Whirlpool Corp /De/ Q4 FY2020 Earnings Call

Good morning and welcome to General Dynamics' Whirlpool Corporation's Fourth Quarter and Full Year 2020 Earnings Release Call. All participants will be in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Please note this event is being recorded. I would now like to turn the conference over to Roxanne Warner. Please go ahead.

Thank you. And welcome to our fourth quarter 2020 conference call. Joining me today are Marc Bitzer, our Chairman and Chief Executive Officer; and Jim Peters, our Chief Financial Officer. Our remarks today track with a presentation available on the Investors section of our website at whirlpoolcorp.com. Before we begin, I 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 other periodic reports. We also 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 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 presentation appendix and 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 a 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 two questions. With that, I’ll turn the call over to Marc.

Thanks, Roxanne. And good morning, everyone. In difficult times like the ones we're living through today, it is important that we remain true to our guiding principles. Whirlpool's 110-year history is rooted in our value-driven commitment to our shareholders, employees, consumers, and communities in which we operate. In 2020, we faced unprecedented challenges due to the ongoing COVID-19 pandemic, yet we remain firm in our commitment to all of our stakeholders. The health and well-being of our employees was and remains our top priority. We increased safety measures at all manufacturing plants and provided additional resources to care for families and those who fell ill. We established business continuity plans to ensure our consumers received our products to improve life at home with their families. And we continue to support our global communities by procuring medical supplies, making donations, and engineering critical equipment for frontline workers. In parallel, we made significant advancements toward our sustainability targets, resulting in ratings improvements and external recognition. Most notably, we received a low-risk rating from Sustainalytics, a year-over-year improvement driven by our outstanding energy and efficiency programs and our strong global product safety systems. Additionally, we were named to the Dow Jones Sustainability - North America Index in recognition of our long-standing sustainable business practices. 2020 marked our 14th time on the list in the last 15 years. I'm very proud of the way our employees managed through this pandemic. It is ultimately the agility of our organization and the resilience of our employees that allowed us to deliver record results in 2020. Now turning to our fourth quarter 2020 highlights on slide four. We delivered strong organic net sales growth of over 10%, driven by solid industry demand across the globe. Additionally, we delivered an ongoing EBIT margin of over 11%, a second consecutive quarter of double-digit margins and a year-over-year expansion of 410 basis points. Lastly, we successfully executed our go-to-market initiative and drove strong cost reduction across the globe, leading to positive EBIT and EBIT margin expansion in all regions. Now turning to slide five, we will discuss our full-year highlights. We took immediate and decisive action as we announced and executed our $500 million plus cost reduction program. Further, we realigned our go-to-market strategy to effectively operate within a supply-constrained environment. Structural and sustained positive demand trends and exceptional execution of our COVID-19 response strategy resulted in record ongoing earnings per share of $18.55, a 16% improvement compared to the prior year, above our previous guidance. Record ongoing EBIT margin of 9.1%, a 220 basis point improvement and a 25% increase in total EBIT compared to the prior year. Record free cash flow of approximately $1.25 billion with positive free cash flow in North America, Latin America, and Europe. Despite significant macroeconomic uncertainty, we strengthened our balance sheet and drove significant shareholder value. We reduced our gross debt leverage to 2.3 times, making progress towards our long-term target of 2 times. We delivered a return on invested capital of approximately 11%, representing the fourth consecutive year of improvement, as we realize the benefits of continued EBIT margin expansion at an optimized asset base in our Europe region. Lastly, we returned strong levels of cash to shareholders through share repurchases and increased our dividends for the eighth consecutive year. Overall, the results we delivered in 2020 reflect the structural improvements we have made not just in 2020, but also in those made during the years before. We are a fundamentally different company with an improved margin and cash flow profile. 2020 could have been a setback for us, instead, we were able to significantly accelerate our progress towards our long-term financial goals. Turning to slide six, we show the drivers of our fourth quarter and full year EBIT margin. In the fourth quarter, price mix delivered 375 basis points of margin expansion driven by reduced promotional investments and mix benefits as consumers invest in their homes. Additionally, we delivered on our cost reduction program positively impacting margins by 125 basis points. Further, reduced steel and resin costs resulted in a favorable impact of 125 basis points. These margin benefits were partially offset by continued marketing and technology investments and the unfavorable impact of currency. For the full year, very strong margin expansion from price mix and our cost reduction program were partially offset by increased brand investments in currency. Overall, we're very pleased to be delivering on our long-term EBIT margin commitment and are confident this positive momentum will continue to drive very strong results in '21. Now I'll turn it over to Jim to review our regional results.

Thanks, Marc. And good morning, everyone. Turning to slide eight, I'll review our fourth quarter regional results. In North America, we delivered 4% revenue growth, driven by continued strong demand in the region. Additionally, we delivered record EBIT driven by the flawless execution of our cost reduction and go-to-market actions. Lastly, we continue to optimize our supply chain operations, driving weekly improvements in our production yield. Delivering top-line growth and a record EBIT performance, the region's outstanding results again demonstrate the fundamental strength of our business model. Turning to slide nine, I'll review our fourth quarter results for our Europe, Middle East, and Africa region. Share growth in Italy and the UK, along with strong demand in the region, drove another quarter of double-digit revenue growth. Additionally, the region delivered year-over-year EBIT improvement of $29 million, led by increased demand and strong cost reduction. We overcame the challenges presented by COVID-19 and restored profitability to the region, in line with our commitment at the start of the year. Our 2020 results demonstrate the effectiveness of our strategic actions and the progress we have made to date. Turning to slide 10, I'll review our fourth quarter results for our Latin America region. Net sales increased 5% with organic net sales growth of 28%, led by strong demand in Brazil. The region delivered very strong EBIT margins of 12% with continued strong demand and disciplined execution of go-to-market actions, offsetting significant currency devaluation. Overall, the region's 2020 performance serves as a proof point of the viability of our long-term financial goals, highlighting our ability to deliver double-digit margins in a strong demand environment. Turning to slide 11, I'll review our fourth quarter results for our Asia region. In India, we delivered strong year-over-year net sales growth, driven by demand recovery. In China, we delivered Whirlpool branded share growth in addition to EBIT improvement led by cost productivity actions. Overall, we are pleased to see a rebound in Asia and look forward to building on this momentum in 2021. Turning to slide 13, Marc and I will discuss our full year 2021 guidance. I will now turn it over to Marc to begin.

Thanks, Jim. While needless to say, some uncertainty remains as we continue to operate in a COVID environment. However, we do believe increased disposable income, investments in the home, and a favorable housing shift are here to stay and will drive strong demand. Based on our internal model for industry and broad economy, we expect global industry growth of 4%. As we have demonstrated in 2020, we are uniquely positioned to capture restructuring shifts and further advance our strategic priorities. It is with confidence that we provide our 2021 guidance, which reflects our fourth consecutive year of record earnings per share and significant topline growth. We expect to drive net sales growth of approximately 6%, as we capitalize on strong demand and share gains in all regions. Additionally, we expect to deliver above 9% ongoing EBIT margin and deliver free cash flow of $1 billion or more. Turning to slide 14, we show the drivers of our 9% plus ongoing EBIT margin guidance. We expect price mix to deliver approximately 100 basis points of margin expansion through three key initiatives. One, disciplined execution of our go-to-market actions, two, recently announced cost-based price increases in Brazil, Russia, and India, and three, new product launches, just to give you a few examples of our legacy of innovation. In 2020, we rolled out our new global dishwasher architecture, featuring the largest capacity for a 3rd Rack Dishwasher. In Europe, we launched a Red Dot Award-winning built-in induction cooktop. In the United States, we entered the consumables detergent business with the launch of our ultra-concentrated wash detergent. Next, we expect net cost to positively impact margin by 150 basis points. As ongoing cost productivity efforts, coupled with a carryover benefit from our 2020 cost reduction program more than offset elevated freight and labor costs. We expect raw material inflation to negatively impact margin by 150 basis points, led by higher steel and resin costs. Further, as we continue to invest in the future, we expect increased marketing and technology investments to drive a negative margin impact of 50 basis points. While unfavorable currency, primarily Latin America, is expected to impact margins by approximately 50 basis points. In total, we expect these actions to deliver a 9% plus ongoing EBIT margin, an EBIT improvement of over $1 million compared to the prior year. Now I'll turn it over to Jim to highlight a few remaining guidance items.

Thanks, Marc. Turning to slide 15, we show our regional guidance for the year. Starting with industry demand, we expect a robust demand environment for North America, supported by continued strength from consumer nesting trends and increased discretionary spending. Additionally, the impact from positive US housing starts, which began to strengthen in late 2019 and strong existing home sales will translate to higher appliance demand. In EMEA, we expect a continued recovery in the first half of the year to support strong growth. While in Latin America, we expect modest growth of 2% to 4% as the benefits from government stimulus in Brazil are lessened. Asia industry is expected to accelerate by 6% to 8% as the region rebounds from prolonged shutdowns in 2020. Regarding our EBIT guidance, we expect very strong margins of 15% or more in North America. We expect the impact of favorable go-to-market initiatives and disciplined cost actions to offset cost inflation. In EMEA, we expect the strategic actions laid out during our 2019 Investor Day to drive EBIT margin expansion of over 250 basis points and a full year EBIT margin of over 2.5%. In Latin America, we expect to deliver EBIT margins of 7% or higher, as steady demand improvements and positive price mix are offset by continued currency devaluation in Argentina and Brazil. Lastly, we expect to achieve EBIT margins of 2% or higher in Asia driven by demand recovery. Turning to slide 16, we will discuss the drivers of our 2021 free cash flow. We expect another year of very strong cash earnings of approximately $2 billion driven by sustained EBIT margins. We plan to increase capital investments to historical levels to support the launch of innovative products around the globe. Additionally, we will continue to invest in world-class manufacturing and our digital transformation journey. Furthermore, as we ended 2020 with record low inventory levels, we are planning for a moderate inventory build. We anticipate restructuring cash outlays of approximately $225 million, primarily due to the impact of COVID-19-related restructuring actions executed in 2020 and the exit of our Naples, Italy operations. Overall, we expect to drive free cash flow of $1 billion or more as we focus on continuing to deliver record EBIT margin levels and prioritizing our capital investments. Turning to slide 17, we provide an update on our capital allocation priorities for 2021. We remain fully committed to funding the business, driving innovation and growth, while continuing to strengthen our balance sheet and return cash to shareholders. We expect to invest over $1 billion in capital expenditures and research and development, highlighting our commitment to driving innovation and growth in the future. We have reinstated our share repurchase program that had been temporarily suspended during the height of the pandemic, with a clear focus on returning increased levels of cash to shareholders. We expect to repurchase shares at moderate levels. Lastly, we have a clear line of sight to delivering on our long-term goal of gross debt-to-EBITDA of two times. Now, on slide 18, I'll turn it back over to Marc to summarize our key messages.

Thanks, Jim. Let me just recap what you've heard over the past few minutes. We are extremely pleased to see that despite the enormous challenges of operating in a global dynamic, our teams were able to deliver on our long-term value creation targets. In North America, we delivered nearly 16% EBIT margins for the full year, significantly above our long-term margin goal for the region of 13% plus. We restored the European region to profitability. In Latin America, we capitalized on strong industry demand, demonstrating long-term margin potential in the region. And finally, we delivered record free cash flow of $1.25 billion or 6.4% of sales, above our long-term goal of 6% of sales. Further, we demonstrated an unwavering commitment to our environmental, social, and governance priorities, resulting in significant advancements to our targets. Building on the momentum of our 2020 performance and the operational excellence of our global team, we are confident that we are well positioned to deliver another record year in 2021. Now, we will end our formal remarks and open it up for questions.

Your first question comes from the line of David MacGregor from Longbow Research.

Yes. Good morning, everyone and congratulations on the strong quarter and the good guide. Marc, I guess I wanted to just ask about North America and the 4% revenue growth, and you indicated price mix was up close to 4%, implying flat volumes versus core 6%. It was up 20%. So, you noted that you'd be back to normal in terms of the manufacturing efficiencies by the end of the second quarter. But what is the recovery path between here and there look like? And what are the implications for the first quarter? And then I've got a follow-up question as well.

Yeah. First of all, David, good morning and thanks a lot. First of all, stepping back in North America Q4, and not just Q4, we're needless to say exceptionally pleased with the overall financial performance in North America and the margins we achieved in light of a pandemic which is still pretty severe. Now, specifically to the volumes and the supply chain, I would say our overall volume directionally is in line with what you talked about, which also means we're kind of on a sequential base Q3 versus Q4. We directionally kept market share, but year-over-year, we're down. So, it's the same down which we had also in Q3 and Q4, which is ultimately related to the supply chain constraints we have. Now, our supply chain constraints, as we talked about in the prior earnings call, are fundamentally pandemic-driven, meaning we have absenteeism in factories, labor shortages, significant component shortages, and transportation bottlenecks. So yes, of course, we're improving month-by-month, but it's also against the demand which is rising month-by-month. So, we're still experiencing a fairly significant backlog situation, slightly better than at the end of Q3, but only slightly. From everything we see right now, our preparation remarks likely indicate that by the end of Q2, depending on the progress of the pandemic, we should be out of those constraints. But it will linger as long as COVID is around. It is also clear this impacts pretty much everyone producing in the Americas and in Europe, it has less of an impact on production in China or Asia.

So is the recovery path through the first half? Do we see the first quarter kind of look more like the fourth quarter and then we see the inflection in Q2? Or just how should we think about the first half?

No. David, it's not going to be an inflection point. It will be gradual improvement month-by-month. Actually, frankly, already in January, it's slightly getting better. February would be slightly better. But we will not resolve the backlog situation in the short term. It's just too big from an overall perspective. Our production yield has increased a lot. We're also adding capacity, so every month, you will see improvement. And frankly, we've already seen improvements in January. So, it will still take us time to work through it.

Okay. Well, good luck with that. And my second question was just with regards to your ongoing EBIT margin guidance, where you indicated that the net cost would be 150 basis points against that raw material inflation of negative 150 basis points. I guess just trying to get some sense from you, your confidence in that 150 basis points on net cost. I guess a third of that is still a carryover. But just could you talk a little bit about your ability to carve the costs further in '21 and offset that raw material inflation?

Yeah, Dave, why don't I start here, and then Marc, you can kind of follow up. I'd say, David, as you highlighted, that 1.5% includes $50 million to $100 million that is our carryover from last year. We continue to implement and drive actions related to that. We also have some additional actions that rolled out in Q4 that will continue to provide benefits this year. The second thing is, if you look across our broader production base and as we get more efficient in understanding how to deal with some of the COVID inefficiencies that have occurred, that will help us. Incrementally, we expect volume to be higher this year, which will drive additional cost savings. Additionally, within any given year, we typically look to drive a certain amount of reduction in what we call infrastructure and SG&A costs. That is probably another big portion of what comes out there. Where we start the year in terms of the cost take-out programs we've already initiated versus what we've got in the pipeline, we feel very good about that number. Additionally, we’ve talked about you know, from a manufacturing perspective, we ceased production in our Naples facility in Italy during Q4. We will start to see the benefits of that also rolling in this year from a cost perspective.

David, the comment I want to add is, first of all, also reflecting back on last year, we significantly ramped up our cost take-outs. We started with a certain assumption, which we provided in the earnings call. Once the pandemic hit us, we massively increased it to a $500 million net cost take-out, and we successfully achieved that. I would say we have a track record of being able to deal with costs. Of course, we do know raw material inflation is a headwind this year, and we indicated earlier it would be $250 million to $300 million. But I believe we have other tools to overcome some of these headwinds. There’s carryover, plus additional measures which we are taking. As you know, this is not our first experience with raw material headwinds, and we have successfully navigated them in the past. Additionally, I want to clarify that regarding raw material prices, we are generally under long-term contracts or hedged in certain positions. Thus, we are less exposed to the volatility that occurs in spot markets compared to most competitors. This gives us a higher level of confidence that we can remain in the range we are discussing.

Your next question comes from the line of Eric Bosshard from Cleveland Research.

Good morning.

Good morning, Eric.

Two things, I'm curious about. One, if you could just give a little bit more insight into what you're seeing in North American demand trends, how that behaved through Q4? And then secondly, I think you commented about gaining share in the US in 2021. When during the year, do you think the supply chain will be in a position that's effective to allow you to start to accomplish that?

So, Eric, let me maybe first talk about the demand trends, and maybe, Jim, you want to cover the supply chain piece again. So, Eric, on the demand trend, first of all, we got to recognize in 2020, yes, you've all seen the North American industry volume was positive. What most people lose sight of is the quality of demand has changed positively. We saw, in particular in Q2 and beginning of Q3, a lot of duress or COVID-related stress purchases, like freezers and microwaves, but that has gradually shifted more into higher-value items, such as remodeled kitchen upgrades or full home constructions. So, beyond just volume metrics, we are really pleased with the mix coming along with the increased volume. It also means we don’t see the demand falling back as it did during the COVID spike. Yes, there was a little spike, but this is structurally and sustained powerful demand stemming from extremely strong housing trends and more than just housing; it’s the overall home improvement activity. I don’t foresee that fundamentally changing anytime soon. Of all the global regions, North America is where I feel the most bullish. In terms of structural demand trends, it looks promising, and we don’t see it slowing down. So, while I know we’ve guided a number, it might actually be stronger. We’re confident about these sustained demand trends. Secondly, as we resolve our supply chain constraints, I believe we can capitalize on these demand trends.

Yeah, and I’d say, Eric, from a supply chain perspective, as we discussed earlier, we now have our supply chain capable of keeping up with the current levels of demand. We are beginning, as Marc mentioned, to see improvements here early in the year in our ability to start to catch up on some of that backlog. By mid-year is when we expect to begin to have worked through that, assuming that nothing else changes in our environment, since most of these supply chain issues are driven by COVID. That positions us where we’ve worked through both demand increases and also the needed higher retail inventory levels. As we transition into the back half of the year, we should gradually see an inventory level build slightly as we return to what would be a normalized production environment. We discussed how our inventory levels decreased during this time. Looking at midyear, we'll normalize trade inventory levels and then enter slightly into the third to fourth quarters with normalized inventories overall.

Your next question comes from the line of Sam Darkatsh from Raymond James.

Good morning, Marc. Good morning, Jim. I hope you both are well.

Good morning, Sam.

Sam, good morning.

A couple of questions, if I might. First off, with respect to the expectations for share gains in all of the regions embedded within your fiscal '21 guidance, I'm trying to get a sense of what gives you the degree of confidence to categorically state that. I know you're going to have some easy market share comparisons and you noted the new product rollouts. But I'm mostly interested in what your thoughts are if the industry promotional activity resumes like the normalized promotional activity resumes as lead times normalize, as discretionary replacement demand continues to improve. If that were to reoccur, what gives you confidence that you would still gain share in that sort of backdrop?

Sam, let me take this one. First of all, as you rightly highlighted, I start with our new product innovations. We launched new dishwashers and top loaders, and our product pipeline is very strong. From our trade flooring or trade reaction, the perception of our innovations is very positive. Additionally, consider that our back order level remains significant. I don’t need to promote back orders; I just need to deliver them. Therefore, there’s little to no promotional pressure on resolving that backlog. That is a significant portion. Now regarding promotions going forward, as you know, we’re not commenting on our go-forward pricing strategy. The only thing I want to hint at and repeat is that our promotion strategy has not changed regardless of circumstances. If we participate, we do so when we can create value for either us or our trade customers, and it is a case-by-case decision. In general, knowing the raw material pressure, and given that we understand particular China transportation costs are rising, I'm not quite sure the promotional pressure will increase as rapidly as some people assume.

Yeah, I think, Sam, the other thing to add to that is you kind of talked about it on a global basis. If you look at EMEA right now, the share gains we've had there, especially within some of the key countries we operate in, we expect to continue into next year as well. Our supply chain, while affected, is not as deeply impacted as we see within the US. Additionally, in other large markets such as Mexico and India, we expect to continue gaining share there. Brazil, as we've highlighted, has also been a very healthy market for us. We see multiple opportunities this year in terms of trends and their current status globally.

And then my second question, Jim, I don't know if you had this in your prepared remarks. If I missed it, I apologize. Normal seasonality from an earnings delivery standpoint is roughly about 40% in the first half, 60% in the second half. But I'm guessing your cost take-out and rollover hits you in your first half; your volume load-in is going to be early on in the first half. So should we expect the normal seasonal earnings delivery to flip this year? I'm guessing the answer is yes, but I'm just trying to get a sense of to what degree?

Yes, Sam, I think you're thinking about it the right way regarding the variables you're accounting for. We do expect it to flip. Now not to the extreme; in many of the more recent years, we've been closer to 45, 55, but we actually expect higher earnings in the first half this year. The points you highlighted are key: as we catch up on our supply chain and production, as well as the carryover of cost, it will contribute to a stronger first half. Therefore, your expectations for a flip are reasonable.

Your next question comes from the line of Michael Rehaut from JPMorgan.

Thanks. Good morning, everyone.

Good morning, Mike.

First question I had was just kind of circling back to price mix, particularly in the US. This has obviously been a major focus for investors following 2Q and particularly 3Q and now in 4Q in terms of the dramatically reduced promotional backdrop helping price mix, which you saw that come through in the 4Q results. How should we think about price mix as 2021 progresses, particularly in the US? I mean, Marc, you mentioned that you obviously don't have to promote your backlog. By all accounts, it appears that the demand trends that have allowed for that reduced promotional backdrop seems like they will continue into the first half. If that's correct, should we be thinking about more of a flat to down price mix dynamic in the back half? Related to this, I heard you mention, if I heard right, you talked about price increases in Russia, Brazil, India, but not the US, despite having significant raw material inflation. I was wondering if, in lieu of those changes, we would expect some price increases to offset raw materials. Effectively, you're getting that from the reduced promotional backdrop at least in the first half?

Mike, it's Marc. So let me try to answer this one. First of all, as you know, we're not giving quarterly guidance on price and mix. We provided a full-year number, which is positive, and we're confident in this figure. As you pointed out, there are several elements at play here. One is carryover elements that will provide good momentum. Two, we have significant innovation, which I mentioned. Three - and this is crucial – the current demand mix is rich. Therefore, we have mix opportunities. Lastly, we have already implemented some price increases in certain markets as we move to regions like Russia, India, Brazil. However, we are not commenting on any planned future price increases. I will reiterate that in the past, we have demonstrated our ability to pass on necessary pricing - cost-based price increases to the market. But that doesn't mean we have any precise plans.

Yeah, I think the other thing to consider, as you mentioned, Q1 is typically our least promotional quarter. So, when you evaluate year-over-year and even the first half of the year, it tends to be less promotional. While, as Marc said, there's carryover, the impact is less than it would have been in the back half of the year of what we observed this year.

Okay, all right. Well, that’s helpful. I appreciate it. And certainly, obviously, I appreciate you highlighting mix because I think that's crucial and perhaps underappreciated to a degree. Secondly, maybe refocusing on the EMEA region with its margin trajectory, which was down a little bit sequentially in the fourth quarter versus the third quarter, and the guidance of 2.5% plus in 2021. I was hoping you could comment on how you feel the margin improvement trajectory is unfolding, and what markers we should expect over the next two or three years to drive that margin towards what you expect to be normal levels.

Why don't I start with it, Michael, and then I can have Marc add some comments. To begin with, as we look at - we're very happy with the performance we saw in the back half of the year within EMEA and the margin improvement. We have to remember that EMEA typically experiences their first quarter as their lowest quarter of the year. Thus, we do expect that to continue being profitable. Obviously, when you analyze a sequential quarter-over-quarter, we wouldn't expect continued margin growth in Q1. Over the full year, we expect growth to materialize to 2.5%. A significant part of this is driven by our cost reduction measures, many of which were not implemented until the latter half of the year in EMEA. Additionally, we've discussed share gains and incrementally improved demand there. We feel positive on this front. Accordingly, these drivers will position us favorably for longer term margin improvement.

Yes, Michael, just to echo Jim's sentiments about Europe, we're pleased with the full-year results there. Remember, the pandemic hit Europe particularly hard compared to Latin America or North America, especially in Q2. I am proud that we were able not only to achieve profitability in Europe during the full year but, given the circumstances, that was a very difficult target earlier in the year. Achieving profitability is an important milestone, but it is also critical to note that our second half performance is back on track with what we laid out for the future. We aim to achieve an EBIT margin of 2% to 4% and, while we work on long-term strategic levers, we are aiming for a 7% to 8% operating margin target. Today, I can confidently say that our second half performance gives us assurance that we are back on this trajectory.

Your next question comes from the line of Curtis Nagle from Bank of America.

Good morning. Thank you very much for taking my question. So forgive me if you guys have already addressed this, but just a quick one on the backlog. In Q3, you mentioned it was 7 to 8 weeks. That compares to 1 to 2 weeks normally. Where does that stand, or where did that stand in Q4? And roughly, I know improvements will come through to Q2, but how should that phase through the first half of the year?

Yeah, Curt, this is Jim. As I mentioned, our backlog continues to be at that similar 7 to 8 week level. However, our production is now aligned with current demand levels. We haven't provided a forecast or an outlook of how the backlog will progress over the next two quarters, but we do see production improvements and believe we will resolve it by mid-year. So, you could think about that as a gradual resolution over the first two quarters.

Okay. I guess just a quick follow-up. In terms of cancellations, I think you mentioned there were no issues there. Is that still the case? Also, from a modeling perspective, at the Analyst Day in 2019, I believe 55% was replacement, 15% was new housing, and 30% was discretionary. Presumably, that math has changed a little bit. Could you provide an update on the distribution of those percentages?

Yeah, Curtis, it's Marc. Without getting into the specifics of our percentages, let me provide some qualitative insights as to why we are confident in the long-term demand trends, particularly in North America. On the replacement side, we are now moving beyond the trough of the industry in 2008 to 2010. Last year, due to heightened usage at home, you can say that the need for replacement has likely accelerated. We're now transitioning out of this trough. Overall, this provides positive support for the structural demand. Moreover, we have witnessed significant discretionary demand driven by a necessity to improve the structure and the overall home. Regarding housing, while it can take time to see an influx, we have also seen improved housing starts around 1.7 million in December, which is the highest in quite some time, although it should be nearer to 2 million. These factors aid in driving high confidence in the ongoing structural advancements in demand.

Your next question comes from the line of Mike Dahl from RBC Capital Markets.

Hi, thanks for taking my questions and appreciate the color so far. Marc, I share the overall enthusiasm around home improvement spending and what that can mean for long-term appliance demand. I'm trying to think more about cadence in the context of some of the replacement cycles potentially being accelerated, considering all your commentary on potential structural shifts and stay-at-home consumer habits. However, there's also speculation about a 'roaring 20s' post-vaccine environment and a potential shift in pent-up demand towards dining out and dining away from home more broadly. To what extent do you think this outlook plays into your view of demand cadence for 2021, especially later in the year?

Mike, first of all, you’re right; there's a lot to consider in the macro picture. But currently, we have high confidence in the structural demand trends, and the reality is, the pandemic's uncertainty remains every year around raw material, currency, etc. Yet we are confident in the ongoing structural demands that heavily revolve around housing and home improvement. Furthermore, a consumer will not shift their behavior overnight after being home for over a year. This behavioral shift towards homes will remain, leading to a fundamental change in how consumers experience and invest in their homes. So, we are optimistic that these multiple trends will play in our favor.

Got it. And just a quick follow-up to that. I think this ties into some earlier questions regarding seasonality of earnings. Based on your response, we should not expect any huge differentiation in growth expectations for the first half versus the second half in your guidance. That is, nothing like high single digits in certain parts of the first half, then flat to down in the second half?

Correct. Michael, this is Jim. You shouldn't anticipate any dramatic high first-half variations. Just based on year-over-year observations, you will indeed see stronger first-half growth as memory jogs from previous year closures due to various lockdowns will affect shipments and sales. But, starting from Q3 of this year into Q4, we do not foresee such drastic quarter-over-quarter growth.

Moreover, I want to highlight as mentioned, consider long-term perspectives in your evaluations. Last year was the third consecutive one with record EPS, and we’re guiding for a fourth consecutive year. This speaks to a structural improvement and sustainability in our company, not a temporary COVID play. We are on track with our long-term shareholder targets, and I am pleased to communicate that we are successfully delivering. We expect earnings around $19 to $20, emphasizing sustainability beyond just short-term challenges. This is a fundamentally different company than it was ten years ago.

Ladies and gentlemen, this does conclude today's conference. We thank you again for your participation. You may now all disconnect.