Earnings Call: Q1 2019

Apr 23, 2019

And welcome to Whirlpool Corporation's First Quarter 2019 Earnings Release Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Senior Director of Investor Relations, Max Tunnicliffe. Thank you, and welcome to our Q1 2019 conference call. Joining me today are Mark Bitzer, our Chairman and Chief Executive Officer and Jim Peters, our Chief Financial Officer. Our remarks today track with a presentation available on the Investors section of our website at whirlpool.com. Before we begin, I'll remind you that as we conduct this call, we will be making forward looking statements to assist you in understanding Whirlpool Corporation's future expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10 ks and other periodic reports. We want to remind you that today's presentation includes non GAAP measures. We believe these measures are important indicators of our operations as they exclude items that may not be indicative of or are unrelated to results from our ongoing business operations. We also think the adjusted measures will provide you a better baseline for analyzing trends in our ongoing business operations. Listeners are directed to the supplemental information package posted on the Investor Relations section of our website for the reconciliation of non GAAP items to the most directly comparable GAAP measures. Questions. With that, I'll turn the call over to Mark. Thanks and good morning everyone. On Slide 3, we show our Q1 highlights. As you saw in our press release, we delivered another quarter with strong results including a record Q1 ongoing earnings per share of $3.11 Although revenue growth was impacted by softer demand in certain countries, including the U. S, Canada, Mexico, China and several European countries, we delivered global EBIT margin expansion of 30 basis points, driven by excellent price mix progress and sustained fixed cost discipline. Additionally, our North America region delivered very impressive results with EBIT margin expansion of 90 basis points despite continued macro pressures. This performance gives us continued confidence in delivering our full year guidance, which remains unchanged in total as raw material favorability is offset by lower industry we delivered global revenue growth of 1% as very strong price mix more than offset unit volume declines. Ongoing EBIT margin was 6.3% for the quarter compared to 6% last year, driven by very strong price mix. Finally, our Q1 free cash flow reflects normal seasonality of cash usage and was unfavorably impacted by the timing of certain payments. Overall, we're very pleased with our Q1 results and believe we are well positioned to deliver on our full year commitment. Turning to Slide 5, we show the details of our Q1 margin performance. We delivered approximately 300 basis points of margin improvement as we realized the carryover benefits of prior year pricing actions as well as new pricing actions during the Q1, primarily in the United States. We continue to expect margin benefit from price mix throughout the year, which will moderate slightly on a year over year basis as we begin to compare against higher pricing in the second half of twenty eighteen. These benefits were partially offset by approximately 2 50 basis points of cost inflation and unfavorable currency. Now I'll turn it over to Jim to review our regional results. Thanks, Mark, and good morning, everyone. Turning to Slide 7, I'll review the Q1 results for our North America region. We delivered very strong results in the quarter with revenue growth and strong EBIT margin expansion despite a challenging macro environment, which included a 7% decline in industry demand and continued cost pressures. Overall, we expanded EBIT margin by approximately 90 basis points as very strong price mix was partially offset by over 125 basis points of cost inflation. Our results in North America once again demonstrate the strength of our underlying business and our ability to overcome significant external pressures and is a testament to our strong brand and product portfolio, fixed cost discipline and flexible supply chain. Turning to Slide 8, we review the Q1 results for our Europe, Middle East and Africa region. Excluding the impact of currency, net sales increased nearly 2%, while unit volumes increased 5%, in line with our prior guidance and our improvement actions to stabilize volume. EBIT margins improved 40 basis points, primarily from the benefits of our fixed cost reduction actions and volume improvement, which were partially offset by lower production levels as we continue to right size our business. Additionally, EBIT margins were unfavorably impacted by approximately 60 basis points as we continue to liquidate our remaining inventory in Turkey. As it relates to our improvement actions, we are on track to complete the exit of our Turkish domestic sales operations and Hotpoint branded small appliances business by the end of the second quarter. And we continue to actively market our South Africa operations for a potential sale. Now we turn to Slide 9 to review the Q1 results for our Latin region. Excluding the impact of currency, net sales increased approximately 7%, driven by unit volume growth, share gains and positive price mix despite negative industry demand in Mexico. EBIT margin benefited from the carryover impact of our previously announced cost based price increases, plus additional improvements through continued cost discipline. These actions offset unfavorable currency of over 100 basis points. Lastly, prior year results were favorably impacted by the monetization of approximately $22,000,000 in certain tax credits. We now turn to the Q1 results for our Asia region, which are shown on Slide 10. Excluding the impact of currency, net sales decreased 12%. Our India business had another excellent quarter and delivered solid unit volume growth with share gains and EBIT margin improvement. However, this was offset by significant volume weakness due to sharp decline in industry demand along with increased brand investments in China as we transition from Sanyo branded products to the Whirlpool brand. Now I'd like to turn it back over to Mark to review our guidance. Thanks, Jim. On Slide 12, our guidance assumptions for 2019 remain unchanged. In line with our long term goals, we expect to drive organic net sales growth of approximately 3%. As before, we expect to deliver ongoing EBIT margins of 6.5 percent to 6.8 percent, a 40 basis point improvement compared to 2018. Consistent with our previous guidance, we expect free cash flow of $800,000,000 to $900,000,000 progressing strongly towards our long term cash conversion goal of 5% to 6% of net sales. Our first quarter results strengthen our confidence in delivering on our full year financial commitments and we continue to expect to deliver ongoing earnings per share of $14 to $15 Turning to Slide 13, we show the updated drivers of our EBIT margin guidance. We expect approximately 150 basis points of improvement related continued price and mix benefits in 2019 in line with our previous guidance. We now expect to deliver net cost improvement of 50 basis points based on revised industry demand and related lower production volume expectations. Although macroeconomic pressures remain elevated, raw material inflation has slowed down, leading us to revise our cost inflation guidance favorably by 25 basis points for the full year. In total, our margin guidance remains unchanged and we continue to expect meaningful margin expansion versus the prior year. Now Jim will cover our regional guidance and cash priorities. Thanks, Mark. On Slide 14, we show our regional industry and EBIT margin guidance for the year. Our regional industry guidance ranges are unchanged with the exception of North America. Based on weaker than expected U. S. Industry in the Q1, we are revising our guidance range to negative 2% to flat for the full year. Although industry demand guidance is unchanged for the remaining regions, we are trending towards the low end of the range in Latin America and Asia as Mexico and China both experienced negative industry demand in the Q1. In North America, we continue to expect EBIT margins of at least 12% as benefits from price mix actions are partially offset by lower industry demand and raw material and tariff inflation. As we look to the 2nd quarter, we have 2 items that will cause North America margins to more closely resemble the Q1 rather than the normal sequential quarterly improvement that you would expect. We plan to reduce production volumes to right size inventory levels and increase marketing investments in support of product launches. In EMEA, we remain confident in our ability to deliver above breakeven results for the full year as we continue focusing on restoring volume and rightsizing our business. We anticipate exiting the 2nd quarter at a breakeven rate, meaning 3rd quarter results should reflect the first full quarter of positive EBIT in the year. Lastly, our guidance for Latin America and Asia remains unchanged. Turning to Slide 15, I will discuss the drivers of our 2019 free cash flow. With margin guidance unchanged, we continue to expect cash earnings to positively impact free cash flow, partially offset by the sale of our Embraco compressor business. We remain committed to driving sustainably lower working capital, which is expected to result in $200,000,000 of working capital improvement in 2019. We continue to anticipate lower restructuring cash outlays, leaving guidance unchanged at $100,000,000 for the year. And as previously discussed, our first quarter free cash flow was unfavorably primarily the partial French Competition Authority payment of approximately $50,000,000 The remaining balance of approximately $50,000,000 will be paid in the 2nd quarter. In total, we remain committed to delivering free cash flow of $800,000,000 to $900,000,000 excluding the anticipated proceeds from the sale of Embraco. Turning to Slide 16, we show our capital allocation priorities. Our capital allocation priorities for the year remain unchanged. We will continue to make significant progress towards our year end gross debt to EBITDA target of 2.0. 0. In addition, we raised our quarterly dividend for the 7th consecutive year, which is a reflection of our confidence in the business and our ability to generate strong free cash flow going forward. Lastly, we repurchased approximately $50,000,000 of common stock in the quarter and anticipate a similar level of quarterly repurchases for the remainder of the year. Now we will end our formal remarks and open it up for questions. Your first question comes from the line of David MacGregor from Longbow Research. Please go ahead. Yes. Good morning, everyone. Good morning, David. Good morning, David. Congratulations on a good quarter and a tough environment. But I guess I wanted to talk about the price mix. And your implied price mix is about 810 basis points. And how much of that was price versus what was realized from an improved mix? And I guess how sustainable do you feel your pricing is given your reduced North American industry volume guidance? And I have a follow-up. David, it's Mark. Let me just take this question. So I'm not exactly sure which 800 basis points you're referring to. First of all, again, the ASC, the average sales value is not necessarily what we would refer to the margin impact coming from pricemix. So our pricemix overall in terms of margin impact was significantly positive. Been one of the strongest we ever recorded company. It's been as a side note, not only North America, but also other regions and across most categories. That is ultimately still reflection of, as you know, we have cumulative significant material cost increases over 2 years in June of $650,000,000 and we had several rounds of cost based price increases. As you know, I can't give a forward looking statement on pricing, but the need for us in terms of mitigating this cumulative material cost impact is still there. Yes, we got a little bit of relief, small relief on the increase in material cost, but the fundamental cost inflation is still in place. And we executed what we had to do from price increase. And I would say our team has done a very good job in managing these price increases. I would also like to emphasize with all the new product introductions, we have opportunities for price mix. We've done that so far and I think there's more price mix opportunity, particularly with the new products coming out there, which should help us on a full year base. Okay. Second question just on Europe. Can you give us a little more detail on your Q1 efforts to get relisted with European retailers? And will we see evidence of that success in the 2nd quarter results? Yes. So David, I mean, as you know, this Q4 earnings release in January, we indicate we want to have or we should expect to see about 5% volume growth in Europe and that's what we've seen. So I would say Q1 marks the Q1 where we kind of stem this volume decline, which is, I would say, an early indication of success of getting relisted on a number of floors. But it would be also the first one to say a lot more needs to be done. We are the 5% up in Q1. We're still below where we have been 1 or 2 years ago. So there's still more to be done, but I would read the Q1 numbers from a relisting perspective as an encouraging first milestone. And hopefully, we'll see more milestones along the way. Your next question comes from the line of Sam Darkatsh from Raymond James. Please go ahead. Good morning, Mark. Good morning, Jim. How are you? Good, Sam. Good morning. Two questions. First, wanted to explore production versus shipments in North America. I think last year, I think your production was down maybe call it 10% versus shipments, which is a really significant drag on last year's margin. Jim, could you help color in terms of what that might have been from a quantification standpoint in terms of what the headwind was last year from that lower production. And I know you're mentioning that you're going to cut production in the Q2, but your 2019 guidance, what does that assume for production versus shipments in 2019, maybe excluding the Q2 reset? Yes. Well, Sam overall our assumption for 2019 is that production will be slightly lower than shipments because we've targeted additional working capital takeout, which obviously primarily comes from inventory. So the assumption for the full year is a similar level of not to the extent we had in 2018. Now specifically Q1 in North America, if you look at what the U. S. Industry did and again it was below our expectations. So we had to adjust our production late in the quarter and most of that will actually be adjusted out to reduce our production levels to shipment levels in the Q2. Year over year, it's not going to be a significantly material amount, but we will have a little bit lower production in Q2. And then pretty similar for the rest of the year, if you look at where we're assuming the industry is, as you get to the back half of the year, production levels should be relatively similar year over year. Sam, it's Mark. Maybe just to add an additional comment before you get into your second question. Again, on last year's impact, volume leverage is a factor in our industry, okay, in our business. And most of you guys tend to work with $0.10 or $0.15 per inventory dollar, which is in total not a wrong number, but you need to keep in mind it can be very, very different product by product and that just depends on fixed cost intensity on the respective factory and where the factory load is. But it is a factor. And last year's inventory reduction as such was a drag on our overall profit, which we knew about, and that's just the reality. Q1 from an inventory perspective looks good year over year. It's still up versus year end. And in all transparency, kind of the market was a touch softer than we expected in particular North America. And you also know you can't just from 1 week to never adjust inventory levels. And we will do so in Q2 because very simply, we committed we don't want to have elevated inventory levels and we'll dew a bit whenever we feel it's kind of time to adjust it and we will do that in Q2. So that will be an impact on our overall profitability. Having said that, it is baked into our guidance. Thank you. Second question, Mark. I know you mentioned that your inventories at least domestically are a little higher than you expected. How would you characterize the channel inventories also? Are we going to see some draw downs at retail as well? Yes, Sam, I mean from and again, we as you know, we have some information that particularly refers to the inventory related to our products with most of the retailer. I would say right now the inventory level is actually pretty balanced. Last year, the same period, there were some inventory moves and driven by a number of factors out there, which kind of probably elevated the Q1 sell in number from industry a little bit. Right now, I would say the inventory before trade is reasonably balanced. So we don't see significantly elevated inventory levels right now with retailers, and that's pretty much across the board. Thank you. Your next question comes from the line of Michael Rehaut from JPMorgan. Please go ahead. Thanks. Good morning, everyone. Thanks for taking my question. First question, I just want to make sure because there we got some questions last night, this morning around the inventory levels and appreciate the guidance and the thoughts around there. So just want to get a sense then when you say that to clarify, I guess that Q1 I'm sorry, Q2 North American margins to be similar to a year ago, that's about 40 basis points of a sequential decline. Is are we to take it that, that is the full impact of the inventory drawdown or the reduction in inventory, the reduced production levels? And perhaps you could just give a sense of what are some of the pluses and minuses there because obviously you had a strong 90 bps year over year improvement. Now you're talking about flat, perhaps it's more of a 90 basis point impact. Just trying to get a sense of the degree of magnitude and what type of dollar inventory reduction you're shooting for as a result? Yes. Michael, it's Mark. First of all, on the let me start with the North American margins. As you know, we don't give quarterly guidance on the total on the region. Having said that, we guided the full year North America to 12 plus percent EBIT margin. And starting the year with Q1 with 12.3%, I would probably say we're somewhere between confident and very confident on the 12% plus Okay. That's a reality. And I don't think you should expect any irregular or abnormal moves on any of the quarters throughout the year. So we see that right now and we've demonstrated that over last year, a very steady, very strong performance. So any kind of inventory moves are baked in, in this one. And we have a comment I want to make on the inventories. Let's not take without a proportion. So we year over year our company inventories are down. That's a good starting point. But I think we you've seen it also over the last 2 years, we've been very disciplined in managing our working capital. That was a big part of our cash flow story. And we want to the moment we see even a slight increase of inventory versus where we want to have, we will adjust it. So it is not a big or massive move, but it's something which we will do in Q2. And as such, you should not see a big impact on the margin, but more steady margin also in sequential base. Yes. I mean, Michael, this is Jim. I think as Mark pointed out, if you look at our overall working capital, last year, we were close to as a percentage of sales on net working capital 7% in Q1 and now we're closer to 4.5%. If you look at our cash flow statement, you see we built an incremental $100,000,000 of inventory this year versus last year and that's really indicative of the amount that we look to get out sooner in the second quarter here. So not a massive amount, but an amount that we're very focused on reducing in the near term. No, that's very helpful. And the stability overall in the operating margins is pretty notable and impressive. So congrats on that. I guess secondly, as you look to continuing to execute the actions in Europe, obviously, you got some progress there from a volume standpoint this quarter, still kind of working your way through some of the other restructuring items as you gave us that update as well. How should we think about the longer term margin targets that you've set? I think initially 2 or 3 years ago, it was that 8% number for EMEA. I think now you've kind of ratcheted it back to like a 4%, 5% number. How should we think about the timing over the next couple of years in terms of achieving that mid single digit margin target? Should we be pushing it out? Is it on track? Anything around the timelines of how to think about kind of that walk, that improvement walk of profitability over the next couple of years? Michael, it's Marcio. So again, let me maybe also put that in context. Obviously, with having made a loss in Europe for the last several quarters, our key or 80% or 70% of our focus is on the operational levers to turn around the business. And that has been largely around recovering volume, doing additional restructuring actions, exiting Turkey, domestic markets and the small domestic appliance and the Hotpoint brand and potentially selling the South Africa business. All these actions are on track, but not completed. I would say probably with the exception of South Africa, most of these ones will be completed for Q2. So I feel good about where we are from an operational turnaround. And as Jim indicated and as we repeatedly said, we expect the full year in Europe to breakeven or 0% to 1% operating margin. And we expect to exit Q2 with a number which is close to breakeven. So we're I would say from an operation perspective on track. We've also, while we're doing these operational priorities, we have redefined our strategy for Europe last year, and that is starting to take place. We put several actions in place and that is largely around focused around how we regain lost market share in particular in the kitchen business, which is a very profitable business and how we can further mix up the business. Now we always said these strategies take longer to implement, but I feel good about where we are from first step. Now with all of that in mind, we lost time against the same as 8% target. Lost probably 2 years and that's just what we lost. So we still believe the business is structurally capable of delivering 8% EBIT margin, but we as evidenced by some competitors, so this industry in Europe can deliver 8% EBIT margin, but we lost time. On the exact timeline about what we expect for midterm and long term, I would actually ask Michael, we will give an update at our Investor Day in New York. So we will show you both mid term targets and the long term targets. The long term target will be 8%, but we'll give you more specific timeline about what we expect over the next 2 or 3 years. Thank you. Your next question comes from the line of Susan Maklari from Credit Suisse. Please go ahead. Thank you. Good morning. Good morning, Susan. My first question is just around broader U. S. Demand. It seems like from a unit level that the industry is sort of implying that there's a much softer economic backdrop than what we're actually seeing. I mean, in spite of housing sort of being weaker in the Q1, you're still seeing unemployment and GDP and all those kinds of things that are supportive. And so can you just help us maybe understand where the disconnect is? How you're feeling about the business as you exited the Q1? And maybe how we should think about these 2 opposing dynamics coming together as we move through the year? Yes. Susan, it's Mark. Let me take this one. So the U. S. Demand in particular, I mean, you have to see the trailing 4 quarters have been negative. And Q1 and Q4 last year from sell in was soft, and frankly also a little bit softer than we did expect. I would say, 1st of all, and we indicated that already a little bit in Q4, but also Q1, the sell through is stronger than the sell in right now, which is partially a reflection of last year around the same time, there was quite a bit of elevated inventory with the trade driven by a number of factors. That is one element. And right now, I would say the trade customers out there, they don't start Q2 with an elevated inventory level. It's pretty much normalized. So there's some inventory moves. So the sell through is not as soft as you right now would read from a pure sell in. Now having said that, the overall market has been call it, sluggish or moving sideways or slightly down. That is ultimately driven by 2 factors. 1 is, the 2 basic components of demand being replacement and discretionary demand. Replacement 1 and we started seeing metalloy last year, we're now comping from replacement against the low cycle pretty much 10 years ago. We knew that coming in, the offsetting item was always the discretionary demand, which is coming largely from housing and remodeling. And as you've seen, the housing market for the last 6 months has been soft, not very soft, but it's been kind of softer than most people expected. And when you see existing home sales of $5,100,000 and housing starts of below $1,200,000 that is probably a little bit softer, touch softer than most people expected, including us. Having said that, and we said that in both the last two earnings calls, we believe the fundamental dynamics of the U. S. Housing market are still intact. And that is largely driven. We always said the housing market has been supply constrained from the early days on, is still supply constrained. And what happens now is that with mortgage rates rise over last year and the appreciation of home prices, which probably was a little faster than you would expect in the cycle, that led to a little bit of a suppression of demand in particularly Q4. And we saw some of it in Q1. Having said that, the fundamental demand from demographic development, household formation, if you look at the age of both rental and owned housing stock is very encouraging in terms of driving demand going forward. So we just don't see the housing market coming down. We see it stabilizing and potentially growing at low single digit over the next couple of years. And that's why we also still are fundamentally confident that the U. S. Overall appliance demand remains stable. Okay. Thank you for the color. That's helpful. My second question is just around the update in terms of the inflation and the raw material side of things. Can you just give us a little color on what's been going on, especially with steel and resins? And then within that, also what are you including in terms of tariffs? I know there's a 25% step up was initially in there. With that seeming to be much, much less likely in there, how do we think about the role that that's playing in the $200,000,000 to $250,000,000 And Susan again, it's Mark. So as you heard from the our pre comments, overall, we see less of a headwind from a raw material tariff side. And we that's why we slightly adjusted the margin walk and we basically took the kind of headwinds down by a quarter of a margin point on a full year basis. That part is largely coming from raw materials, but not only. Let me just give you a little bit more color. On raw material side, I would say steel is by and large where we expected. And we kind of trends pretty much confirm what we have in mind. Having said that in Q1, we still had year over year increases. Raw and plastics are stable, but frankly, there is a little bit uncertainty around the recent appreciation of oil prices, and we got to see how that all plays out. And we have a raw material that gave us a little bit of relief. And relief versus our original inflation assumption, it is still in total a year over year increase. And we should not lose sight of that. So I would say the biggest part of a reduction of headwinds came from a probably slightly better outlook on raw materials. On a tariff, there is a marginal change, which is also included in these numbers. And that is largely coming from the List 3 on Section 301 tariffs, where we originally had 25% as of April in mind. And from what it looks right now, it will probably remain at 10% at least for the time being, and until we get new news. I think in an earlier call, we said that impact on its own is about $2,000,000 or $3,000,000 every month. So yes, that is a slight positive impact, and that is the other component in why we reduce the overall raw material and tariffs. I just also want to in my context also remind again, there's other uncertainties on raw materials and tariffs and other elements. So we still have oil price, which is right now at 66. The currencies are concerned around the world. To give you one example, the Brazilian real is at 3.93 and the mid quarter Q1, it was around 3.65. So there are other moving pieces. Again, we included all these moving pieces factored within and that's why we feel with confidence that our guidance right now is the right guidance for the year. Okay. Thank you. Your next question comes from the line of Curtis Nagle from Bank of America. Please go ahead. Good morning. Thank you very much. Would you guys be able to give the demand split in the U. S. Between replacement housing and discretionary? I believe at least the last numbers I saw were something in the order of 50% and then 25% and 25 percent. Does that still hold? Yes. Curtis, it's Marc. First of all, there's a big caveat. There is no scientific definition of replacement market versus discretionary market. In our definition, and we can give you and Max can give you a follow-up. We right now would estimate that 2019 about 54% or 55% of the total market is about replacement, rest is discretionary. I think the more important thing is the absolute numbers. On replacement side, we've seen that now, I would say over the last one and a half years that the replacement side stabilizes starts coming down and that is simply a reflection of the appliance demand kind of 10 years ago, which is a typical replacement cycle kind of getting into a trough. And the discretionary side right now is, I would say, moving sideways. And we would have expected by now with discretionary side to probably show a little bit more strength than we originally had in mind. Yes. And up here, you're split on the discretionary, you had 25, 25 on the typically it's more about 15% as new housing, and the remainder is remodels and other discretionary. So just to give you the full split out there. Okay. Great. That's very helpful. I appreciate it. Yes, and then I guess just a follow-up on China. I guess first, how much were volumes down? And look, I mean, I guess if things don't progress, I know you are going through a transition in terms of brands. If you don't start to see progress, would you consider exiting the market just given you guys are probably positioned maybe number 5 or so in terms of market share and the climb up probably is it would take a while and it may take a while to actually start earning some profitability there. So I guess how are you thinking about positioning in that market? So Curtis, it's Mark. So first of all, as you indicated, China was a soft Q1. And obviously, in our overall Asia numbers, which shows unit down 10%, that is a reflection of India, Southeast Asia, by way including Hong Kong. There's a very strong performance in Q1, strong market share, strong EBIT performance, but China was soft. But China is soft, you alluded to the brand transfer. I would first start with the market environment. As you know, the market data in China are not 100% accurate always and they come with a certain delay, but right now it's fair to assume that the China market in total was either high single digit down or low double digit down. So we saw a significant market softness, which doesn't make it easier. We are in the midst of the brand transfer, and that will be with us for another year. And we saw very strong growth of Vopel brands, but we of course then see the opposite effect on the Sanya brand, which is coming down. So the net effect between industry brand transfer, we had significant volumes down in China. We are committed to do the brand transfer. That's why you've also seen significant more investments in brand advertising in China in Q1 and you will see that going forward. So we are committed to make this brand transfer successful. And keep also in mind when we talk about China, China as far as a very important production base. We produce microwave pretty much throughout the world. We have a very sophisticated and strong 4 door refrigerator coming out of China. We have more and more exports. So China is for us beyond the domestic market, which of course is challenging, I agree. It's a very important, and also long term important production base for us. Okay, fair enough. Thanks very much. Your next question comes from the line of Mike Dahl from RBC Capital Markets. Please go ahead. Good morning. Thanks for taking my questions. Good morning. Good morning. Good morning. I wanted to follow-up, Mark and Jim, just as a clarification, the 2Q commentary around North America margins. I thought in the opening remarks, the comments were that margins would resemble 1st quarter margins in North America rather than year ago margins. So I just wanted to clarify that because 12.3% is still a pretty solid number in the context of the pressures that you're talking about on production takedowns? Yes, Mike, this is Jim. And I think when you look at it quarter over quarter, again, as we've said for the full year, we expect North America to be 12% plus. So it implies that we're going to and we don't as Mark said earlier, we don't give quarterly guidance, but that we're going to be close to that number throughout the year. And that within the Q1, we did have a slight benefit and as I say, slight benefit of some incremental production above our shipment levels that will correct in the Q2, but it won't be a significant deviation so that way. Got it. Okay. And my second question, I think you guys adopted new lease accounting this year and I was hoping you could give us a little more detail on what if any impact that had on the P and L, where it's coming from. Sundry expense was an income line. So I don't know if there was something impacting that or if it's somewhere else, but just any detail you can give us on the lease accounting and maybe also the sundry? Yes. So if you step back Mike on this and look lease accounting was a U. S. Wide change that was made to the accounting rules that you had to adopt by now. And effectively, you put all your leases now on your balance sheet rather than having them as off balance sheet. So we put over $800,000,000 on our balance sheet that offsets that then there's an offset for a future payable on that. The impact of the P and L is nothing because you were currently flowing that through as a lease expense. You still flow that through in a similar way, still have similar cash payments. It's just the way that you now have put these on your balance sheet versus you had them off your balance sheet before. In terms of the sundry, what we had within that line is we had a and we carved this out of ongoing, so it's only in our GAAP results. We had a significant gain in Latin America on a legal case we won regarding some operational taxes. So we recognized about an $85,000,000 gain and that's net of income taxes on it and success fees, legal success fees. And again, that's carved out, but that sits down in that interest in sundry line. So again, we it's nothing that affects our ongoing results within there. Your next question comes from the line of Ken Zener from KeyBanc. Please go ahead. Good morning, everybody. Good morning, Ken. Good morning. Nice North America margins as well as new picks in your presentation. I'm sure you're going to be addressing this stuff at your Analyst Day. So I only really have one question for you. Given the strength of your North America margins, obviously that alleviates up, I think near term pressure people thought might have occurred from new production coming into America. It's going to be a long debate obviously. But my question to you is operationally. So you held guidance, you obviously got a lot of price. What other levers would you have had to offset the decline in U. S. Production by for the tailwind you had from the lower input costs. So I mean, would except for the lower input costs, would you have had to cut production or I mean are there other levers that you could have pulled? And I think it just goes to kind of the operating flexibility that the platform might have. In no way am I taking anything away from the price strength you've had. I'm just wondering if you could address that one piece. Thank you very much. So Ken, let me maybe try to take that on. And again, we will give a more strategic perspective on North America Investor Meeting, but just operationally. First of all, I want to emphasize, if you look at North America margins, this has not been a 1 quarter wonder. We had now very strong margin for an extended period. And particularly if you look at the last the trading 4 quarters, the industry was down. And in North America also, even though we don't show regional inventory, over last 4 quarters, we took even inventories down in a broader negative industry. So I would say the team has successfully and impressively demonstrated we can expand margins despite these tough environments. So in any given quarter, you have some pluses and minuses of industry, etcetera. But over last four quarters, we have a sustained margin run rate and we're now kind of on 12% or 12% plus. So I feel very good about it. It will be a little bit too easy to just say that's entirely only becoming of pricing. Yes, I feel very, very good about pricing. The team has done an excellent job in executing price, remaining disciplined, staying focused on value creation for any kind of promotion. So we've done that very well. But we also had our fixed cost base very well intact. In such an environment or particularly 2 or 3 years ago, you would have been tempted to expand fixed costs and particularly with strong margin. We were very disciplined in managing the fixed costs and we will remain so also in the near future. We have elements and that's in particular lever going forward. We are getting better and finding more traction and managing down this massive cost inflation, which again is not just raw materials and tariffs. It is logistic cost and everything else. It's been very painful. We start seeing now, I would say, progress in managing these costs down. And of course, going forward, we have to turn around the negative cost environment and find actions which are in our control to mitigate whatever inflation and pressure we have around us. So in short, I would really emphasize that the cost takeout opportunities despite a still broad inflation environment, which we will add to the equation beyond managing price mix in a disciplined manner. Thank you very much. There are no further questions at this time. I turn the call back over to management for closing remarks. Yes. And it's again, first of all, I want to thank you all for your questions, very good questions. As you've seen before, we finished a very strong Q1. Are not going to get carried away. We feel very good about the year and we feel very good about the pricing progress. We feel very good about our North American margins, coupled with strong performance in Latin America. I think you've all seen that our European turnaround actions are on track, yet a lot still needs to be done, but we'll remain confident on full year. So with that in mind, I really look forward to hopefully seeing many of you at our Investor Day in New York, where in particular we can also spend a little bit more time talking about your rightful questions about the midterm, the long term and what our margin guidance is by region and for the company total. With that, I thank you all and wish you a very nice day. Thank you. This concludes today's conference call. You may now disconnect.