Earnings Call: Q4 2018

Jan 29, 2019

Good morning, and welcome to Whirlpool Corporation's 4th Quarter 2018 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 Tennecliff. Thank you, and welcome to our Q4 2018 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. At this time, all participants are in listen only mode. Following our prepared remarks, the call will be open for analyst questions. As a reminder, we ask that participants ask no more than 2 questions. With that, I'll turn the call over to Mark. Thanks, and good morning, everyone. On Slide 3, we show our 4th quarter highlights. As you saw in our press release, we delivered strong results for the quarter, including a record ongoing EPS of $4.75 Excluding currency, we delivered revenue growth of 2.5%, driven by very strong price mix actions across all regions as we continue to realize the benefits of the actions we initiated early in 2018. Additionally, our North America region continued to deliver impressive results, driving 5% revenue growth while again expanding EBIT margin 40 basis points despite a soft industry and significant cost inflation. In Europe, we drove sequential quarterly improvement in volume and EBIT margins, which were in line with our expectations as we began to benefit from previously announced actions directed at returning the region to profitability. Lastly, I want to remind you that our prior year results included the benefit of certain tax credits in our Latin America region, a 50 basis point positive impact to our Q4 2017 consolidated EBIT margin. Turning to Slide 4, I will discuss our full year highlights. We delivered solid global results and expanded margins in North America despite a number of challenges such as softer than anticipated industry, significant cost inflation, trade tariffs and currency volatility. In total, these challenges amounted to an approximately 200 basis point impact. Additionally, our performance in Europe was worse than expected and drove a mix in revenues and margin for the corporation. Based with these challenges, we quickly adapted our plans and took strong actions to address and offset them. These actions included strong execution of our previously announced cost based price increases, delivering on our fixed cost reduction initiatives, refocusing and rightsizing our European business and continuing in our disciplined approach to capital management. Lastly, we delivered very strong free cash flow of $853,000,000 for the year, driven by disciplined working capital management, including significant improvement in inventory and the favorable timing of certain payments. The actions we took in 2018, coupled with favorable exit rates in Europe, give us confidence that we will deliver results in 2019 and put us back on track to our long term goals. Turning to Slide 5, we show further details of our margin performance, which were highlighted on the previous slide. Full year margins positively benefited from successful execution of our global price mix and innovative product launches throughout the year, impacting margins by approximately 200 basis points. Additionally, our previously announced fixed cost reduction actions continue to progress in line successfully offset the significant raw material, tariff and currency challenges we faced throughout the year. 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 4th quarter results for our North America region. We delivered very strong results in the quarter with both revenue growth and margin expansion despite continued challenges in the external environment. Net sales increased 5% despite negative industry demand. Overall, we expanded our ongoing EBIT margin approximately 40 basis points as we overcame more than 150 basis points of cost inflation. Our ability to once again deliver strong margin expansion regardless of external volatility and significant inflation demonstrates the fundamental strength of our North America business. Turning to Slide 8, we review the 4th quarter results for our Europe, Middle East and Africa region. Excluding the impact of currency, net sales were down 6%, but reflects sequential quarterly improvement. EBIT margins were positively impacted by continued year over year price mix improvement, which was more than offset by approximately 2 25 basis points of cost inflation and currency. We delivered sequential EBIT improvement as we began to experience the benefits of our actions centered around stabilizing volume. I will provide an update on these and other actions later in the guidance portion of this presentation. Now we turn to Slide 9 to review the Q4 results for our Latin America region. Excluding the impact of currency, net sales increased approximately 1%, driven by share gains and positive price mix. Our underlying home appliance business drove EBIT margin expansion, which was more than offset by approximately 300 basis points of cost inflation and currency. Also, prior year results were favorably impacted by the sale and monetization of approximately $30,000,000 in certain tax credits. We now turn to the Q4 results for our Asia region, which are shown on Slide 10. Excluding the impact of currency, net sales increased 11% as we benefited from unit growth and share gains in India. EBIT margins declined as strong price mix was more than offset by raw material inflation and an increase in our bad debt provision. Now I'd like to turn it back over to Mark to review our guidance. Thanks, Jim. On Slide 12, we review our guidance assumptions for 2019. In line with our long term goals, we expect to drive net sales growth of approximately 3%, adjusted for the divestiture of our Embrocco compressor business and the carryover impact of currency. In addition to previously announced pricing actions, we are bringing innovative and compelling product launches across all regions in 2019, which will positively impact mix. We expect to deliver ongoing EBIT margins of 6.5% to 6.8%, a 40 basis point increase compared to 2018. And free cash flow of $800,000,000 to $900,000,000 progressing strongly towards our long term cash conversion goal. Turning to Slide 13, we highlight the drivers of our ongoing earnings per share expectations of $14 to $15 As you can see on this chart, there are certain elements which make our 2018 ongoing earnings per share not fully comparable to our 2019 EPS guidance. Most notably is our tax rate assumption of 15% to 20% compared to 6.6% in 2018 as well as the absence of Embraco business for 3 quarters of the year. At the same time, the EPS measure had a carryover benefit from share buybacks in 20 18, while at this point, we have not included a specific number for share buybacks in 2019. The ongoing EBIT margin expansion is expected to drive approximately $1 of earnings per share growth, which I will discuss in further detail on the next slide. Turning to Slide 14. Which show the drivers of our EBIT margin improvement in 2019. We expect approximately 150 basis points of improvement related to continued price mix benefits and net cost improvement of 75 basis points as our fixed and ongoing cost reduction initiatives remain on track. With macroeconomic pressures remaining elevated, we continue to expect an increase of approximately $300,000,000 in raw material inflation and tariffs. And we anticipate additional investments in our brands and products in support of upcoming product launches. We're confident that we have put the right actions in place to drive margin expansion in 2019. Now Jim will cover our regional guidance and cash priorities. Thanks, Mark. On Slide 15, we show our regional industry and EBIT margin guidance for the coming year. Starting with industry demand, we anticipate continued economic and trade uncertainty to temper overall demand resulting in moderate, but positive industry growth of approximately 1% globally, with the exception of our Latin America region, where we expect a strong improvement in consumer demand. As previously discussed, we expect to deliver margin expansion across every region driven by price mix actions and strong cost takeout. Turning to Slide 16, I'd like to update you on the strategic actions we announced last quarter to refocus our EMEA business and return to profitability. First, we have taken specific actions to stabilize volume across the core EMEA business. We saw volume improvement in the second half compared to the first half of twenty eighteen, and we expect volumes to be positive in the Q1 of 2019. Discussions with our trade customers are focused on recovering floor spots lost during the peak of the integration. These negotiations began late in Q4 of 20 18 with the majority expected to be completed by the end of Q1. Our efforts to refocus marketplace investments towards our most profitable segments are on track to deliver benefits throughout 2019. 2nd, looking at the bottom half of the slide, we are on track with the strategic actions we announced last quarter to refocus and rightsize our EMEA business. The exit of Turkish domestic sales operations and Hotpoint Branded Small Appliance Businesses is in process and is on track to conclude by the end of Q2, and we are actively marketing our South Africa operations region is on track. As a result of all these actions, we expect to drive approximately $100,000,000 in annualized EBIT improvement in EMEA before exit costs. For 2019, we expect to realize approximately $75,000,000 for this 1st year of implementation and $100,000,000 in total gross benefits thereafter. From a quarterly earnings perspective, we anticipate year over year EBIT improvement in the Q1 and expect to be around breakeven in the Q2. We are firmly committed to improving our regional cost structure and restoring profitability in EMEA, placing us back on track toward our long term margin targets for the region. Turning to Slide 17. I will discuss the drivers of our 2019 free cash flow. We expect cash earnings to positively impact free cash flow as margin expansion is partially offset by the sale of Embraco. Additionally, 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 which have a neutral impact to cash overall. These items are explained in more detail in the appendix of the slide presentation. In total, we expect to drive $800,000,000 to $900,000,000 in free cash flow, excluding the anticipated proceeds from the sale of Umbraco. Turning to Slide 18. We show our capital allocation priorities for the year. We remain committed to fully fund the business for growth, while maintaining strong cost discipline across all regions. Additionally, we continue to expect to close the sale of our Umbraco compressor business in early 2019 and use the anticipated proceeds to pay down debt. Consistent with our balanced approach to capital allocation, we intend to continue share buybacks, albeit at a moderate pace, while continuing to strengthen our balance sheet. We are committed to maintaining a strong investment grade rating and optimal capital structure as we target a gross debt to EBITDA ratio of approximately 2. Now we will end our formal remarks and open it up for questions. Your first question comes from the line of Mike Dahl from RBC Capital Markets. Please go ahead. Good morning. Thanks for taking the questions. Just wanted to start off on the North America guidance and what you guys are thinking from a price and a volume perspective, just given some of the moving pieces in the industry, tariffs rolling off, new capacity coming online, some of the other items? Yes. First of all, Michael, it's Mark. Let me maybe just talk a little bit about the 2019 North America guidance. First of all, as you've seen, we guide towards a very strong EBIT margin of 12% plus, and we expect the industry to grow approximately 0% to 1%. And let me just elaborate on both items. The 12% is pretty close to where we're already running at 2018. As you see north in Q4, we had 11.8%. On a GAAP basis, we're even above 12%. So even in somewhat softer than expected market environment we're experiencing in Q4, we are pretty close or we're already running at 12%. So we're highly confident with 12% -plus, and that is also a result of the carryover of the pricing which we had in 2018 and the effect of previously announced price increases in kitchen segment which came into effect late December. So there's a significant portion of carryover benefit from the pricing, coupled with what we still expect to be a somewhat inflationary cost environment. But at the same time, we're having confidence that we're getting more and more traction on the cost takeout actions. So a combination of that leads to a further expansion of margins. Now on the industry, as you see, we're guiding 0% to 1%, and that is on the back of what I would say a stable replacement market and the housing market, which as you've seen in Q3, Q4 went somewhat sideways. But as we also said in the previous earnings call, even though we're not surprised about the sideways moves at the housing market, we're still fundamentally bullish on the long term demand driver of the U. S. Housing market. So and that's probably explained for broader context. Now particularly with regards to tariffs, and I presume you're talking about the washer tariffs, the 201 tariffs. First of all, as we already indicated, one competitor was already fully kind of live and up and running kind of Q3, Q4. So we wouldn't see any further changes or impact in the marketplace. And BR1 has been partially online. So I don't expect dramatic changes coming out of this one because we've seen already most of that. With regard to the other tariffs, and that may be also a point of clarification for just for broader guidance. We at this point have included the tariffs as they have been announced or as they have been kind of communicated by the government, which also includes the 301 List 3 part, which is supposed to go to 25%, I think, early March. So we have fully factored that in, but also recognized, of course, there's a lot of uncertainty on moving parts on the tariff side. Got it. A lot of helpful information. And then just a quick follow-up. And when thinking about the overall guidance and the different moving pieces in there from a segment region. I think if you look at it from a segment standpoint, there's upside to the numbers. So on a consolidated basis, is there somewhere that you guys are baking in conservatism? Or is there another moving piece that would help explain how to square away all of those numbers to the consolidated range? Yes. And Michael, this is Jim. I think if you step back from it to begin with, as we give the different range on the regions, obviously, there's some rounding that comes in there and all that. So if you take it perfectly, you may get a little bit higher and lower than our overall range. 2nd is, we believe overall the guidance is set at the appropriate level. And again, as you look at the different regions, I think that's pretty close to where we expect to be. Outside of that, I think it's just rounding and nothing else in there. Yes. Michael, maybe it's Mark. Maybe just elaborate a little bit further. First of all, stepping back on the guidance, and I think that's an important thing to note and recognize. As we said in our prepared remarks, the 'nineteen guidance or EPS is not fully comparable to 2018 because there's a big element which just comes from what I call a more normalized tax rate of 15% to 20 percent and the absence of Embraco. So you take these two elements out, it's basically $2.25 So that's particularly when you look at the broader guidance, it's a big element. Underneath that, we're still planning margin expansion, margin expansion on the back of pricing, but also recognizing some cost elements. So to Jim's point, I would call our guidance realistic. But I think as we've evidenced in Q4 and hopefully what you hear, we're very confident. We're very confident that we're in control of all the actions. We delivered good margin and good performance, also cash flow side in Q4 despite a soft industry. So we're highly confident. But I also recognize there's uncertainty as we experienced in 2018, and we're probably going to be volatility 2019. Right now, I think volatility points more towards, call it, upside risk, I. E, the raw material going in the right direction. But we all recognize on the currency side, on the raw materials, there's still a lot of uncertainty out there. And that's what we have appropriately reflected in our guidance. But again, I want to reiterate, we're highly confident in our actions. Understood. Thanks for taking the questions. Your next question comes from the line of Susan Maklari from Credit Please go ahead. Good morning. Good morning, Susan. In 2018, we saw you get really significant price in North America, especially sort of relative to the way the volumes came through. Can you just give us some color on how you're thinking about pricing in 'nineteen? I know that there'll be some sort of continued benefit that comes through from what we saw last year. But just how should we think about the breakdown in terms of pricing as we move through this year? Susan, it's Marc. So first of all, I want to also reemphasize, it's not just North America. We had globally very strong price mix across all four regions in Q4. So that's a pretty remarkable progress. Now North America was particularly positive on the pricing side. And to your point about 2019, there's a significant part, which is carryover, carryover from the price increases, which we announced early in the year. And of course, there's kind of a new announced price increase from Kitchen, which came in effect late December. As you also know, we're not making any forward statements about what we might or might not do in pricing. The only thing which I want to reiterate is we I do believe based on our strong product pipeline and the product launches, we have significant mixed opportunities ahead of us beyond list price increases. So we are beyond the list price, our mixed opportunities are big. Our product pipeline is strong and we're confident behind that. Okay. And then I just wanted to dig in a little bit more into the $300,000,000 of raw material and tariff inflation in there. Can you just talk to what you've been seeing in steel? Maybe any color around how much or to what extent you were able to lock in prices? And how we should be thinking about maybe some tailwinds that could perhaps flow through over the next few quarters? Susan, it's Mark again. And this also comes back to what we said in the previous earnings call. The €300,000,000 as you rightly point out, is both a combination of raw material inflation and the effect of tariffs. So these are the 2 big components in there. On the raw materials, when we first kind of indicated €300,000,000 we took a forward assumption on raw materials into account. So we factored in a certain, call it, normalization of steel prices and we also factored in a kind of improvement on particular plastic prices. Because as you know, these are the 2 big components in our raw material purchase. So I think sitting here today, well, of course, we saw the steel price coming down and plastics coming down, which is in line with pretty much what we expected. And given the kind of long nature of our steel contract, we locked in, I would say, reasonably good conditions. But they still mean a year over year increase because that's we're comparing not against spot but against kind of full year average. So we still have some increases, but I would agree right now, steel and plastic are pointing in the right direction. But as you also know, there's other raw materials which have a lot of volatility. The other big part which has not changed, because at this point we just don't have new information is the tariff landscape. The combination of 232 and the 3 different lists on 301. And as I mentioned earlier in my answer to Michael, particularly on 301, we have fully factored in a potential increase or likely increase to 25% as of end of March or mid March. So that is sitting in our in these assumptions. But frankly, it's we can't speculate about whether this happens or not. We right now took into account what is known and what has communicated by the U. S. Government. Your next question comes from the line of Michael Rehaut from JPMorgan. Please go ahead. Hi, thanks. Good morning, everyone. Good morning, Michael. The first question, I just wanted to circle back a little bit and just make sure I'm thinking about the components of the margin guidance correctly. I think earlier, it was kind of pointed out that if you kind of sum up the regional components, you'll get something maybe slightly above the 6.5 to 6.8. By contrast, actually, if you sum up the components of price mix, costs, raw material inflation on Slide 14, you actually get right at the lower end of the range. So obviously, there's a little bit of rounding, Jim, as you said. Are we just to take it that each of the components on Slide 14, you might want to slightly that you're being a touch overly conservative. I'm just trying to understand how perhaps if you look at the components on 14, Slide 14, if there are any areas where let's say price mix, maybe it's not 1.5%, you're really thinking 1 point in 160, 170 basis points, if there are movement within those components that gets you a little bit to the closer of the midpoint of the range? Yes. And Michael, this is Jim. I think as you start out and you pointed out here that as you start to go through the different components there and I think Mark highlighted this earlier in some of his answers is that all of these are a point in time estimate and there's some variability within them. Right now as we look at RMI, we would say yes. Based on what we've said, we see the conditions similar to maybe slightly favorable. Tariffs are in the same situation as we had expected before, but there still could be some movement throughout the year in there. Net cost with inflation in there, again, this is an approximation and we do expect to see obviously some variation in there. As you continue to work down the lift there as I said, I think if you add up all the pieces, could it be a quarter point either direction in aggregate? Yes. And that's why we put a range around this right now. These are our best estimates at this point in time. If you look at across the different regions, I think also as we've said there that there's probably some rounding as you add it all up and try and get. But we feel very comfortable. As Mark said, we feel very confident about the range we've given on EBIT margin. We feel very comfortable where it's coming in that it reflects the best information we have today. I appreciate it. I guess secondly, I just also wanted to go back to pricemix more broadly. You talked about some of your expectations around the carryover of 'eighteen actions, price mix actions, as well as new price increases effective in the Q1 essentially. On the mix side, you also said you think you have some positive or upward potential there. I was hoping if you could just talk a little bit about the industry backdrop in North America right now from a mix standpoint, how it's trending. One of the things that we've observed across different building product companies is somewhat of a negative mix shift or strength in lower price points across different building product sectors in 2018. I'm curious if you've seen any of that in the appliance world this past year from a mix standpoint and how your own business has performed against that and what you expect for the upcoming year? Michael, it's Martin. Let me try to answer that. To your point about the building products and kind of more of the lower end growing, I would say in the pure new housing side, I would see, yes, there are some trends or some signs that in particular the first time buyers are coming more into the market, which overall I would see as a good news in its demand, which comes with a slightly lower mix. Keep in mind that it's only a fraction of the total markets with the new housing. On the broader base, we don't see that massive shift down. I would say the broader mix is pretty stable. But then I would also again point to back to what we are doing on product launches and innovation. I mentioned in one of my early calls, we have this year for Vopro brand an entire new global brand language for the kitchen products. We'll just launch a new front load washer, an entire new front load washer platform in North America. And we will in Q2 announce an entire new top load airline. So we I think we're bringing out a lot of new products with a lot of innovation, which ultimately I think that's our job to kind of bring the consumer to buy it and to mix up and I think we feel very good about what we have there in the pipeline. Great. If I could just sneak one more in. In Braco, what was the contribution from a revenue and profit standpoint in 2018? And I think you're only baking in 1 quarter of that in 2019? Yes. I mean, right now, Michael, we've assumed that that's about as we've said in our margin walk, our EPS walk, it's about $0.50 is the difference. As we pull that out, we have factored in approximately 1 quarter of that. And then from a top line perspective, approximately $1,000,000,000 Your next question comes from the line of David MacGregor from Longbow Research. Please go ahead. Just kind of a high level first of all, and then a couple of follow-up. But I guess having covered you guys for a long time now, this is a pretty strong pricing environment, probably the strongest pricing environment I remember seeing with you in over 20 years. And I'm just wondering if something's changed here with regard to the tariffs, you've got foreign manufacturers adjusting U. S. Cost structures. You truly have an acceleration in new product introductions and innovation going on as well. But the big risk to the 2019 guide seems to be your ability to hold on to pricing in North American market. And just wondering if something's changed structurally in the marketplace competitively that would suggest that maybe the industry as a whole has a little more pricing power. In other words, the space is becoming a little more rational. What are your thoughts there? David, it's Marc. So I mean, so yes, you're correct. In 2018, we had a very significant positive price mix for the entire company. I also want to remind everybody, we had also very significant cost inflation out there. So it was a cost base need, and I think that explains a big part. The other part is, and I can't speak for the industry, I can speak for ourselves. We shifted, I would say, several years ago where we said we will participate in promotion, then we believe it creates value for us as a company. That policy hasn't changed even under pressure. I think so there is a strong commitment on our side to expand margins. We saw cost increases reflected that progress the product pricing. And on top of that, and again, I can't be stressed that enough, we launched a lot of new products. We invest every year $600,000,000 in capital and almost the same amount in engineering and that ultimately pays off. I mean, we feel very good about our product pipeline. There's not a single platform in North America, which I right now would see is behind. We feel very good and that helps us also having these prices stick. Okay. Follow-up question, just regard to the balance sheet, you talked about trying to get your leverage down to 2.0 or approaching 2.0 by the end of the year. Can you just talk about how that plays out in terms of your share repurchase plans versus deleveraging plans and what we should expect there? Yes. So David, this is Jim. And the first thing on the deleveraging that's obvious is when we closed the Embraco transaction that brings $1,000,000,000 worth of debt off our balance sheet within a very short period of time. The second thing is we've highlighted we do expect our cash flows to be very similar to strong this year. So we'll have adequate free cash flow to handle all the various things we've talked about in our capital allocation. From a and we've talked about that we want to get our debt levels closer to 2% and very close to 2% by the end of the year. If you look at share buybacks right now, as we've said, while we don't give a solid number, we do say we'll continue to do it a at least in the near to midterm on an ongoing basis. And David, it's Marc. Let me maybe just add to Tim's point. First of all, I also want to underline. We have today a very strong balance sheet and our debt rating is a very solid one. But it's and this is consistent with what we have communicated for quite some time on capital allocation. We want to have directionally a balance sheet or debt leverage of 2%. We will not be exactly 2%, but we will get pretty close to 2% by the year end. So the combination of strong cash flow, kind of the reversal of this Embraco related loan and kind of a moderate share buyback that exactly leads you to that level. And that's, I think, Ben, we have a very strong balance sheet, which leaves firing power and prepares us for whatever might happen. Your next question comes from the line of Sam Darkatsh from Raymond James. Please go ahead. Good morning, Mark. Good morning, Jim. Happy New Year. Good morning, Sam. Happy New Year. You as well. I was kicked off earlier, so I apologize profusely if you've already covered this. But I've got 2 questions and both of them have to do with Slide 5. So first with net cost for the year, it was a favorable 25 basis points to margin, but I think last quarter in October, you were pegging that at 75 basis points for the year, which is a pretty significant swing. It's like $100,000,000 negative variance. And I'm trying to piece together why that would have occurred in such a truncated period of time in the quarter. I'm guessing there's some freight and warehousing in there. But could you talk about what happened with net cost in the quarter versus planned? Yes. Sam, this is Jim. And let me start off and then Mark can add some color commentary here. I mean the first thing is we had some of it that was just a shift from marketing and technology to net cost. So again, as I said, these are always approximate buckets and we had some movement within the different cost lines, but being close to where we expected to be. The other thing you've got to remember, if you look at our strong cash flow that we generated, a lot of that came through inventory reduction. And that continued to put pressure on our net cost takeout throughout the Q4. And so it was slightly below where we'd expect it to be from a conversion perspective, but we had a significant benefit within working it to be from a conversion perspective, but we had a significant benefit within working capital and inventory that we really felt was appropriate. And the other thing that you highlighted is that we saw continued trends in inflation outside of raw materials, especially in logistics costs that continue to put pressure on those areas. So those are 3 of the big items that really caused that to move from where we thought it would be at the end of Q3 to where it was at the end of the year. Yes. And Sami, the only thing which I want to add is, margins on the tariffs, in particular, if you compare the first half with second half, the tariffs largely sit in the second half. So that is what we saw in Q4, that's pretty much reflective of what we expect to see in Q1. The good news is we delivered North American margins with all the tariffs already being in effect. Now the other point, and again, it's echoing what Jim was saying on the inventory. We drove year over year a very significant inventory reduction in a pretty much flat demand environment. So depending on if you count in Braco in or not, we have more than €400,000,000 actually, euros to €500,000,000 inventory reduction. You also know there's a certain fixed cost leverage, which is fairly significant. So kind of a negative impact of not having that production volume is fully sitting in this net cost element. And the good news is we're starting the year with, I would say, very balanced inventory levels, and we don't have to reduce that as we go into 2019. And my second question, the marketing and technology investments were ultimately trimmed, although again, there may be some definitional things as you suggested, Jim, in the Q4. But for 2019 guiding to a 25 basis point headwind, that seems like you're taking your discretionary expenses lower, especially in an area where one could argue it's designed for long term growth and brand support. Is that you getting more efficient with marketing and technology investments? Or is that decision you're making based on perspective end market activity and elasticity? Why take those investment spending numbers down? No. And Sam, I'd say you kind of hit the nail on the head on part of it there. We are becoming a lot more efficient in what I'll say our R and D or engineering spending. And we've talked about that over the last few years, the reorganization we've done at that group and how we've aligned to get more projects done with less spending and make ourselves much more efficient in that area. We continue to invest significantly in our products. Additionally, in that space, there are some technology investments that we've had that can ebb and flow throughout periods of time, especially with some of the integrations that we've done. And so we're seeing a slight reduction in some of those as we wrap up some of the integration within EMEA. So those are the big drivers that we have there, but we do continue to invest in our products significantly. And if I could sneak one more in real quickly. The IMBRACO sale proceeds, are they guaranteed no matter what the regulatory timing or ruling is ultimately on the sale? Yes. Sam, it's Mark. As you know and I think we mentioned that in one of our previous calls, the buyer is required by contract to do whatever is needed to get the regulatory approval by the end of April. So that is technically, legally, it's called a hell or high water clause. So they have to take all actions necessary to get the regulatory approval. They got a lot of already a lot of regulatory approval, the ones which are still missing is Europe and Turkey. But we're confident that we'll buy and we'll get it by end of April. So and then kind of that triggers this that happening, that would mean the reversal of the short term loan, which we took on the share buybacks last year. Your next question comes from the line of Ken Zener from KeyBanc. Please go ahead. Good morning, gentlemen. Good morning, Ken. Good morning. Very solid North America margin. Could you talk a little bit, Jim, maybe just to start, is there a first quarter or first half weighting ratio that we should be focused on? And if I missed it, I'm sorry. Yes. And Ken, we really haven't said anything about weighting. I think you should expect it to be similar to our normal pattern of seasonality within the year and especially as you look at Q1. I would say it's going to be very similar to prior years. There's no distinct items. Obviously, Mark did mention earlier, the tariffs do weigh a little bit heavier in the first half of the year on us because they accelerated throughout the year and we do have some additional interest cost within the Q1 due to the term loan we took out in the Q2 of last year and we'll have that until we get the Embraco proceeds in. But outside of that, it's going to be relatively similar from an operational perspective. Okay. I appreciate that. Mark, you mentioned I just want to be clear, because the effect is another company that I cover. You said it's the 25%, I assume tariff increase was fully priced in. Could you go over that again in terms of clarify that as well as quantify that in case the 25% does not go through? I mean is that how much is that worth if it doesn't go? I assume you're talking about the tariff. Yes. So Ken, I mean as you know and given that you covered quite extensively, there's a lot of tariff components versus 232 versus 301, which had 3 different And what we have factored in everything which has been communicated or announced at this point, which means basically everything on the 301, all 3 lists, including the increase to 25% of a famous List 3 of part of a 301 section. That is all factored in. We typically don't split kind of the different components between List 1, List 2 and List 3. But it's needless to say, well, if List 3 stays at 10%, yes, there will be a positive impact. But in total, it still will be a headwind, but it will be positive impact. Right. I'm just trying to get a little because there was another company that had 10% and said the 25% would be an X% headwind. So if it doesn't go through, I'm just trying to extract from you a perhaps benefit that might accrue to your guidance, But Ken, maybe just help you a little bit, frame it a little bit more. In total, and again, without going to all the details and the components, in total, you should assume the net of all tariffs right now weigh about $10,000,000 or $10,000,000 to $12,000,000 every month on us, and that's just reality. Every month. Every month. So the 301 is a part of that, and the 301 List 3 is a part of that. So yes, if it would say 10%, it will be a few million every month and that will be good news. But in total, it's right now still a headwind. Okay. And I think I'm going to achieve here. But so if AAM is flat, kind of your guidance for this year, You have a positive outlook on housing fine. Can you split it up a little more in terms of the suites that you're selling, so stuff that's a little more R and R versus replacement demand and just pontificate on that a little? Thank you very much. Now you successfully sneak in 4 questions. Having said that, right now, again, we guide North America to a very modest growth of 0% to 1%. And that is against a housing market, which is right now still moving sideways. However, we expect the fundamental demand drivers to be intact and still a reasonably good actually. If you look at the numbers, actually a very good consumer confidence. With that in mind, on a pure in the traditional split between replacement and discretionary, Right now, we see slightly more than half of a market around replacement and discretionary, being less than half. As a comparison, that discretionary volume is still way below what we saw, for example, 205 or 206 at the peak of our clients' demands. So if you want to see so say so, I mean, replacement is a pretty predictable number because that's just it becomes with a life of appliances. So the discretionary, yes, in the long term, you could argue still has some upside potential, but we did not factor that in our 'nineteen guidance. Your next question comes from the line of Curtis Nagle from Bank of America Merrill Lynch. Please go ahead. Great. Thanks so much for taking the question. So I guess just kind of the first one going back to North America volumes. I guess could you give any color in terms of how things look from a cadence perspective given that comparisons are just a little bit choppy kind of quarter to quarter? Curtis, it's Mark. Let me first of all talk about Q4. As you've seen in Q4, frankly, we expect the industry to be a little bit stronger in Q4 and largely driven by we expected Q4 industry to have a probably a little bit more inventory low by retailers, which did not happen to full magnitude. On the sell through base, internally, we probably would have expected a 1% to 3% sell through growth and probably now in Q4, the sell through from consumer perspective was probably around 0 to 1. So a small change versus what we originally had in mind. So I would expect also on a quarter by quarter basis, you will see the plus or minus 1% up and down quarter by quarter. But having said that, the fundamental driver of consumer confidence in housing, we consider to be intact. It doesn't mean that we will have a strong growth, but we just don't see right now the scenario where you would have a significant quarterly contractual market. Again, we see consumer confidence and the fundamental drivers of demand being fairly intact. Okay. Fair enough. And I guess quickly going back to the 300,000,000 dollars I understand, I guess, the basis of worldwide still at 300,000,000 but let's just say hypothetically, steel and perhaps resins continue to be weak and maybe get a little bit of relief there. Would you have to pull back any of your cost base price increases, say, later in the year if that would happen? Yes. Kurt, this is Jim. I'd say, right now, as we said, we base the $300,000,000 on what we've seen to date and what we expect obviously throughout the year. Different dynamics can drive that. The cost or the price increases that we have announced are based on the cost increases we've seen. And so at this point in time, that's also our best estimate of that. Obviously, throughout the year, as we see different trends within the marketplace around cost and all that, We'll update our guidance in those areas, but there's a lot of different lines of volatility in addition to RMI that we're seeing today. As we mentioned tariffs, there's still some unknown on currency, obviously some up and downs on. And inflation in other areas of our P and L, especially around logistics and other areas that can fluctuate also. So at this time in aggregate, we really feel that in terms of what we're seeing in cost in terms of cost increases are appropriate for the year right now. Your next question comes from the line of Alvaro Lacayo from Gabelli and Company. Please go ahead. Good morning, gentlemen. Good morning, Alvaro. Just two quick questions. On North American, the expectations you see for that 0% to 1% growth, if you can maybe just talk to us about your assumptions on what you think repair and remodel spend growth will be and what your expectations are on new construction? And then secondly, with regards to the tariffs, particularly the piece that would step up to 25% in March, If that were to change or if that doesn't materialize if the step up doesn't materialize, would that impact pricing realization in any way based on the conversations you have with your retailers on what price increases may be, especially the ones in kitchen that were just announced? I think, Alvaro, let me start with your second question. As I just mentioned previously, there's a lot of different moving parts within our cost structure today in terms of raw material increases, tariffs, logistics cost increases. And so the 301 tariffs in that last piece is only a small part of all those increases that you see. So I think there's a lot of other moving pieces and cost pressures that we're seeing right now on top of that. And I think as Mark mentioned that while it could be a benefit to us, it's not going to be a significant benefit against that total bucket of cost increase that we're seeing right now. The second thing and then I'll kind of let Mark talk a little bit about the demand. As we've looked over time in terms of what how much of the demand is replacement versus discretionary, it typically treads around the 50% range, plus or minus 5% from there. And as we look forward to 2019, we don't see a significant deviation in that in terms of what we expect to be versus the last 3 or 4 years, what we expect to be discretionary versus replacement. And Alvaro, it's Marc. Let me maybe just add a few additional comments on particular housing. And obviously, we all follow the press and analysts report on housing. And it almost feels like there was a first period of overconfidence and now over pessimism. I think both extremes are wrong, I think. Fundamental housing, yes, we saw some moderation, but the fundamentals are solid. To give a little bit more color, and I think I made some comments on this one on previous earnings call. The U. S. Housing market ever since recession has been supply constrained. That supply constraint led to probably an acceleration of home prices ahead of where you would expect of a demand cycle. And kind of that started to cycle down demand a little bit. Come on top of that, the mortgage increase, which were particular in, I think, August, September of last year, that together led to a small moderation. Now having said that, if you look at the fundamentals of household formation, entry buyers, age of the housing stock, rental occupancy, etcetera, etcetera, the fundamentals actually leave a lot of upside opportunity. So with that in mind, whenever people talk about the housing market, it's not even remotely comparable to what we saw like a decade ago. We're still on the new housing, way below a 25 year average of new housing and even existing home sales are far away from high numbers. To be more specifically, yes, on existing home sales, we would expect the number clearly north of 5, probably somewhere around 5.3 to 5.6 in that ballpark. And the new housing, we would expect the number getting close to 1,300,000, which again is way below kind of what you've seen in previous cycles and way below long term average. At the same time, we don't expect kind of a double digit to high single digit growth of that market. It will be a solid, probably single low single digit growth in the housing market. I think we're coming to the end of a Q and A section. So let me maybe just quickly summarize a little bit some of our key messages from this call and also from Q and A on Slide 20. As we exit 2018, we are encouraged by the results of our actions to overcome significant external pressures and volatility. Now looking back at 2018, we took decisive actions to overcome these headwinds, including the successful execution of our previously announced cost based price increases, delivering our cost takeout commitments, refocusing and rightsizing our European business and driving sustainable improvements in working capital. We are confident, but the strategy, the natural is currently in place to generate margin expansion and strong free cash flow in 2019. Regarding capital allocation, we will continue to buy back shares at a moderate pace, while we are on track to further strengthen our balance sheet. And finally, we will be providing you with a strategic update on our long term plans at our Investor Day in New York City on May 23. With that, I just want to thank you for joining us today. Wish you all a good week and looking forward to talking with all of you at our earnings call in late April.