Q2 2023 Whirlpool Corp Earnings Call
Speaker 1: Good morning and welcome to Whirlpool Corporation's second quarter 2023 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, Corey Thomas.
Speaker 2: Thank you and welcome to our second quarter 2023 conference call. Joining me today are Mark Bitzer, our Chairman and Chief Executive Officer, and Jim Peters, our Chief Financial Officer.
Speaker 2: Our remarks today track with a presentation available in the investors section of our website at whirlpoolcorp.com
Speaker 2: 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.
Speaker 2: Our actual results could differ materially from these statements due to many factors discussed in our latest 10k, 10q, and other PRAG reports.
Speaker 2: We also want to remind you that today's presentation includes the non-CAP measures outlined in further detail on slide three of the presentation.
Speaker 2: We believe these measures are important indicators of our operations as they exclude items they may not be indicative of results from our ongoing business operations.
Speaker 2: We also think the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations.
Speaker 2: Listeners are directed to the supplemental information package, post on the Invest Relations section of our website for the reconciliation of non-GAP items to the most directly comparable GAAP measures .
Speaker 2: At this time, all participants are in a listen only mode. Following our prepared remarks, the call will be open for analyst questions. As a reminder, we ask that participants ask no more than two questions. With that, I'll turn the call over to Mark.
Speaker 3: Thanks, Corey, and good morning, everyone.
Speaker 3: As you will have noticed in our earnings release, we did post another quarter of solid sequential improvement.
Speaker 3: And it was a quote of which puts us firmly on track towards our fuller guidance.
Speaker 3: If you look at the drivers of his improved performance, we did not get a lot of help from a macro environment.
Speaker 3: Global industry demand was down, but frankly very exactly what we expected.
Speaker 3: Evidence that are consistent and disciplined execution of operational priorities that drove its improvement.
Speaker 3: We were able to achieve meaningful cost reductions.
Speaker 3: We improved our supply chain, our product innovations drove strong consumer demand and we gained market share.
Speaker 3: In short, we did what we told you we would do.
Speaker 3: As we are looking towards the second half of 2023, we are leaving our industry demand outlook unchanged.
Speaker 3: Even though we are starting to see early, but clear signs of a strengthening US housing market, which will benefit us disproportionately, but broader consumer sentiment is still causes, and not yet pointing towards more discretionary purchases.
Speaker 3: We're also seeing the operating environment essentially return to pre-pandemic conditions with stabilized supply chains, improved inventories, and a promotion environment which is similar to pre-pandemic levels.
Speaker 3: Frankly, this is an environment we have demonstrated that we can successfully operate and create valuings.
Speaker 3: Turning to slide 6 I will provide an overview of our second quarter results.
Speaker 3: World we are operating in today is very different from the first half of 2022, where supply chains were fragile, inventory was historically low, promotions were largely absent, and inflation was historically unprecedented levels.
Speaker 3: key countries.
Speaker 3: We continue to experience this trend into the first half of 2023 with global demand declines in the mid-single digits.
Speaker 3: The promotional landscape is normalizing at pre-pandemic levels, negatively impacting price and mix.
Speaker 3: Yet we continue to gain momentum with the over-year share gains in the Americas for improved supply chains and our strong product lineup.
Speaker 3: In Q-TU, we deliver the strong operating margin of 7.3%.
Speaker 3: This represents a 200 basis point expansion from a first quarter to a buyer's strong car stakeout actions. These actions deliver the $150 million of year-view benefit and are not tracked to a fully target of 800 to $900 million of cost to a guard.
Speaker 3: and delivered strong second quarter ongoing earnings per share of $4.21 in line with expectations.
Speaker 3: Now turning to slide 7, I will share more details in our second quarter even margin.
Speaker 3: The second quarter was unfavorably impacted by a normalization of promotions, which emerged in the second half of 2022, and are now following historical seasonal trends.
Speaker 3: Sequentially price makes negatively impacted margins by 50 base points with a year-over-year impact of 350 base points.
Speaker 3: Our strong cost-take-out actions deliver 275 basal points both sequentially and the overyear.
Speaker 3: And as expected, marketing technology and foreign currency negatively impacted margins.
Speaker 3: Overall, we are pleased with our second quarter performance, delivering ongoing even margin of 7.3%.
Speaker 3: Turning to slide 8, you can see we aren't track to deliver 800 to 900 million dollars of the over-year cost takeout benefits.
Speaker 3: including $300-400 million of reduced raw material costs.
Speaker 3: and 500 million dollars of additional cost takeout actions driven by enhanced supply chain resiliency, reduced parts complexity with approximately 50% fewer parts since 2021, and improved transportation rates and reduced premium freight costs.
Speaker 3: Additionally, in aggregate we have reduced our salaried workforce by 7% and remain disciplined with discretionary spending and our indirect costs.
Speaker 3: For cost actions we took over past quarters, we have fully an immediate track towards delivering our cost-takeout targets.
Speaker 3: By the chart shows high year-over-year cost reduction in Q3 and Q4, it is important to note that this is entirely driven by the baseline effects in the second half of 2022.
Speaker 3: and will not require additional new cost takeout actions. Now I will turn it over to Jim to review our regional results.
Speaker 3: but not require additional new cost-stake heart actions. Now I will turn it over to Jim to review our regional results. Thanks Mark. Good morning everyone.
Speaker 4: Turning to slide 10, I'll review results for our North America region.
Speaker 4: Year over year share gains and the addition of InSinkErator was more than offset by industry decline of 1% and increased promotions, resulting in 5% revenue decline.
Speaker 4: The region delivered sequential margin expansion with solid double digit EBIT margins of 10.3%. As our strong cost takeout actions continue to gain traction alongside the integration of insincurator.
Speaker 4: We expect the region to deliver 100 plus basis point margin expansion each quarter driven by strong cost takeout actions.
Speaker 4: We are confident in the structural strength of our North America business and continue to expect our actions to deliver strong results.
Speaker 4: Exiting the gear with 12 to 13% EBIT margins.
Speaker 4: Turning to slide 11, I'll provide additional color around the U.S. housing market.
Speaker 4: During our earnings call in October of 2022, we presented our upbeat long-term view on the US housing market. Nothing has changed, and we are very optimistic about mid and long-term housing-driven demand trends, currently representing 15% of the total industry demand.
Speaker 4: New housing construction has significantly lagged historical averages for more than a decade.
Speaker 4: For perspective, there was only one year in the 40 years prior to the Great Recession in which fewer than 1.2 million new homes were built.
Speaker 4: Much of the period between 2007 and 2017 was below this level.
Speaker 4: leading to the oldest U.S. housing stock in the country's history.
Speaker 4: In total, we estimate 3 to 4 million units under supply of housing.
Speaker 4: While we do not expect housing starts to reach a steady state of supply to fill this gap in the near term.
Speaker 4: We do believe housing starts will begin to increase to 1.7 million units annually or higher due to the housing shortage.
Speaker 4: Turning to slide 12, you can see we are well positioned to capture this trend as the number one choice for home builders.
Speaker 4: The combination of one, the best brand portfolio with multiple 1 billion dollar brands including Whirlpool, Maytag and KitchenAid,
Speaker 4: Two, an innovative product portfolio that targets 90% of the consumers. And three, our strong final mile delivery capabilities across the region.
Speaker 4: strongly positions Whirlpool to drive value creation as the housing market rebounds.
Speaker 4: with every new home having a full suite of typically five new appliances.
Speaker 4: It is not surprising that we have become the number one choice for U.S. home builders, serving eight of the top ten national builders.
Speaker 4: Turning to slide 13, I'll review our results for our Europe , Middle East, and Africa region.
Speaker 4: Organic second quarter revenue was down approximately 12% driven by continued industry demand weakness across key countries.
Speaker 4: EMEA margin expansion was driven by strong cost takeout actions, alongside help for sale accounting benefits due to reduced appreciation that will continue each quarter until the transaction closes which is expected in Q4 of this year.
Speaker 4: Turning to slide 14, I'll review the results for our Latin America region.
Speaker 4: The region saw a demand improvement in Mexico and your over-year share gains resulting in a 4% revenue increase.
Speaker 4: Inflationary pressures were partially offset by higher volumes resulting in solid EBIT margins of 6.5%.
Speaker 4: Turning to slide 15, I'll review results for our Asia region.
Speaker 4: Excluding the impact of currency, revenue declined approximately 8% driven by consumer demand weakness.
Speaker 4: Sequential share gains drove a 15% revenue increase compared to the first quarter.
Speaker 4: The region delivered EBIT margins of 3.7% with our strong cost takeout actions offset by negative price mix.
Speaker 4: Turning to slide 16, I will discuss our full year guidance. We are reaffirming our ongoing EPS range of $16 to $18, and free cash flow guidance of approximately $800 million.
Speaker 4: We continue to expect to deliver approximately 60% of our full year earnings in the second half of the year, driven by our cost structure reset.
Speaker 4: We now expect to deliver EBIT margins of 7.25% as promotional spend has slightly increased and demand weakness in EMEA has been greater than anticipated.
Speaker 4: Our guidance also includes updated expectations for our adjusted effective tax rate, now 10-15% for the year. As the Europe transaction progresses, we will continue to assess the adjusted tax rate, which has the potential to be at the low end of our range.
Speaker 4: We continue to expect to deliver $800 million of free cash flow.
Speaker 4: Turning to Slide 17, we show the drivers of our updated full-year ongoing EBIT margin guidance.
Speaker 4: We have updated our expectation of price mix by 25 basis points to a negative 250 basis point impact, reflecting a global promotional environment at pre-pandemic levels.
Speaker 4: All other margin drivers remain unchanged. We now expect to deliver solid margins of 7.25% for the year.
Speaker 4: Turning to slide 18, we show our regional guidance. We see no change to our full year regional industry expectations.
Speaker 4: While second quarter North America industry shipments were slightly favorable versus our prior expectation, this was largely driven by retailer restocking and slightly higher retailer inventory levels.
Speaker 4: The consumer sellout was relatively stable with a low single digit decline.
Speaker 4: And while there might be some uptick in consumer demand driven by the housing rebound, consumer sentiment in the region continues to be impacted by macro uncertainty.
Speaker 4: Therefore, our market assumptions are unchanged.
Speaker 4: Overall, we expect continued EBIT margin expansion driven by our strong cost takeout actions, as well as raw material inflation tailwinds.
Speaker 4: In North America, we expect to deliver full year margins of approximately 11.5%, with the region's strong cost takeout actions partially offsetting a promotional environment that is at normal pre-pandemic levels.
Speaker 4: We expect to partially offset the impact of the promotional environment with positive mix driven by a strong lineup of new product introductions delivering year-over-year share gains.
Speaker 4: We now expect Amia to deliver approximately 1.5% margins, as the region continues to be impacted by soft consumer sentiment.
Speaker 4: Lastly, EBIT margin expectations for Latin America and Asia remain unchanged.
Speaker 4: Now I will turn the call over to Mark.
Speaker 3: Thanks Jim, turning to slide 20, let me provide an update on our portfolio transformation.
Speaker 3: Warp with today is very different from Warp with off the past.
Speaker 3: In the last five years, we've taken several significant steps to transform a company into a higher growth, higher margin business based on three structural pillars.
Speaker 3: Small appliances, major appliances, and commercial appliances. We step in changing our company portfolio Labor Foundation for a company with a double digit EBIT margin profile, which is very different from our historic mid to high single digit profile.
Speaker 3: As we look forward, we are reassessing our operating segment structure in anticipation of a potential change after the completion of your transaction. During one of our future earning calls, we expect to share more information about our assessment and potential re-segmentation.
Speaker 3: Specifically about our strong value creating small domestic appliance business. Turning to slide 21, I will provide an update on In-Sync Arater on how this strengthening output for you.
Speaker 3: Our integration efforts are well underway and near-encompassion after crying integrator in Q4 2022.
Speaker 3: In-sync Arater's rich history and strong product legacy have us very excited about the brand's largest launch next gen, which we presented during our last earnings call.
Speaker 3: We continue to be pleased with the sustained EBIT margins of approximately 20%.
Speaker 3: contributing approximately 50 basis points to our consolidated EBIT margins.
Speaker 3: Turning to slide 22, I will provide an update on our EMEA transaction. In January , we agreed to contribute our European major domestic appliance business into a newly formed entity with Archlit.
Speaker 3: The Europe Transactions and the regulatory processes are ongoing and progressing as expected.
Speaker 3: including executing agreements to sell our Middle East and Africa business.
Speaker 3: We continue to expect to close with Europe transaction in the fourth quarter of 2023. Until then, we will continue to focus on EMEA delivering the best products in consumer preferred brands.
Speaker 3: Let me also remind you of the benefits of this transaction. We will own approximately 25% of a new company.
Speaker 3: which will be well positioned to deliver value to consumers through attractive brands, sustainable manufacturing, product innovation, and best-in-class consumer services.
Speaker 3: And if expected to have over 6 billion euro of annual sales with over 200 million euro of cost energies.
Speaker 3: Additionally, post-closing would expect the transaction to improve our value creation metrics by $250 million of incremental free cash flows.
Speaker 3: and 150 basis points improvement in ongoing EBIT margin.
Speaker 3: Turning to slide 23 I will discuss our capital allocation priorities which remain unchanged.
Speaker 3: We remain committed to funding innovation and growth and expect to invest over $1 billion in capital expenditures and research and development this year. Additionally, we are confident in our ability to generate strong free cash flows.
Speaker 3: This, coupled with our balance sheet strength, provides us the flexibility to support our commitment to returning cash to shareholders.
Speaker 3: In the first half of 2023 we returned $193 million in cash to shareholders, representing nearly 70 consecutive years of dividends.
Speaker 3: Turning to slide 24, let me further discuss our commitment to maintaining our strong investment great credit rating.
Speaker 3: We are confident but we are well on our way to delivering debt leverage to below historical norms and towards our target of 2 times or below with 1.3 billion dollars cash on hand.
Speaker 3: and strong free cash flow which as mentioned earlier we expect to be 250 million dollars higher after the close of a Europe transaction.
Speaker 3: We continue to prioritize debt repayment with approximately $500 million of acquisition related term loan pay down expected by the end of the year. Turning to slide 25, I will review our healthy debt ladder and how it gives us flexibility and de-risks our balance sheet. We have an attractive weighted average interest rate of approximately 4.2%
Speaker 3: Turning to slide 26, let me close with a few remarks.
Speaker 3: Despite a dynamic external environment we delivered another solid quality of sustained margin expansion.
Speaker 3: Through strong execution of operational priorities, we delivered results in line with our expectations and remain on track to deliver $16 to $18 of ongoing earnings per share and approximately $800 million of free cash flow.
Speaker 3: More importantly, the strength of our brands and products is resonating with consumers with a point of year-over-year share gains. With our strong position as the US Builders number one choice and serving 8 of the top 10 national builders, WOPU is well positioned to benefit from a housing-driven demand recovery.
Speaker 3: and we continue to unlock value with our ongoing portfolio transformation. Now we will end our formal remarks and open it up for questions.
Speaker 1: 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. And your first question comes from the line of Mike Rehold from JP Morgan. Your line is open.
Speaker 5: Great. Thanks so much. Good morning and thanks for all the detail.
Speaker 5: So first question, I wanted to hit on the promotional environment, if I could. You kind of mentioned it's now reverted back to pre-pandemic levels, which I guess is maybe a little higher than what it was before.
Speaker 5: Perhaps you were expecting at the beginning of the year and it appears the driver of the reduced North American margin outlook I was hoping to get a sense from you in terms of you know, how this affects How this might affect price cost in the back half
Speaker 5: and into 24. And also, from a margin perspective in North America, I believe last quarter you were expecting to end the year at roughly 14%. Just want to get a sense of how that changes and how we should think about the new baseline for the business outside of...
Speaker 5: you know additional price mix gains in in 24
Speaker 3: First of all, Michael, good morning, it's Mark. Let me try to answer that fairly wide question. On the promotion environment first, you ask a question about where we expect, is it higher than we expected? I would rather call it, the promotion normality came earlier than expected.
Speaker 3: And what I mean with that, we always assumed that at one point the normal promotion environment will return back to pre-pandemic levels. Honestly, we probably would have expected more close to Q3, Q4, and it now basically came to Q2. So that's, as such, not a surprise. It just happened one or two quarters earlier. That's the only change.
Speaker 3: The level of promotional depth is frankly not surprising relative to what we see in pre-pandemic. So I wouldn't see that as an overly concern.
Speaker 3: What in that context what I really want to remind everybody on the call is
Speaker 3: and refer back to page seven of our presentation because I think that tells the full story and I think it's very helpful in that context.
Speaker 3: because you see both a year-over-year comparison on a margin walk and the sequential. If you first start with a year-over-year comparison, you see, and Jim alluded to this one earlier, there is a big price mix decline year-over-year.
Speaker 3: But I really want to remind everybody Q1 and Q2 last year were pretty much the last order basically absent of any promotion. It was basically a kind of a dark period from a promotion perspective.
Speaker 3: these promotions started to resume in the marketplace in Q3 and Q4.
Speaker 3: So you saw this little ramp up there such yes, but you over your comparisons look big, but that's not surprising given that we all knew promotions are coming back into the market.
Speaker 3: The more relevant perspective, and we pointed to already in the last earnings call, is right now the sequential look. Sequentially over Q1 we lost half a point of market share. Keep in mind Q2 in the marketplace has Memorial Day in July 4th in there, so by definition it's a little bit more promotion heavy than Q1 is. So we 0.5 price decline, I wouldn't call that out of a norm.
Speaker 3: Even more relevant is when you look at relative to cost take out.
Speaker 3: Deconventionally we took 2.75 points of cost out. Put it differently, we basically reinvested the marketplace 20% of our cost take out. I would call that a very measured and reasonable approach to approaching promotions. Frankly it worked for us because we picked up market share and expanded our overall margin by 2 points.
Speaker 3: specific to the North American margin. We expect North American margin by year end to be around 12% to 13%. And also coming back to this pre-pandemic margin run rate, that was pretty much the margin run rate we had coming into the pandemic. It was around 12 or 12 plus in North America.
Speaker 3: And yes, we fully expect that to be back on that level and then we can see where we can expand it from there on.
Speaker 5: Great, no, no, I appreciate that Mark. Thank you very much. Secondly, I wanted to hit on InSinkErator for a little bit. Wanted to get a little color or more granularity on how the product launch is unfolding and what that's contributing to the business.
Speaker 5: And also just you know in context of that or maybe in addition to that I think more broadly I think you did notch down the full year revenue contribution outlook So I wanted to understand the drivers of that as well Yeah, Michael again, let me give a context and integrator First of all we're very pleased with that business the margins hold up
Speaker 3: very strongly, 20% plus. It's a very EBIT accretive business. We like the team, we like the product lineup, we like the product production efficiency. It is a very, very strong business.
Speaker 3: There's obviously two factors. One is the broader revenue. I would say, in Synchirator, it is more exposed to the US housing market than our normal appliance business.
Speaker 3: And as such, as we always expected, the first half of the first three quarters of this year will be somewhat soft from housing before the housing fully rebounds. That is one element, but hasn't changed in terms of where we are from a market share perspective on InSinkErator.
Speaker 3: The second part in particular on the new product introduction of NextGen. First of all you need to know the NextGen carries margins which are stronger than rest of the line. So inherently it's a margin accretive product.
Speaker 3: and right now you're going through what we call the phase in and phase out so we started the first shipment actually in July so that is now underway but in the short term given that we have product placement costs and in the phase in phase out costs which we do not capitalize we take it into our ongoing cost
Speaker 3: It's actually even a slight burden in both Q2 and Q3. But the inherent margin of the next-gen is very attractive and we're now fully in the process of ramping up the production and we would expect the full sales element of a new product to be fully visible in Q4.
Speaker 1: Your next question comes from the line of David McGregor from Longbow Research. Your line is open.
Speaker 6: Yes, good morning, everyone. Good morning, David.
Speaker 6: Yeah, come on guys. I wonder if you could just talk a little bit about volume demand or market demand right now. I mean we had the the course six number out that you indicated in your prepared remarks included some restock. I wonder if there's any way of just giving us a sense of what you're seeing right now in terms of replacement demand versus
Speaker 3: So, first of all, it's a little bit similar to what we already qualitatively alluded to in Q1. The discretionary side of the demand continues to remain soft. And we see better major appliances, and I think as one of your colleagues pointed out, we see it almost more domestic appliances. There's the nature of discretionary demand, which is right now still impacted by the demand.
Speaker 3: uncertainty in consumer sentiment which is still not in the positive territory. What is holding up strong is the replacement side, as we always expected, because we see that with the pandemic there comes increased usage of appliance which applies to the placement demand and that is holding up very strong.
Speaker 3: To put it in the numbers, as you've seen the industry, and I'm referring to the US industry, shipments were minus one. In all transparency of consumer sellout, we expect it to be slightly weaker and we think it was around the minus three, minus four, pretty much in line with what we initially guide the industry shipments to.
Speaker 3: The difference is retails were restocking what were very low inventory levels. So there's a restocking element in there and that explains the difference.
Speaker 3: Now going forward, as you know, we left the industry assumption unchanged. Frankly because there's still uncertainty out there. Now...
Speaker 3: But there are clear, and that's probably to your point.
Speaker 3: clear signs and data points about the housing recovery. And what I'm referring to, I mean, this morning, another nationally recognized big builder came out with numbers, the order intake of a builder is very strong across the board.
Speaker 3: You do the math to pick an order that translates into an appliance shipment anywhere 6-10 months after the order comes. That's just the time it takes to build the house and as you know, appliances always come in last when the house is completed. So we do know there's a significant momentum building on the builder side. The only question is how much of that will fall into the calendar year of 2020.
Speaker 3: on this questionnaire side. But we know and we see it, the housing momentum is starting to build and that's very very positive news for us.
Speaker 6: Thank you for that. Just as a follow-up, talk about the cost take-out program. You've got some very well-defined goals for 2023. You mentioned most of that's just coming from the year-ago comp. What does that imply in terms of the 2024 carryover benefit at this point?
Speaker 4: Yeah, David, this is Jim and you know what I'd start with is first off we are extremely happy with, as you said, that we're on track to deliver the $800 to $900 million and we're seeing what we expected in raw materials. I think as we look forward and we haven't and we won't give guidance yet, at least on next year, but as we look forward there are some of these actions.
Speaker 4: to half to a point of cost reduction. Typically, give or take 25 to 35, 40% of that is carryover. So right now at this point in time, we don't have a specific number, but we do expect to come into next year with some strong tailwinds from a cost perspective.
Speaker 1: Your next question comes from a line of Susan McClary from Goldman Sachs. Your line is open. Thank you. Good morning, everyone.
Speaker 7: My first question is around the mix. Are you saying that that has been changing either positively or negatively for you? And what role is that having within that price mix shift that we're seeing?
Speaker 3: I'm Susan, it's Mark. I think overall we don't see the big mix down effect which some people have referred to. In particular North America actually, if you would look in the detail, our denier business, our kitchenette business are performing very well. So we feel pretty good about it. Coupled with that we have a couple product introductions.
Speaker 3: the Maytag pad, the dishwasher, which really are just by lifting the mix. So, and of course mix also going forward will be a major lever to offset any promotion pressure. So I would say in general terms for North America, but it's also pretty true for most of every region.
Speaker 3: There's a slight pause at mix and that is right now offset by the promotion pressure out there. But again, mix and particular product innovation so far has been a good guy for us.
Speaker 7: Okay, that's helpful. And then you're targeting the $300 to $400 million in terms of raw materials for the year. Can you talk about any changes to where you expect to fall within that range, especially as perhaps some of the raws have moved over the last few months and what that could apply for the back half of the year?
Speaker 4: Yes, Susan, this is Jim. And what I would say is if you remember in Q1, as we kind of at the end of Q1, we talked about we thought we were at the lower end of that range as we were looking at where the commodity prices were. Now as we look at where we are today and what happened within the second quarter, commodity prices have improved some. But we're still within the range and whether we're at the midpoint or slightly better than the midpoint.
Speaker 4: We're probably at that point. So it won't have a significant impact for us in the back half of the year against what we guided before, what we're guiding now, because it's still within that range that we thought. You know, so I don't think it's going to be a big impact for us. And as I mentioned earlier, we won't be guiding for next year until, you know, later, till in January of 2024.
Speaker 1: Your next question comes from the line of Sam Darkash from Raymond James. Your line is open. Good morning, Mark. Good morning, Jim. How are you? Good, Sam. Good morning. A couple questions. First off, what is your
Speaker 4: Going back to North America margins specific second half versus first half, it looks like you're guiding, I don't know, somewhere around 13% or so in the back half versus the 10% in the first half. I think we can back into the sequential benefits of RMI and cost takeout and we can guess at pricing.
Speaker 4: what you're expecting for volume production specifically in the second half versus the first half.
Speaker 3: Sam, it's Mark. First of all, yeah, first half now margins are now 10.15% over 10.2% and the back half, and we said earlier, we expect to exit with 12-13%, which again, essentially is spot on to pre-pandemic level North America margins.
Speaker 3: First of all, structural, as you know, where there is a little bit of seasonal element in the back half or first half, one is volume related because you tend to shift more in the second half and first half and second part is our more seasonal business, particularly kitchen, it's that mix of which, as you know, is margin-creative, tends to be a little bit higher in the back half. So, the B-D? ??????al element is 20 degrees degrees, we have the structural elements.
Speaker 3: Now specifically to the question about production level of the inventory, I think you're rightfully pointing out to last year we had to take down production significantly Q3 and Q4. The tranqis is a fairly costly manner to do it. I would say right now coming into Q3 I think we're much better balanced and we feel very good about right now inventory levels.
Speaker 3: Our supply chain is basically, except for some very small residual items, is running very smoothly. So I don't see this kind of need for this draconian action which we had to undertake in Q3 and Q4. So as such we expect a pretty level production volume similar to Q1 and Q2. And then my second question, the
Speaker 4: Corporate overhead line bounces around a lot, and it's hard for us to model, and it looks like it was considerably below, at least where we were thinking. I was imagining it was gonna be maybe a $70 million quarterly run rate, excluding items, and it came in around, you know, call it around $20 million or so. What was that due to, I'm guessing it was a confluence of items, but what were the primary drivers of that?
Speaker 8: So, you know, I think you should continue to model at that type of number, especially maybe a little bit closer to the lower end of that range, because some of our cost takeout actions we're doing are obviously falling into there, so you'd be slightly lower than historical averages. Now, specific items that drive, you know, a...
Speaker 8: changes within there. I'm not going to get into a lot of them, but obviously you have certain accruals that can be related to employee related expenses or certain accruals that can be related to some of the legal cases that we're resolving in the Mia as we close that out. And so those just cause some fluctuations between quarters, but for a full year, we do not expect to be outside of our normal range of 50 to 60 million average per quarter. This is maybe just...
Speaker 3: Adding to what Jim was alluding to, again, the corporate expense space has two structural items. One is the ongoing corporate infrastructure costs, one is one-timers, either deal costs or other actions.
Speaker 3: So of course, the latter one is always a little bit difficult to model, because that's the nature of the ins and outs. But it's important to look also beyond the line, but corporate infrastructure. As we alluded to in our remarks, I've prepared remarks, our overall salary workforce is down 7% the over here.
Speaker 3: that is a very, very significant number. And that is also visible in our corporate expenses. Keep in mind, we are starting to reposition our corporate headquarters basically to a potential post-Europe environment. So we took proactive measures and as such our ongoing corporate expenses bear a lower than they were several years ago.
Speaker 5: So there's also this element which is just structurally and structurally lower than it was a couple years before. Your next question comes from the line of Eric Bussard from Cleveland Research. Your line is open. Thank you. Good morning.
Speaker 5: Morning, Eric. Morning. Two questions that could, I guess, first for Jim, just a housekeeping question. The comment was made that mix was...
Speaker 9: I'm sure you can you just help us understand the North American or organic revenue. Extensin rate or looks like it's down. Then seven eight nine percent. And it sounds like your units are up better than the industry. What is that is that all price you just help us understand the mechanics between the gap between your dollar decline and that your.
Speaker 8: apparent unit volume growth. Yeah, so you know as you said that year over year we did pick up share and so that would obviously be a positive. Still within the quarter as we said the industry was down slightly so that would be a negative and then you know as Mark talked about earlier with the the promotional environment. That's your increment.
Speaker 8: then as we get to the back half of the year, it will have much less of an impact. And that's why you see the full year average for price mix being below where this quarter is when you walk it year over year. Eric, it's market. The additional comment I want to make is you keep in mind that we show the North America business. There's the US core business.
Speaker 3: But then you have other elements like InSinkerator, KitchenAid Small Domestic Appliance and you have Canada in there. The pure US core business was better than the number which we show for North America. What hurt us in Q2 was Canada was fairly weak. Canada has been very strong in the last couple of years and this year is a waste of the momentum from an industry perspective.
Speaker 3: And the small domestic appliance business was also softer than prior years. So these were two offsetting items. But the US core business was slightly better than the number you see here.
And then secondly, a strategic question, I guess, for you Mark, which is from a promotional standpoint, I'm curious how what your thoughts are. It, I guess first of all, is the promotional environment now stable or more intense in the back half than the first half? Within this...
Are you are you playing the focus on participating and maintaining or improving market share? Or is your focus more on margin and less on promotion and share? Just curious how we should think about that relative to your guidance. Eric, first of all I would describe a promotion environment, it's back to normal.
I know that sounds boring but that's pretty much it. And we know how to operate in that environment fairly effectively and efficiently. Which also means we will participate in promotions as long as we are value creating.
Also, from an overall margin-to-margin expansion, of course there will always be an element where some of the cost savings you have to reinvest in the marketplace. We've done that in Q2 and the MAP, overall it worked for us very well. We've expanded market share and expanded margin and that is also going to be our balancing act going forward. We want to continue to win market share.
but we certainly will expand all of our margins. So that's the balancing act. Again, overall the promotion environment, it just came a little bit earlier, but it's right now not to levels which we wouldn't know how to operate in. We know and feel very confident about the cost take out and some of that will be reinvested in the marketplace, but not all of it. Your next question comes from a line of Mike Dahl from...
I tell winds but in an environment where you know gross prices have still risen substantially the past few years sell out is a little soft
and costs are down across the industry. How do you handicap the risk of just the other competitors leaning more into promotion and reinvesting more of some of the overall cost tailwinds into promotion here in the back half?
Yeah, Mike, I can only repeat what I said before. First of all, the raw material, yes, it's a perfect instrument. More or less, most people kind of benefit from same tailwinds. Now with different color, keep in mind that North American raw materials were particular but last couple of years, worse than some of the Asian raw materials. So I would say...
Right now you come to a period where the North America production slightly gets more raw material benefit than an Asian production. So that is already one differentiating element. I would say on the company specific cost take out actions and you've seen that before, I mean our own numbers, more than half of our cost take out is
discrete to us, that's what we are doing, okay? I would pride ourselves, we took actions early and fairly decisive, so I would see, we see some of these cost elements, reductions probably earlier and more than most other competitors. Obviously, we gotta see, so as such, we feel confident about our cost takeout, we know how to operate in a...
respect to inventory and the channel I mean inventory was running fairly mean you called out some restock how would you characterize inventory at retail now is it is it back to normal is it still climbing back toward normal off of levels that are still you characterized
To Wien or are there any pockets where you think there's now relative to the cell out environment? Potentially, you know, a little too much.
Yeah Michael, first of all we got to recognize and remind ourselves that the last three years we've seen extreme swings on manufacturer and retail inventory levels.
bullwhip effect up and down and that's what we've seen the last couple years. I think we're now back to a normal environment on many fronts including trade inventories which I would consider the back to normal trade environment at trade inventory levels and basically the retailers over the last half year
took a particular advantage of restocking to required levels. And that's how we would look at this one. But right now from what we've seen, we don't see excessive inventories out there. You also know there's one trade customer who doesn't carry inventories. So it's not very not excessive inventories out there. I again, I would just describe them as normal retail inventory levels, which we see out there. And which I...
It's kind of a normalized level. It's obviously quite suppressed this year, but just as we think going forward, and I mean, I know you're not giving 2024 guidance, but in just any normal year, what do you think a tax rate should be that we incorporate into our models?
Yeah, so Liz, this is Jim. And historically, we have said that we thought the tax rate on an ongoing basis and on a cash basis would be closer to the 2025 rate over extended period of time. Now what I would say is as we go through our divestiture of Amia,
We have a significant amount of tax assets there that have resulted from losses that we've incurred over the years and funded and paid for already. And as we go through this process we're really looking at our ability to utilize many of those because like I said these are losses that we did incur and what we're finding is that you know we're finding more and more opportunity to continue to utilize those and so that's why this year we think you know.
that we have in the remainder, and then we look at the assets that we have. It's hard for us to give a longer term guidance, but I do believe it'll be better than we've said historically. And in addition to that, I do believe we'll be able to realize significant amount of just cash benefits over the period of years as we utilize some of those losses that we've already incurred.
Alright, that makes sense. And just to follow up on the Price Mix guidance, which for the year is estimated to be below what the first half is tracking at. I mean, most of that improvement in the back half of the year, easier comparisons, or do you think it's more gonna be concentrated in the home builder side of the business versus retail, and just curious how you think about pricing by a channel as we get into the back half.
back half because again every quarter the promotions have been building. So as such, with 2.5 on a fully based or just a quarter difference versus what we had in mind, that just reflection is yeah we saw the normal promotion environment kind of one quarter earlier than we originally expected.
but not fundamentally different from baseline and where we expected the year end to be. I think with that we were pretty much the last question which we had and I want to take the opportunity to thank you all for joining us today. Hopefully as you heard before and we feel very good about the Q2. I mean visual.
more towards the end of the year but they're undeniable and they will at one point provide tailwinds for us for our industry and we feel good about it so with that we feel good about where we are Q2, puts us on track towards reaffirming our full year guidance and
I'm looking forward to talk to you again at the Q3 Ernie's call. Thanks a lot for joining us. Ladies and gentlemen, that concludes today's conference call. You may now disconnect.