Q2 2022 Whirlpool Corp Earnings Call
Good morning, and welcome to Whirlpool corporations second quarter 2022 earnings release call today's call is being recorded for.
For opening remarks, and introductions I would like to turn the call over to senior director of Investor Relations Corey Thomas.
Thank you and welcome to our second quarter Conference call.
Joining me today are Marc Bitzer, our chairman and Chief Executive Officer, Jim Peters, Our Chief Financial Officer, and Joe <unk>, Our Chief operating officer.
Remarks today track with a presentation available on the investors section of our website at Whirlpool Corp Dot com.
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 I'd say food items. They 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.
Price increases or pricing actions referenced throughout this call reflect previously announced cost based price increases.
The centers are directed to the supplemental information package posted on the Investor Relations section of our website for the reconciliation of non-GAAP items to our most directly comparable GAAP measures.
At this time all participants are in a listen only mode. Following our prepared remarks, the call will be opened for analysts' questions. As a reminder, we ask that participants ask no more than two questions with that I will turn the call over to Mark.
Thanks, Corey and good morning, everyone before I get into the results of the quarter I'd like to step back and share with you the progress that we're making structurally improving global for the better.
We have a clear line of sight on the long term success of our business and driving shareholder value.
Whirlpool has become a stronger entity today versus historically.
We operate in a healthy long term growing markets and our long term growth outlook remains unchanged.
Our brands are strong and consumers use them daily and we'll use them even more in the future.
Based on the initiatives that were are taking multiple will exit the current and temporary industry headwinds and our highest operating performance.
Twice, where focus on simplifying and transforming our business portfolio for pruning of underperforming assets by investing in high margin businesses.
We are operating in unprecedented times, but thanks to a strong balance sheet transformation efforts and the hard work of the team Whirlpool continues to perform better today than in the past.
<unk> record performance over the medium term.
Today, we will discuss our second quarter results.
Highlight how we continue to successfully manage our business despite near term pressures while at the same time remaining focused on delivering towards our value creation goals over the long term.
We are operating in a dynamic world marked by rapid cost inflation, a war and geopolitical tension as well as broader economic uncertainty and its subsequent negative impact on consumer sentiment.
Throughout the past years, we have demonstrated that we take needed actions early and decisively.
And we have done so again in the second quarter.
We're confident the actions, we've taken to mitigate industry headwinds, including a fee.
Our focus on enhanced operating margins with strong global cost based pricing and.
And broad cost reduction initiatives throughout the world.
And our strong margins not only in Q2 are evidence that these initiatives are working.
We are prepared for the near term pressures and remain focused on delivering over long term regardless of circumstances.
Turning to slide four I will review, our second quarter results.
Our performance this quarter showed yet again some of our best results ever I'm convinced that we have built our new whirlpool better stronger and better prepared for future <unk>.
In particular, we delivered solid ongoing EPS of $5 97.
At 9% ongoing EBIT margins.
With ongoing EPS, approximately 50% better than the second quarter of 2019, even in the face of historic levels of cost inflation and a demand slowdown.
We experienced mid single digit to double digit demand slowdown in key countries in the second quarter alongside a rapidly strengthening dollar and yet we impressively delivered relative to stable revenue of down 2%, excluding the impact of currency.
Even more impressive North America delivered over 14% margin demonstrating the structurally higher profit levels of our region.
Next with the confidence we have in our business and the strength of our balance sheet.
Continue to fund innovation growth, while returning approximately $400 million to shareholders in the quarter.
Additionally, we signed an agreement for the divestiture of mobile Russia business trigger.
<unk> $747 million of one time almost entirely noncash charges.
We expect the Russia sale to close during the third quarter and will be at to be the best course of action for our employees shareholders and overall business.
Lastly, the near term impact on demand from consumer sentiment led us to revise our full year ongoing EPS guidance of $22 to $24. However to put it into context. This guidance represents the second highest full year ongoing EPS in the history of our company despite inflation running at 40 year highs and the additional headwind.
But we've been discussing.
Our free cash flow guidance of $125 billion.
It remains unchanged again, we're confident in the actions we have in place to management near term pressures, while remaining focused on delivering over the long term.
Turning to slide five we show the drivers of our second quarter EBIT margin.
Led by our fully executed cost based price actions across the globe. We successfully delivered positive price mix, resulting in 675 basis points of margin expansion.
Net costs negatively impacted our margin by 175 basis points, largely driven by increased logistics and energy costs alongside operational inefficiencies from supply disruptions.
Lastly, and in line with our expectations raw material inflation continues to be a significant headwind negatively impacted margin by 750 basis points.
This is a very solid performance addressing the challenging environment and delivering operating margin of 9%.
Now I will turn it over to Joe to review our regional results.
Thanks, Mark and good morning, everyone.
Turning to slide seven I'll review the results for our North American region.
In the quarter the industry continued to be negatively impacted by softening consumer sentiment alongside the constrained supply chain.
The industry slowdown we experienced in the second quarter was greater than expected.
Never as we implemented operational improvements, we realized sequential share gains as our share position improved throughout the quarter.
We believe the fundamental strength of consumer demand trends remain intact as we continue to see elevated cooking appliance usage over two times above pre pandemic levels.
We were able to largely offset the negative impact of the industry decline with the strong execution of cost based price increases.
We delivered 14, 1% EBIT margins, despite inflationary pressures alongside the negative impact of operational inefficiencies and temporary volume deleveraging, we remain confident in the strength of our business and our ability to deliver strong results in any environment.
Turning to slide eight I'll review the results for our Europe , Middle East and Africa region.
The revenue decline was largely attributed to reduced volume, which was negatively impacted by the war in Ukraine, including our operations in Russia flowing to a near shutdown.
Leading currency the region's revenue declined by approximately 10%.
The recent strong execution of pricing actions drove 270 basis points of sequential margin expansion that was more than offset by lower volumes and cost inflation.
<unk> and the EBIT margin contraction of two three points in the quarter.
Next as part of our strategic review of EMEA, We announced the pending divestiture of our Russia business.
This is a standalone business with localized production and sales offices positioning it well to be sold as a unique entity.
We continue to expect to conclude the strategic review of our EMEA business by the end of the third quarter.
Turning to slide nine I'll provide additional detail regarding the pending sale of our Russia business.
In June we entered into a share purchase agreement to sell our whirlpool, Russia business, we expect the sale to conclude in the third quarter subject to customary closing conditions.
As a result of this transaction, we recorded $747 million.
Non recurring primarily non cash charges, including $346 million primarily.
Associated with the write down of Russia assets.
Which triggered a comprehensive assessment, resulting in a $384 million goodwill and intangible asset impairment in the EMEA region.
We are pleased with our team's ability to navigate and find a solution is furthers our portfolio transformation and represents the best course of action for our employees located in Russia.
Turning to slide 10, I will review results for our Latin America region.
Net sales growth of 3% driven by strong execution of cost based price increases fully offsetting expected industry softness.
The region delivered strong EBIT margins of seven 2% once again, demonstrating the consistency in which this region delivers results in any environment.
Turning to slide 11, I'll review, our Asia region.
Revenue growth of 26% is largely attributed to higher volumes in India as the region was impacted by Covid related shutdowns in the prior year period.
The region delivered a significant EBIT improvement of $19 million, resulting in EBIT margins of six 8% driven by cost based pricing actions and higher volumes fully offsetting cost inflation.
Now on slide 12, I'll turn it over to Jim to discuss our full year 2022 guidance.
Thanks, Joe and good morning, everyone.
Now turning to slide 13, I'll review, our updated guidance for 2022.
We have revised our full year guidance to reflect the larger than expected industry slowdown.
While there is no change to our expectation for long term growth, including a robust multiyear appliance demand outlook, we have adjusted our 2022 guidance to reflect the current environment.
As a result, we now expect a revenue contraction of approximately 5% to 6% and ongoing EBIT margins of approximately 9% for the year.
This represents a full year ongoing EPS range of 22 to $24.
Next we continue to expect to generate significant free cash flow of approximately $1 25 billion.
Or around 6% of net sales.
Turning to slide 14, we show the drivers of our full year ongoing EBIT margin guidance.
We have increased our expectation of negative net cost by 50 basis points to a negative 150 basis points, reflecting the added inefficiencies, resulting from temporarily reduced volumes and additional logistics and energy costs.
Next with the strengthening of the dollar we now expect a negative currency impact of 25 basis points, driven primarily by Brazil and India.
All other drivers remain unchanged.
<unk>, our expectations of previously announced cost based price actions driving 725 basis points of margin fully offsetting raw material inflation, which we expect to peak in the second and third quarters. We are confident that we have the right actions in place to deliver approximately 9% ongoing EBIT margin.
Turning to slide 15, we show our regional guidance for the year.
We are reducing our global growth expectations to negative 6% to negative 4%, reflecting updated industry expectations for North America in 2022.
In North America, our near term growth expectations or negative 7% to negative 5% with a second half industry performance in line with the second quarter.
Looking beyond 2022, we remain confident in the fundamentals of the demand environment for North America supported by one broader home nesting trends to an under supply of housing market three a strong replacement cycle and for continued elevated levels of consumer engagement with our appliances.
Regarding our EBIT guidance, we expect North America to deliver approximately 15% EBIT margin, which remains in line with our long term expectations for the region.
Our industry and EBIT margin expectations for EMEA, Latin America, and Asia remain unchanged.
Turning to slide 16, we will discuss the drivers of our 2022 free cash flow.
We continue to expect to generate significant free cash flow of $1 $25 billion.
With cash earnings of approximately $2 billion and a modest level of inventory supply recovery, while funding innovation through our capital investments. These investments are in line with our target of approximately 3% of net sales.
This supports our planned introduction of over 100, new products this year, including our newly launched shave ice attachment in time for summer as we create new ways for our consumers to engage with our iconic kitchenaid stand mixer Lastly, we anticipate minimal cash outlays related to restructuring as these actions have been largely.
<unk>.
This performance along with our strong balance sheet positions us with significant optionality and flexibility.
We repurchased approximately $300 million of our stock in the second quarter, bringing us to over $800 million year to date.
We are on track to return $1 5 billion in buybacks and dividends to shareholders in 2022.
Now on slide 17, I will turn it over to Mark to summarize our key messages.
Thank you Jim let me recap, what you've heard over the past few minutes.
We have a right global actions in place to deliver strong second half.
Raw material inflation expectations remain unchanged and we do expect raw material inflation to peak in the second and third quarter.
Our previously announced cost based price increase has been fully executed.
We expect to exit the year with our existing pricing actions fully offsetting raw material inflation.
Additional cost actions, including hiring freezes have already been initiated.
We are prepared and expect to successfully navigate the near term industry slowdown in 2022.
The long term fundamental strength in consumer demand remains unchanged.
Consumers continue to use our clients at an elevated rate alongside strong replacement demand and an under supply of housing market.
We are progressing in our portfolio transformation focusing on high growth high margin businesses. We're very pleased with the divestiture of our Russia business and expect to conclude a strategic review of Europe within the next few months.
Lastly, we are on track to return approximately $1 5 billion in cash to shareholders in 2022.
And we have reduced our outstanding share count by over 10% in the last four quarters alone.
These actions demonstrate our confidence in the sustainability of our high margin and strong cash generating business and our commitment to creating shareholder value.
Now we will end, our formal remarks and open it up for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Michael Rehaut from Jpmorgan. Your line is open.
Thanks, Good morning, everyone.
Hi, Michael I'm, taking my question.
I wanted to focus first on North America, and obviously, the big driver of the change in guidance.
As part of our sale of the second quarter, but also the back half.
What do you see in terms of.
Decent.
The drop off in the full year expectation.
I was hoping to get a little more granular in terms of what you think is driving that relative to your prior expectations.
Also encouragingly.
How you think about share.
Going forward your own share you mentioned sequential gains.
Which is important obviously given some of the losses over the past eight.
18 months, and how that might progress as well.
Yeah.
So Michael it's Mark good morning.
Well multiple questions in one question, let me try to address that.
Let me first talk about North America demand and Joe should probably also add some color.
Mike what we're seeing is basically call. It two trends going on at the same time. There is a long term trend Mitch as Jim alluded to we see very positive long term trend the positivity is driven by.
Replacement cycle, which is favorable high usage of our clients.
Structurally under supplied housing markets. So all of these factors remain intact and you can't be in denial about this fundamental positive long term trends.
A short term trend, which is kind of overriding med right now.
Did see in.
Pretty much around the late April may timeframe is a pretty strong drop in consumer demand, which is ultimately driven.
With consumer sentiment dropping off.
And we all know it I mean consumers, it's not that consumers have a no cash available I think Bruce disposable income it is consumer sentiment driven by inflation.
All the bad news around war.
And the pandemic, which is still not behind it met together drops or led to a significant drop of consumer sentiment impacting demand.
We do not see those fundamentals of consumer sentiment going away, probably before year end because the fundamental drivers between inflation more.
And probably upcoming mid term elections don't help consumer sentiment probably pretty much until November maybe towards the year end, we see something more positive.
But again that has not changed our outlook what it means for 'twenty three 'twenty four in terms of long term demand.
We continue to remain bullish on the long term demand trends.
Now when it comes to share as.
As we alluded in our prepared remarks Q2 saw a small sequential gain over Q1 I'll put it differently pretty much. If you look at Q3 last year Q4, Q1, and Q2, it's pretty steady.
Slide slight increase towards the end of Q2.
In a certain way, we stabilize the share but in all transparency, we have not regained the share which compared to pre pandemic.
However, with supply chain constraints, becoming less of an issue. We're confident that we can make progress and Mr mentioned going forward.
And this is Joe maybe just to build on <unk> comments from Mark.
In the back half, we do have some upcoming launches that we're excited about that will help spur some growth. In addition to the comments Marc made we really saw the sentiment impact the promotional period the holiday period.
In Q2, and so that was.
The factor that contributed to our outlook changing for the back half, but if we look at the fundamentals that still remains in a very positive light and so our outlook. There remains as it has been but the in the back half really is where the.
Increased sentiment depression occurred.
Okay, I appreciate that and maybe just.
It.
As a follow on.
Joe you kind of hit on promotions there and.
You know it would be.
Very helpful I think to kind of unpack the.
The drivers of reducing the North American margin guidance from 16% to 15% I know in the margin walk you talked about.
Uh huh.
A quarter of a $1 billion I believe in.
Non structural efficiencies and temporary volume deleveraging.
But you just mentioned Joe in your remarks that you refer to promotions.
I'd love to get a sense of the price environment today.
If that's holding if promotions are increasing and that's part of the reduction in EBIT margin guidance for the region or is it more.
Volume.
Efficient seize and deleveraging.
Yeah, Michael maybe just to clarify a comment.
I was referring.
Referring to the promotional period, the holiday period less about promotions themselves, but as you know we have shared that our our price margin and mix all of those kind of fully on track and has kind of offset all of the Rmi. We expect that to continue for the rest of the year. So we feel that that really is as stated previously the <unk>.
Deleveraging is kind of what we were talking about in terms of impacting margins and also the inefficiencies as a consequence of some of that lower volume that really kind of as the new news.
That occurred in Q2, so maybe just separate the two from a price and promotion standpoint, I think we've over many many years and quarters demonstrated a high ability remains that space only participate.
ROI positive or or a positive returns for the company. So I think that approach that mentality nothing's really changed there from a company standpoint, we expect to do that and manage that well no matter what the environment is and Michael just it's Mark again, just to add to Joe's comments.
And I would refer to page 14 of our presentation, where we basically showed the margin walk and prior guidance in current guidance.
And that picture you've moved forward Corporation by definition is very similar to North America that will be showed there, but we did not change our pricing assumptions and the margin walk, which probably answered already the big question of course, there will be always some some promotions, but nothing has changed versus our prior outlook in terms of how much. We think we can get from price mix.
Drove Joe's point with slight margin drop is largely coming from volume deleveraging because we have to adjust inventories in line with market demand.
And that is just annual.
<unk> has a certain cost associated with that volume deleveraging and some temporary cost, which we are pretty convinced will go away in the short term. So anyhow. So that's the difference in margin now to receive a positive.
And again, we should put them in all of it in context with 9% margin in Q2 matters in an environment, where we had a 40 year high inflation and market demand being down mid tells you a lot about the resilience of this business in North America, 14% in that environment.
I think speaks to the health and the structural changes of this of our business.
Your next question comes from the line of Sam <unk> from Raymond James Your line is open.
Good morning, Marc Jim Joe how are you.
Good morning.
So I'll ask the million dollar question I suppose regarding the EMEA strategic review process I know you mentioned that youre expecting that conclude.
The review by the end of the third quarter. It was notable at least to me that it's not at least yet listed in disc ops.
So I'm just trying to get a sense of your of your view of the likelihood of a sale in light of the idea that.
European demand is weakening.
The financing markets and the capital markets are also to an extent tightening up in FX is a pressure so.
How is this.
Evolved in terms of your expectation to consummate a sale that would be.
Of your liking.
Sam This is Jim and I'll start and then mark or Joe could chime in but to begin with as we said last quarter. We expect the process to go through the third quarter and after that we'll talk further about it and right now we're in the middle of the process and so.
Within this quarter and as we mentioned in our remarks earlier, we did at least reached an agreement to divest of our Russia business, which was a necessary step considering the sanctions in the environment that we were trying to operate in and that is a progression along the path in terms of our strategic assessment here now when you asked about the accounting, Florida, putting it in.
Discontinued ops, because we're not at a point, where we have a definitive answer to give yet in terms of the situation in many options are open it wouldn't be the appropriate time, but we did move.
Russia into held for sale because we do have an arrangement there. So that's where we are today.
No that there is any more that we can really share on this until we get past the third quarter SME, maybe just adding to this one.
As we indicated in the April earnings call. We're looking at all options and just to be clarified the options on the table are.
Anything from selling the business to parcel sale to keeping the business now keeping the business I would have to qualify and as is not really be option keeping the business will be a reduced footprint or different we'll put Europe , but pretty much all options on the table, but at this point it would be pure speculation to stave off the likely outcome is.
To Jim's point.
The only change we have in the quarter. We originally assumed that Russia will be part of a broader review, but give them all the environment, which we are well aware of we had to decouple that and move on Russia transaction earlier.
But as we stated before we do expect by the end of Q3.
Two kind of pretty much come to conclusion of our strategic review.
My second question mathematically it looks like your guidance for pricing.
Year on year is going to be better in the second half than in the first half by about a point or two.
Just trying to get a sense of how much of that sequential improvement.
Just the timing of first half pricing rollover, how much of that is from.
From incremental pricing on the comm and I know you mentioned a little bit of promotional but is there specifically is there any anticipated anticipated promotional leakage.
Hey, Sam This is Joe just in response to that.
Yes.
Obviously multiple things going on there is rolling over of pricing actions taken earlier in the year that kind of roll in there was additional pricing actions across the globe and different countries taken in Q2.
Also kind of factoring in and kind of ramping up as they come on so thats essentially what youre seeing.
From a pricing promotional standpoint, as we touched on earlier, obviously that is very different than I'll say years ago, and we expect that to remain at LLC.
New data or moderated levels.
It has been in Q2 to date and that's kind of where we're at from a pricing promotion standpoint. The bigger factor is that your first point, which is how things affect or take on throughout the year kind of the cumulative impact of that as each of the final decisions were made in the Q2 period.
Your next question comes from the line of David Magee Gregor from Longbow Research. Your line is open.
Good morning, everyone.
Sure.
Mark I Wonder if you could just talk about the builder channel and how much of the drag on how much of that was the drag on <unk> would you attribute back to the builder channel versus replacement demand.
Just if you could talk about what you're seeing changed there.
David Let me start and maybe Joe should add some color.
As we all witnessed and experienced I think there is a lot of noise.
And not always the best information about what's going on the housing market I'll start with the long term.
Housing U S housing market structurally under supplied and we've talked about before for many years.
And I still stayed before the statement, which we said before the U S housing market need several years.
Of housing starts and housing completion anywhere between one eight and 2 million units just to re stabilize markets given demographic trends, giving age of housing stock and give them household formation. So nothing has changed on the long term needs now obviously the combination of.
Price increase in the housing market, which were well ahead of the extra supply and the mortgage rate put a big dent on how home affordability, which led to cancellations and I would see slowdown in the short term. So I would expect but also going forward call. It. The next 12 months or so to be the case, yes.
I would probably say some correction home prices as necessary.
To re stabilize the market doesn't change the long term outlook for positive outlook, which we have in housing, but I don't think the next 12 months you see we will see a very dynamic market in that respect.
Now when it comes specifically to ability you also need to understand the order backlog the pace of cancellations.
But in a nutshell, we did not see a dramatic change on the completions keep in mind, what we see our typical completions because appliances coming pretty much lost so we did not see a dramatic drop off by.
By now in Q2, but we also don't expect a lot of growth now in Q3 and Q4, Joe Yeah, just to build on those points.
Didn't see a dramatic drop off at all on the new home starts didn't see really any material changes from what we were expecting in Q2, and then the remodel area, which is kind of a quasi builder area didn't really see any new information there either in Q2. So although there is a lot of information in terms of.
What's affecting consumer sentiment that was not one of our drivers in the results for Q2.
Okay.
Just as a follow up question I guess the share repurchase activities seem to be running at a pretty good clip here midyear I think $800 million.
Got numbers third correct.
I guess the question would be how would you handicap the likelihood of new coming in above your $1 billion in guidance.
Yes, I would say David right now as we emphasized and I said in the earlier remarks, we still intend to come in where we forecasted at the beginning of the year.
And so we're turning about 1 billion and a half to shareholders, which.
The dividend makes up about $400 million of that and then we did the majority of the share repurchase in the first half of the year with where the market conditions. We're in all of that as well as where our cash position was but that doesn't change our estimate for the full year right now we're still on track and at that level.
Your next question comes from the line of latest Suzuki from Bank of America. Your line is open.
Great. Thank you how are you just thinking about the path toward your long term value creation goals and getting back to annual organic net sales growth of five 6% and then what does the EBIT margin will look like from yearend guidance till <unk> all of 11% to 12% ongoing EBIT margin.
Yes.
Market and there's a couple of components first of all on the topline as we indicated earlier.
We do.
To see the current environment is temporary.
But doesn't change our long term demand outlook. So we do expect and it's obviously this is another 23 or 24 guidance, but right now we would assume with $23 24, we would see healthy underlying market growth again, driven by replacement needs housing market and higher usage of a blind sold so we continue.
To assume solid.
Probably mid single digit market growth 23, and 24 again I won't reiterate but its another 23 guidance, but right now the current thinking.
In memory environment, we still expect in particular, North America rebounds, our market share back to pre COVID-19 levels. So beyond the market demand you will have a certain level of share gain.
Probably over the course of 'twenty, three and to some extent and 24.
Is a big driver of the top line in.
In addition globally, we have several growth markets, which continue to win in the combination between strong market share and underlying market dynamics like India. We have strong organic growth more of a high single digit bottom and topline.
On the margin side.
This right now again, we pretty much guiding this year to a 9% keep in mind that 9% also includes several kind of cost which are not typically masai group because you still had express shipments all kind of extra cost which were related to supply chain constraints, which obviously will go away and it has a significant volume deleveraging so.
<unk> just taken that out of the equation you start getting a lot closer to 11%.
With bandwidth for different cost action, and then our focus more and more in high margin businesses that we believe to be 11% to 12% Allison.
Listen this is Jim and just to maybe add to what Mark said there is as you know we've talked about too as we go forward our focus on higher margin businesses and Thats, where we will we will invest on top of this and then even as we talked about the <unk>.
Strategic review in EMEA, and Mark alluded to that no matter what the scenario is.
It would not be the same as it is today and so even in a keep situation you have a turnaround in a fundamentally different business structure. There. So all of these are kind of the contributing factors that get us from the 9% to that 11% to 12% in the future.
Great. Thanks very much.
Your next question comes from the line of Susan Mcclary from Goldman Sachs. Your line is open.
Thank you good morning, everyone.
My first question is focusing a little bit more on the production side of things I know you mentioned that you take gain a bit of share. This quarter can you just talk about the state of the supply chain what are the key headwinds that you're facing today and how youre thinking about those easing as the demand moderates.
Jim This is more North America focused but it is a little bit reflective what we see globally.
We still saw.
Quite significant supply chain disruption pretty much I would say until April to early may so that impacted.
But the situation got better as Q2 progressed.
On a going forward based.
We still don't fully expect a fully normalized supply chain environment, but still significant better than what we've seen last year and probably until April may. So we will still have spots are elements that you will have a disruption for a number of reasons, but not to the same level as before so in this in simplistic term supply chain constraints.
To east, but will not completely go away throughout the year.
Specific event on production levels and inventory.
With a drop off of the April may volume frankly, our inventory towards June is probably slightly elevated to what we had in mind, because we assumed a higher <unk>.
Market demand level, but as you would expect from US we are adjusting production and inventory in line with what we see right now from industry forecasts I'll put it differently. We are correcting production. We did already in June and will continue to do so going forward, we're not going to wait until year end.
Okay. That's helpful. My follow up question is you mentioned in your commentary Mark that Youre, taking decisive actions as you do see the macro changing can you talk a little bit more about the playbook that you have in a weaker macro environment.
And especially maybe as it relates to thinking about the promotional side of things you know to what extent is the consumer responding to that and how youre thinking about balancing that relative to the other goals that you have as you think about the business, especially within North America.
Yes, Susan I mean first of all it starts, albeit with a macro assumption you have and I think it's coming it's true for many companies where macro assumptions, which we have now in July 22 are very different from January 22.
So in our scenario and an over different opinions around this one we do assume a recessionary environment around US you can argue about the depth of duration, but we right now that is our main scenario.
That became very clear in our view probably around June July . So accordingly, we've taken the actions, which will which we have in our recession playbook, which are largely focused on.
Being very aggressive on cost side, and we do believe the raw material market will turn favorable.
Notably the extent of it.
As we like in 'twenty, two but it starts turning more favorable and that's why I said earlier, we do think inflation peaked in Q2 and Q3, but above and beyond we are taking additional cost actions on the material side on the logistic cost side that we were faced with many express and inefficiencies.
But we would also be very disciplined in managing head count and all associated costs. So we are taking strong actions on cost side call. It from a recessionary playbook.
In addition every recession in the past is prudent <unk> got to keep an eye on cash flow. So we are.
You should expect it to be very disciplined on networking capital and how we management net working capital and our cash flow accordingly.
In that context I'm also very pleased where we are in our scenario, we are able to keep our guidance on the cash flow.
Your next question comes from the line of Chris <unk> from RBC capital markets. Your line is open.
Hi, Thanks for taking my questions.
Going back to the promotional dynamics.
And you could help quantify how much of the kind of 420 basis point year over year decline in North America EBIT margin came from.
The increased seasonal promotional activity in <unk>.
How do you expect that to trend in the back half are you assuming kind of a similar magnitude of promotions or any color there would be helpful.
Yes, Chris this is Jim and maybe I'll kind of start with that and Jochen.
In here, but.
As we talked about earlier, when we look at price mix for the year for the total company, which is very reflective of North America, because it's about half of our business.
We've really said that in the back half of the year, we still expect to have price mix benefits that are still coming so that.
That would imply that we don't see whether it's now or in the back half of the year promotions being a big impact on our margins overall as we've talked about the impact on margins has more been driven from one a cost inflation perspective, which is come whether it be materials or logistics or labor.
Or freight and warehousing costs again.
Or that it's come from volume deleveraging as we just manage the business to a lower level of demand right now and had to reduce our production levels. So those are the two big drivers within there and even if you look at our overall company gross margins, that's what what reflect that so it is not assuming that theres a higher promotional environment anything. This is mainly just a reflection of where costs.
Sure.
Yes, maybe just to build on that to Jim's points.
The deleveraging did.
It did occur.
Pretty much in Q2 that was the new news that we had kind of referenced earlier in the call and so thats really whats impacting the cost from a price promotion standpoint expectations remain didn't see elevated levels in Q2. So those those are more static than anything else.
Okay.
Understood and just to drill into the.
Sequential cadence for North America margins your guidance for 15% EBIT.
For the year implies a second half step up so yes.
Assuming you could help us.
If you could help us.
Can't break out the key drivers of that assuming the promotional dynamics.
Stay the same.
<unk> outlined the cost cutting program.
Any way you could help provide some quantification on how much of that is driving the sequential step up there in addition to incremental pricing announcements.
And then another.
Other actions you are taking.
Yes, I don't know that we haven't broken out and quantified those specifically and so what I can say is though you really hit the drivers there there's as Joe talked about earlier there are.
Price increases we took in Q2 that fully run in in the back half of the year you have cost saving programs that we have now kicked off and Mark talked about this the different things we're doing to prepare ourselves for a recession and so as you look at that those begin to become larger savings within the back half of the year and then as we talked about too we see material.
Cost is maybe being stable in the back half of the year that we're hitting the peak now so those are the bigger drivers. When we look from Q2 into Q3 and Q4 in terms of North America margins and Chris It's Mark.
And to be.
I apologize for being very direct I think you're missing the point here.
And what I mean with that is first of all if you look at Q1 and Q2 margins were pretty close to 14% in North America with 15 in Q1 in 2014 on Q2 to be pretty much on the run rate. Despite inflation will be just at peak in Q2, and Q3 and despite volume negative environment. So.
I would say with this north American margin given the environment are spectacular strong.
We're well above any historic levels. They clearly demonstrate how strong the underlying businesses and again met with all of the volume deleveraging and with all the inflationary pressures so.
Also if you look at the competitive environment I don't think you will find any competitors who've been close to his north American margins. So I take that as a prior to the north American margins and not as a concern going forward.
Okay.
Your next question comes from the line of Eric <unk> from Cleveland Research. Your line is open.
Okay.
Thanks to two follow up questions first of all just some clarity on you made a comment about rebalancing market share back to pre COVID-19 levels and so what I wanted to understand in the back half of the year.
Industry volumes are softer.
And inventories are normalized and if not a bit heavy.
Is it your intention it's an environment that certainly seems right for more promotions, either driven by retailers or competitors to try to make up some of the lost volume coming from software consumers is it your intent to participate in promotions or is it your intent to not participate in promotions and what does that suggest for your market share outlook through that period.
Todd.
Eric This is Joe just kind of setting up a response to that question. If you look at what transpired in Q1 to Q2, we did grow share slightly in Q2, even in a depressed environment. So that's kind of where we are we're beginning from we think we will continue to.
Look for opportunities to improve and rebalance share back to pre COVID-19 levels in the back half and into frankly into 2023 in terms of promotions I mean, that's always the case that there is different factors in the market. We always are going to review those and make sure they are value, creating and so I look at that as a bit more of a constant.
I think now that we're past I'll say some of the disruptions on supply chains, we're able to get the right production, where we want it we're able to put inventory levels to where we want it and then go into the market. The way, we think is most value creating.
As I said, we slightly grew excuse me in Q2, and we expect to kind of continue that into the back half of 2022 and into 2023.
Promotions as a bit of a constant how we participate is also a bit of a constant in that we have a very rich.
Rigid approach rigid formal approach on what creates value and what doesn't and I think that youll see that transpire into the back half.
Okay.
And then the.
The other follow up just related to cost productivity I think the assumption or the guidance implies the second half is.
Roughly half the headwind it was in the first half, but the volume sounds like it's similar.
I guess you've spoken to this but just to hear you say it again why does the business delever less in the back half on a similar volume and a more cautious consumer.
Yeah, Eric This is Jim and I think what Youre looking at to here as the year over year.
And when you take year over year, it would imply that year over year the back half of the year cost, especially net cost is a little bit less of an impact now a lot of that is because we saw a lot of these inflationary pressures beginning to ramp up throughout the back half of last year.
So that's part of the thing on a year over year. The first half of the year was comping against the first half last year that didn't see as much inflationary pressures. We did in the back half. That's that's a part of it. The second thing is when we look at the back half of the year and we talk about it's not as much the volume deleveraging here, but you are getting an offset with some of the cost reduction actions that we have.
Talked about earlier, the things such as reducing our hiring the things such as looking at some of our discretionary expenses in other areas that helps to offset some of those net cost headwinds that we're seeing in the back half of the year and Thats why it implies.
The back half would be slightly better year over year, but for the full year, we're still at about 150 basis points.
So I guess, we're coming to the end of our Q&A session. So first of all I want to thank you all for joining us today.
Obviously as you heard today versus there is a lot of moving parts. It's a dynamic you can call. It a challenging environment by any definition, but I think in Q2, we demonstrated we can perform very well in a tough environment and we will continue to do so.
We change our guidance, which frankly, we don't like but is the guidance towards the second best year ever in the history, Yes, we would have like to make a number of best year, but we're going to be pretty close and I think all the actions, which we talk about now for the back half of 'twenty two.
The lineup our business very well for 'twenty, three and going forward. So again. Thank you all for joining us today and have a wonderful day.
Ladies and gentlemen that concludes today's conference call you may now disconnect.
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