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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to Whirlpool Corporation's Fourth Quarter 2017 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 fourth quarter 2017 conference call. Joining me today are Marc Bitzer, our Chief Executive Officer, and Jim Peters, our Chief Financial Officer. Our remarks today track with the presentation available at the Investors section of our website at whirlpool.com.
Before we begin, let me 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-K and our 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 unrelated to, results from our ongoing business operations. We also think the adjusted measures will provide you with 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 opened for analyst questions. As a reminder, we ask that participants ask no more than two questions.
With that, let me turn the call over to Marc.
Thanks, and good morning everyone. On slide 3 we show our fourth quarter highlights. As you saw in our press release, our Q4 ongoing earnings per share were $4.10 in line with expectations. GAAP earnings were impacted by a one-time non-cash charge of approximately $420 million related to a tax reform. We are pleased that despite continued promotional intensity in many countries, we delivered positive global price mix in the quarter and are positioned well on price mix going into 2018. It was our first quarter with positive global price mix since Q4 2015.
We delivered strong margins of 11.8% in our North American region, a 60 basis points improvement. Since last quarter’s announcement, we’ve made significant progress in global price mix and our fixed cost reduction initiatives. These are progressing ahead of expectations and we remain confident they will be a catalyst for margin expansion in 2018.
As a testament to the underlying strength of our business, we returned record $1.1 billion to shareholders this year. We repurchased $750 million in common stock and paid more than $300 million in dividends, and we expect to continue returning strong levels of cash in 2018.
Before I turn to our financial results, I want to quickly discuss the outcome of our safeguard petition on washers. After nearly a decade of litigation, we are thankful that US government has announced an effective remedy. This decision is a victory for American workers and will enable new manufacturing jobs here in United States, including the [new 200] [ph] jobs we have announced at our Clyde, Ohio manufacturing plant. At this point however it is too early to quantify the financial impact on 2018. But this is without any doubt a positive catalyst for Whirlpool.
Now turning to slide 4, we show our financial results as it relates to our long term goals. We delivered revenue growth of approximately 1% during the quarter and a full year growth of 2.6%. Our fourth quarter growth was impacted by weaker demand in the US and certain countries in Europe.
Ongoing EBIT margins were 6.6% for the quarter, 70 basis points a bit lower than the same period last year. For the full year we delivered 6.4% ongoing EBIT margin. I will discuss the factors that contributed to our reduced margins on the next slide.
Free cash flow was 707 million for the full year, an improvement of nearly $80 million versus the prior year, but below our own expectations. The key reason for softer unexpected free cash flow was elevated inventory as a result of weaker than expected industry demand in the US and several other major countries.
I’m confident that the margin recovery actions we’ve taken in 2018 including the actions launched last quarter and a renewed focus on inventory management will deliver significant earnings and free cash flow improvement in the coming years.
On slide 5, we show the drivers of our fourth quarter and full year margin performance. During the quarter, we improved price mix year-over-year. Cost takeout and raw material inflation were in line with expectations, and for the full year we delivered positive net cost take out more than offsetting significant increased raw material inflation. Finally in the fourth quarter we had higher technology and infrastructure expenses compared to the prior year, primarily due to a quarterly timing of certain [indiscernible] and product related expenses.
On slide 6, I will discuss our price mix performance in more detail. In total, fourth quarter price mix improved by approximately 50 basis points, compared to the prior year. In North America, we mixed positively towards the cooking category and the KitchenAid brand. In addition we slightly reduced our participation in some Black Friday promotions.
For the full year price mix was approximately flat in North America, as our strong exit rate offset unfavorable price mix earlier in the year. In the rest of the world, price mix was unfavorable for the year, primarily due to category demand mix in Latin America and the impact of brand transitions and selling through obsolete inventory in Europe.
Overall, we are pleased with our exit rate or price mix and we are confident that the improvement we saw in the fourth quarter will continue through 2018.
With that I’d like to turn it over to Jim to review our recent financial results.
Thanks Marc and good morning everyone. Turning to slide 8, we review fourth quarter results for our North America region. Net sales were $3.1 billion, flat to the prior year. The US industry grew below our expectations and we reduced our participation in certain non-value creating holiday promotions in the fourth quarter. While revenue was flat, we are pleased with our performance in North America.
Overall margins improved 60 basis points to 11.8%, despite a 75 basis points impact from raw material headwinds. We are confident that we are executing the right actions to deliver significantly improved price mix in the coming year, while maintaining appropriate share positions and driving growth.
On slide 9, we review the fourth quarter results for our Europe, Middle East and Africa region. Net sales were $1.4 billion, up 1.5% versus the prior year. Operating profit was 4 million, down versus the prior year. Compared to the prior year, our operating margins were negatively impacted by approximately $20 million of raw material inflation or 150 basis points.
We experienced holiday demand below expectations in several key countries. We also experienced unfavorable price mix of approximately $25 million, as we continue to progress through brand transitions partially offset by our pricing actions.
As we enter 2018, we are focused on completing our (inaudible) integration and clearing remaining obsolete inventory early in the year. This will likely unfavorably impact our margins during the first half of the year. We expect to ramp up from improved price mix, product availability, and marketing spend efficiency in the second half.
Turning to slide 10, we review the fourth quarter results for our Latin America region. Net sales were $905 million, an increase of 5% versus the prior year. Operating profit was $64 million and margins were 7.1%. Raw material inflation impacted margins by approximately $15 million or 150 basis points. Despite these headwinds we delivered solid margins.
The industry began to shift back to refrigeration from washers, lessening price mix pressures. Additionally, we realized the favorable impact of selling and monetizing certain tax credits in Brazil.
We now turn to the fourth quarter results for our Asia region, which are shown on slide 11. Net sales were $333 million compared to $352 million in the prior year period. We recorded an operating loss of $1 million for the quarter and margins were impacted by continued raw material inflation of approximately $10 million. Our results were also impacted by approximately $10 million from a charge related to the revaluation of brand intangibles.
Our India business continues to perform well with strong growth, continued market share gains and margin expansion in the quarter. In China, we prioritized price mix improvements, but volumes were negatively impacted as we focused on profitability.
Before we turn to 2018 guidance, I’d like to remind everyone that we will report and guide our regional results on an earnings before interest and taxes basis starting with Q1 2018. Additionally, as of January 1, 2018, we have realigned our Mexico business as part of our Latin America segment and will shift certain adjacent business from North America segment to the Asia segment. These changes allow us to align with the company’s new leadership reporting structure.
Now I’d like to turn it back over to Marc to review our guidance for 2018.
Thanks Jim. Turning to slide 13, we’ll review our guidance assumptions for 2018. We expect to grow revenues in line with our long term goal of 3% to 5%. In addition to our previously announced cost based price increases, we are bringing compelling new product to the market which will have a positive impact to mix. In particular, we are excited about the global launch of our new connected Kitchen Suite, which will be a catalyst for strong volumes and mix in 2018.
Finally, we expect to benefit from continued industry growth in many of our major countries including the US and Brazil. We expect to deliver ongoing EBIT margin of approximately 7.5% in 2018, an improvement of 110 basis points. I will discuss the drivers of our EBIT margin guidance on the next slide.
We expect earnings growth for margin improvement to generate a majority of our free cash flow growth in 2018, and in addition we expect to generate free cash flow improvement for working capital optimization primarily focused on reducing inventories from the elevated levels we experienced at the end of 2017. Overall, we expect to deliver ongoing earnings of $14.50 to $15.50 per share.
Turning to slide 14, we show the drivers of our EBIT margin improvement in 2018. We expect approximately $250 million of net benefit from improved price mix as well as a $150 million from our fixed cost reduction initiative. Together we expect this to improve margins by approximately 175 basis points.
We will also continue to focus on delivering ongoing cost productivity and expect to deliver approximately $175 million in productivity and another $100 million from restructuring benefits, all of which is incremental to our fixed cos initiatives.
The combined impact to deliver 125 basis points margin improvement more than offset in continued raw material inflation which we expect to be approximately $200 million to $250 million higher than the prior year. Finally, we plan to continue investing in our business with increased new product introductions in 2018, including a global connected suite which I mentioned earlier.
Now Jim will cover our recent guidance and cash priority for 2018.
On slide 15, we provide regional industry and EBIT margin guidance for the coming year. We expect low-single digit industry growth in all regions and our businesses will benefit from this growth throughout the world. We also expect to benefit from favorable price mix and strong cost take-outs. As a result, we expect to deliver at least 12% margin in North America in 2018.
In EMEA, our margins are expected to expand to approximately 2% through improved price mix and completing the final phases of our brand and product transitions. We expect to improve our margins in Latin America to approximately 7%, as we benefit from industry growth, favorable price mix and continued cost takeout. Finally, we expect to deliver approximately 5% margin in Asia, with continued strong performance in India and improved price mix and cost takeout in China.
Before I get to our free cash flow guidance, let me briefly outline our view on the impacts of tax reform. We see the Tax Cuts & Jobs Act as a significant benefit for the competitiveness of US companies and a positive development for consumer demand, and we fully expect the tax reform to have a positive medium and long term impact to Whirlpool.
The changes included in the tax act are broad and complex, and there is still potential for changes to provisions and other legislative actions. As a result, our estimates may change as we refine our calculations. Our current tax rate guidance for 2018 is for the mid-20% for both the effective and cash tax rates. We will continue accessing the impact on our tax rates and update you on the first quarter call as necessary.
Turning to slide 16, we show the drivers of our improved free cash flow for 2018. We expect to drive the majority of this improvement through stronger cash earnings. We will also continue to focus on working capital optimization, primarily related to our inventory in North America and EMEA. This guidance is inclusive of higher restructuring cash outlays versus 2017 related to our global fixed cost reduction initiative and recently announced closure of a compressor facility in Italy. In total, we expect to drive significantly higher free cash flow in 2018 with conversion of approximately 5% of sales.
Turning to slide 17, we show our capital allocation priorities for 2018, which are largely unchanged. We will continue to fully fund our business for growth and be prudent about our capital structure to maintain a strong investment grade rating. We also plan to be balanced in how we return cash to shareholders.
We currently have approximately $2 billion remaining under our existing share repurchase authorization and we expect to continue repurchasing this year after repurchasing 750 million of our shares in 2017.
Now I’d like to turn it back over to Marc.
Thanks Jim. Turning to slide 18, I would like to review our long term value creation framework. We did not make as much progress on our long term goals in 2017 as expected; however, we do expect that the actions we put in place during the fourth quarter have positioned us to get back on track to those goals this year. We expect to drive growth in line with our goals, positive industry growth, improved product availability in Europe and the global launch of our compelling new Connected Kitchen Suite will be candidate for growth. We also expect to drive significant EBIT margin improvement.
Global price mix and our fixed cost reduction initiatives will be the primary catalyst, and we are fully focused on ensuring that these actions are effectively and successfully implemented. To be clear, our primary focus in 2018 is on margin expansion, and we remain committed to achieving our goal of 5% to 6% free cash flow as a percent of net sales this year.
Now I will end our formal remarks and open it up for questions.
[Operator Instructions] We’ll take our questions from David MacGregor of Longbow Research.
Let me begin with just a question on the European business. You highlighted the negative impact Europe has had on the price mix and called out the obsolete inventory challenge. Now I realize you’re pursuing pricing and there’s product availability issues you’re working on, and you’re also taking a highly cautious stance on your guidance at 2% EBIT margins which is well below our EBIT guidance during your analyst meeting last May.
From where you stand today Marc, what exactly do you need to do to deliver on that 8% goal you discussed at your analyst meeting last year.
David, first of all in Q4 in Europe as you saw, we delivered above breakeven, but that’s certainly not where our expectations should be and was. We expected a strong result. There are certain things around promotion and demand which was a little bit weak in key countries like UK and we had in Russia some market places disruption due to consolidation.
Having said that at the end of the day 2017 was a setback and we were the first one to admit that. I think with our system integration and complexity and some external challenges, I think we lost about a year or 1.5 on our integration timeline and that’s a reality. Having said that does not change where we strongly believe we can take the business, but we also as evidenced as how some of our competitive performance. So with 8% we still strongly believe in the steady state 2018 will be a year where we complete the integration and then we’re kind of really more in a steady state mode.
So I strongly believe that the path to 8% is there. It is achievable as evidenced by the competitors. You call 2% a little bit conservative and very honest our internal targets are more aggressive, but given that we missed them particularly in Europe, several times we took a slightly more conservative stand on the regional guidance.
That makes sense. So my second question is just regarding innovation. When we speak with almost anyone in the industry today they’ll know the key contributing factor to the success of the Korean manufacturing which has been a proven ability to bring to market product innovations that really capture the consumes attention and for which the consumer is prepared to pay a premium price.
Whirlpool is innovation leader, there are many out there that would say that you are the innovation leader. So I guess you are now taking over the leadership of the company that has consistently spent 6% to 7% of its revenues developing innovation, a number that’s now approaching a 1.5 billion a year. I guess my question is, what do you do as the new CEO to achieve a higher level of productivity from that annual investment, so that investors need to rely less in the future on cost reduction and cost productivity to achieve the company’s financial goals.
David that obviously was a very broad question. First of all to clarify the numbers, we invest roughly every year about 600 to 700 million in capital, which is not all new products but a majority goes in products, and we invest roughly in total another 600 million in engineering. So the total, but it’s just different line items. That investment has been steady, with a slight increase, but it’s steady as a percentage of sales.
Now we may have referred both in investor day to this and also in earnings calls. We have done a fundamental realignment of our entire product development organization systems and structure, and that was pretty much 1.5 years ago. So we’ve done massive changes and I would say we start seeing the fruits of these changes in terms of our innovation pipeline which is actually very encouraging.
But that doesn’t change the fact that this is a highly competitive market place, and I wouldn’t give the companies you mentioned the credit for innovation, but that’s obvious to me. But it’s a highly competitive market place. So you got to run faster. I think the changes which we’ve done internally on our product development we’re well positioned to drive growth of effectiveness but also the efficiency of these investments.
And again it’s just also if you would have walked the CES Show, you see our kitchen suite and what’s happening in that space, I feel we’re very well positioned when it comes to the innovation pipeline.
We’ll move next to Susan Maklari of Credit Suisse. Your line is open.
I wanted to talk a little bit about your North America guidance. On that slide you pointed 2% to 3% industry growth there. And given what we saw in ’17 you ended up at about 6% in units which is the high end of that range. In the fourth quarter, we did see some shift towards maybe focusing more on price as opposed to volumes. Can you just talk to maybe how you’re thinking about that going into ’18 and how we should think about these different pieces coming together?
Susan this is Jim and I’ll start off here. As you look at 2018 for North America, we expect our volumes to grow in line or slightly above the industry. And again we will continue to, obviously with the new products we are launching, we expect to continue to gain shares in certain categories. But also we expect to continue our focus on value creating promotions and making sure that any promotions that we participate in are value-creating. So again as I said, overall we believe the unit demand for the industry is stable within the US and we see that our growth will be in line with that and maybe slightly ahead of it.
Susan, it’s Marc, maybe to add to Jim’s point. At the end of the day last year industry in terms of shipment to the trade came in at the low end of our initial guidance or even slightly below. But it was still solid, and essentially we’re signaling the same. We see robust demands in the lower single digits and so it’s a continuation pretty much of focus on ’17.
If you would look at factors which could surprise us on positive, I would say, consumer confidence may be also related to tax reform to wage increases that could be a positive, because we sense a certain confidence and optimism out there. But concerns are still constraints on the housing market, supply constraints, and you see that in existing home sales and new home builds. But overall I think there are a couple of factors which gives a positive momentum to markets. Keep also in mind, we always indicated that as the housing cycle progresses, we will move more and more to a stage of roughly 2% to 3% annual growth which from a manufacturing perspective, I would consider a very healthy growth rate; we all love spikes. It’s that kind of a growth rate we like.
And then just in terms of maybe some of the inflation. You’re continuing to point to that 200 million to 250 million for this year. Can you just give us some sense of maybe what’s going in to that? Is there anything that has changed relative to where we were and maybe potential to come in at the higher or the lower end of that depending on how things move this year?
So Susan it’s Marc again. So stepping back a little bit, we entered ’17 with a lot lower assumption on the raw material inflation. You may recall we entered the year with an estimate of 100 to 150 and we had to change that quite drastically in the summer and the fall to roughly about 350. So I would say the first major shift on the raw material landscape, we saw pretty much around summer for the last year, and now also as the year kind of progressed towards year-end, we saw that it’s not going to be slowing down, it’s fully continuing. That’s why we refer to that over two year period, ’17-’18 we have roughly 600 million headwinds of which 250 are still ahead of us, 200 to 250.
The initial culprits if you want to say is over steel and resins and they both are still very elevated, and you also know that while we - typically on normal contract on steel on resins you can’t go out too long on contracts. So I would say there’s still heightened uncertainty around resins. Unfortunately we see also now this inflation creeping in in other aspects like car parts. We don’t know what’s happening with oil and what does it mean for freight and warehousing. So I would say we feel confident about the current guide of 200 to 250 and that internal forecast has now been stable for several weeks and months. But I will be lying to you if I wouldn’t say there’s uncertainty on raw material side, because we just see the inflation trends creeping in on many parts of our value chain.
We’ll move to Curtis Nagle of Banc of America Merrill Lynch.
Just quickly on the tax rate. If you guys could clarify what corporate tax rate in the US you guys are embedding in the guide mid-20s for 2018?
The tax rate we’re assuming is the new tax rate obviously of 21%. But with that there are certain parts of the legislation that we’re still trying to understand especially how it effects some of our tax planning strategies globally, and the impact on those on how that will impact our US tax rate. The other thing you always have to keep in mind is as I said, we see the tax reform as a very positive thing and we believe over the next coming months we’ll have a much better understanding where those tax planning opportunities sit. But also keeping in mind that 45% of our taxable income is generated outside of the US.
So also when you start to blend the rates together, you have to remember that we still have a large portion of our business outside the US that is in now countries that have a higher tax rate than the US. And so it’s only going to have partial impact on our tax rate in the long run, but we don’t see this right now having a negative impact from a cash perspective. And in fact as we look forward, we expect it to be positive in the mid-to-longer term.
And then just as a quick follow-up, I was kind of curious why you guys aren’t expecting a higher margin in Latin America. I think it implies about, I think a little bit less than a point of growth. Just given all the cost taking you guys have done and the market positioning and some volume growth, I would have intended it to be a touch higher, do you perhaps needed maybe a little bit more volume say Brazil or some of the other markets to get to higher rate?
It’s Marc, the background probably of what you described as conservative is probably coming from two areas, one, we do not expect a significant rebound in the Brazilian demand prior to the elections or the election outcome. So I would say it certainly not going to get worse, but we don’t see strong single digit or double digit growth in Brazil in the short term, maybe more as the year progresses in both elections. That’s the one factor.
The other factor is the global compressor business is a highly competitive environment with quite a bit of success capacity. And that as you know it sits in our Latin America business where the opportunities for significant growth are just limited.
We’ll move next to Michael Rehaut of JPMorgan.
First question just want to drill down a little bit in North America, which continue to be a bright spot for you despite the continued competitive backdrop obviously outside of what may occur following the safeguard petition decision. With the guidance of over 12% margins or at least 12%, I was hoping to get a sense of the key drivers of that. Obviously you’ve talked to positive price mix in the kitchen suite rollout, and if there is – maybe if it’s possible to break it down between pre to mix volume leverage and perhaps if there is additional productivity or cost reduction. And if that improvement should be kind of steady throughout the year or weighted to one-half versus the other.
Michael, its Marc, let me try to answer it. And as you know we don’t give recent volume or detailed driver breakdown. Having said that, the fundamental levers and drivers are in North America very similar to the global, maybe it’s a slightly different timing. And what I mean by that is, we have announced in North America cost base, try to increase our kitchen business, and we’ve done that in October. That coupled with further price mix opportunities i.e. even more to kitchen age and to a new product might give us a lift on the year-over-year price mix that is true for North America, and for the rest of the world and maybe we see some of these benefits in North America a little bit early when some of our part (inaudible).
On the volume side, you heard our industry forecast, and what we said is also true for North America. We expect to grow in line or above the industry growth. So again, the overall trends are very similar, but also in terms of raw materials exposure. So in a certain way the margin what we gave for the globe is also true for North America, maybe with a slightly different timing.
So I’m kind of hearing that perhaps it might get a little more benefit from price in the first half if I heard that right. Secondly, just going to the other end of the spectrum with the continued challenges in Europe, you mentioned that it’s kind of been a disappointment throughout 2017, and fourth quarter not being an exception to that. I wanted to get a bigger picture from you Marc on, given that this has been the fourth quarter in a row where you’ve had to downwardly revise your expectations and guidance for the segment. Certainly there’s been a lot of challenges in terms of all the factors that you’ve enumerated, the integration, the inventory work-down, the skew count, the tougher promotional environment in the UK.
But in a bigger picture level, what has been the biggest challenge of not getting it right in terms of putting out a guidance that you’re able to hit. And are you looking at kind – how are you looking at to change that or fix that? Is it a personnel issue in terms of getting better execution in the region or is it a matter of getting better information to put together a better set of guidance going forward.
Michael, its Marc again, let me push that back in terms of a European integration. As you may recall, kind of a first 1.5 almost two years, the integration was going very well, frankly even ahead of our expectations. We hit all our internal milestones. And as you pointed out, we had a coup le of quarters now, four or five quarters where we disappointed. And in hindsight you always have perfect 20-20, but I would say it’s a combination of a couple really unforeseen external events like the Brexit, like what I would recall and we had some Russia currency issues, coupled with the accumulation of a complexity of an integration, which is as you know system, factories, products, brands, which is a lot once it comes altogether.
And that’s why we had in ’17 what we call a disappointing 2017. It doesn’t change where we have our long term side in terms of where we can take the margins. So the 8% of 8% and we strongly believe we can achieve that. I think we’re pre-conditioned to really get fair in order to get through some more predictability is it essentially comes down to stability in our systems and supply chain where we had a lot of disruption, a lot of back and forth.
The good news is we have achieved a lot better stability in the entire supply chain already in Q4 and I feel a lot better how we go in to the next year. We’ve also done internally a number of management system changes to get to more predictability. And frankly and the last, and I mentioned that before, I would say our internal targets are higher than we’ve given as an external region guidance, because on this one we want to probably air more on the conservative side.
We’ll take our next question from Sam Darkatsh of Raymond James.
There’s a couple of questions, first getting back to EMEA and I see that is conservatively crafted the margin guide. Specifically to the UK, I think your number one competitor has Turkish labor based cost and has used the weak currency to price aggressively which obviously exacerbates the already very challenging conditions for you.
My question, have you folks contemplated hedging the Turkish Lira versus the euro and/or moving production to Turkey. I’m just spit-balling here, but if you don’t do that and the Lira continues its slide versus the euro what gives you the confidence in really EMEA margin target going forward.
Sam that’s obviously a very detailed question. First of all on UK, it’s not only about Turkish competitor who forms a competition, but a very significant factor and yes your right the Turkish lira versus the British pound gave them probably longer protection and we also know ultimately inflation creeps also in to weak currencies. So a lot of the raw material input in steel etcetera will also ultimately show up in the Turkish production cost.
But it’s nothing we can do about the hedging, it’s more like ultimately that inflation will also rise on that part of the business. Having said all that the UK market in Q4 was still a very soft one. So we feel better about our price margin realization in UK. So the markets in UK in December have been more promotional was actually surprisingly soft, even softer than the previous quarter.
If you want to see any encouragement, but it’s obviously way, way too early to read it. In January the British pound regained some strength which of course takes some pressure of our margins. But I would say that in the early, early data point and we got to see how the British pound evolves over the next couple of months.
My other question will be much more broad and probably as too simplistic, but your 3% sales growth guide company-wide does that include or exclude FX. I think FX might be, maybe as much as a two point tail wind and with the industry growth expectations you gave along with price that would have imagined that your overall sales growth guide would have been higher than three points if you’re including FX.
Sam, this is Jim, and right now when we put that out we were assuming FX was slightly positive but closer to neutral. So I think right now and again where FX rates are currently they would say, yes we would have a tailwind on sales. But it’s January and as we know things will progress throughout the year. So right now that does not assume a significant tailwind from any kind of currency or FX changes.
And Sam may be just to add a (inaudible) and that’s also what I had in my prepared remarks. Our focus is on margin expansion, and that is, we lost last EBIT margin 7.5% is one point above this year and that’s our number one focus which has to come from the slight increases which we already announced the mix and the fixed cost reduction program, and that’s our number one focus.
We’ll move next to Ken Zener of KeyBanc Capital.
Jim I wondered if you could comment, do you have a first, second half split in terms of how EPS earnings will fall within your guys’ guidance and then could you guys be expletive around tax rate. I mean mid-20s, I think everyone’s going to assume 25% is that what you want us to assume?
I’d say Ken on the tax rate I think 25% is a safe assumption for right now, and so that’s when we say mid-20, that’s where we believe it will be at. That’s kind of in line with what we used to say we thought our historical structural run rate will be. And as we said once we get further in to the year, we will give an update in terms of what we think the impacts longer term and mid-term could be from tax planning strategies. In terms of split between first half and second half of the year, I don’t think we’re going to be much different than any of our prior years. Obviously we have some seasonality that affects us in the first half of the year as well as the ramp up of some of our cost reduction initiatives that are launching right now, and have launched and some of the previously announced cost based pricing that we took is beginning to run in here in the first quarter.
So, again I think you’ll see a little bit of a tailwind coming in to the second half of the year, but it won’t be significantly dissimilar from some of the prior years where we’ve been anywhere between 45 to 55 in that type of a range.
We’ll move next to Sam Eisner of Goldman Sachs.
Just going to free cash flow, I think we haven’t discussed that yet. I’m trying to reconcile your $700 million starting point for this year. It looks like it’s inclusive of about $120 million of other items, and so I just really want to understand how do you walk from what you guys have generated this year in terms of free cash flow to the roughly 1 billion to 1.1 for next year. What are the moving pieces I see that in there, but it feels like that there’s a different starting point that you’re using. So I just want to make sure we are apples-to-apples.
I think Sam the one thing, as you assume and we already talked about in here is working capital mixture we see to be at least 125 million, and if you look where we ended on inventory, we think there’s a significant benefit there to some of the things that show up in there that sale of very expensive assets or tax credits.
Again we have things like that that go on continuously and obviously we don’t guide on them, but we’re working on them even as part of our value creation strategy to make sure that we’ve got the right asset base for our business. So I don’t think that that will have a significant impact year-over-year in terms of our cash flow.
So said another way, your $1 billion to 1.1 billion of free cash flow does include about $120 million or so of other items, is that fair to say?
I would say it assumes an assumption that obviously if there are opportunities there we will take advantage of them. But we don’t see any significant headwinds coming against it based on things that we had this year.
That’s helpful. And then maybe just going to raw materials, so oil prices are up 35% since November, steel prices are up 20%. Those two commodity buckets are roughly combined almost 20% of your COGS. So I’m a little bit confused how you’re holding your guidance from October yet there’s been significant moves particularly in oil which, oil goes in to benzene, benzene in to major portion of your COGS. Just help me better understand why we should feel confident in the 225 million [debt].
Sam, its Marc. First of all to clarify also the indication which we gave in October about the 600 million that was not based on spot prices in October. That is based on our models which we have internally about projected raw material cost development. So if you take [steel], we have our models where we take input cost in to consideration, supply-demand etcetera. So it’s a fairly complicated and complex model. So that was our forecast not the spot price. And right now what we see is that the spot price is actually up pretty much in line with our forecast, maybe even slightly higher than the forecast. But our amounts were pretty active in prediction.
That doesn’t mean that we have, as I mentioned before, about 250 or 200 to 250 is firm. There could be risks, we don’t know yet, but that’s today kind of our best view in the current year.
We’ll move to Megan McGrath of MKM Partners.
Since pricing is such a big part of your strategy and guidance this year, I wanted to get a little more tactical color. In terms of the fourth quarter, how much of if you can tell us, how much of the positive price mix was really sort of apples-to-apples pricing, how much were you able to raise price in the market, and how much was mix? And if mix is a big part of this, how do you from a practical perspective make that better mix happen. Is it just coming out with new products that’s more expensive or is there some sort of marketing effort you’re doing to mix more towards the products you want to mix to?
Let me try to answer it, so first of all we have internally our tools where we know exactly what we call like-for-like pricing, what is mixed and what comes from promotional investments or trade [burn] investments. We typically don’t publish this one, because I think we would reveal a little bit too much competitive information.
Having said that, as I indicated, Q4 was over positive price mix, and I would say a portion of us was already related to some price increases which we announced in certain parts of the world like in Asia. A certain amount was probably from less promotional intensity. As I indicated before and particularly North America, we saw certain promotions which we didn’t see for value creating and we didn’t participate.
So I would say it’s a combination of list price increases and reward of a less promotional intensity and lastly we still see the benefits and we’ll see probably more next year from new product introductions. We had last year KitchenAid as a new suite which is flying, I mean it’s really going extremely well. We know we will have some carry over benefits. We know we launched the Whirlpool Kitchen suite that will give us quite a bit of mixed opportunities.
So to your question, to do large products with new prices, no. What we typically try to do is involve the products with new features where people voluntarily mix up, doesn’t necessarily mean higher price on a like-for-like price, but it’s a richer product and people are encouraged to mix up.
And as I felt I understand that it’s too early to really talk too much about the (inaudible), but wanted to get your sense on where you think inventory levels are? Do you get a sense that maybe there was some stuff in the channel or a loading of products in to the US ahead of the tariff announcements do you have any feel for that?
Let me maybe at first a little bit further expand and we talk about the safeguards position. First of all, as I said before, we are very thankful that the ITC, the USDR and this administration has finally put an end to this long story of dumping. Recently a press reported, sometimes few people confuse offenders with victims. So the LG and Samsung have been dumping for a number years, there’ve been several times we’ve seen proof and evidence and decisions that dumping has been confirmed. So the safeguard finally puts an end to what we call this country hopping and the dumping. So it’s an incredibly good outcome, it’s a good catalyst for Whirlpool Corporation. It’s also encouraging that finally trade laws are being enforced.
With that in mind, the reason why we couldn’t specify what is the bottom line impact on our company is, has a couple of reasons. One is exactly to your point, we do not know exactly how much inventory has been built up. We have certain customs data until December , but we don’t have the January data. We saw significant amount of preloading already in December and that probably continued to January. So we can’t exactly estimate, but I would think its a few weeks to a couple of months of kind of preload.
Two, we have a certain mechanics around the quota which are not yet fully specified in terms of our quota by country or by competitor. And thirdly, and that’s the most important thing is that it ultimately comes down to the question, will the offender stop the dumping. I can’t give you that answer, but that’s of course the key question in terms of we of course firmly would expect the safeguard measure in place that finally the dumping ends. But we don’t know with certainty.
I would say as the next couple of months unfold, we would see a lot more clarity around how all these three factors come together, and maybe we can give you a better picture about what it all means.
We’ll move next to Alvaro Lacayo of Gabelli & Company.
Just on a follow-up on the safeguard petition and sort of the chatter around the inventory loadings from competitors. In the past when you had those trade related victories, I think they followed a similar playbook where they’ve done inventory loading in anticipation. Maybe if you could talk about a little bit of what were the dynamics you saw in the past and how that impacted the business and how long was that sort of effect felt?
Alvaro its Marc again. And again we do not know exactly the inventory levels. We have the customs data until December. I would just say, judging from the past, depending on which dumping actions were typically a couple of weeks to a couple of months inventory which may typically found a way in to the market over a couple of months. I think this time it’s different. It’s different in that respect that in the past they used the bridge to kind of move factories in to other countries. That is a safeguard measure and I think it’s sort of impossible, just not possible.
The only kind of way out, which is a positive for a country is that they start producing in US and we all know of our certain timeline. So I would say, you should expect, probably should expect that that inventory flushes through in the next couple of months, and that’s it, and (inaudible) probably just the level of supply.
And then secondly just on the price mix guide on a global basis, but more focused in terms of just thoughts on North America in terms of, you mentioned the levers to drive the price mix which I think have been levers that you have in the past employed, and you had big product launches before and you’ve had cost based price increases and price mix over the last few years have been a little bit more stubborn.
Maybe if you could just highlight of what you think about this time, in terms of what’s different and what gives you the confidence to sort of hit those numbers. And then just from an order of magnitude, where do you see most of those price mix benefits happening across the footprint.
Again it’s a little bit region by region different. First of all, pretty much in all regions we work on cost based price actions and price mix opportunities in some regions also in terms of promotional investment or a triparty investments. But it differs region by region. To give you for example, one example because it’s already behind us. In China, the raw material cost increases are so big and the mix opportunities are somewhat limited, we relied heavily on like-for-like cost based price increases. That is already behind us.
I think in US we have in particularly the product pipeline and the brand portfolio. We have more mix opportunities available to us than in other markets. So in US you would probably see a combination of the effect of a kitchen price increase which we already know, but again also the product pipeline which we have. It’s not – I mentioned it early, but I keep saying about the carryover benefit, but the [Work With] suite launch is significant for us. It impacts a lot of products and if connected suite gives us a lot of opportunities to mix up.
And again we know the product that we are launching and they are not year-end launches, they come throughout Q1 and Q2, so very inside and maybe it will drive certain mix and that’s why we are confident about it.
At this time, I would like to turn the call over to President and Chief Executive Officer, Marc Bitzer for closing comments.
Let me just may be just summarize key message from this call, and that’s again on slide 20 if you want to look it up. First of all again, global price mix and fixed cost initiatives we announced last quarter are progressing ahead of expectations and that’s a very good news. And we are very encouraged by the price mix, exit rate and strong margins in North America, and we expect to deliver significant improvement to EBIT margin this year and we are committed to further margin expansion in the coming year.
We also expect strong free cash flow growth this year as a result of a margin improvement. And we expect to continue to returning strong levels of cash to shareholders in a balanced way. So thank you for joining us today, and we look forward to speaking with you again on our first quarter earnings call on April 24. Thanks.
This does conclude today’s Whirlpool Corporation’s fourth quarter 2017 earnings release call. You may now disconnect your lines and everyone have a great day.