Earnings Call: Q3 2018

Oct 25, 2018

Good morning, and welcome to Whirlpool Corporation's 3rd 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 Tunnicliff. Thank you, and welcome to our Q3 2018 conference call. Joining me today are Mark Bitzer, our 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 atwhirlpool.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, let me turn the call over to Mark. Thanks and good morning everyone. On Slide 3, we show our Q3 highlights. As you saw in our press release, we delivered record ongoing earnings per share of $4.55 as well as ongoing EBIT margin expansion in 3 of 4 reasons. From the Q2 in a row, we delivered very strong price and mix in all regions as we continue to realize the benefits of a price mix actions we took earlier this year. Additionally, our North America region delivered impressive results, driving strong top and bottom line growth. We expanded ongoing EBIT margins in North American regions despite soft U. S. Industry demand and continued cost pressures as we increased our share position while also delivering very strong price and mix. Operational and external challenges continue to weigh on our European results, But we are encouraged by the sequential progress we made on slowly restoring volume in the Q3. And today, we are announcing further actions to refocus and improve our Europe performance in 2019, which Jim will discuss later in the call. Additionally, as part of our ongoing initiatives to respond to external factors, including raw material, tariffs and currency headwinds, we have recently announced new cost based price increases, including our U. S. Kitchen and Brazilian major home appliance business. Finally, we have taken multiple actions related to recent changes in U. S. Tax legislation, which favorably impacted our effective tax rate for the quarter, most notable, a voluntary prepayment of a portion of our long term pension obligations. Turning to Slide 4, I will discuss our 3rd quarter results. Excluding currency, we delivered global growth of approximately 1.5%, driven by unit volume growth in North America and Latin America and strong global price and mix. Ongoing EBIT margin was 6.2% as price mix was more than offset by continued cost inflation and increased marketplace investments related to recent product launches. As mentioned earlier, we made a voluntary contribution approximately $350,000,000 to lower our longer term pension obligation funding, which impacted our free cash flow year to date. We will discuss our guidance in more detail later on the call. Our ability to successfully execute cost based price increases and drive improved mix across multiple regions, while maintaining strong cost discipline, furthers our confidence that we are well positioned to deliver margin expansion and improve free cash flow conversion over the upcoming quarters. Turning to Slide 5, which shows what drives our Q3 margin performance. As mentioned earlier, our global price mix improved sequentially as well as year over year and was positive in all four regions. Our previously announced fixed cost reduction actions continue to progress in line with expectations. During the quarter, these benefits were offset by 3 main drivers. First, within net cost, we experienced rising freight costs as well as volume deleverage, primarily related to our inventory reduction actions. 2nd, raw material inflation continued to be a significant year over year headwind impacting 3rd quarter margin by approximately 175 basis points, while unfavorable currency impacted margin by 50 basis points. Finally, our margin was impacted by additional investments related to product launches, primarily in North America, which Jim will discuss in more detail later in my presentation. Turning to Slide 6, we once again demonstrate our commitment to delivering significant price mix performance. In total, 3rd quarter pricemix improved by approximately 250 basis points compared to the prior year and we delivered positive pricemix in all regions. On a sequential basis, every year, every region either maintained or improved pricemix, driving quarter over quarter improvement of 50 basis points globally. These results demonstrate the success of the initiatives we've implemented over the past several quarters. Finally, we recently announced additional cost based price increase in multiple regions, including our U. S. Kitchen and Brazil businesses, which will become effective during the Q4. With that, I'd like to turn it over to Jim to review our regional results. Thanks, Mark, and good morning, everyone. Turning to Slide 8, we review the Q3 results for our North America region. We delivered very impressive results in the quarter with both revenue growth and ongoing margin expansion in spite of a challenging external environment. Net sales increased 5% despite an industry demand decline of nearly 2% in the quarter. We delivered this growth through strong price mix as well as volume growth due to market share gains, primarily in the kitchen category. Overall, we expanded our ongoing EBIT margin 20 basis points to 12% as our strong performance overcame more than 200 basis points of raw material, tariff and freight cost inflation. These strong results once again demonstrate the success of our proactive price mix and cost initiatives and show the fundamental strength of our business in North America. Looking forward, we expect to deliver continued strong results in the region as our previously announced price mix actions and recently announced U. S. Kitchen cost based price increases are expected to offset continued cost pressures next year. In addition to these actions, we expect to deliver continued growth and margin expansion as we improve volume and mix through a steady offering of innovative products, including those shown on Slide 9. In the Q3, we completed the launch of a number of connected kitchen products under the Whirlpool brand. These products combine modern design and compelling features including Yumly guided cooking and voice command capabilities. Also within our North America business, we have made 2 massive laundry platform investments totaling approximately $100,000,000 In the Q4, we are launching our brand new front load laundry line, including a connected all in one washer and dryer. These products feature industry leading innovations. The 2nd major laundry investment brings significant upgrades to our top load platform and launches later in 2019. This new connected washer and dryer pair will offer brand specific and consumer relevant innovation in both the mass and mass premium segments. While we continue to focus on cost containment and managing price mix across our portfolio, we are truly excited about the growth and margin expansion opportunities that these and other new products will enable for our business. Turning to Slide 10, we review the Q3 results for our Europe, Middle East and Africa region. Excluding the impact of currency, net sales were down 8%. Volume remains a challenge, but we are beginning to see sequential progress with improvement in most countries. EBIT declined versus the prior year as positive price mix was more than offset by unit volume declines and unfavorable productivity due to reducing inventories. Additionally, the combination of raw materials, inflation, unfavorable currency and operational challenges in Turkey impacted results by approximately $40,000,000 or more than 3.50 basis points. Turning to Slide 11, I'd like to update you on the strategic actions we are taking to refocus the EMEA business and return to profitability. First, we have taken specific actions to recover and restore volume across the core EMEA business. We saw some improvement in the Q3 and expect further improvement in the Q4, but the pace and magnitude have been slow. In order to drive fundamental change in our volume year over year, we are focused on rebuilding relationships with our trade customers and recovering floor spots lost during the peak of the integration. We are also committed to refocusing our marketplace investments towards our most profitable segments to ensure that we not only drive higher volumes, but also capitalize on new product innovation to expand margins. 2nd, as we announced last quarter, we have begun to reevaluate certain aspects of our EMEA business. As part of that effort, we are announcing several new strategic actions to refocus and right size our business. We will be exiting a number of loss making businesses, including our Turkish domestic sales operation, which does not include the factory operations, as well as our Hotpoint branded small appliance business. Additionally, we are evaluating our South Africa operations for a potential sale as we refocus on our core European business. Together, these three businesses represent approximately $230,000,000 in revenue and a sizable EBIT loss of $60,000,000 for the full year 2018. Finally, we have announced a new $50,000,000 fixed cost reduction initiative for the region, which is expected to deliver benefits in 2019. This initiative is in addition to the $150,000,000 global fixed cost reduction announced last year. As a result of all of these actions, we expect to drive approximately $100,000,000 in annualized EBIT improvement in EMEA before exit cost as actions are completed throughout 2019. This represents a step function improvement to our regional cost structure and is the first step to restoring profitability and getting back on track toward our long term margin targets for the region. With that, we turn to Slide 12 to review the Q3 results for our Latin America region. Excluding the impact of currency, net sales increased approximately 2%. Ongoing EBIT increased 11% as strong price mix and volume growth more than offset $15,000,000 of raw material and currency headwinds driving margin expansion. We delivered these strong results through unit volume growth, share gains and positive price mix. We are well positioned to deliver margin expansion in Latin America in the coming quarters through strong cost discipline and realizing the benefits of recently announced cost based price increases in the region. We now turn to the Q3 results for our Asia region, which are shown on slide 13. Excluding the impact of currency, net sales declined 4%. We delivered EBIT of $13,000,000 a solid improvement versus the prior year. Our 3rd quarter results were positively impacted by EBIT improvement in China and positive price mix. We delivered strong results despite raw material inflation of approximately $10,000,000 and productivity headwinds related to lower volume levels and temporary industry demand weakness. Now I'd like to turn it back over to Mark to review our guidance. Thanks, Jim. On Slide 15, we'll review our updated guidance assumptions. We continue to expect total revenue to be flat to the prior year, a strong price mix improvement is offset by lower unit volumes. Despite the success of our global price mix and cost reduction initiatives, as well as the continued strength of our business in North America, we're slightly revising our ongoing EBIT margin expectations as a result of weaker than anticipated results in Europe for the second half. We now expect to deliver free cash flow of approximately $600,000,000 primarily driven by our voluntary pension contribution. Absent of our voluntary one time items, we expect to deliver approximately 800,000,000 dollars in underlying free cash flow this year. Finally, we expect an ongoing 2018 effective tax rate of approximately 10.5% for the full year, driven by our voluntary pension prefunding and additional tax planning actions. As a result of these adjustments, we're narrowing our ongoing earnings per share guidance towards the high end of our previous range. We now expect to deliver ongoing earnings of $14.50 to $14.80 per share, which will be an all time record. Turning to Slide 16, we show the updated drivers of our ongoing EBIT margin guidance. We continue to expect to deliver approximately $400,000,000 or 2 points of net benefit from improved price mix as our global cost based price increases have delivered strong results in line with expectations. Our previously announced fixed cost reduction actions remain on track to deliver $150,000,000 benefit this year. However, we have reduced our expectations for net cost as volume weakness has impacted conversion and fuel price inflation has continued to impact our freight costs. Finally, our guidance for raw material inflation, currency and marketing investments are unchanged. Overall, we now expect to deliver 6.4% ongoing EBIT margin this year. Now Jim will cover our regional guidance and cash priorities. Thanks Mark. On Slide 17, we show our regional industry and EBIT margin guidance. We now expect the U. S. Industry to continue to build on the growth we saw in September and deliver modest growth of approximately 1% for the full year. And we continue to expect to deliver approximately 12% ongoing EBIT margin in North America for the full year. In EMEA, we now expect to deliver EBIT margin of approximately negative 2% to 3%. Finally, our guidance for Latin America and Asia is unchanged. Turning to Slide 18, our total free cash flow guidance for 2018 remains essentially the same as our previous guidance. We have reduced our guidance for cash earnings as a result of our performance in EMEA. Capital expenditures have been slightly reduced due to changes in the timing of certain projects. Excluding the impact of discrete voluntary items, our full year 2018 free cash flow expectation is approximately $800,000,000 Our updated free cash guidance reflects approximately $350,000,000 of pension prefunding we discussed earlier as well as the benefits of a real estate portfolio optimization opportunity expected in the Q4. Turning to slide 19, we show our capital allocation priorities for 2018, which are unchanged and on track. We continue to expect to close the sale of our Umbraco compressor business in early 2019. In the Q3, we repurchased approximately $100,000,000 of common stock and we expect to continue repurchasing shares in the Q4. Year to date, we have returned approximately $1,300,000,000 in cash to shareholders, which already represents an all time record on an annual basis. Now, I'll turn it back over to Mark. Thanks, Jim. Turning to Slide 20, I would like to take a moment to provide a few assumptions regarding our current expectations for 2019. We expect modest global industry growth in the low single digits with the U. S. Industry showing growth of approximately 1%. Our positive view on the U. S. Appliance industry is based in part on our perspective regarding the U. S. Housing market. While we recognize the sluggish trends in housing starts and existing home sales, there are some more favorable fundamentals related to housing supply and demand that are getting less attention. First, housing recovery has been held back by massive supply constraints. Since the end of the recession, housing starts have remained well below the 25 year average of 1,300,000 units per year. Further, the current age of U. S. Rental stock is now 40 years and 100% of the new apartment supply since the recession has been fully absorbed. Secondly, supply constraints have led to a strong appreciation of home prices. In essence, home prices paced well ahead of where you would expect them to be in the cycle. This, coupled with mortgage constraints and rising interest rates, has tempered demand. And thirdly, we are now seeing a scenario where a slowdown of home price appreciation and a slight increase in inventory will meet strong demand fundamentals, including favorable demographics, a homeownership rate at a 52 year low and a strong need for rental homes and apartments. We expect the combination of these factors to lead to continued recovery in the housing market, while perhaps at a slower pace, which in turn would help ensure continued healthy demand for new appliances. While we believe the U. S. Industry will continue to grow in the coming years as a result of these factors, we also want to be clear that our North American business is well positioned to deliver strong results in any environment as evidenced by our performance this year. Shifting to cost for 2019, we currently expect raw material and tariff inflation of approximately $300,000,000 similar to what we're facing in 2018. We do expect our previous and recently announced cost based price increases to fully offset this cost inflation, while continued cost discipline and focused cost takeout will enable us to expand margins in the coming year. Finally, we anticipate significantly reduced restructuring expenses and an ongoing effective tax rate in 2019 of less than 20%. At this point, I also want to remind you that we will provide our guidance for 2019 on our Q4 earnings call in January. Now, we will end our formal remarks and open it up for questions. We'll take a question from Ken Zener of KeyBanc Capital. Good morning. Good morning, Ken. So it's been quite a year, very steady U. S. Results as you're gaining price amid lots of international volatility. So just because Europe was such a big adjustment, I would say this year, And I think it's important what you're doing in your small business appliance. So you're walking away from $230,000,000 of revenue, which is a $60,000,000 loss. Just for a perspective, was that business businesses, were those making money in, let's say, FY 'sixteen and FY 'seventeen? And I ask because I'm trying to understand if you can shrink your way to profitability given your, I believe, FY 'twenty margin targets, which are still below your long term targets of 7% to 8%. I'm just trying to understand how you might be able to get there sooner on the margin basis? Okay. So Ken, it's Mark. Let me actually maybe split the answer in 2 pieces. First, because you started the U. S. Obviously, we are very pleased with our U. S. Results in Q3. We had revenue growth, we had share growth, pricing found traction. We overcame a lot of headwinds and delivered 12% margin, which I think is a very, very strong result given the overall environment. So we're really pleased with our U. S. Performance. Specifically on European, the actions which we announced basically fall into the bucket of what we call non core business. It's the Hotpoint FDA business, the Turkey domestic sales. It's not for production, it's for domestic sales. And we're looking at option for South Africa. As you saw in the presentation, that's roughly around a $230,000,000 revenue, dollars 60,000,000 loss this year. Now specific to your question, if I would look back at full year 2016, these are businesses which even over longer term did not create a lot of value for us or no value at all. Specifically Turkey, even Turkey in a health environment is a tough business because you have strong local competitors and there's a strong franchise network in stores, which is always difficult to get into. So, I would say even a normal environment, it's a tough market. And basically, this was under the headline, we want to stop certain leaders, but we also didn't see a long term perspective to create value. Now also linked to your point about shrinking your way to profitability. Now what we're doing with these actions is we want to eliminate some leaders. We want to give the team a chance to focus on the core businesses. We are making money and we can make a lot of money in our core markets where we're strong. So, this is very much about the focus. The ultimate way to profitability beyond restoring volumes, which is more short term, ultimately comes back to what I referred to in my previous conference call. We have to strengthen our so called built in business, which is a kitchen business. That's our path to profitability beyond the short term actions of restoring volumes. Thank you. With that 2 or 1, can I ask another one, Mark? Sure. Okay. In the U. S, looking at the volume and price, I had thought looking at 2012 when you guys got about 5% price, which is where you're kind of running, Volumes in the industry or your volumes actually had fallen 5% that year, realizing there's Canada and Mexico in there. Do you think the elasticity we saw in 2Q where you got price, volume was very weak, now you outpaced the market with 5% price. Is there elasticity after a certain period of price introduction, which is to say you're gaining share, is that because the price increase has abated and or we receive lots of questions from clients about the Koreans, LG Samsung perhaps having run out of pre tariff product. Could you just talk about price and volume dynamics related to those 2 items, elasticity and the Korean tariffs? Thank you. So Ken, it's Mark again. So, first of all, on the question of elasticity, I'm always a little bit careful to give a precise number of elasticity for a number of reasons. First of all, particularly if you look at the current quarter, there's sometimes difference between sell in, I. E, what you sell into trades, sell through and other elements. I would always argue on a full year base, there is limited overall category price, elasticity on the consumer side, I. E, I would say on a full year base, consumer prices do not necessarily impact consumer demand in a strong way. Having said that, of course, it's a highly competitive environment. So, at any given point, you have competition out there, which drives a certain amount of elasticity. But I would argue, what Bush Tea and Vision in the U. S. Has probably been our strongest price mix execution by any historical standard. So, we're very pleased about the traction, how the team has implemented it. And you're referring to laundry. I want to remind us also, our first price increase was in kitchen. So, this was a cost based price increase and additional mix action throughout our entire business, not just the laundry, it's also in kitchen side. And we're really, really pleased with that. And I think we've proven that we what we understand how we manage certain categories in a highly competitive marketplace. Our next question is from Michael Rehaut of JPMorgan. Thanks. Good morning, everyone. First question, if I could go back to Europe for a moment and think it makes a lot of sense, obviously, exiting some loss making regions or product lines. But if I'm looking at what you're expecting to lose for the full year this year, it will be a little bit above $100,000,000 So my question is, as you look towards 2019, are there other areas, perhaps top line recovery, that you think could get you towards being in the black for 2019? And specifically, I'm thinking about trying to stabilize or recover some of the volume loss. And obviously, it's easy to lose flooring or share and it's sometimes much harder to gain it back. So just want your thoughts around what additional items you need to do to push yourself back into the black and how you're thinking about the timing and the fruits of some of the upcoming labors around trying to recover some of that volume? Michael, I mean, 1st of all, on these actions which we announced, they're critical, they're necessary, but they're only part of the answer, as you point out. First of all, beyond exiting certain loss making business, keep also have announced a fixed cost reduction, which structurally lower our infrastructure cost base. So that's a sustained benefit. But you have to be right. I mean, we have to stabilize the volume. That's what we always said. And frankly, even though we've seen improvement, the improvement has been slow. In the first half, as you saw on our presentation, we lost 18% volume, which obviously, given the fixed cost intensity of a business, has a massive impact on how you deleverage and the cost you carry. In Q3, we've been able to slightly improve it to minus 12. But I see I mean, from minus 18 to minus 12, yes, that's an improvement, but it's slow, very simply because it's very difficult mid year to regain floor spots, to re motivate trade customers, given certain annual agreements. Q4 starts better. As you saw in the presentation, we expect roughly minus 8%. So it's a further improvement. But ultimately, it comes back to we want to exit the year with pretty much a flat trend from a volume perspective and that is the starting point to have a profitable business in Europe. And Michael on top of that, this is Jim. I would say that if you look at some of the inventory actions that we've taken to reduce our inventory levels year over year, a significant portion of that does come within EMEA. So there's additional deleveraging due to volume that was on top of just the volume, the share loss we had within EMEA. Great. Thank you. I guess the second question to shift towards your 2018 margin walk where you have reduced the net cost benefit from for the full year from 125 bps to 75 bps. I think if you look at what you've been able to do so far this year, in the Q1, you hit that 75 bps mark. The last couple of quarters, it's been more like 25 bps, if I'm looking right, on those on that line item. So it would imply, a much stronger number for the Q4. I believe well over obviously just the math dictates well over 100, 125 bps of a benefit. So what's driving that 4Q waiting in terms of either are there certain actions that you expect to kick in or better just productivity from a higher growth number or higher volume number or revenue number? What's driving that 4Q payoff, so to speak? Michael, it's Mark. So first of all, just for as a point of clarification, what we have in the net cost is also including freight inflation, which as you know has been massive in particular in the U. S, but for most parts of the world. So what you see as a raw material tariff inflation is literally only raw material than what we see in tariff. Anything which we see on freight costs, labor inflation, all these elements are kind of a negative sitting in the net just for a point of clarification. Specific to your question between Q3 and Q4, I want to come back to a point which Jim made before. We made a very significant inventory reduction as a company in Q3. As you may recall, end of Q2, we pretty much had flat inventories year over year, if you include the Embraco inventory. And end of Q3, we're $300,000,000 down. But as you all know, every dollar of inventory captures a certain cost leverage or cost benefit. So that weighs heavily on our Q3 net cost takeout because we're deleveraging, because we took so much volume out, sits in Q3. So, in a certain way, that part will not be a burden in Q4 and that explains why we're kind of in Q4 back to, I would say, the run rate, which you would have expected coming out of Q1 and Q2. Our next question is from Sam Darkatsh of Raymond James. Two questions. First, with respect to the implied 4th quarter guide for U. S. Industry shipments, at least the math would suggest that it looks like you're guiding for AHAM essentially to be up mid single digit. That optically to some, could appear aggressive, especially if the Sears inventory in the channel gets bled down. Now favorably, I think you I'm guessing you're baking in some pre buy at retail ahead of your price increases. But how should we think about how you're thinking about sell through at retail in the Q4 and why sell through would improve in the 4th quarter versus what we've seen earlier this year? So first of all, your observation is correct. I mean, Q3 sell in was a minus 1.7. Keep all in mind that was still strongly impacted by soft July August. September starting to come better. Actually, in September, we saw finally kind of the overall getting closer to what we've seen through at sell through on a full year base. And we already in the previous earnings call, we said sell through we see running between 0% and plus 1% or sometimes plus 2%. So our expectation of full year is basically that the sell in is very similar to the sell through, which is around this 1 plus 1%. Particularly on Q4, to your question, first of all, I would not overestimate the Sears inventory impact, because I think it's a lot less than you might assume. The second point is, yes, we do expect some industry shipments in particular in November, December related to our already announced cost base price increases. And we also see right now even on the sell through trends in September early October, that kind of the as we're heading into the promotional period, I think the sell through is actually fairly solid. Next question. You have a lot of moving parts with free cash flow in 2018 with tax, with restructuring, with discretionary items, all that stuff. You have the long term target of 5% to 6% of sales for free cash flow. I don't want to peg you on specific free cash flow for 2019, but can we how realistic is it to think that 2019 might see free cash flow in that 5% to 6% range knowing how many how much noise there was this year in free cash? Yes, Sam, this is Jim. And I think that's a safe assumption as you look forward because what a couple of things that will happen here is one, obviously this pension contribution was a one time item, $350,000,000 and it's the equivalent of what would have been our next 5 years of pension contributions. So we've accelerated that piece and that comes out of the future years. Additionally, on the restructuring cash, we are at the peak of the payout of the restructuring cash and so that should come down over future years. And then as we look forward, while we will have a significant benefit this year from working capital, we still believe there are working capital opportunities not at the same level, but there are working capital opportunities as we go forward into 2019. So 5% to 6% realistic for next year? It is, yes. Our next question is from David MacGregor of Longbow Research. Yes. Good morning. Good morning, David. I get a lot to talk about this quarter. Boy, a lot of moving parts. You guys got a lot going on. I guess, we haven't really talked about Kenmore yet. So, with the Sears exit, maybe you could talk about that. I know a lot of people are trying to make sense of this. Can you talk to the extent you can about potential inventory liquidation and what kind of impact that should have on the business and maybe to the extent you're seeing order cancellation right now as a consequence of this by not just Sears but maybe other retailers looking to get their inventory levels down? Just any kind of color you can provide around that I think would be helpful to people. This is David. It's Marc. Obviously, a lot has been written about Sears and Kenmore, and I don't need to add a whole lot to it. First of all, as we already in our announcements last week, the impact on our business is very limited. You saw in our kind of announcement, we had at the end of the day, we had a receivable exposure of roughly around $30,000,000 which is very low if you look if you have looked at historical standards. So, we managed that down in a very attractive manner. You will also see in our details, we accrued for more than half or about half of it. And there's uncertainty around it. Now obviously, Sears is in the Chapter 11 process. There's a lot of moving pieces right now. I would expect that Sears will be active in the market with a certain store footprint in Q4 and where right now, while we protect our own interests, we're at the same time in a very constructive dialogue with Sears about what it all means for Q4 and going forward. So I would see there's some Sears activity also happening in Q4 and we will be part of But again, there's a lot of moving pieces, and but I think we're very well engaged in the process. We have the right particularly on the questions of the inventory and the inventory liquidation, you should assume that the Sears inventory position was not very high. Sears, first of all, historically, I always had a very efficient and effective supply chain. So, Cirrus would have historically been not the big inventory holder, and that inventory came further down over last period. So, in any model you have, I would remind don't overestimate the Sears inventory, which is out there because it's very limited. But Sears is also responsible for whatever work is in process with the manufacturers. So I guess it's a little bit bigger than just the inventory they had in their RDCs. And is there any way you can sort of give us some kind of an assessment? Would it look like a month or a couple of months worth of shipments? So David, I can give you a hand for us as a manufacturer. Keep in mind, we're not an overseas producer. We're largely domestic producer. So, we have a benefit of a very short and responsive supply chain. So, our basically our Sears product historically were what you would call a built to order. We produce once we get the order and the forecast. So we don't have the big ships coming over the Pacific with a lot of inventory. We build to order, have a short supply chain. And that's also probably the reason why our impact on our business is very limited. There is so if you think there is some big warehouses somewhere in Ohio where we keep a lot of Kenmore units, the answer is no. Our next question is from Susan Maklari of Credit Suisse. Good morning. My first question is I wanted to think about a lot of the moving parts that are coming through in terms of how the 4th quarter margin could come together, it feels like you've got some tailwinds as it relates to some of the pricing actions that have been taking, some of the volume and maybe even some of the pull forward that can come in there. How should we think about that relative to some of the more normal trends that come through in terms of, sort of promotional events and things like that. I guess what I'm trying to get to is, could that 4th quarter margin in North America actually sort of have some of its normal seasonality negated by some of these tailwinds? No, I would say that you'll see within the 4th quarter for North America similar type of margin seasonality and all that because as you mentioned that the big drivers within there, one it is a highly promotional period and that's very similar year over year. But then 2, our kitchen our countertop appliance business that's the prime season for that. And so those are the 2 big drivers that affect the Q4 margins in North America and we don't see any significant differences this year. Okay. And then on the slides you noted that inflation is expected to stay around that $300,000,000 range and there are no changes. Can you just give us some context of what you've been seeing in terms of your key raw material inputs and what the outlook is for those? Susan, it's Mark. So first of all, we said this year, we will expect raw material inflation and tariff inflation of around $350,000,000 As we pointed out, that is largely driven this year by steel prices, including the Section 232 effect, and plastics in all forms. So these were the biggest items behind the raw material inflation. And on top of that, we have a tariff impact, which impacts certain strategic components like motors or electronics. We do expect a similar effect for next year. As you've seen in our presentation, at this point, we would assume around a $300,000,000 raw material and tariff increase, which again says it's sustained, but it's certainly not higher than what we would have seen in 2018. And that largely comes from one element is just the carryover element of the tariff, which you can quantify. And the other element is on steel, we see a stabilization or actually slightly coming down from its peak. There's still some uncertainty, particularly around the oil based products, and that uncertainty still remains. And we will once we see more developments, we will give updated guidance on the real raw material outlook for 2019 in January. Our next question is from Curtis Nagle of Bank of America Merrill Lynch. Great. Thanks very much for taking my questions. Mark, just a quick follow-up on the $300,000,000 in pressure you guys are expecting next year. I guess could you be a little more specific on what steel price that's based on? Is it the current? Just assume continued walk down in price. And I don't know, I guess, how much cushion do you think you have in that $300,000,000 And I guess the confidence that we don't see another round of increases in the assumptions like we did last year and the year before? Curtis, again, first of all, again to clarify, whenever we give a raw material outlook, it is against a forward expectation. It's never against the current spot price because we typically don't In particular, with big raw material items, we don't buy spots. We have long term contracts or we have hedges. The only element which we buy more short term is plastics because you can't hedge it and you can't have a full year contract. So our outlook is against expected forward rates, not against current spot prices. Now of course, spot price always, to some extent, influence what you expect on a go forward base. So what we basically outlook right now is based on steel price development and based on certain spot price, this is what we would expect to lock in on a full year base, with the current assumptions. So on the I think in the next 2 or 3 months, we will get a lot more clarity around this one. The uncertainty still remains about plastics. I also want to remind ourselves that in particular in 2018, the big surprise in raw material in Q1, Q2 was around the plastics and the sudden development of plastics. And mean, on top of that, you had the tariffs, which frankly we did not have on the horizon when we started the year. So but the tariffs are now known, so we know what we're counting on this one. But of course, in an environment in which we're living with a lot of inflation, there's always some uncertainty around raw material and inflation associated with that. Okay, fair enough. And then just a question for Jim. I guess could you help us bridge in some detail the free cash flow for the year at a pretty big deficit. I understand that 4Q is the quarter where you generate cash flow, but at least historically it looks like GAAP is pretty big. So, yes, just kind of in working order, what are the biggest pieces? And how confident are you in hitting that $600,000,000 target for the year? Yes, Curtis. So the biggest driver overall right now year over year is working capital. And as I mentioned earlier, our inventory levels are significantly below where they were last year, but we reduced those inventory levels in Q3 of this year versus Q4 of last year. And when we reduce them in Q3, you'll also see a lower level of accounts payable, which means we have significantly less that we pay out within the Q4 this year versus last year. That's the first biggest driver that we see. The next thing that we see on that while we've said CapEx will be slightly lower this year than we originally expected, most of that is coming in the Q4 and that's just due to the timing of some of the investments that we are making as we expect those to flow through. And then the other thing that I mentioned in the prepared remarks earlier was the real estate portfolio optimization opportunities that we have that are partially offsetting the pension contribution and those are about $125,000,000 which is coming in Q4 this year, which would be different from Q4 of last year. Our next question is from Michael Dahl of RBC Capital Markets. Hi, thanks for taking my questions. My first one is actually a follow-up on free cash and I wanted to ask 2 different things about it. The first, just touching on that last response regarding working capital. Just given the significant adjustments you've talked about making this year, how should we think about working cap as it relates to kind of a baseline for 2019 and whether there's further room for improvement or if it should be more neutral? Well, as I said earlier, for this year, it'll be it will be a significant item for us and a significant opportunity. As we look forward, the opportunity will be smaller, but there will be continuing opportunities to reduce working capital. But this year we're looking at that being approximately an incremental $125,000,000 above last year. I would say next year it will not be at this year's level, but we'll continue to reduce our working capital. And that primarily comes through inventory. That's where most of our opportunities sit as we look both globally, but as well as throughout our entire product portfolio, we see opportunities to reduce our inventory levels and maintain the same levels of service. Got it. Okay. And the second related question is really in this ties in taxes as well, but just I want to understand better the change in tax rate expectations. And to the extent that the pension funding contributed to the lower tax rate this year, I would assume that it also is having some benefit on your cash earnings. And so wanted to understand kind of you're pointing out the $800,000,000 of excluding voluntary items, but it seems like tax rate would have been higher if not for the pension funding. So what's the cash impact of that from a tax benefit standpoint and then on your overall tax rate? Yes. So there's again, you are correct that this has an impact on our overall tax rate of about 3% for the year. So as you look at that go forward and that's why we've said, you know, we are at 10.5% this year. We expect to be below 20% in the future years, but that 3% right now would not obviously not repeat itself next year. In terms of impact to cash earnings, it's relatively small this year. If you can just think about the benefit overall on $350,000,000 is around $40 some $1,000,000 And so again, not all of that comes as cash within this year also. So that has a very small impact on our free cash flow for this year. Also looking at the tax rate go forward and the change we made throughout the year, what's happened is the tax regulations have evolved a lot and it's allowed us to at the beginning of the year most of our tax planning strategies we had in the past were no longer available, but it's allowed us to identify new opportunities and so we've continued to refine that as we've understood it better. Our next question is from Alvaro Lacayo of Gabelli and Company. Just one question regarding EMEA. You talked about the non core business exits, the fixed cost reduction. Can you maybe just give us an idea of timing on when you expect to see the brunt of these benefits? And then if you can quantify how inventory reductions impacted EMEA in 2018, that would be helpful as well. Navarro, so first of all, on the timing of these actions, we said it over the next few quarters. So you should think probably about the next 2 or 3 quarters where we try to exit some of these businesses. And so the actions are underway, but it will not be done in 1 quarter. So we it could be fast in the Hotpoint small domestic business. On Turkey, we got to exit certain franchise networks. So I would say over next few, I. E. Next 2 or 3 quarters, that's when you should expect them. And that's when you should see the benefits ramping up. The same is probably true on fixed costs, where you should start seeing some benefits as of Q1 next year and then slowly ramping up. And just on the inventory reduction and what kind of an impact it had on EMEA during 'eighteen? So on the Alvaro, what you have, first of all, I mentioned earlier the overall company year over year inventory reduction of $300,000,000 Now a big part of that is actually related to Europe. So you had in Europe the combination of both lower volumes from sales side and an additional inventory reduction. So you should assume that kind of our entire European production base ran with you roughly with about minus 20% volume. So, you had a very significant kind of cost deleverage effect sitting in the entire 2018 numbers in Europe. Our next question is from Doug Clark of Goldman Sachs. Hey, great. Thanks a lot. I have 2 related questions on North America. First is, in terms of the price increases that you're taking, earlier in the year, you took some price increases a bit more aggressively or earlier than some of the competitors. So I'm just curious if these price increases are going to be replicated throughout the industry or if heading into the holiday season, excuse me, that might just cause some noise? That's first question. And then second question is, I'm curious if you can give us a sense of how much of your North America business in particular is purchased through financing and if the rising interest rate environment has an impact on that? So Doug, it's Mark. Honestly, on pricing, I can't tell you what the other competitors will be doing. That's their decision. We take the pricing when we see cost pressures, which we can't fully mitigate from mix or additional cost takeout actions. That's what we've done late last year when we announced the kitchen base and then early this year when we announced the laundry one. As you saw from or heard from our comments, we expect raw material and cost inflation also next year. And that's why we announced the price increase, which will become in effect in the kitchen side in early January. Obviously, as you will understand, I can't make comments about other planned or unplanned price increases because we never do it. And again, I can't tell you what the competitors will be doing. All I can say is just judging on the past is that our team has been able to execute these price increases very well. The fact that we picked up market share in Q3, I think speaks volumes to how well we executed these price increases. Okay. And then my question on On the financing, I was just coming to it. I would say over in North America, the pure consumer financing, I would say outside the homebuilding industry is somewhat limited. It is actually a fairly small part. There are other parts in the world like Brazil or what I mentioned earlier Turkey, where you have a significant amount of consumer financing. But the actual consumer financing on appliances in U. S. Is somewhat limited. So if you would see an impact of rising interest rates, if at all you would see, and you've seen it already, is more on the homebuilding side, but you have to finance. But it's not so much on the kind of on the single unit purchase on the client side. And I think And then quick follow-up, just to EMEA, if I can sneak in quickly, I know last quarter and you've been talking about kind of 4% EBIT margin target in 2020. Is that still the right timeframe or has that moved a bit? Yes, Doug, we still expect in 2020 or by 2020 to have an EBIT margin of 4% to 5% in Europe. So that is consistent. But obviously, it all is contingent on us showing now the short term improvement, both in Q4 and then for 2019. And we will obviously give more precise guidance around this one in the January earnings call. So I guess with that, we're I think we were at our last question. So let me maybe as we close, let me just step back and give a little bit additional perspective on 2018, even though it's not over yet. And obviously, this has been a year where we external headwinds in form of raw materials, tariffs and currency were far greater than anybody could assume at the beginning of the year when we issued our guidance. In fact, these additional challenges amount to more than $200,000,000 on top of the original $200,000,000 we already planned for. Now being able to reconfirm today an all time record ongoing earnings per share guidance in this tough environment is a result of not only a favorable tax rate, but also very strong execution of our pricing cost actions. 3 of our 4 regions have delivered margin expansions and growth, and we will also turn around our disappointing Europe performance. We've also taken a number of actions throughout the world to refocus and right size our business, including a significant global fixed cost reduction, the sale of Umbraco and a number of strategic actions now underway in Europe. We have and we will continue to take all the actions necessary to match through external challenges and improve profitability in every region. As I look forward to 2019, I'm confident that the actions we've taken and the underlying strength of our business will together deliver significant value for our shareholders. So thank you for joining us today and we look forward to speaking with you again on our Q4 earnings call on January 29. This does conclude today's Whirlpool Corporation's 3rd quarter 2018 earnings release call.