Good morning and welcome to Whirlpool Corporation's Third Quarter 2022 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, Korey Thomas.

Thank you and welcome to our fourth quarter and full year 2022 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. Before we begin, I want to remind you that as we conduct this call, we'll be making forward-looking statements to assist you in better 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, 10-Q 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 with a better baseline for analyzing trends in our ongoing business operations. Listeners are directed to the presentation and 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 to ask no more than two questions. With that, I'll turn the call over to Marc.

Thanks, Korey and good morning, everyone. Turning to our agenda on Slide 4. I will preview what we will discuss today. Two weeks ago, we announced the conclusion of a strategic review of EMEA alongside preliminary 2022 results and a preview of our '23 expectations. This morning, we will provide additional context on each, starting with our '22 results. During the second half of 2022, we were in the midst of an unfavorable macro cycle. Consumer sentiment and demand continued to reflect recessionary concerns. At the same time, inflationary pressures remained stubbornly high. While the combination of down demand and rising costs is historically unusual for a best temporary it did impact our results negatively during Q4. Additionally, our supply chain execution was not where we expected it to be in the fourth quarter due to a one-off supply issue that has since been resolved but negatively impacted a number of our North American factories. Jim will provide more information on 2022 later in the call. Looking ahead into 2023, we do expect the tail end of this negative macro cycle to be felt during the first few months of the year. We foresee macro headwinds turning into tailwinds as the year progresses. It's difficult to predict the exact timing of the shift in the macro cycle, but we would expect this to happen towards late Q2 or early Q3. Given this volatility, we remain focused on the business levers we can control. We are confident that the medium-term demand drivers of our business remain intact. Our operational priorities in 2023 will be flawless execution of our supply chain and the delivery of very significant cost targets. After 2 years of inflationary cost increases, we will deliver $800 million to $900 million of total cost takeout. We have a high degree of confidence in delivering this target. Looking back on our history, Whirlpool has a strong record of successfully managing through challenging cycles and delivering substantial cost reductions. In 2007, we expected $400 million of raw material inflation as we entered the year. We responded decisively to this high level of cost inflation, delivering record results. In 2011 and 2012, we reduced our fixed costs in North America by more than $400 million. More importantly, we're not just starting this new cost initiative in January 2023. As mentioned in our prior earnings calls, we have initiated this during the second half of 2022. The maturity of the underlying actions has advanced significantly, thus giving us confidence in delivering our cost targets. Now turning to Slide 5, I will provide an update on our strategic review of EMEA and our portfolio transformation. I am very happy with the EMEA transaction, its value creation and how it fits into the broader context of Whirlpool's portfolio transformation. In April of 2022, we outlined how we would continue our multiyear journey of transforming Whirlpool into a high-growth, high-margin business. The world we operate in is very different now than it was 10 or 20 years ago—a less global world. The diminishing advantages of global scale have become apparent, while the benefits of regional and local scale are now more compelling. At the same time, Whirlpool has raised the bar for long-term value creation. This mindset compels us to critically assess ourselves as we focus on transforming our portfolio into a high-margin, high-growth business. Recent actions include bolstering our already strong brand portfolio and agreeing to contribute our European major domestic appliance business into a newly formed entity with Arcelik. As you can see, our portfolio transformation is ongoing and we have made significant progress. I believe these actions position us well for delivering growing shareholder value over time. As a reminder, as a result of our transactions executed in 2022, we will see an increase in free cash flow of approximately $350 million in 2024. Now turning to Slide 6, I will share more about the strategic review of our EMEA business. We assessed a range of options with the goal of maximizing value for our shareholders, employees, and consumers. We are pleased with the outcome of the agreement to contribute our European major domestic appliance business to a newly formed European appliance entity with Arcelik. Arcelik is a familiar company to us, as we have executed multiple transactions with them. Our consumers will benefit from broader product and service offerings, combining the best innovations, attractive brands, and sustainable manufacturing practices. We will own approximately 25% of the new company, and we expect the transaction to close during the second half of 2023, subject to regulatory approvals. The new company is projected to have over €6 billion in annual sales with over €200 million in cost synergies. It is important to note that we are retaining ownership of our EMEA KitchenAid business. Our global KitchenAid Small Appliance business is one of the three strong pillars of our high-value business model with a structurally attractive margin profile. Regarding Slide 7, I will discuss our value creation expectations from the actions we have taken in the EMEA region. We expect to participate in the significant efficiencies the new company will generate, including sustained productivity, building upon already established purchasing capabilities, and continued commitment to design, innovation, and sustainability. We potentially unlock long-term value creation through our ability to monetize our minority interest at an estimated net present value of $500 million. Even though we envision a long-term profitable relationship with Arcelik, a shareholder agreement includes various exit options at predetermined parameters after 5 years. Our 40-year Whirlpool brand licensing agreement will produce predictable cash flows of over $20 million per year. Overall, we expect $750 million in net present value of future cash flows. Separately, through the previously executed divestiture of our Russia business, we anticipate up to $260 million in deferred payments. Now, I'll turn it over to Jim to review our fourth quarter results.

Thanks, Marc and good morning, everyone. Turning to Slide 9. Our fourth quarter performance was impacted by a one-off supply chain disruption in North America and elevated cost inflation. Despite this, I want to highlight that our previously initiated cost actions remain on track. Additionally, raw material costs remain elevated, but we are beginning to see improvements. In the fourth quarter, we delivered ongoing EPS of $3.89 and ongoing margins of 3.5% as results benefited from a full year adjusted effective tax rate of 4%. Turning to Slide 10, I'll review results for our North America region. As expected, the inflationary environment and increasing interest rates continued to weigh on demand, and cost-based pricing actions partially offset elevated cost inflation. Our production volumes were impacted by approximately 5% due to a one-off supply chain disruption as mentioned before. This disruption involved one critical supplier providing a common platform of parts for multiple manufacturing locations and products, which was resolved in mid-January. This disruption also negatively impacted price mix as we had previously committed investments in anticipation of value-creating holiday promotions. Given the confidential nature of the ongoing discussions with the supplier, we will not share any additional information about this situation. Even with the supply challenges faced in the quarter, we successfully maintained our recent quarterly share gains. We are confident that the actions we have implemented position us to win, and we remain confident in the structural strength of our North America business. Turning to Slide 11, I'll review our results for our Europe, Middle East and Africa region. Excluding the impact of foreign currency and the divested Whirlpool Russia business, fourth quarter revenue fell approximately 9%. The region delivered breakeven EBIT margins during the quarter as cost-based pricing actions offset lower volumes and cost inflation. As Marc mentioned, we completed our strategic review of EMEA. Until the transaction closes, EMEA's performance will continue to be included in our ongoing results. Turning to Slide 12, I will review results for our Latin America region. The region experienced moderate demand declines compared to the steep declines during the third quarter. The region's cost-based pricing and strong cost actions resulted in flat revenue and solid EBIT margins for the quarter. Finally, turning to Slide 13, I will review results for our Asia region. For the full year, excluding the China business and foreign currency impacts, revenue grew by approximately 5%. Cost-based pricing actions were more than offset by weaker demand and continued cost inflation, resulting in an EBIT margin of 2.7%. Now, I'll turn it back to Marc to discuss our perspective on 2023.

Thanks, Jim. Turning to Slide 15, I will share how we expect the current operating environment marked by softer demand and elevated but easing costs will impact 2023. As we enter the new year, we continue to expect consumer sentiment to negatively impact demand. This is expected to be more pronounced at the beginning of the year, predicting a first half demand decline of 5% to 10%. We expect demand to improve each quarter and to exit 2023 with flat industry volumes. We strongly believe in the favorable mid- and long-term demand tailwinds, especially in North America. The undersupplied aging housing stock is the oldest it has ever been, and this will drive new construction demand in the mid- to long term. In the short term, sharp increases in mortgage rates have suppressed existing home sales, but consumer equity remains very strong. Thus, we expect sustained high levels of remodeling activities in homes, particularly kitchens. In other words, while consumers may be reluctant to buy a new house, they will utilize their strong balance sheets to remodel their homes. From a go-to-market perspective, we expect 2023 promotional activity to be on par with levels in the second half of 2022. Additionally, we anticipate that promotional activity in the second half of 2023 will remain below pre-pandemic levels. Regarding raw materials, we see costs easing throughout the year. Steel spot rates have significantly decreased, and we are beginning to see these benefits reflected in our annual contracts. We also expect improvements in resins and ocean freight. However, we still face persistent high cost levels for certain commodities such as nickel and strategic components. Now turning to Slide 16, our 2023 operational priorities are clear. First, we aim for flawless execution of our supply chain. I want to emphasize that flawless execution is easier said than done. Our supply chain model has served us exceptionally well over many decades, characterized by long transportation lanes from low-cost countries, high parts complexity, and a considerable percentage of single sourcing. While this model has been cost-efficient, it has not been resilient enough to cope with the unprecedented volatility and disruptions caused by COVID. Over the last 2 years, we have reduced our active parts count from over 110,000 to slightly more than 70,000. In the midterm, we see a path to further reduce this number to below 50,000 parts. We also significantly expanded our dual sourcing from single sourcing, focusing on high-value strategic parts and components. We have made substantial progress in derisking this part of our supply chain, but we still have some lower-value single-sourced parts as our focus in the coming months and years. As mentioned previously, our second operational priority is a cost reduction of $800 million to $900 million. We expect to deliver $500 million through removing over $250 million of premium costs and inefficiencies from our supply chain operations while being disciplined with discretionary spending and managing headcount. Compared to the summer of 2022, our global salaried workforce is already down by 4%, and we will remain disciplined throughout 2023. In addition to these net cost takeout actions, we anticipate $300 million to $400 million in raw material cost reductions, totaling $800 million to $900 million in total cost targets. The seasonality of this cost reduction is more skewed towards the second half of 2023 due to three factors. First, we have higher cost inventory entering 2023, creating a lag effect on easing raw materials. In other words, even as costs decrease because of this inventory, it typically takes about 2 months to fully reflect this in our P&L. Second, we are lapping lower year-over-year inflation periods, as cost increases peaked in the third quarter of 2022. Third, many of our material contract lanes have quarterly and annual durations creating a lag. Now that most of our annual contract negotiations are complete, we have visibility to deliver the anticipated $300 million to $400 million in raw material cost benefits throughout 2023. Now, I'll turn it over to Jim to discuss our full year 2023 guidance on Slide 17.

Thanks, Marc. I'll review our full year 2023 guidance. In 2023, we expect a revenue decline of 1% to 2%, given softer consumer demand and sentiment, especially in North America and EMEA, particularly as the first half of 2023 reflects current macro cycles. As we reset our cost structure, we expect to expand ongoing EBIT margins to approximately 7.5% and deliver approximately $800 million in free cash flow. The time of our free cash flow delivery could be significantly impacted by the timing of the close of the EMEA transaction consistent with seasonal cash generation from the region. We expect our ongoing tax rate to be 14% to 16% and our interest cost to be approximately $325 million, reflecting incremental debt from the InSinkErator acquisition. This leads to a full year ongoing EPS range of $16 to $18. Turning to Slide 18, we show the drivers of our full year ongoing EBIT margin guidance. We expect price/mix to negatively impact by 225 basis points. As availability improves, we anticipate participating in value-creating promotions, partially offset by a positive mix driven by a strong lineup of new product introductions. Next, as we execute $500 million of substantial cost takeout actions throughout the year alongside raw material benefits, we expect a positive 425 basis point impact to margins. Continued investments in marketing and technology alongside currency headwinds are expected to negatively impact margins by 125 basis points. As we navigate temporary demand declines, an easing inflationary environment while executing decisive cost takeout actions, we expect to deliver approximately 35% to 40% of our earnings in the first half of the year. We are confident that we have the right actions in place to navigate this macro environment and deliver approximately 7.5% EBIT margins. Turning to Slide 19, we show our regional guidance for the year. Starting with industry demand, we expect most of our regions to continue to be impacted by a subdued demand environment, especially during the first part of the year. In North America and EMEA, we expect a contraction of 4% to 6%. In Latin America, we expect a contraction of 1% to 3%, while in Asia, we expect industry to accelerate by 2% to 4%. Despite these anticipated declines, we expect industry volumes in North America to be approximately 6% above 2019 levels. We anticipate EBIT margin expansion across all regions, driven by strong cost takeout actions, as well as raw material inflation tailwinds. In North America, we expect to deliver full-year margins of approximately 12%, with the region closing the year at around 14%. In EMEA, we expect margins of approximately 2.5%. In Latin America, we anticipate EBIT margins of about 7% as cost takeout actions are partially offset by continued macroeconomic and geopolitical volatility affecting demand. Lastly, we project EBIT margins of approximately 5.5% in Asia, driven by top-line growth and strong cost takeout actions. Now turning to Slide 20, I'll discuss our unchanged capital allocation priorities. We invested over $5 billion in capital expenditures and research and development over the last five years, reflecting our commitment to delivering a high-growth, high-margin business. During that same period, we returned over $5 billion in cash to shareholders, including $900 million of buybacks in 2022 and a 25% increase in our quarterly dividend—our tenth consecutive year of dividend increases and nearly the 70th consecutive year for dividend payouts. Our strong balance sheet with $2 billion in cash at year-end gives us the flexibility to pursue value-creating opportunities like the acquisition of InSinkErator in 2022. In 2023, our focus is on debt repayment, aiming for an optimal capital structure and maintaining our strong investment-grade credit rating. Now, I'll turn the call back over to Marc.

Thanks, Jim. Turning to Slide 21, let me close with a few remarks. In our 111-year history, we have built a proven track record of successfully operating through challenging macro cycles and we're confident in our ability to deliver margin expansion in 2023. We will flawlessly execute on our supply chain initiatives, while resetting our cost structure is expected to yield $800 million to $900 million in benefits. Alongside these actions, the ongoing portfolio transformation will unlock value and enhance our financial profile. With the InSinkErator acquisition and the EMEA divestiture, we expect incremental free cash flow of approximately $350 million in 2024. The EMEA transaction alone is expected to result in a 200 basis point improvement to return on invested capital, along with a 150 basis point enhancement in ongoing EBIT margin. These improvements, together with a robust balance sheet, underpin our firm commitment to returning cash to shareholders. Allow me to remind you that 2022 represents our tenth consecutive year of dividend increases, along with a 25% increase to our quarterly dividend. Additionally, we repurchased $900 million in shares, returning a total of $1.3 billion in cash to our shareholders. Moving forward, we will maintain a solid balance sheet while continuing to provide attractive returns to shareholders. We are competitively well-positioned, seeing favorable market share trends and will continue to benefit from long-term demand tailwinds in our industry. Now, we will end our formal remarks and open the floor to questions.

Your first question comes from David MacGregor from Longbow Research.

I guess sort of a two-part question. On Slide 21, you talk about setting yourself up for 2024. I'm just wondering if you are providing a high-level view that by 2024, you think you can achieve 11% to 12% ongoing EBIT margins? Or do you believe you can make progress towards that goal? The second part is, I just want you to comment on what happened in the fourth quarter promotionally. There were a lot of programs there. You've said in the past that you don't expect promotional activity to revert to pre-pandemic levels. Do you still feel this way? If so, what are you observing that gives you confidence in your second half price/mix expectations?

So David, let me first address the first question. Obviously, we're just giving guidance for '23. So it's a little too early to provide guidance for '24. With that being said, you're correct in your interpretation that there are numerous positive elements expected to materialize in '24. First of all, the consumer demand, particularly in U.S. housing, is expected to strengthen as we move towards stronger years due to a structurally undersupplied housing market. Regarding the cost side, the heavy lifting we are doing now on cost reduction will reset our cost base, setting us up favorably for '24. In addition, we expect the full contribution of InSinkErator in terms of margins and cash flow. Assuming we can close the European transaction, that will also deliver cash flow and margin benefits to the entire company. Thus, in '24, I would say we are confident about where we're heading towards our long-term shareholder value creation targets. As for your second question on promotion, as we reviewed the entire back half of '22, it aligned with our expectations. We anticipated a higher level of promotions compared to previous periods, although this level remained below pre-COVID levels, leading us to classify it as a moderate promotional environment. We expect this environment to continue into '23.

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

Two themes in my questions. First would be around EMEA. I believe EMEA is typically much more profitable in the second half than the first half. I'm assuming this will also occur in '23. However, it seems you're including EMEA throughout the entirety of the year. What is the likelihood or general quantification if the transaction closes as expected for incremental dilution to EPS guidance from the absence of a profitable EMEA in the back half? Mark, could you also discuss the terms of the options that Arcelik has after five years? I couldn't find it in the filings, and I'm just trying to gauge the probability of an $800 million transaction or a $500 million PV?

Let me first address your first question about what is in the guidance and how it might be impacted by the closure of the transaction. To keep it simple, the timing of the transaction will likely impact EPS to a lesser extent than cash flow. Historically, we have not shown regional cash flows, but we could experience some volatility in European cash flow this year, with significant cash drains and cash builds in the back half. So depending on when we close it, that will have more of an impact on cash flow rather than EPS. Keep in mind that Europe is indeed a bit skewed towards Q3 and Q4 due to the proficiencies of the KitchenAid small domestic appliance business, which also parallels North America in terms of Q3 and Q4 sales. If the transaction closes, remember that part of the business will remain with us; hence, I do not expect a significant EPS impact. Regarding the terms of the transaction's shareholder agreement, I cannot disclose all the details. However, I assure you that after 5 years there are multiple predetermined exit opportunities defined in the shareholder agreement, including EBITDA multiples, so it's clear what the potential valuation could be.

If I could sneak in another question regarding the $300 million to $400 million tailwind you identified. Typically, oil and resins are major variables within this, but are there any other significant factors like steel that could influence whether that $300 million to $400 million is achieved, such as the number of contracts you have?

You successfully sneaked in a third question, Sam, but let me address it. At this point, there is some uncertainty and volatility in forecasting. That said, our largest procured item remains steel, generally secured through long-standing annual contracts. As of now, we have virtually closed all contracts, except for one that technically expires in Q1, which has a slight lag effect. Thus, we have high confidence in our predicted steel costs. We experienced minor lagging items, but overall, steel pricing will be stable and predictable moving forward. As for resins, which also have quarterly contracts, they tend to correlate loosely with oil prices, making them more susceptible to variation. We have already begun observing numerous benefits, and this stability is expected to continue in Q1 as well. However, several other commodities continue to experience significant price fluctuations. Notably, glass, which is impacted by lithium, has had variable pricing, but its total impact on us is minimal. Overall, we currently estimate a 70% to 80% fill rate on our actions in achieving the expected $800 million to $900 million in cost takeouts.

Yes. Sam, just to add to what Marc said, a lot of this confidence stems from actions we executed throughout 2022. We have accurately reflected those in our exit run rate, and we believe we’ve been successful in estimating future material expenses despite the volatility over the last couple of years.

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

First, I would love to explore the assumptions you're making for InSinkErator in 2023. I know in some of your past acquisitions, you’ve been reluctant to disclose the impact of acquisitions. However, given the $3 billion price tag, it would be helpful to understand the expected contribution to sales and margins for 2023, ideally on a quarterly basis to gauge how that acquisition is performing.

Mike, this is Jim. When we acquired InSinkErator, we projected revenues of over $600 million, and we expect that to continue and grow. The margins for this acquisition are above our average and remain strong. Overall, we believe this acquisition adds approximately $1 to our EPS for 2023 while generating over $100 million in free cash flow. InSinkErator has proven to be a consistent performer and cash generator, and that’s part of the reasoning behind our acquisition.

And Mike, just to add to that, it's now been 2 to 3 months since we acquired InSinkErator. The external environment they operate in aligns closely with that of our major appliances. Therefore, the same demand environment we described earlier also applies here. We anticipate a soft demand environment in the first half, but with a pick-up expected in the latter half. However, the key factor here is that InSinkErator is a high-margin business, and we observed impressive stability from both a margin and performance perspective. More significant product innovations are on the horizon as we move into April and May, which we believe will enhance our consumer offerings and cost reductions. Therefore, we are optimistic about this business overall.

Okay, I appreciate that. I guess my second question is around your guidance that 35% to 40% of your earnings would be in the first half. When I look at Slide 16, raw material and cost takeouts really don't begin until Q2, yet the first quarter is forecast to be somewhat flat year-over-year. How should we think about first quarter EBIT or margins versus the fourth quarter? If you're not facing any incremental headwinds, is there potential for significant improvement in margins sequentially? Additionally, I'd like to clarify your comment on North America achieving a 14% margin by year-end. Should we interpret that to mean that could be a starting point for 2024?

Yes, Michael, this is Jim. As we discuss seasonality, it’s important to note that we’re starting the first quarter with a higher layer of inventory costs, which will persist through Q1 due to the lagging effect of prior high-cost inventory. This is why, while we expect sequential margin improvement, the number of improvements won't be substantial in Q1 as a result of factors such as the ongoing completion of ongoing cost reduction programs as we exit Q1 into Q2. Additionally, while we face year-over-year demand declines, we expect mid-year margins to improve throughout the year with the absence of issues that impacted prior margins. Regarding North America margins: reflecting on our performance, we had an 11.5% margin last year, and we are guiding towards a 12% full-year margin this year. The focus should be on sequential improvements since Q4 margins were not representative of our long-term performance. By Q4, we estimate margins were impacted by about $100 million due to previous production reductions and the one-off supply issue. By the same reasoning, as we move into Q1, we should expect a margin of 8% or higher. Though this is not a concrete forecast, it does illustrate where we might align. Thus, sequential margin expansion is expected in Q1 and throughout the year as raw material cost benefits set in.

To clarify the North American margins, they significantly influence the company's overall performance. For the full year, we saw 11.5% margins last year and expect 12%. While this doesn't reflect a sizable increase on a yearly basis, it does imply significant sequential growth. The Q4 margins of 5.8% are not indicative of our structural performance. Two factors drove our Q4 testimony: the production reduction's residual impact and the aforementioned one-off supply issue which should not reappear. Therefore, in Q1, I would anticipate a margin of 8% or greater, but we'll see significant improvement throughout the year regarding profitability, particularly as raw material benefits kick in.

Your next question comes from the line of Liz Suzuki from Bank of America.

I'm curious about your relationships with retail customers today, given the disruption in the fourth quarter. Has your world lost shelf space to other brands? If so, how will you reclaim it? Do you have contracts that might help you fulfill those orders? How should we think about the potential for market share recovery in 2023 in your assumptions?

Liz, to focus especially on the U.S. market, in Q4 we held a market share that was largely consistent with Q3, which already saw sequential gains. While we did not expand our share in Q4, we expect market share gains moving forward. The results in January further confirm our plans for that gain, particularly in the relationships we maintain with our retailers. In terms of traditional retail and builder relationships, we noted that the builder side remains under suppression due to current housing constraints. Conversely, our efforts have been strong in traditional retail, and we haven't lost any floor space. However, we need to provide our retailers with the products needed to fulfill demand. We remain confident in the innovations we have, such as our Mate PET program and the dual-function top load dishwasher, and we anticipate fulfilling that supply need moving forward.

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

Mark, Jim, I appreciate all the clarity so far. Looking back over the last 6 months, visibility has presented challenges. In regard to the housing landscape today, single-family permits are down 40%, home sales have plunged mid-30s, and home prices are starting to soften. While I understand your long-term views on housing, what's the foundation for your belief that these headwinds will lessen towards the end of the first half?

Certainly, Michael, specifically addressing the U.S. housing market. While we do not expect a major uplift within the first 6-month period of this year, we foresee a recovery commencing in the latter half. It's crucial to differentiate between existing home sales and new home construction. The existing home sales have fallen dramatically as mortgage rate shocks and high home prices have impacted spendings. However, these price declines can improve home affordability, which will stimulate demand for existing homes. Furthermore, while the Fed rates may not drop, we expect spreads between mortgage interest and treasury bonds to decrease, leading to improved housing affordability over time. The new home construction sector also faces similar trends. Several industry sources estimate a long-standing undersupply of at least 3 million homes must eventually be addressed. This gap cannot persist indefinitely.

To build on that, it’s also essential to remember that we're in a prominent replacement business, as nearly 55% of our business stems from replacement. Reflecting back to the industry conditions in 2011 and 2012, which saw significant growth starting in 2013, we believe we're entering a similar phase where we can expect favorable replacement trends in the coming periods.

Thank you for the insights. I recognize some of these factors can be debated; the timing remains uncertain. Hence, it seems that in the second half of the year, your expectations for industry volumes might align closely with your own. If the anticipated demand doesn't materialize in H2, how do you expect that to impact margins, especially considering shifting costs?

In terms of North America, our annual expectations reflect a forecasted market contraction of 4% to 6%. This projection follows a decline of 6.5% last year, reaching a floor on replacement demand as this significant sector stabilizes. While downward risks exist, we also see potential upside recognizing our housing market fundamentals, which we maintain are strong.

Your next question comes from the line of Susan Maklari from Goldman Sachs.

My first question pertains to your extensive operational experience across different regions facing numerous challenges over the years. How do you evaluate North American operations today, the opportunities available, and your ability to achieve the outlined initiatives?

Susan, this is a very macro question that spans over a longer timeline. However, I firmly believe in the long-term fundamentals of both North and South America, as well as the robust market position we hold in both areas. Although North America's business may experience cycles due to influences such as interest shocks, it does not sway my confidence in the long-term health of the market, our position within it, or the margin potential moving forward. Having overseen North America since around 2008 or 2009, I've witnessed market fluctuations firsthand and believe our industry fundamentals will ultimately bolster future performance, particularly given the current prolonged period of housing undersupply.

I appreciate that insight. One thing we've observed in some promotional-driven categories is that their demand dynamics over the last two years haven’t played out in a manner consistent with pre-COVID effects on consumer behavior. Accompanying that, could you say you’re experiencing similar trends in your industry? Is that leading you to reassess your promotional levels compared to pre-COVID norms?

Susan, you are raising an insightful question. I believe that the traditional response to promotions in the market has altered due to COVID and how it has shaped consumer behavior, particularly in the replacement market. This segment is structurally less responsive to promotional pricing, as replacement needs typically dictate consumer purchase decisions. Thus, we believe the elasticity concerning promotions has diminished, accounting for the shifts you're observing.

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

On the price/mix front, you mentioned in the latter part of 2022 having a significant step down from your targeted price/mix. As you guide to a decline of approximately 200 basis points in '23, could you provide insight into how elements such as retailers asking for a return of prior cost-based increases influence this? Are there any moving components that might lead to more upside or downside on price/mix?

Eric, regarding our expectations for '23, we must keep in mind that we are now looping against three rounds of previous price increases, and as a result, any positive price mix will decline naturally compared to prior periods. Expectations regarding promotional levels remain consistent with the back half of 2022. Additionally, we strongly believe we have opportunities in product mix. Since we couldn't deliver our high-value products during Q4 due to supply constraints, we anticipate sequential improvement in mix as we enter 2023, which will help us maintain pricing despite the ongoing promotional environment.

Yes, Eric, to add to what Marc said, we have been thorough in evaluating various alternatives through this process. Ultimately, the method we've chosen proves the most lucrative when comparing with numerous other options, and it allows us to remain involved while minimizing capital investments.

To clarify, this marks the conclusion of our questions today. Thank you for joining us. There are numerous moving pieces, but I want to remind you of two critical items discussed today. One is the culmination of our strategic review from April of last year, and the outcome we anticipate is the most value-creating option. This transaction is a pivotal move. Additionally, we expect the challenging demand dynamics and increased costs to stabilize leading into '23, while we take robust measures to maximize our cost reductions. The target of $800 million to $900 million in cost reductions is important, and it lies at the heart of our guidance. We look forward to further discussing our progress during the next earnings call or related conferences. Thank you all once again for joining us.

Ladies and gentlemen, that concludes our fourth quarter 2022 Whirlpool Corporation earnings conference call. You may now disconnect.