our other strategic initiatives. On slide nine, we introduced the newest version of KitchenConnect and launched our new common controller into our first product lines last quarter. As a reminder, KitchenConnect is our open cloud-based digital platform that brings the benefits of connectivity to commercial food service operators in a stable, secured digital environment. Because this is an open cloud-based solution, we can share data with other kitchen management platforms to connect competitors' equipment to Welbilt's KitchenConnect. Our new common controller connects to KitchenConnect 3.0 and is now being integrated into new products across all of our brands.

We will also be retrofitting several existing products with new controllers, and we'll offer kits to operators who want to retrofit their equipment with the new controller to take advantage of our integrated digital platform. The operators are increasingly demanding digital capabilities when choosing what equipment they will use in their kitchens, Welbilt's integrated approach of having a leading cloud-based data management system with the only controller of using the same operating launch across all of its brands, with Welbilt at the leading edge for digital platforms in our industry. Since our dual launch last quarter, we have had several chain operators express interest in adopting KitchenConnect along with Welbilt equipment into their operations. We're currently working with these customers on field testing within their operations. More on this in future quarters.

The last item I want to cover is an update on our ghost kitchen efforts. On Slide 10, you can see one of our standard ghost kitchen designs that was developed by our kitchen team to help the operators of these kitchens adopt an efficient, modular layout that is digitally enabled by KitchenConnect. Demand for ghost kitchen is expected to grow rapidly with an estimated 1,000 ghost kitchen openings over the next four years and the Americas representing approximately $100 million of equipment. We estimate that we have some equipment in the majority of ghost kitchens in operation today and have agreements in place with multiple ghost kitchen operators for their planned store openings in 2021. This is yet another example of where our leadership and digital capabilities will help us grow in an emerging market segment.

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

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

Thanks, Bill, and good morning, everyone. I'm going to start with Slide 11 and the discussion of our adjusted operating EBITDA margin results. As you might expect, the year-over-year drop in volume had impacts throughout our system and these margin drivers, although this is beginning to be mitigated by the progress we've made in executing our transformation program. Volume, which we measure at the gross profit level and is netted against the impact of net pricing, drove a decline of 100 basis points in the fourth quarter. This reflects the 16% decline in sales versus prior year, partially mitigated by positive net pricing as our 2020 price increases continue to hold up. Material costs, including tariffs, was a 30 basis point positive contributor this quarter compared to the prior year. This is a reflection of the net savings coming through from our transformation program's procurement activities which are still ramping up, but more than offset rising commodity costs in the quarter.

We have seen more inflationary pressures so far in the first quarter of 2021 related to both vendor pandemic-related operating constraints and logistics costs, particularly overseas. We expect these headwinds to be present through the first half of the year, but despite that, we believe that our transformation program efforts and our upcoming 2021 price increase will be effective in expanding our margin from 2020 as we proceed through 2021. Other manufacturing expenses, mainly labor, overhead and warranty were a 20 basis point positive contributor to margin this quarter. We continued to effectively flex our production expenses to the lower volume environment again this quarter. As a reminder, we implemented a reduction in force at the end of March that addressed both lower volume and anticipated productivity gains and took an additional, but smaller action early in Q3 as we made further progress on improving productivity in our plants and gained more visibility on upcoming demand.

As volume improved sequentially in many of our plants this quarter, we minimized the headcount that was brought back in and held on to the productivity gains that we've made. We still have a degree of fixed cost we could not impact proportionate to volume, but that was less impactful this quarter due to the higher volumes. We are continuing to execute the transformation program-related labor strategies across our plants in 2021 and have several more equipment upgrades planned over the next few quarters. As Bill mentioned, we are executing a few facility consolidations, and we remain encouraged by the organization's lean focus. We expect to continue taking additional restructuring actions over the next few quarters as each plant progresses in its individual transformation program.

SG&A on an adjusted basis contributed 70 basis points toward margin improvement in the quarter. Like our actions within the manufacturing footprint, on SG&A, we also took early and aggressive action to contain spending as the pandemic's impact emerged in March. Many of those actions continue to contribute to lower SG&A costs and enabled us to show favorability in most of the SG&A categories in the quarter as professional fees, marketing and travel expenses were all favorable. As a reminder, if you're reading the face of the income statement, the SG&A includes the transformation program investments that are excluded from our adjusted operating EBITDA. You can track the specifics through the non-GAAP reconciliation schedules. Moving to Slide 12. Free cash flow was a positive $38 million in the quarter and increased 10% from last year's fourth quarter. Working capital was a slight use of cash in the quarter, with a decrease in inventory, offset by slightly larger reduction in accounts payable.

Overall, working capital remains well managed. Also impacting free cash flow is our investment program in both traditional capital spending and the transformation program. For the quarter, we spent $4 million in capital, down $12 million from 2019. We finished the year at $20 million in capital spending, down from $34 million in 2019, reflecting the reduced activity through the pandemic restrictions. We will ramp this back up in 2021 to be more similar to 2019 spending levels with investments planned for equipment upgrades, facility investments, new product innovation and IT initiatives. The transformation program investment is reflected in both SG&A and restructuring. For the spend reported in SG&A, after the $2.4 million in Q4, we had spent $59 million since the program began in May 2019. And combined with transformation-related restructuring charges of $9 million since inception, we have now incurred approximately $67 million of the original $75 million to $85 million range of investments planned.

We expect to finish the incremental spending later in 2021 and to be in the lower half of the range for the full life of the program. One last reminder on our free cash flow is that it is traditionally a seasonal use of cash in the first quarter as we pay customer rebates and annual incentive compensation, build inventory and experience seasonally lower volumes. We then generate seasonally stronger cash flow in the remaining three quarters. As shown on this chart, we have remained free cash flow positive since the beginning of the pandemic. While we are not providing a free cash flow forecast today nor expecting it to achieve pre-pandemic levels in 2021, absent an abrupt market disruption, we expect free cash flow to be materially improved in 2021. Moving on to liquidity, which we define as cash and short-term investments plus availability on our revolver. We ended the fourth quarter with $375 million of total liquidity, which is well ahead of where we were at the end of the last three quarters and close to even with December 2019.

In summary, we are very pleased with our free cash flow and liquidity performance through the pandemic in 2020. Cash and cash equivalents plus restricted cash increased by $2 million during the quarter, while our overall debt balance decreased by $40 million, providing the $42 million improvement in liquidity this quarter. We remain in compliance with the liquidity, EBITDA and capital expenditure covenants in our amended credit agreements with significant headroom. Finally, on Slide 12 Slide 13, I'd like to share a few initial thoughts on 2021. First, we will not reinstate full year guidance until conditions sufficiently stabilize and become more predictable. We are providing first quarter sales guidance, which we expect to be down between 11% and 16% from 2020. We expect this will be our last quarter of negative sales comparisons, and we will be able to provide sales growth guidance next quarter, absent a significant setback in the fight against COVID or some other external shock to our end markets.

We currently believe that 2021 will show full year growth compared to 2020, but that we won't be back to 2019 or pre-pandemic levels in 2021. Similarly, related to our EBITDA margin, we expect to deliver meaningful expansion from 2020 but are not likely to reach the pre-pandemic 2019 level. And we still expect a degree of seasonality, particularly related to the first quarter, where some of the inflationary pressures, I mentioned earlier, are evident. We have seasonally lower sales, and our expected price increases have not taken effect yet. This is just a reminder of the quarterly pattern from the last three years, and by no means, do I want to suggest any doubt about our transformation program.

As Bill stated, we remain confident that transformation actions are working. On a transactional level, we can clearly see the savings are materializing, and we are confident those benefits will accelerate as we move through the year. Under the headwinds of the pandemic-related volume declines, and hopefully, temporary inflationary and logistics cost pressures, our efforts are positioning us to be stronger and more profitable company in the quarters ahead when both our transformation actions are mature and the market has recovered. We have not lost sight of our 500 basis point improvement goal nor our path to it. That concludes my comments.

Operator, we'll now open the call for questions.

Questions and Answers:

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

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

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys.

William C. Johnson -- President And Chief Executive Officer

Hey, Jeff.

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

Good morning, Jeff.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

So, thanks for the caller on 1Q. Just trying to get a better read on what you're seeing from order momentum perspective, sequential trends into January, February, understanding seasonality? Any kind of disruption from kind of this COVID reemergence and restaurants shutting down? And kind of how that all plays in, into the guide?

William C. Johnson -- President And Chief Executive Officer

Yes. So we say in the January time period that it's better than the fourth quarter actual, which was the 16.2%. The shutdowns are having an effect. There's a slight amount of noise in the order patterns in February. We think that will kind of normalize for March from the guide that we've given you here. But yes, to be sure, it's choppy week-to-week right now.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then just -- you mentioned kind of rebuild and companies starting to talk about plans for new store reemergence. Like when do you start to see? I think some of that will start to move ahead as we kind of come out and we get momentum on vaccines, etc..

William C. Johnson -- President And Chief Executive Officer

Well, we saw a little bit of it in the fourth quarter. In the Americas, we had some rollouts that -- from some of the QSRs that -- taking effect, a little -- the smaller rollouts. And what we're hearing from them is everything that was in 2020 -- delayed out of 2020 will take place in 2021. I think it's -- there's some small things happening in the first half, but it's really a second half kind of an event that we'll start to see more pickup of that type of activity.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then just on the savings, good to hear that you're on track, and you gave kind of run rate exiting -- $20 million exiting 2020. Where do you think that -- how are you thinking about incremental savings for 2021 or exit run rate savings as you exit 2021?

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

Yes. We're not ready to sort of give you a specific kind of range around that, but it should continue to build. I mean each quarter, we think, is ramping in. We are continuing to finish the qualification of parts and the procurement side of this, continuing to buy a little bit more of those new parts at lower cost, and the productivity, as we talked about, continues to expand. So I just can't quite give you the kind of range you'd like. But just, let's say, it's going to continue to advance. In fact, probably faster. It will probably advance faster than Q4 did from Q3. If you recall, I think we were at $4 million a quarter, $16 million run rate in Q3 and now $20 million. I think that pace will pick up a little bit as we get through 2021.

William C. Johnson -- President And Chief Executive Officer

And it's probably a couple of quarters longer than what we said at the Investor Day, kind of what it feels like right now. And we kind of said that we will be there somewhere around the end of 2021 hitting that kind of stride. But it's still subject to volume constraints, right? And I just don't know when the volume is coming back. But all the actions that we've taken, as you can see them in the numbers, are taking hold and materializing -- having material effect on the margins.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay, thanks.

Operator

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

Mig Dobre -- Baird -- Analyst

Thank you and good morning, everyone. I guess where I'd like to start is maybe with a little more color on the fourth quarter. I'm trying to sort of separate out the impact of the rollout, which it sounds to me like you called out as a little bit of a onetime item that helped you in a quarter relative to the actual replacement demand that you also noted in your press release that is starting to materialize. So can you sort of help us understand what's going on there? And I ask this in trying to understand your guidance for the first quarter, right? Because if I look at the midpoint, it seems like the dollar revenue is very similar to what you reported in the third quarter. So we're stepping down sequentially. Trying to understand how much of that is the natural seasonality of the business relative to maybe the onetime effect of the rollout or maybe channel stocking or something like that, that might have helped you in the fourth quarter?

William C. Johnson -- President And Chief Executive Officer

Yes. I think we had a couple of rollouts that -- in the fourth quarter that were kind of -- in total in kind of the $10 million range compared to Q4 of 2019, which is -- were a couple of billion dollars. So that's the order of magnitude that kind of rollouts that happened and kind of tailwind in the fourth quarter for kind of the QSR segment.

Mig Dobre -- Baird -- Analyst

That's helpful. And do you get the sense that your distributors behaved any differently than they did in the prior year as far as their own sort of stocking goes?

William C. Johnson -- President And Chief Executive Officer

Yes. I think there was no -- of course, we didn't announce price increase. Sometimes, we do it in -- on January 1, sometimes we do it after the first quarter. This year, we've done it after the first quarter. This is effective that -- for the first quarter. So sometimes, they do prebuys on that. They weren't doing any of that, partly because we didn't have a price increase announced, and mainly, because of their own cash constraints and liquidity issues. The inventory in the channel is relatively low right now. And as Marty said, there's some seasonality to inventory stocking. And right now, we're starting to ramp up, particularly ice demand for the second quarter -- second and third quarter, there'd be demand for ice products. And so we'll start ramping up the inventory levels and working with our distributors to just -- to get their stocking levels up. But in general, I think when you talk to any of the dealers, on the general market side of things, their inventories are really low at this point. They're just not carrying anything.

Mig Dobre -- Baird -- Analyst

I see. And then just to clarify here, as far as the guidance for the first quarter and the sequential downtick in revenue, it sounds to me like this is pure seasonality that we're experiencing here. Do you think the business can build sequentially from Q1 in terms of revenues higher sequentially as you look at Q2 and Q3? Or are you thinking of a different progression at this point based on what you're seeing in the end markets?

William C. Johnson -- President And Chief Executive Officer

No. I think you've got it pegged right. It's seasonality in the first quarter. And there is -- we'll be able to grow from there.

Mig Dobre -- Baird -- Analyst

Great. Then my follow-up is on the transformation program and the way we should think about margins. So if I understand Slide eight correctly, you're maybe going to spend closer to $75 million. You already spent $67 million. The implication here is that most of the work is done, is behind us, and maybe now all we need is volume. So if I look at the targets that you've reiterated here, 23 margin -- 23% EBITDA margin on revenue that is close to 2019 levels. I guess this would imply 44% incremental margin on $440 million of additional revenue. So my question is this, how should we think about the way these incrementals kind of ramp with revenue? Should the first, say, $200 million in revenues carry different incrementals than the subsequent $200 million? Are -- should the incrementals be higher earlier in the recovery? Or should we see higher incrementals later as your savings are sort of maturing and ramping up?

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

Yes, Mig, it's Marty. What I would say is the paces of the rebound and recovery in revenue is not exactly the same time pattern as the savings ramp-up. So I think the incrementals will be a little steeper in the second half of the revenue gains as the procurement cycle really runs its course and the productivity side run their course, whereas some of the steeper rebound in revenue will happen kind of in the -- particularly the second quarter, when we're comparing against the depths of 2020 will be the steepest. So you'll get some natural bounce in margin in that second quarter for sure from just scaling SG&A and so forth year-over-year. But the real drive toward the 500 basis points and the 23% will come as the -- as kind of the BTP really matures in the second half of this year and into 2022.

William C. Johnson -- President And Chief Executive Officer

Yes. And I would say that there is a significant amount of work still to be done, Mig. It's -- even though some of the dollars have been spent, we have -- a lot of the capex is for fabrication equipment and things like that, that have yet to be installed, up and running, fully operational, all bugs worked out. So there's still quite a bit of work to be done on the productivity side of things that we see accomplishing that this year. And as Marty said, on the procurement side of things, that's just an ongoing everyday fight, right? And that -- we'll see that mature toward the end of the year in terms of all the actions that we've taken. And then the funnels fill back up again for more after that, right? So we don't stop.

Mig Dobre -- Baird -- Analyst

Yes. I appreciate that. It's just a little counterintuitive. If you ask me, I would expect incrementals to be higher as volumes are just starting to come back and then moderate over time. But it sounds to me like you're saying that maybe we should be thinking the opposite here. I'll get back in the queue.

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

Yes. Mig, it's that lag around procurement, in particular, that's powerful, a, qualifying products, getting them starting to buy them and getting them into inventory, buy them in scale as opposed to, what I'll say, buying them at full volume and then getting them through the inventory capitalization cycle and out through the P&L. It's just -- even though the transformation spending has been done, that exercise, that procurement follow-through will run. I mean it's been going on several quarters, has several more quarters to go. And so the lag of getting that into the P&L and drive the incremental margins is just not to be underestimated.

Mig Dobre -- Baird -- Analyst

Thank you for the call, I appreciate it.

Operator

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

Larry De Maria -- William Blair -- Analyst

Thanks, good morning. First question. First question. I think through the first few quarters, you had about $12 million in kind of government assistance, credit, cash, etc., that flowed through to you guys. So I'm curious what the full year benefit was, if that was impacted the fourth quarter? And then secondly, does any of that come back in '21? Or do we have to overcome, obviously, a multimillion-dollar headwind? And how do we do that?

William C. Johnson -- President And Chief Executive Officer

Well, Marty's kind of scrambling for the numbers there. I'll tell you that we did see benefit in the fourth quarter. We do still have some benefit in the -- in 2021, obviously, not to the magnitude that the 2020 was, but I'll let Marty give you the exact numbers here.

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

Yes. We're going to get the K out imminently, and you'll see it in there in a footnote. There was some lower in the fourth quarter, it's tapering down. It's in both cost of goods and SG&A. So I won't scramble around for this number now, but you'll get access to it in the K soon, and you'll be able to do your analysis. We don't expect much next year as these things come back just a little bit in some of the -- more in the international markets really where we see a little bit of that still as an opportunity.

Larry De Maria -- William Blair -- Analyst

Okay. It just seems like -- probably in the low mid-teens overall, and it seems like a big number to overcome in 2021 considering 16% of, I guess, EBIT in the -- through the first few quarters. But I guess maybe switching over to price. End of the first quarter, you have some price increase come through. Can you give us an order of magnitude and how much confidence you have that, that's enough? Or are we going to have to raise price again? And how broad across your product portfolio, the price increases are because, obviously, we all know there's an awful lot of inflation and supply chain inefficiencies out there in the industry?

William C. Johnson -- President And Chief Executive Officer

Yes. So we went out with a price increase on the spare parts piece of our business in January. So we did get part of it implemented in the first quarter on that. The general market and the rest of GSA, global strategic accounts, is in the second -- starts in the second quarter. And it varies by product line, anywhere from 3% to 5%, depending on the product line, can be in that range. And we typically net 60% to 70% of the number that we go out with just based on contracts and the timing and the issues -- different issues like that, depending on the customer.

Larry De Maria -- William Blair -- Analyst

Okay. And last question. Merrychef obviously did well 4Q. Is that -- was that part of the one-off things that helped or year-over-year help? Or is that indicative of the industry moving toward some more versatile cooking equipment that may have some legs? And I'll leave it there.

William C. Johnson -- President And Chief Executive Officer

No. We believe that we're growing share in Merrychef and being able to maintain that share and what you're seeing is sustained progress with Merrychef.

Richard J. Sheffer -- Vice President of Investor Relations And Risk Management And Treasurer

Larry, before you drop, I just want to revisit the governmental assistance. The Q4 impact was just a little bit over $4 million, most of that in cost of sales, just a couple of hundred thousand in SG&A. And for the full year, we were at just under $13 million, more evenly split between cost of sales and SG&A. But I think one thing to remember, while it's a number to overcome, without that, we would have reduced costs further. So one way or the other, I think, we still would have had a positive impact that just allowed us to keep folks around that we otherwise would have furloughed or taken other actions, so without the -- in the absence of government assistance.

Larry De Maria -- William Blair -- Analyst

Okay, thanks Richard.

Richard J. Sheffer -- Vice President of Investor Relations And Risk Management And Treasurer

Thanks.

Operator

Your next question comes from the line of Rob Wertheimer with Melius Research. Please proceed with your question.

Rob Wertheimer -- Melius Research -- Analyst

Hi. Good morning, everyone. Thanks for the discussion on just sort of some of the customer conversations you're having. I just wanted to expand on that. And just kind of what people are saying on the role of technology on connectivity, etc., as to whether -- not next week or next month or next quarter, but just over the next few years, if it does ignite a larger refurbishment or change in the average content that you have. I mean just some general comments on the sense of urgency your customers are -- and a sense of value-add your customers are seeing from the sort of things you're developing?

William C. Johnson -- President And Chief Executive Officer

Yes. So it is important. It's happening at the larger QSRs right now in terms of people wanting connected devices is where the initial thrust is, and I think that's important because once you start -- once they start it, they start making it affordable for everybody else for the smaller players as it becomes more prominent. Every piece of our equipment is born-digital now and will be in the future and capable of analytics and kind of connecting to either our cloud or customer cloud. We're able to connect other people's equipment to our cloud. So it's a very open platform and which -- it has to be because there are so many different pieces of kitchen equipment from different manufacturers in the kitchen that you have to have an open platform. We have somewhere around 8,000 units connected across thousands of kitchens right now. And I can tell you that, that's up double what it was a year ago. And we see this accelerating and improving and just -- almost exponentially as people start to get more equipment connected. There's just too many benefits from having connected equipment for people not to buy connected equipment, their ability to monitor energy, to monitor usage, to monitor maintenance, all the things that it brings.

And especially, if you look at some of the dynamics going on right now in the political landscape, if they've got -- you have $15 an hour labor, they're going to be focusing on how do they get more labor out of their kitchens, right? And having this digital technology and connected kitchens really enables that. And then all things digital, delivery, takeout options, all those things, everybody is working on their digital capabilities. We're coming out with a new product in the second quarter, storage cabinets that our Merco brand is having, and it's specifically centered around people picking up orders at retail outlets where they scan the code from their phone onto the cabinet and they pull the food out. And again, it's all loaded from the back and the customer never gets -- never has to touch anything other than their food. So a lot of innovation coming as a result of connected kitchen. And we think that we're in a very strong leadership position with our common controller, common user interface and having the ability to connect multiple Welbilt devices using the same controller and the same user interface, same amount of training for operators. They can operate a grill, they can operate a fryer, they can operate a holding cabinet using the same controller. So it's just going to accelerate.

Rob Wertheimer -- Melius Research -- Analyst

That's your point. Yeah.

William C. Johnson -- President And Chief Executive Officer

Thank you as well.

Rob Wertheimer -- Melius Research -- Analyst

Yeah.

Operator

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

[Phonetic] -- Longbow Research -- Analyst

This is [Indecipherable] on for David. Great work on navigating through this challenging environment. I guess, to start, the commentary around QSRs, looking at new builds is pretty encouraging. Can you describe what you're seeing with quoting activity year-to-date compared to the fourth quarter across the various end markets? And are you still seeing a little in the way of order cancellations?

William C. Johnson -- President And Chief Executive Officer

Yes. I mean we're not seeing a lot of order cancellations. I would say that a lot of the projects, the larger projects are still on hold. We know they're out there. And I think, like I said, we'll see that activity pick up in the second half of the year. But there's a pretty big pipeline of projects that is just a question of when they pull the trigger on them and start moving them forward. But I think with all the recent COVID cases and just the news around the lockdowns, it slowed a little bit. But I think there's reasonable expectation to see that in the second half of this year at this point.

[Phonetic] -- Longbow Research -- Analyst

Okay. And then it was mentioned that distributor inventories remained lean. Do you anticipate kind of a gradual build back to pre-COVID levels taking place this year and maybe next? Or do you expect that dealers will carry a lower profile going forward than they did previously?

William C. Johnson -- President And Chief Executive Officer

I think it's -- there are some interesting dynamics, right, because you got -- he who has the inventory will get the sale in some cases, right? And so I think you'll see dealers put more inventory in as they have more faith that those vaccinations are taking hold and that people are going to be operating closer to normal. And so I think you'll start to see them ramp their inventories up because if they don't have it in the inventory, then somebody will make the call to go to the next guy, right, who does have it. And we see this in ice all the time, which is why we have to be really careful and make sure that our ice distributors have a significant volume and inventory during the second and third quarters so that they can meet all the demands that are pretty quick in that quarter.

[Phonetic] -- Longbow Research -- Analyst

Okay. And then a last one for me. What are you seeing in the market in terms of permanent restaurant closures so far in '21 compared to, call it, the fourth quarter exit rate? And what are your initial thoughts on closures for the full year?

William C. Johnson -- President And Chief Executive Officer

Yes. I have no idea. I think it just -- I think the restaurant association just came out that 110,000 restaurants have closed. I think the second round of closures is really hurting people even worse because of -- they were exhausted from the first round and used up a lot of their natural cash and just their ability to withstand this pandemic and having a second round is really going to be difficult on them. So I don't know what their closure rate is going to be, but it's not going to subside if they keep these lockdowns going.

[Phonetic] -- Longbow Research -- Analyst

Okay. Thanks so much for the caller and goodluck to the new year.

William C. Johnson -- President And Chief Executive Officer

Thank you.

Operator

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

Walter Liptak -- Seaport -- Analyst

Hi, thanks guys. Good morning. I wanted to ask first about just the ghost kitchen opportunity, the $100 million.

William C. Johnson -- President And Chief Executive Officer

Yeah

Walter Liptak -- Seaport -- Analyst

And I wondered if -- are those sold centrally or are those sold kind of direct to the customer through a dealer channel?

William C. Johnson -- President And Chief Executive Officer

There's a little bit of both. It happens. I mean there's different types of ghost kitchens. There's kitchens-as-a-service. There's restaurant-operated kitchens. There's kitchen incubators. So it just kind of depends on the type of format and the way that it goes to channel. But we do deal with dealers for the most part in this area and not direct. I don't know of any direct sales actually.

Walter Liptak -- Seaport -- Analyst

Okay. Got it. Okay. So it's sort of a jump all general market for that $100 million. It doesn't sound like there's anything specific about your sales were -- except that -- are there -- is there -- do you have an idea of the mix of large chains versus small customers that are going into these ghost kitchens because maybe you have a competitive advantage there?

William C. Johnson -- President And Chief Executive Officer

No. I don't have a mix that I can give you on that. I mean there's different people that are doing different things. You've got to like triple things, some of these other restaurants are adding an extra line in their back of their kitchens, right, for the kind of what we would call a restaurant operated -- in a restaurant-operated kitchen kind of format. And then you just have other people that are putting it in a parking lot somewhere, right? And it's just different. But I don't have a standard for you.

Richard J. Sheffer -- Vice President of Investor Relations And Risk Management And Treasurer

Okay. Walt, I think -- this is Rich. I think really, though, these ghost kitchen operators, they're going to focus on more of the top-tier equipment. Connectivity is an absolute certainty for them. They have to have it to make their model work. So I think there does -- that does drive a preference for a manufacturer like Welbilt that has leading capabilities around connectivity, not just our cloud-based system, but then the common controller that helps us make the -- make us the easiest to connect and get the data up to the cloud and back down to the cloud as usable information and drive operational savings for these operators.

Walter Liptak -- Seaport -- Analyst

Okay. Great. Makes sense. The APAC was down. I understand it's on that difficult comp with 2019 fourth quarter. Can you provide us with a little bit more detail about sort of the outlook for China. They seem to be a little bit ahead of us. Are you seeing more -- are these QSR openings in APAC happening sooner than in the U.S.? What does the growth look like for APAC in your guess?

William C. Johnson -- President And Chief Executive Officer

Yes. I mean China has fully recovered. It was down a little bit in the fourth quarter just because they had tough comps, but we see a good year in APAC, particularly in China and Australia, which are two markets that we have a significant presence in. Some of the other APAC regions are kind of in the same boat as the U.S., where they're struggling a little bit. But yes, we do see a good year for the APAC region.

Walter Liptak -- Seaport -- Analyst

Okay. All right, great. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Mig Dobre with Baird. Please proceed with your question.

Mig Dobre -- Baird -- Analyst

Thanks for taking the follow-up. I wanted to see if you guys can give us a little color on your raw material hedging program. I know you employ that. And I'm wondering what various commodities does this program cover at this point? And how far in advance are you kind of bought -- what portion of '21 you might have covered at this point?

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

Yes. So Mig, we look out typically four quarters and are covering the main metals, right, just three or four of the main metals really, and really, are looking for when the price is at an outlier relative to the market and then hedge. The closer we are we hedge a little bit higher percentages, the further out and -- is much lower percentages, and we have a general bias not to do it. So we're really looking for times when it feels like there's an outlier. And I would say, relatively small percentage of 2021 is covered. I don't know if that's 25% or I don't know, somewhere less than half, I'm sure, but -- and again, we're trying not to do this unless there's some outlier kind of movement there.

Richard J. Sheffer -- Vice President of Investor Relations And Risk Management And Treasurer

Yes. Mig, this is Rich. Just a little more color on the hedging program. So we de-designated our hedges late in 2019 with the new accounting rules and the added complexities that they put in and trying to comply with these. So we haven't been adding new hedges for the probably, call it, five quarters and letting the existing ones roll off. So we still have some protection out there going through '21 here, but it will continue to wind down a little bit as we move through the year.

Mig Dobre -- Baird -- Analyst

Right. So it's fair to say that we should be kind of thinking spot pricing for things like stainless, aluminum, copper, things like that, as you're looking in maybe like Q3, Q4, for sure, right?

Richard J. Sheffer -- Vice President of Investor Relations And Risk Management And Treasurer

Right. I think predominantly it's spot. Go ahead, Marty.

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

We realize a lot of these are components that we're buying as well that have metal content, but it's not as direct as the commodity is moving. It's not as kind of volatile as that.

Mig Dobre -- Baird -- Analyst

Understood. And then the pricing framework that you presented, the 3% to 5%, are you comfortable with the fact that, that can put you in at least a neutral kind of price cost situation for '21? Or does that -- will that require additional action as the year progresses?

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

No. I think we took the time. We saw some of this happening in the fourth quarter, so we took the time to really evaluate what the impact would be. And we think we got it covered. So -- but if we have to go back out, if things worsen, we'll go back out and do something to correct it.

Mig Dobre -- Baird -- Analyst

Understood. And then final question for me. The end markets are finally recovering, fortunately. And you're doing better as well from a margin standpoint as we've seen in the fourth quarter and your stock has recovered. I guess I'm curious as to how you're thinking about the balance sheet going forward. There's still, as we all know, quite a bit of debt there. What is your view on the strategy here as we think about the next two to three years, any updated thoughts from the board? Curious to know.

William C. Johnson -- President And Chief Executive Officer

Understood. And then final question for me. The end markets are finally recovering, fortunately. And you're doing better as well from a margin standpoint as we've seen in the fourth quarter and your stock has recovered. I guess I'm curious as to how you're thinking about the balance sheet going forward. There's still, as we all know, quite a bit of debt there. What is your view on the strategy here as we think about the next two to three years, any updated thoughts from the board? Curious to know.

Mig Dobre -- Baird -- Analyst

Okay. Go on guys.

William C. Johnson -- President And Chief Executive Officer

Thanks, Mig.

Operator

And there are no further questions in queue at this time. I turn the call back to Mr. Johnson for any closing remarks.

William C. Johnson -- President And Chief Executive Officer

Thank you. Before we end today's call, I would like to thank our employees, and considering the challenges we collectively faced in 2020, I consider their performance to be at the top of any group that I have been privileged to lead. I want to reiterate my continued belief that Welbilt will emerge from this crisis as a stronger company that is structurally leaner and more efficient. We will focus on opportunities where we can use our competitive advantages of innovation and digital leadership to help our customers succeed and grow. We will continue to leverage our culture of innovation and customer service to win the battle for brand preference and outgrow our end markets. We will deliver on our promise of margin improvement and delever our balance sheet as this crisis abates. This concludes today's 2020 fourth quarter earnings call. Thanks again for joining us this morning, and have a great day.

Duration: 57 minutes

Call participants:

Richard J. Sheffer -- Vice President of Investor Relations And Risk Management And Treasurer

William C. Johnson -- President And Chief Executive Officer

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

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Mig Dobre -- Baird -- Analyst

Larry De Maria -- William Blair -- Analyst

Rob Wertheimer -- Melius Research -- Analyst

[Phonetic] -- Longbow Research -- Analyst

Walter Liptak -- Seaport -- Analyst

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