Q2 2021 Whirlpool Corp Earnings Call
Good morning, and welcome to Whirlpool Corporation's second quarter 2021 earnings release call. Today's call is being recorded for opening remarks, and introductions I would like to turn the call over to the senior director of Investor.
The relations Corey Thomas.
Okay.
The.
Thank you and welcome to our second quarter 2021 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 the presentation available on the investors section of our website.
The court Dot com.
Before we begin I want to remind you of that as we conduct this call well be making forward looking statements to assist you and 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-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 and 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 and 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 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 2 questions with that I'll turn the call over to Marc.
Thanks, Corey and good morning, everyone before we discuss our second quarter results I'd like to knowledge, but we're comparing to a period and which will world was experiencing the greatest step of disruption from COVID-19.
While the lessons disruptions from genetics do in fact remain along with volatile and Mr dynamics and numerous global supply chain constraints.
Having said that our impressive results throughout this entire period and.
And in Q2 demonstrates the strong execution of our global teams and the resiliency of our business model.
Now turning to our second quarter highlights on slide 4.
And we delivered very strong revenue growth of 32% year over year, which also represents growth of above 2019 levels, driven by robust and sustained consumer demand and the execution of our pricing actions net.
Our decisive response plan to address volatile industry dynamics and broad supply constraints delivered ongoing EPS of $6.64.
And $4, 57% improvement year over year.
Ongoing EBIT margin of 11, 4% of year over year improvement of 640 basis points, overcoming 400 basis points of cost inflation.
Additionally, we generated positive free cash flow of $769 million led by strong earnings and the successful completion of a partial tender offer of art will put China business and the Divesture of our Turkey subsidiary.
These global results were driven by substantial EBIT growth and margin expansion across every region.
The execution of these actions and the sustained consumer demand deliberate very strong and Q2 results and gave us the confidence significantly raised our guidance to approximately $26 per share.
Turning to slide 5 we show the drivers of our second quarter EBIT margin.
Price and mix delivered 600 basis points of margin expansion driven by reduced promotions and the further implementation of the previously announced cost based pricing actions.
Additionally, structural cost take out actions higher volumes and ongoing cost productivity initiatives delivered 550 basis points of net cost margin improvement.
These margin benefits were partially offset by raw material inflation, particularly steel and resins, which resulted in an unfavorable impact of 400 basis points.
Lastly, increased investment and marketing and technology and the continued impacts from currency and Latin America impacted margin by a combined 100 basis points.
Overall, we're very pleased to be delivering even above our long term EBIT margin commitment and are confident this positive momentum will continue to drive of outstanding results throughout 2021 and beyond.
Now I'll turn it over to Jim to review our regional results.
Thanks, Marc and good morning, everyone.
Turning to slide 7 I'll review, our second quarter regional results.
In North America, we delivered 22% revenue growth driven by sustained strong consumer demand and the region.
Additionally, we delivered another quarter of very strong EBIT margin driven by volume growth and the disciplined execution of our go to market actions and the previously announced cost based price increases that were fully in place as we exited the quarter.
Demand for our products remains high as we continue to produce and a constrained environment that we now expect to persist throughout 2021.
Lastly, the region's outstanding results demonstrate the fundamental strength and agility of our business model.
Turning to slide 8 I'll review, our second quarter results for our Europe, Middle East and Africa region.
Double digit growth and all key countries drove a fourth consecutive quarter of revenue growth above 10% in the region.
Additionally, the region delivered year over year EBIT improvement of $97 million led by increased revenue and strong cost takeout overcoming inflationary pressures.
These results demonstrate the progress we are making towards our long term goals.
Turning to slide 9 I'll review, our second quarter results for all of Latin America region.
Net sales increased 76% led by strong demand across Brazil, and Mexico, and the continued growth of our direct to consumer business.
The region delivered very strong EBIT margins of 9.7% with continued robust demand and the execution of cost based price actions offsetting inflation and currency devaluation.
Turning to slide 10, I'll review, our second quarter results for our Asia region.
And Asia revenue decline of 1% reflects the successful partial tender offer for our Whirlpool, China business, which was completed in May and.
Additionally, as Covid cases search and India, we were yet again faced with shutdowns and significantly impacting the industry. However in June as we exited the quarter, we began to see demand recover.
Despite this disruption the reach and delivered year over year EBIT growth of $23 million led by pricing and cost productivity actions.
Turning to slide 12, Marc and I will discuss our revised full year 2021 guidance I will now turn it over to Marc to begin.
Thanks, Jim.
And the macroeconomic environment remains uncertain and volatile we are confident and sustained strong consumer demand and our previously announced cost based pricing actions will offset the impact of global supply constraints and rising input costs.
We are raising our guidance now expected to drive net sales growth of approximately 16% and EBIT margins of 10, 5 plus percent.
Additionally, we now expect the deliberate 1.7 billion and free cash flow or 7.5 per cent of net sales driven by higher earnings and the complete the divestitures.
Excluding the impact of divestitures, we expect to deliver on our long term goal of free cash flow at 6% of net sales.
Finally, we are significantly raising our EPS guidance to approximately $26.
Year over year increase of over 40%.
Turning to slide 13, we show the drivers of our revised EBIT margin guidance.
We continue to expect 600 basis points of margin expansion driven by price and mix as we demonstrate the disciplined execution of our go to market strategy and capture the benefits of our previously announced cost based pricing actions.
We have increased our expectation for net cost to 175 basis points and we realize further efficiencies from higher revenues and strong cost takeout initiative.
As we closely monitor cost inflation globally, particularly in steel and resins.
Continue to expect of business to be negatively impacted by about 1 billion dollar and the peak increases to materialize in the third quarter.
Increased investments and marketing and technology and unfavorable currency, primarily in Latin America, I expect it to impact margin by 125 basis points.
Overall based on our track record, we are confident and our ability to continue to navigate this uncertain environment and delivered 10, 5 plus percent EBIT margin.
Presenting our fourth consecutive year of margin expansion.
And I'll turn it over to Jim to highlight our regional industry and EBIT margin expectations. Thanks.
Thanks Marc.
Turning to slide 14, we show our updated industry and regional EBIT guidance for the year.
We have increased our North America industry expectation to 10 plus percent to reflect the continued demand strength. We continue to expect to see demand strength driven from broader home nesting trends and and under supply of housing market.
Additionally, we have updated the EBIT guidance of our North America region to reflect the benefits of increased cost efficiencies, which are more than offsetting increased costs from logistics and labor and operational inefficiencies of producing and a heavily constrained environment.
This brings our EBIT guidance for North America to approximately 17%.
Lastly, we continue to expect to deliver strong growth and significant EBIT expansion across our international regions with each region contributing to our global EBIT margin of 10, 5 plus percent.
Turning to slide 15, we will discuss the drivers of our updated 2021 free cash flow. We now expect to drive free cash flow of approximately $1.7 billion and.
And increase of $450 million.
Driven by expectations for stronger topline growth and improved EBIT margins, we increased our cash earnings guidance by $250 million.
Next we have reflected the benefit from the divestitures completed in the quarter.
And this represents free cash flow generation of 7.5% of sales delivering above our long term goal of 6%.
Turning to slide 16, we provide and update on our capital allocation priorities for 2021.
We continue to expect to invest over $1 billion and capital expenditures and research and development.
Highlighting our commitment to driving innovation and growth in the future.
This includes industry, leading externally recognized innovation such as our newly launched 2 and 1 removable agitator and our top load laundry machine and North America.
And the launch of new products and EMEA, such as our new built and refrigerator, which is recognized as the quietest built and fridge and the marketplace.
Next with a clear focus on returning strong levels of cash to shareholders and the signal of our confidence and the business. We expect to increase our rate of share repurchases in the second half of 2021 to at or above $300 million.
Lastly, we repaid a 300 million dollar of maturing bonds and issued our inaugural sustainability bond focusing on actions to drive positive environmental and social impacts.
This milestone further advances our global sustainability strategy and reflects our core philosophy that sound corporate citizenship and environmental performance are good for business and.
And underscores our leadership position and our industry as we continue our constant pursuit of improving life at home.
Now on slide 17, and I'll turn it back over to Marc to summarize our key messages.
Jim and let me just recap what you've heard over the past few minutes.
Q2, again impressively demonstrated our ability to operate and a very volatile and environment and deliver very strong operating results.
Sustained healthy market demand and strong operation excuse and give us the confidence to increase our guidance for revenue EBIT and earnings per share and free cash flow.
Next we remain unwavering and our commitment to drive strong shareholder value and return cash to shareholders.
Lastly, as we look beyond 2021, we firmly believe we have demonstrated with our business is structurally improved and well positioned to again build on our record results.
And now we will and our formal remarks and open up for questions.
As a reminder to ask a question press Star then the number 1 on your telephone keypad.
All of your question, Chris the pound key.
Your first question comes from the line of Susan Mcclary with Goldman Sachs.
Thank you good morning, everyone.
And congrats on a good quarter guys.
My first question is on ground.
The volumes in North America.
It seems like you've trailed the industry overall during the quarter can you talk to what drove that and how you're thinking about the back half of the year and.
And maybe kind of get back to that outperformance, we saw and the first quarter in Asia.
And some of that market share.
Marc.
So I think Bud Bud and Bud Basi state hears on a sequential basis, we were not able to further improve our market share in Q2, and North America, which ultimately comes and tied it back to the supply chain constraints, which with.
And we discussed and which we talked about.
And you would probably all of the US who was the beneficiary.
The large lease and med similar to what we've seen in Q1 Chinese.
Chinese based production of deliberate less constrained and call it the Americas onto some of the and Europe, and and and that's still the beneficiary and as you know, we the entre produce and mirrors, what we sell them yes.
Having said that going forward sequentially, we do expect to gradually increase our shares I'm seeing gradually because of the supply chain constraints and not immediately disappear they gradually get better.
But we will be fundamentally faced with the supply constrained for some quarters to come NOG and with every quarter of becoming slightly better.
Okay. That's helpful. And then my next question is.
And the revised margin guide for this year you did increase the benefit that you can see and terms of some of the cost reductions.
Over from last year can you just talk to what is driving that are there any incremental projects that you are taking on and what is the potential going forward to continue to see some of that benefit coming through.
Yeah, and and Susan This is Jim and and you know kind of like we said at the beginning of the year and you highlighted is that we had approximately $100 million of just carryover from the prior year, which is about 50 basis points and and.
And then with additional actions that we've taken which were more in our normal cost management programs, where we look across the board of different areas of spending.
You know for opportunities to reduce and think about typically on an annual basis, we target between 50 to 150 basis points of incremental cost reduction and so what we're seeing right now as we improved our guidance for the year is 1 we see some of the programs that we implemented last year as well as early this year of delivering more than we expected.
And then the the.
The second thing that we're seeing on that as we did identify some of it but there's no 1 large opportunity. It's just multiple opportunities that have delivered more than we expected and then the third thing is as we expect to see some of the restructuring benefits.
The increase within the back half of the year.
Yeah.
Our next question comes from the line of Eric Bosshardt with Cleveland Research.
Good day.
Yeah.
Good morning.
Hi, 2 questions first of all in terms of the market share performance and this is maybe more of a strategic question as you look out.
Over the next year or 2 in an environment, where promotions at some point will increase a bit.
How important is his market share performance for you relative to profitability. How are you thinking about managing that.
Sort of those 2 vectors if you will.
Eric It's Marc first of all again on a global level and all of the put bad and context.
Outside of the U S. We feel pretty good about the ortho market share performance in Q2, So we picked up slightly and market share in and Europe were very solid and in South America and India. We also have and we used 1 market share position. So it is predominantly the U S production constraints, which kind of didn't allow us to further expand our market share.
In Q2 in the long term you know we got to do both we got to deliver strong financial performance, while expanding our market share and and we were confident we can do but having said that I think what your particular need to hold US accountable is is the revenue growth and revenue growth is not always unit market share.
Because squares.
Our business model and how we explored there are multiple opportunities to get additional revenue beyond the pure unit growth and that's particularly what you need to focus on the midst why I also feel very good about what we guided this year with $22.5 billion.
And which is a very very strong organic growth no matter, where you come from and I would also expect.
And I would hope for similar groceries also going forward.
Not to the same magnitude of issue because you of a baseline effect, but we will go for strong organic growth of also going forward.
Great and then and then secondly, you've raised guidance and I think twice pretty meaningfully the Asia.
And you take a step back and look at 'twenty, 1 what has been some notably different than what you thought coming into the year. Obviously, there was I guess some degree of uncertainty, but what's been most of the different and the in 'twenty..1 is it your execution is it how the market has behaved and just talk a bit about that.
Well.
Yeah, and Eric base first of all of every quarter is kind of different and I think we got the liberty used about over last 1 and the heavy years net yeah, you wake up and there's something new news, but I think fundamentally it still comes back to.
On Max inside the.
The the massive raw material cost inflation, which frankly, both stronger than we expected Ebrahim I think we got the reading right already in Q1.
And you see that because we didn't have to forbid changes the wheat.
We saw that in the.
It's too bad news, but we recognize it earlier, but probably the most.
And 2 of our recognition of med this whole what I called this the upside downward with constrains everywhere will last a lot longer and probably everybody was hoping for.
No I think the best thing and we recognize that earlier, we adjusted all the actions we took storm actions and I think with Q2 and the prior quarters demonstrate we can operate very successfully and Ms upside down environment and I think that's also why.
You may see a very different financial performance from us compared to some other players.
I think the other thing Eric and this is Jim if you just look at Marc hit the highlights there as I mentioned earlier, we are seeing more benefits on at least some of the cost takeout areas that we've been able to realize and additionally, you know the pricing that we previously announced and took a you know at the end of the first quarter and into the second quarter has been successful and you know covering off those higher.
<unk> costs and so to Mark's point, we did we did expect materials to be a significant headwind. This year. They were larger but we've really been able to offset it with the the go to market actions we've taken.
Your next question comes from the line of Michael Rehaut with J P. Morgan.
Okay.
Hi, good morning, everyone.
Okay.
First a quick clarification, if I'm able to before asked my questions here on the share of loss don't want to beat it.
Ed horse, but previously you've noted that you haven't lost any shelf space in North America.
They share lots of I mean, obviously, just the slight sequential.
Uh huh.
The mis but.
From a from a shelf space shelf space standpoint.
For me and stable as you've highlighted previously.
Short answer is absolutely, yes, I mean give me a little bit more color, Michael we did not lose the floor space period, which out of I think is the reflection.
We feel really good of all of our product portfolio above the products, which brought the market where several of innovate innovative features.
And that just helped us to absolute to protect our floor space, which is the crew settlement because obviously.
It is a little bit of different challenge. If you would have lost floor space and trying to regain market share, but we have of floor space. So kind of quote unquote dialing up once you get the production is considerably easier, but and number of situations and we feel very good about the floor space, but.
But yes, we got to work from the supply constraints.
Great that's helpful and I think it's an important distinction.
Just going into the.
2 quick questions here first.
And you mentioned that you expect raw material inflation to peak and the third quarter.
You were positive price cost in the second quarter.
Noting that your your previous price price.
Price increased cost based price increases kind of.
And if thats going into full force mid mid year.
Can we expect with a higher raw material headwind and the third quarter of that.
<unk> cost might still be positive as your prior price increases also gained momentum or would it flipped the negative in the third quarter.
Michael It it won't flip negative, but I think you'll begin to see that it will be reduced because remember last year and the back half of the year as we talk about price mix included and Theres allowances and so you began to see the promotional spend come down significantly and the back half of last year.
And then as that tapers off the impact of that now by middle of this year. The price increases begin to fill that that area and so we don't expect to be you know, we expect to still be price mix positive through the back half of the year.
Your next question comes from the line of Sam door cash with Raymond James.
Good morning, and this is Josh filling in for Sam Thanks for taking our questions. This morning, and congrats on the quarter.
Morning, Joseph Good morning.
Inventories were up fairly sharply and <unk> versus <unk>, despite fairly flat sequential sales and supply chain issues could you explain what caused the change in inventory was the raws or finished goods.
Yeah, and and this is Jim I'd say, it's a combination of things, but you have to realize also that we were starting off of very low base of inventory in terms of where we were so you know as as we've said around the globe. We're in different states with our supply chain and some of our supply chain. So we're actually able to keep up with some of the market the market demand. So we're able to build back.
Some of the inventory of the normal buffers that we have so I would say it's no 1 particular area, but it's just the beginning of us and certain countries around the world beginning to get our inventories back to healthy levels, which we had expected to do but as Marc what I talked about earlier from a supply chain perspective, and the U S. We're still trying to catch up and we would expect to.
Continue to build small amounts of inventory go forward.
Got it and your Latin America industry unit guidance of 2% to 4% seems to suggest the substantial drop and second half sales and margin do.
Do we have our math right on that and if so how long life, the softness occur and given that much of demand and methods of stimulus true.
Joseph I can take it.
I think your observation is correct I mean, I would say Latin America has surprised us to the positive over the last several quarters relative to what everybody was expecting.
And at this point with certain context to it that day.
And we'll beat that number easily and to be very transparent and so on and again as you know the.
These markets are a little bit more volatile than some of the north American law of all.
The European markets.
But right now and you're absolutely right now we have strong momentum, there's a little bit more calls from going forward because he also comping, some pretty big numbers and all the transparency.
But from my knowledge, so far it's and we've seen strength out of both Brazil, and Mexico, with some plus and minus so.
Long story short.
And that could be and upside revision on that guidance.
Volume guidance for Latin America.
Your next question comes from the line of David Macgregor from Longbow Research.
Yeah.
Yes. Good morning, good morning, Mogens on the good Corp.
Yeah, Let me just start off by just looking at your free cash flow, which is obviously very strong and you've got some asset sales and there as well, but still really strong underlying cash generation.
Wanted to ask you about inorganic growth and.
And just where M&A may stand right now in terms of.
The priority for the capital allocation strategy and your the competitor on their call. This quarter was calling of the fact that the just doesn't just isn't a lot to buy out there right now that it's kind of quiet. So I just I guess wanted to just sort of take your temperature on how is your final look.
And I know you run the gated process, there, but where do things stand on development and.
And just where M&A and May standards, the priority right now.
David It's Marc and maybe all of the Tim.
The timing later on.
Let me zoom out before we talk about M&A capital allocation.
Our capital allocation policy and guidance is unchanged and and.
And by the way that's why we included and oral clarity on every earnings call in the presentation. So first priority is always fund the business.
We are investing capital slightly more of a minimum of prior 2 years part of that is capacity expansion part of it is new product from.
And that takes a little bit.
We also north you know in April we increased dividends.
From 99.
The <unk> ninth consecutive year.
And that should be also of capital allocation priority going forward.
And we'll be.
And we kind of.
We refinance debt, we didn't pay down the massive debt and right now we have a pretty healthy cash balance, which are and obviously needs. Some question of what do you do with the additional capacity, which we have.
And 1 and Jim alluded to based upon the early in his prepared remarks.
And as we are kind of the second half will be higher on the share buybacks and in the first half and Jim mentioned, the number of 300 million plus and we can debate about how big of a plausible deep, but that's right now and we.
And just consider the company both from past performance and performance, which will guide to and what we consider our long range plan. It's all companies of good investment and that's why we're dialing up the share buybacks and.
And EM and days is and will with it you know it's in the certainly by definition of opportunistic.
We have certain targets on our list of these targets need to be available and they also need to be available at a justifiable price, which is not always the game.
And obviously this is the wrong for him to talk about some immediate M&A and there's nothing imminent to be clear, but I would just the strong balance sheet gives you optionality and that's the good thing and that's the situation between but where.
And the Optionality will not make us unnecessarily trigger happy so we will be very prudent and how we take certain capital allocation decisions yet.
Yeah, David This is Jim and just to Echo what Marc has said as you know the criteria that we use to evaluate potential acquisitions have not changed you know and and but what we have done is we've positioned ourselves as the company both from a balance sheet strength perspective, and from a now having the integration of previous.
The acquisitions behind us and those businesses on the right trajectory in terms of performance, we've positioned ourselves to be ready and able if the right opportunity would come along at some point in time.
Okay. Thanks for that answer.
As a follow up question I guess I wanted to talk a little bit about Europe and.
And maybe specifically if we could talk a little bit of both put the pricing environment over there and your competitor called the fact that pricing had been rather slight and the first half slightly positive and the expected and much.
The more pronounced pricing benefit in the second half. So just wondering if you concur with that view and and as well just thinking about 2022 and Europe. If demand was flat would you still be more profitable and you were in 'twenty..1 just based off all the other initiatives that you've implemented.
And David It's Marc again and.
Tried to spin 2 piece of on pricing and more of a long term margin development in Europe. So.
I can't speak for our competitors that can speak for ourselves we as I mentioned before we did recognize the significant inflationary pressures coming at us probably early buy and everyone's okay and.
As a consequence, we had to make the decision, which we ultimately communicated.
And these costs coming at you you kind of mitigated you have to raise prices.
And that's the decision, which we've taken them already early in the year and we communicated and consequently, we basically raised prices in most parts of the world, but also obviously in Europe, not only once but in some cases, even twice so are we.
And the good thing as.
What we communicated we implemented and we start seeing the benefits to be clear not yet all of that because some of it but fully materialized in Q3, but.
What we communicated we implemented.
So again.
If you would look at whatever reliable market data you have either in Europe and never parts of the world.
Probably would come to the conclusion, but we of Liberty.
Head of from competition and just facing that reality.
Now with regard to the long term margin development, you know I would say Europe is exactly where we wanted to have it from a turnaround plan and we.
And we said the ship will be around 2.5% of operating margin.
And we also indicated next year, you should probably expect around 4% and that's just consistent with our trajectory, which we forecast for Europe, and and I'm pleased that the delivering despite all the ins and outs, which will happen and inflation and everything else.
So I feel very good about where we are from a long term turnaround and the long term value creation scenario for Europe, and and right now and consistent with what we communicated to you a couple of quarters ago, Yeah, and I think David just to add to that I think some of the continuing cost benefits that we'll see within EMEA.
As we continue to drive the cost savings programs. There, we will see more benefits and the back half of the year into next year and.
And Additionally, you said you know even without volume game, we still expect to improve the mix there and that's another thing that we've talked about is a lot of our product investments there have been to ensure that we improve our mix and grow our share of the built and market there.
Our next question comes from the line of Kenzie and now with Keybanc.
Good morning, everybody good morning, Kevin.
What a year.
Couple of questions about.
First of the raw material.
No.
The twofold question, but.
So.
I think people were surprised that.
With steel moving up you had anticipated that you hadn't really.
And given your guidance and where there any different tools that you've kind of deployed to understand that or what gave you that.
Confidence to assume the steel prices or what are your insights I guess is what led to year.
Proper thinking early and the implication of that into FY 'twenty 2.
If you set of raw material pricing is not going to peak till the third quarter and that was.
Got it and our FY 'twenty 2 estimates it seems logical to assume that you'll have.
Quite a bit and its pricing still in her or how.
How should we think about that those 2 components of raw material and the price of used cars.
Pursuit and you get it.
So kind of maybe let me try to take a stab at of your question.
So first of all in raw material and steel and specifically.
And I want transparency, you know compared to what we thought last year and November we would be.
We were somewhat surprised by the magnitude of raw material increase but and frankly.
And as you know from last earnings call and we saw that picture of pretty much in February and and it has since stabilized, which again was a little bit earlier, probably the most thought.
And you're also right the amnesty and it's just a big part of our cost base and that's where we saw a significant portion of the raw material not everything because we all saw and resins and logistic costs, but significant portion.
To answer your question about how did you know it means the base comes back to data and experience.
It's not that we started buying steel this year, we've done that for about 190 of our 100 day.
So so we know steel.
Basically the experience, but we also have a lot of data and we have we know of of cost model by steel mill everywhere.
And we know what our contracts are and we know how they are running.
But having said that the steel market is always you know there's the spot element to it versus the structural elements of you still got to take several factors into account and it will.
Bide, our abilities will still always.
Some surprises, but right now I think we ever see the market right now is pretty much where we unfortunately quote unquote forecasted it to be.
Yeah, and then maybe to the second part of your question about you know.
And as you look towards next year, yes, with the peaking in the third quarter, obviously, there could be some incremental materials, but we've also taken a lot of the a lot of the pricing. We've taken we've implemented throughout Q2 here and so there also will be continuing pricing benefits as we go into next year to offset them and.
And those continuing material headwinds.
Good.
Yes. It is it seems like you guys always get too little credit for your raw materials management.
I guess and it just stepping back given the obviously sales went up in North America.
Supply constraints are more persistence or if you could kind of address why you think that the supply constraints of bird made is it just a function of higher demand and.
And then as it relates to your margin, which I think historically you guys have talked about 50% incrementals.
And on revenue, it's obviously the higher.
Which I assume is a direct connection of.
Higher demand types of lie I E low promotional activity because you guys were looking more for 14% margins in the back half of.
But you are now of higher could you talk to your view if thats the proper logic that margins were up because of lower promotions and demand.
If you see that normalize and really into next year, just so we have a little better sense.
That thinking right now as it relates to the promotional activity and that the supply constraints.
Thank you very much.
So can the.
Let me also split into piece of my aunts and 1 is what do you call the normal and the first 1 is more of why we think the supply constraints the last and what the source of that is.
And the supply constrains are fundamentally driven by similar elements as we've seen in prior quarters. Some of now it's like the different emphasis on 1 item of particular.
And of mentally you talked about 3 issues labor shortages and.
Broader component shortages because of all of our suppliers also happened labor shortages of RV issues and the factory and for the very specific the what the IRA resins because of the Texas storm.
And the semiconductors reserve of fundamental sources now in the first quarter. It was predominantly broader components labor shortage and resins. The second quarter, we saw more and more of a semiconductor what are some of the ever sources kind of get less and less.
And.
Having said that all of that will be around us for some time I think the labor shortages are increasing and manageable I think the ever component shortage get less.
But the semiconductor challenges will not go away anytime soon.
I think you meet the seabed well into 2022.
And again, it's difficult to forecast, but that's not going to go away short short term now.
And now which leads moving to the broader comment and <unk>.
Many of you have commented or asked about the new normal or normalized of whatever you want to call. It.
And I think I think the 2 message, which I really want to pass on this 1 is whenever when you normally is it will happen a lot later and most people assume we always I understand but everybody hopes for new normally to the next quarter its not going to be so as the environment in which we are right now successfully operating will be around us for a lot longer than most.
People assume too and our specific case and the I Hope you have seen Miss 1 all new normal will look very different from our previous noma.
And because we've taken structural cost actions.
Consumer preference of shifted certain business models around e-commerce of changed our new normal will be not comparable to the pre COVID-19 moments and I know better about the broader comment, but I think it's important to make the point here.
Your next question comes from the line of Curtis Nagle with Bank of America.
Alright, great. Thanks, Thanks, very much Michael.
Questions and ask but maybe I'll just.
Net.
And follow up so just sticking on the way.
Margin.
Western Marc show.
I think the masses.
19% in the first half.
It's about 15% applied and the second half given the 17, we're still for the full year.
I guess.
Why would the.
And the kind of materially lower like and just kind of gone through a lot of this demand expectations of pretty good.
The promotions, probably not coming back.
Material way, you got pricing offsetting inflation and so what.
I guess, what am I missing and I'm not.
And I put up like a 19% margin of course, but.
Joe.
It is the difference I guess so.
1 of them I guess.
Yeah, and Kurt this is Jim.
You know I'd say as you kind of step back from it to begin with we're extremely happy with our North America margins and we did say that as you look at as material costs, you know with their we benefited from a lower promotional environment for a period of time and now we're getting the benefits from pricing, but we did talk about debt materials would eventually hit a peak within Q3 and so.
That's the big difference as you look at the first quarter second quarter, and third quarter, and that's where it begins to really hit them.
Net debt the to go into equilibrium, so that I don't think you're necessarily missing anything it's just the timing of as material cost increases begin to come in and.
And that's what we expect for the full year and obviously this as you know with as we talked about with the demand and the supply chain constraints. There too is it's really critical for US is just try and increase our capacity within there because that's also what will help our margin structurally go forward and the back half of the year.
Okay.
Just maybe just just 1 comment in addition to Jim and again, assuming out from a pure margin question again, just look at the EPS in the guidance that you've given the space implies in the back half, we're basically guiding towards $6 of quarter Madison.
And we didn't have a lot of sixth quarter of $6 of quarters in our history actually but it all happened pretty much of a loss of 1 or 2 years. So.
There is no deterioration of misses of very very strong absolute EPS performance in the back half. So there's no slowdown and we feel very good about level of businesses right and are running on all fronts.
Yes.
Fair enough and maybe just the kind of a clarification describe the back on the.
Rob Matts question so.
Yes totally understand and appreciate you guys are.
And quite good at managing.
And I guess anticipating.
Cost increases, but just looking at like the steel I suppose this Friday, the 28% higher at least for hot rolled steel.
And that's not exactly what you use in terms of the production, but Tom.
The 20% higher from the April did.
Could you just anticipate that and that's why you're not increasing.
From a billion dollars is limited by the colors.
Yeah, how should I think about that.
And tour decide.
And we we anticipated structural pricing trends and Misdeal novel week by week spot prices and that's driven by a lot of other factors today and sometimes they are short term availability et cetera. So I am not reading too much into the ease of published C. R. C are you a spot price because we're not in our view and not necessarily indicative of the long term pricing trends.
Having said that I still long term trends point upwards.
And I know you guys already probably want to know what's for 'twenty..2 we don't know and we don't communicate fully until until we had the earnings call, but I would take the current trends persist that will be a carryover of inflation into next year, and we should I mean, its memory and boom at the appropriate point, we will quantify how much of the carryover will be there.
Your next question comes from the line of Mike Dahl with RBC capital markets.
Hi, This is actually Chris kalata on from Mike Thanks for taking my questions.
First question I, just want the follow up on the net cost benefit you're expecting particularly in the back half of the year.
Even with the increase to the full year. It seems like given the strength to date that would that would inflect or imply an inflection 2 of headwind and the back half of the year.
Is that is that just conservatism, what's driving that no I'd say the the big thing you got to look at and the first half of the year, especially in the second quarter, you've got the benefit from production being increased across the globe and think about second quarter of last year, we had factories that were either shut down or slowed down due to COVID-19 restrictions and in many parts of the world now and you get into the back.
Half of this year, the factories were up and running at full speed during that time period, so youre not getting necessarily the volume leverage benefits year over year that you would've seen before it. Additionally within there.
As we look at some of the other costs net of increased while we've increased some of our cost saving initiatives. When you look year over year and the back half of the year you do have other things such as labor costs and transportation costs that still do provide a little bit of a headwind from that perspective, but the biggest driver is just the volume leverage as you look at it comparing 2000 and 'twenty to 'twenty 'twenty 1.
Got it that makes sense and just from my follow up just going back to the supply constraints.
In addition to the unit drag.
From component shortages has there been any any mixed headwind to associated with these challenges and they get a competitor call out debt.
The semiconductor shortage was particularly impactful for their higher price appliances is that something you guys are seeing or incorporating in your forward outlook.
Yeah without getting the the details about where exactly the semiconductors and of this.
But of course, it's not like and met the misperception out there it's not like 1 semiconductor fits every single ask of you know I mean, that's the.
It will be nice if it all universe of the applicable and you can move them, Jeff from left to right.
And of course, you of sometimes it by specific ones and and and where we had the shortages I would because of the factory fire and Japan or prior and Texas.
They sometimes at the product groups, which he didn't want to hit the et cetera, the bets, but that's just in the nature of these extremely supply chain constraints.
But it's not like you can move very easy semiconductors from 1 place to the number because sometimes very very highly specified too.
Adding to the specific application of that product.
So let me maybe just wrap up here given that we're kind of coming to the end of the questions first of all of the I. Appreciate you all joining good questions and and obviously we're available for follow up I just want to recap is.
Seen we were truly outstanding results and Q2, and we had truly outstanding results and the prior quarters and we're guiding towards outstanding results and the back half of the year. So we feel very good about where we are from financial performance.
As evidenced by your questions, where we're living and and what I call and upside down and volt and and I think that would be around us for sometime to come but I think we absolutely have demonstrated we are able and capable to perform very successfully and Ms upside down environment.
And with your Ultimate these you know its testimony of our agility, but all of the Brazilians are of a business model. So we feel very good where we are we feel very good about our future and.
Looking forward to talk to you either in the next earning calls or in between and thanks a lot.
Ladies and gentlemen that does conclude today's conference call you may now disconnect.
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