惠而浦 (WHR) 2015 Q2 法說會逐字稿

Good morning and welcome to Whirlpool Corporation second quarter 2015 earnings release call.

Today's call is being recorded.

For opening remarks and introductions, I'd like to turn the call over to Senior Director of Investor Relations, Chris Conley.

Please go ahead, sir.

Thank you and good morning.

Welcome to the Whirlpool Corporation second quarter 2015 conference call.

Joining me today are Jeff Fettig, our Chairman and CEO; Vice Chairmen, Mike Todman and Marc Bitzer; as well as Larry Venturelli, our Chief Financial Officer.

Our remarks today track with the presentation available on the investor section of our website at whirlpoolcorp.com.

Before we begin, let me remind you that as we conduct this call, we will be making forward looking statements to assist you in understanding Whirlpool Corporation's future expectations.

Our actual results could differ materially from those statements due to many factors discussed in our latest 10-K and our other periodic reports as well as on slide 1 and in the appendix of this presentation.

Turning to slide 2, we want to remind you that today's presentation includes non-GAAP measures.

We believe these measures are important indicators of our operations as they exclude items that may not be indicative of, or are unrelated to, results from our ongoing business operations.

We also think the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations.

Listeners are directed to the appendix section of our presentation beginning on slide 37 for the reconciliation of non-GAAP items to the most directly comparable GAAP measures.

With that, let me turn the call over to Jeff.

Good morning, everyone, and thanks for joining us.

In our press release this morning we reported record revenue and ongoing earnings for the second quarter.

As expected, the global economic environment continued to be challenging, with currency volatility and weak emerging market demand, primarily in three core countries for us in emerging markets.

First, in Brazil we saw decline in demand of about 12%.

Russia was down about 25% and China was down about 3%.

At the same time, our integration activities in Europe and Asia are progressing well and we will continue to accelerate these integrations as we move into the second part of the year.

As we outlined in April, we have deployed actions to deliver second half margin expansion and those plans are on track to deliver record revenue and ongoing earnings performance for the year.

Our ability to deliver these results in this environment reflects the strength and focus of our execution and the benefits of our expanded global operating platform.

I will now turn to slide 5 to briefly review the financials.

You will see here that we had strong revenue growth year over year in the quarter.

Excluding the impact of currency, our revenues were up 25% versus last year.

Our ongoing business earnings per diluted share were a second quarter record at $2.70 compared to $2.62 last year.

This was primarily driven by strong earnings growth in Europe and Asia.

Our free cash flow was slightly higher compared to last year, primarily due to strong working capital management, partially offset by the impact of our acquisitions.

On slide 6, you see that we are reaffirming our ongoing business EPS guidance with ongoing EPS forecasted for the year at $12 to $13 per share.

And we expect to generate approximately $700 million of free cash flow.

Turning to slide 7, you can see that our business priorities that we have shared previously for the year are unchanged.

We believe they are fully aligned to where we see growth and margin opportunities.

There's three core areas where we are driving opportunities for the year.

Certainly our integration activities in Europe and China, as I mentioned, are on track and we expect to accelerate those integrations in the second half.

We have deployed cost-based pricing in inflationary and currency markets and we continue to focus on cost productivity programs around the globe.

Combined, we believe these will expand our margins in the second half of the year.

We do also expect our investments in new products and growth beyond our core appliance business to continue to drive both revenue growth and margin expansion.

Finally, I just referenced slide 8 where we outlined what we have showed you before; our long term growth strategy, which we believe remains on track.

We continue to leverage multiple opportunities for growth and market expansion which fall under three main pillars: geographical expansion, product and brand innovation and leveraging our right sized fixed-cost structure.

In summary, we're making good progress so far this year and we expect to deliver record sales and ongoing earnings in 2015.

With this, I will turn it over to Marc Bitzer.

Thanks, Jeff.

Good morning, everyone.

Let me begin on slide 10 by reviewing North America's performance in the second quarter starting with the top line.

Net sales of $2.7 billion for North America were up slightly compared to the prior-year period and nearly 1.5%, excluding currency.

Our second-quarter ongoing business operating profit was a record $290 million or 10.8% of sales compared to $285 million in the second quarter of 2014.

We continue to expand our operating margins behind strong ongoing cost productivity and fixed-cost leverage.

While we are pleased with our second-quarter margins, we did experience a few challenges.

One, Canadian currency continued to be unfavorable with roughly 14% year-over-year devaluation and we have already executed cost-based price increase to offset that impact.

Two, due to very strong demand for our newly launched products, including our new KitchenAid line, we experienced some short-term capacity constraints.

We have made several investments to improve our capacity for these new products and expect to meet demand in the second half.

Three, we also adjusted our production levels to appropriately match inventory with demand.

These challenges had an unfavorable impact of approximately $40 million on our second quarter margins.

As you might recall, on our fourth-quarter conference call we provided operating margin expectations of 10.5% to 11.5%.

After a strong first half we are already at the lower end of that range.

Turning to slide 11, we lay out our second half actions to continue improving margins.

We believe the industry is on track to grow by 4%, consistent with our expectations for multi-year recovery.

With our new products fully floored, we expect to continue leveraging consumer demands to drive improved price/mix and volume growth in the second half.

Our previously announced Canadian cost-based pricing actions are designed to offset the impact of currency.

We will also continue to deploy strong cost productivity plans.

We expect these actions, combined with our normal seasonal improvement, to deliver growth and margin improvement in the second half of 2015 consistent with our prior expectations.

On slide 12, we highlight our new suite of black stainless steel KitchenAid appliances.

These products are designed to bring professional style appliances without the commercial stainless steel look and have been exceptionally well received in the US.

I will now share the second quarter results for our Europe, Middle East and Africa region as shown on slide 14.

Sales were $1.3 billion, compared to $0.7 billion in the prior year, driven by the integration and continued recovery in western European demand.

Ongoing operating profit was a second quarter record of $56 million, with ongoing operating margins of 4.2% compared to $2 million and 0.2% in the second quarter 2014.

During the second quarter, positive volume, ongoing cost productivity and the planned acceleration of integration activities more than offset the unfavorable impact of currency and lower demand in eastern Europe, delivering yet another quarter of significantly expanded operating profit and margin.

On slide 15, as we look toward full-year 2015, we expect our integration activities to continue building in the back half.

For 2015, we expect the industry to be up 0% to 2%, although it is currently trending at a higher end of the range as western European demand recovery is more than offsetting the weakness in eastern Europe, most prominently in Russia and the Ukraine.

The benefits from previously announced cost-based price increases are designed to offset the impact of currency.

In summary, we remain focused on accelerating integration activities, ongoing cost productivity programs and growth through new product launches, both within and beyond the core.

On slide 16, as an example of product leadership in the region, you can see our new Whirlpool branded refrigerator that is designed to optimize food preservation by reducing freezer burn by up to 50%.

Now I would like to turn it over to Mike.

Thanks, Marc.

Let me begin with our Latin America results on slide 18.

Compared to what we shared on our first quarter call, the macro environment in Brazil has weakened further and currency has remained significantly devalued.

As a result, sales for the quarter were $854 million, down approximately 22% from the same prior-year period.

Excluding the impact of currency, sales increased 1% from the prior-year period.

Our ongoing business operating profit for the quarter totaled $36 million or 4.2% of sales compared to $87 million and 8% in the prior-year period.

These results included an unfavorable operating profit impact of $25 million due to currency and another $10 million due to reduced production levels.

These impacts were partially offset by previously announced cost-based pricing, the benefits of cost and capacity reduction initiatives and strong results in our appliance business outside of Brazil.

On slide 19, we lay out our actions to improve margins and return to run rates more reflective of our expectations.

We now expect 2015 industry for Latin America to be down approximately 15%, reflecting the further deterioration in Brazil.

As mentioned earlier, currency continues to be a challenge for us, as we expect the real to US dollar exchange rate to be between 3 and 3.25.

As discussed on our previous call, we have executed strong and decisive actions to offset the impact of the demand decline and currency devaluation.

These actions include previously announced cost-based pricing, new product launches and fixed-cost reductions.

In the weaker demand environment, we're taking additional actions targeting fixed-cost reduction to improve margins.

Additionally, in the first half we rebalanced production levels to match reduced demand and we will continue to monitor and adjust if needed for the remainder of the year.

It is important to note that we expect to see the impact of all these actions beginning in the second half of 2015, at which time we expect to deliver improved operating margins compared to the first half.

As we implement these actions, we expect margins to strengthen in the third quarter and then to grow significantly in the fourth quarter.

While we will likely be lower than our long-term margin expectations for Latin America, we believe we have the right actions to address the operating environment and improve the trajectory of the margin profile.

Turning to slide 20, as a demonstration of our global leadership in the laundry category, we launched a Whirlpool laundry product with a smart load system that reduces water consumption in addition to delivering best-in-class capacity and superior washing results.

Now turning to our second quarter results in the Asia region, which are shown on slide 22.

Net sales were $381 million in comparison to $211 million in the prior year period, primarily driven by the impact of the integration.

We have delivered a second quarter record ongoing profit of $31 million compared to $4 million in the prior year period.

Ongoing operating margins were 8.1%, up significantly compared to the prior year period behind record performance in India and the expanded benefits of integration activities in our expanded China business.

Turning to slide 23, we continue to see favorable macro trends in India and negative macro trends in China.

Our industry guidance for Asia as a whole is flat.

In summary, for 2015 we expect continued growth from our integration activities, strength in India and as a result, continued strong margin performance in the second half from our larger growth platform.

On slide 24 can see our Diqua front load washing machine with a 5 inch interactive display and a sensor that reduces vibration and noise.

This product is an example of how we continue to leverage products from the integration to accelerate our growth in China.

Now, I'd like to turn it over to Larry.

Thanks, Mike and good morning, everyone.

Let me start with our second quarter results on slides 26 and 27.

As Jeff mentioned, we had record net sales and ongoing operating profit during the quarter.

Our revenues were $5.2 billion compared to $4.7 billion last year, an increase of over 11%.

Currency has impacted our revenues by nearly $650 million, EBIT margins by 1.75 points and net earnings by approximately $1 per share.

The diversification of our regional profit contribution, cost and capacity reductions, ongoing cost productivity and benefits from our acquisitions more than offset the headwinds we discussed.

And as expected, the Company delivered record ongoing earnings of $2.70 per share, up from the $2.62 reported last year.

Allow me to make a few more detailed points on our financial results.

First, SG&A as a percentage of sales on a GAAP basis increased by 1 point.

Approximately half of this increase is due to acquisition related costs, with the remainder primarily associated with the deleveraging effect of a weaker demand environment in Brazil.

We do expect SG&A margins to return to prior year levels as we realize integration synergies, additional fixed-cost reductions and higher volumes in the second half.

Additionally, the interest and sundry line improved year-over-year, driven by a gain from investment business investment in Brazil, which had no impact on ongoing earnings.

Finally as shown on slide 27, on a GAAP basis our effective tax rate for the second quarter was 32% and year to date is approximately 20%.

We continue to expect our full-year tax rate to be between 22% to 25% for both GAAP and ongoing earnings.

On slide 28 we reaffirm our guidance for ongoing business earnings of $12 to $13 per share as well as our expectations of approximately $700 million for free cash flow.

Turning to slide 29, let me make some additional comments regarding expected earnings per share drivers for the second half as compared to the first half of 2015.

We expect strong second half earnings, given the seasonal ramp-up in demand of our business and the benefits from actions we have already taken.

In North America and Europe we expect demand growth to continue in addition to the price/mix benefit from prior year product transitions and our new product launches.

In the second half, we expect our previously announced price increases will be in full effect in Canada, Brazil and Russia.

As a result, we expect $1 in earnings per share for price/mix and another $1.50 from normal volume seasonality in the second half.

An additional $0.50 in earnings per share improvement is expected from ongoing cost productivity and positive raw material trends.

Our acquisition integrations are firmly on track in Europe and Asia and we expect an additional $0.50 in the second half as those synergies continue to ramp up throughout the year.

Finally, we expect currency to drive a negative $0.75 in earnings per share impact, primarily due to the translation effect of higher seasonal volume in the second half.

In summary, we expect earnings per share to accelerate in the second half, as our previously announced cost-based price actions, ongoing cost productivity, acquisition synergies and price/mix benefits ramp up to more than offset the negative currency impact.

As a result, we expect to deliver between $7.16 to $8.16 per share in the second half from an EPS perspective.

On slide 30 you can see an update on the progress of our restructuring and integration activities in both Europe and Asia.

We incurred $90 million in restructuring expense and $65 million in benefits during the first half, which was consistent with our expectations.

For the full year, consistent with prior guidance, we expect $300 million in expense and $175 million in benefits.

And as previously discussed, these benefits are more weighted towards the second half of the year.

As we continue to grow revenues and improve margins, we have solid priorities to deploy the cash generated from our business as shown on slide 31.

In the second quarter, we continued our balanced approach to cash allocation.

In addition, we raised our quarterly dividend by 20% to $0.90 per share and repurchased $50 million in stock through our share buyback program.

We also signed an agreement to purchase the American Dryer Corporation, which closed in early July.

In summary, given our profitable growth trends, increased investment capacity and strong balance sheet, we continue to balance funding for all aspects of our business to ensure the best long-term value creation for our shareholders.

Now I'd like to turn it back over to Jeff.

Thanks, Larry.

Just to sum up, our priorities as you heard throughout the call, have remain focused on the successful integrations in both Europe and Asia and we have very strong operational plans to deliver the expanded margins we have discussed for the year.

These actions do include cost-based pricing already communicated in key markets as well as cost productivity programs.

Overall, we expect these actions to move us towards the run rates more representative of what we outlined in our long-term planning.

Our strategy is progressing well and we continue to execute many actions on the three paths I described earlier in terms of providing opportunities for both revenue growth and margin expansion.

We continue to believe that these plans provide us with an outstanding opportunity to not only have another record year this year, but also deliver significant shareholder returns.

With that, I'm going to close our formal remarks and I would like to open it up to Q&A.

(Operator Instructions)

Megan McGrath.

I wanted to start on North America.

First, on the demand environment it does look as if you may have underperformed the overall market a little bit in the quarter.

I know that there is some differences between your numbers and AHAM, but was that, do you think, of the inventory adjustment or was there more aggressive pricing happening in the quarter that you decided not to participate in?

Good morning, Megan.

It is Marc Bitzer.

I will take your questions.

First of all, let me reiterate what I said in a couple previous calls.

First of all, our reported unit shipments versus a [T-6] market share, which you typically see are not fully comparable.

We sell more than just T-6 major appliances.

We also report non-T-6 major appliances as well as Canada and Mexico units.

We also have extended (inaudible) business made of many products like small domestic appliances.

So obviously you should focus on revenue growth and margins.

And as you know, we delivered strong margins and we delivered growth in Q2.

Admittedly, that growth lacked industry and it is important to keep a few issues and that gets to your question [in mind] with regard to our second quarter unit performance.

One, we completed one of our larger product transitions in the middle of a quarter with the rollout of the KitchenAid suites of kitchen products, which as a side note, the last time we did that was 10 years ago.

So this is a very significant product launch.

Because we have been transitioning large product lines for much of the past few quarters we have not yet seen the full capability of our new product lines in the market.

However, going forward we expect that you will see healthy from these new products in the markets.

Second, during the quarter we showed than expected demand for our recently launched new products.

While our production capacity is still ramping up, we've made investments to improve our capacity and we always expect to see marked improvements in the third and fourth quarter as a result.

Thirdly, yes, during the quarter we did see some moderately aggressive promotional activities from a few competitors, which we choose not to participate in.

As an example, we saw [value destroying promotions in pronto laundry] where we see sustained dumping by certain imports or [Topland] refrigerator and we see promotions in spite of cost increases due to energy efficiency investments.

Whenever there is a promotional activity in the market, we evaluate whether or not we can create value for our shareholders and brand by participating.

When we see value, we participate.

When we don't see value, we do not participate.

Thanks for that.

I just wanted to clarify, you mentioned in your opening remarks a $40 million negative impact.

Was that just from the inventory adjustment or was that all three things that you mentioned: the Canada, the product transition and the inventory adjustment?

Megan, it is Marc again.

Is all three things combined.

Of course that is a rough estimate, but that gives you a sense in terms of our potential in Q2 growth.

Can you give us any breakdown of what was the biggest impact of that $40 million?

No.

First of all, the $40 million is already a rough estimate, so it is difficult to break it down in components.

The inventory adjustment was a big part.

Back to your other question, that was just trying to bring our working capital levels in line with what we saw as the top line growth in the first half of the year.

David MacGregor.

Congratulations on some of this progress.

I wonder if you could talk a little bit about Latin America and specifically, you referenced pricing initiatives aimed at offsetting FX.

Can you talk about your level of confidence in the Latin American price increases holding in what is obviously a difficult macro environment?

Secondly, if you could provide a little bit of color on your non-Brazilian Latin American business.

You said it was doing better, if you can give us a little more elaboration that would be helpful.

David, it is Mike Todman.

With respect to the price increases in Brazil, in fact we held as well as holding our market share.

So we had sequentially flat market share and the pricing has held.

And that is what has allowed us, frankly to offset the huge currency impact as well as the market demand environment.

But pricing has absolutely held.

In terms of the business outside of Latin America, actually we saw growth of around 12% in that business.

So that business continues to perform very well and we saw a significant as well improvement, double digit, in operating profit from that business.

We feel very good about that in the markets outside of Latin America.

David, this is Jeff.

I would just add to that, in Brazil in particular when we say, there is really three impacts.

There is obviously the demand environment, which is negative.

We have the devaluation year-over-year of about over 40%, so you have the translation impact.

And when we talk about pricing offsetting currency, it's really offsetting the inflation consequences of the currency in the local market.

We will not offset translation currency.

If I can squeeze one more in, if you could comment on raw material deflation and your competitor adjusted their guidance for the year.

Any thoughts on how you are tracking versus that $100 million target?

Is it possible that you might ultimately outperform that number in the second half?

David, this is Larry.

As we stated in our prepared remarks, we do expect a higher second half contribution of about $0.50 a share versus the first half from that productivity, which would include materials versus our first half performance.

During our last call we did say that materials would be approximately $100 million lower this year.

And I would say if current commodity rates hold, it could be better than that.

We will see how the rates continue to evolve, but we are confident in $100 million and if rates continue to improve we should potentially have some upside.

I would mention that it is important to remember that we are experiencing headwinds in currency, which in currency outside of the US when you're purchasing US denominated commodities.

If you are to revise the raw material guidance, would that also imply that you'd be revising your cost synergy guidance on Indesit given that a large portion of the early stages of the synergies are raw material related?

David, this is Marc Bitzer.

No, I'm not sure would because particularly with Indesit, in particular applies what Larry just outlined.

You still have a large amount of purchases in US dollar denominated.

So even though you may see increasing tailwind from a raw material side, it is pretty much eaten up by currency because you buy still in US dollars.

Denise Chai.

Going back to Latin America, could you talk about how Brazil performed during the quarter?

Over the course of the quarter did it continue to deteriorate and how are you looking at the back half?

And could you be a little bit more specific in terms of where you expect second half margins to come in?

Denise, it is Mike Todman.

During the quarter what we saw was continued deterioration of the overall market environment in Brazil.

And as you all know, it is kind of the political crisis that has then led to an economic environment and challenging environment.

The fact of the matter is, what we have said is we have adjusted our outlook for the year to now minus 15%, which implies that the second half will be slightly worse, if you will, than the first half.

The first half was about minus 14%, so we continue to see a fairly challenging environment.

What we have done is obviously adjust our business to that particular market demand environment.

The actions that we have taken, including the cost-based price increases, which we have already announced, but we have taken some significant fixed-cost reductions and are taking more just to make sure that we can improve the margins.

I'm not going to give you an exact margin number for the second half, but we do expect for it to improve significantly, substantially over the first half.

Denise, this is Jeff.

I would add that clearly the two variables right now are demand and currency and they move quite radically.

Our assumption we've laid out is that it pretty much stays the same as where we see it today.

But if you accept that, I would say as I said in my comments, we expect over time our Latin America business to deliver double digit operating profits.

We clearly didn't with all of this in the first half.

We won't get there in the second half, but we will be, if those assumptions stay the same, we will have significant improvement from what we see in Q1 and Q2.

In North America, the $40 million negative impact in the second quarter, will there be any more of that to come in the third quarter from Canada, from transitions, et cetera?

Denise, it is Marc Bitzer.

I would say on the capacity constraints we're slowly working our way out and again that is normal ramp up as you launch a brand new product line.

And capacity in this case is not only our own capacity, it's also supplier capacity.

So that is the normal ramp up coupled with strong demand.

I would say it is largely behind us.

The inventory adjustment is completely behind us and the Canadian currency unfortunately not actually.

This week it got worse.

I think it is a mixed bag, but I would still characterize the majority of the issues are behind us.

The value strong promotions that you saw in the second quarter, have those continued as well?

First of all, Denise, you have to bear in mind that there are certain promotional peaks throughout the year, and obviously July 4 is a key element.

So right now we are end of July, mid-July.

There is no active big promotion out there.

It is to early to speculate if one might be happening on Labor Day or Black Friday.

But what I would like to emphasize is the value strong promotions were not across all categories.

We saw certain categories and it is our choice to participate or not to participate.

Ken Zener.

I might have more than two questions.

If we look at Brazil, LatAm, Jeff I think, and Mike, please jump in, 1Q was down 20%, the market was down 15%.

You said LatAm net overall you now expect to be down 15% versus the 10% to 12%.

Your comments seemed to be that Brazil is getting weaker, but with all that decline, your 10% to 12% down to 15%, is that all Brazil?

And what does that mean about the second half comp?

It seemed like it kind of stabilized in May, so did it get worse since May and how much was attributable to Brazil versus these other markets, first question?

When we refer to market data, Ken, we're only talking about Brazil.

I don't know that it got worse, it has just been consistently bad since the first quarter and it is still bad.

We thought when we talked in April that it might not be as bad in the second quarter, given we're comping against a weak prior year World Cup driven type of thing.

But it stayed double digit negative.

Our view, given the environment there right now is that we don't see anything that is going to change that in the very near term.

Respectfully, but it seems like it got worse from what you talked about.

And I think, Mike, you alluded to the margins being second half better than first half, but specifically there being a big ramp in 4Q versus 3Q, where I think before the baseline was at the back half, would it be 9% to 10% margins?

Could you give a little granularity there to the extent your pricing in the quarter was very strong, up 15%, price mix versus you're down volume 14%.

So what is causing that delay in that margin expansion that Mike referred to as significant in 4Q versus 3Q and second half versus first half?

Ken, it is Larry.

I think what is important to remember is Brazil has had to take out a lot of production in the second quarter to meet that demand.

While Mike is absolutely right, we are getting the price mix, some very strong price mix, you have two things happen.

One is productivity from taking inventories down and with the lower sales base right now you're not getting as much leverage on SG&A.

We expect the actions we've taken to right-size inventories are largely behind us now.

The price increases we're taking are now in full effect, which should continue into the second half of the year.

Then, I think the combination of those and the fixed-cost reductions we're taking, the exit rate for Latin America will exit at a nice strong margin.

And there is also, even at depressed demand levels, there is still the normal seasonality.

Q4 is going to be a much higher volume although lower, much higher volume than Q3 is.

Q3 is traditionally one of the weakest seasonal demands.

How much, because currency plays into not only in terms of how it translates, but in terms of how you're bringing inventory to be then priced in.

It sounds like you gave a currency of 3 to 3.25 for the reais, which would be, I think it was just above 3 when you guys reported in April.

So you had another 4% to 5% deterioration there it seems in that currency.

Did that play into the delay of EBIT?

It's been all over the map.

I think even in April it was 3.35.

So we, again, we've got two critical assumptions on the Latin America/Brazil forecast.

And that is currency levels, which we're saying that we are basing all of our discussion around our planning is that it is going to be between 3 and 3.25 and it is right in the middle now and that demand will remain basically negative by about 15% for the full year.

Those can change, but that is what we base things on and based on that environment, we know our pricing actions and our cost actions, taking into account those negatives, will improve as we go throughout the year.

Last one for North America.

Marc, you referred to seasonality being stronger in the second half versus the first half.

Looking at the model, there's a lot of different variants, but it generally seems that you're on the order of 100 basis points higher in the second half because of that volume leverage.

Would that be a fair characterization?

Ken, it is Marc.

First, on the margins in particular, as you recall we gave a guidance or expectation for 10.5[%] to 11.5[%] for the year.

We finished 2Q with 10.8[%].

We still firmly believe that we're in that range on the full year base, which also tells you in the back half, clearly [harkens] to the average or the high end of that range.

That typically, to your point, it bears a certain amount of volume leverage, in particular in Q3 there is also certain seasonality, particularly with small domestic, which (inaudible) Q4.

So it's a combination of both volume leverage and the seasonality of certain products.

Bob Wetenhall.

I wanted to inquire, what was the organic volume growth in EMEA and the Asian businesses?

And your margin performance was a lot better than we were expecting.

I was just wanting to ask you, how much in the back half can we see further expansion?

Bob, it is Marc.

I'll start with the Europe piece.

I'm glad to hear the margins beat your expectations, but it didn't beat our expectation very exactly in the range of what we guided toward.

On a full-year base, we guided European market 4% to 5% and we finish Q2 with 4.2%, which is encouraging that were already in Q2 in that range.

We do see a further margin expansion probably more toward the high end of that range and that is largely coming from a build of synergies and restructuring activity.

There is some top line growth.

On your question about the top line growth, and understand in particular when you look at revenues it's a little bit confusing with exchange rate.

In local currency in Europe we had a very healthy growth pretty much across all base businesses despite our now much stronger exposure in eastern Europe.

Bob, let me talk about China.

We had a strong growth in China.

I think it was slightly over 80%.

If you look at both businesses combined, in fact we picked up market share.

But it is a lower demand environment in China then we had originally thought it was going to be.

So we are on a minus 3% or so market.

That obviously impacted the total volume, but the growth was about in-line with what we thought it was going to be.

In terms of our margins, we were at 8.1% margins for Asia and we guided at the beginning of the year to be between 7% and 8%.

So we are already at the top end of that range and that is what we expect.

And there is some seasonality in emerging markets in Asia as well.

The first and second quarter are good, third quarter's usually weak and then fourth quarter it recovers.

There is some seasonality to that, but to Mike's point, we're pretty much tracking to where we want to be.

I just want to get a little clarification on your North American volume outlook for 4% growth.

I was hoping you could slice a little bit.

The benefit, by your implied guidance, would point toward mid single-digit unit volume growth.

And is that a function of working through the inventory destocking or is that a sign of better organic demand and sustained consumer spending on appliances?

And if the second piece of that is right, it is better consumer demand, would you expect to see firmer pricing?

Bob, it is Marc Bitzer.

Let me comment on the volume outlook.

As you may recall, at the very beginning of the year we guided towards 4% to 6% and then we were a little bit more cautious, more in the 4%.

That's what we technically still have today and that is all based on Q1 being a little bit softer, Q2 being in a reasonably healthy shape.

And if you basically do the math, that would imply a back half volume growth in the market of 4% to 5%, just to get to the math.

I would say first of all, we have seen as of the second quarter pretty sustained healthy sell-in and also increasing sell-out trends.

From today's perspective, we are absolutely firm behind this one and we are also firm behind our what we said long-term positive prospects in growth in the US markets.

Just to add to Marc's comments, just to look at the last three months AHAM, we have been averaging about 4.5% growth.

If I could sneak one in, if you capture that kind of growth, do you think you will get a pricing boost as well?

No, Bob, we cannot really comment about what we think others are going to do.

We know what we are doing.

We said very clearly we think we will amp up our growth rate with the full availability of our new products and that we fully expect to expand margins.

Sam Darkatsh.

Two questions, if I could.

One a clarification question, Larry.

On slide 42, I think you were mentioning interest and sundry expense of $100 million for the year.

I think that was $150 million targeted last quarter.

What is the reasoning behind that variance?

The interest and sundry on the GAAP, if you look at the GAAP financials, you'll see them I believe.

The favorable delta is the one-time gain that is in GAAP results, a business investment in Brazil that is in GAAP, but not in ongoing results.

It is just in GAAP.

Visibility we have right now on an ongoing basis for interest and sundry, you're probably looking at about $130 million for the year.

Make sure I'm understanding that because the non-GAAP and the GAAP gets a little confusing for me.

Back half of the year, what should interest and sundry be then on average?

$52 million in the first half and figure it's going to be $130 million for the full year and then you've got your second half.

The other question and if you mentioned this, Mike, I apologize.

In Latin America, I think you were trying to stabilize or rationalize the retailer inventories in the quarter.

Where are you in that process?

Where are retail inventories?

Have they stabilized and would you imagine that sell-in and sell-through look like each other in the second half?

Right now, we did make the adjustments that I talked about in terms of overall demand.

We think we are about where they need to be, but it does all depend now on demand going forward.

We made all the adjustments that we thought.

We think the inventories are more in line, but all depending on demand in the second half, we will see.

Right now we are comfortable with where we are.

Comfortable with where we are and assuming that the market is down by 15%, we are comfortable.

If it changes radically either direction, then obviously we will adjust.

Michael Rehaut.

First question, going back to the capacity constraints in the quarter, North America, with the product transitions, do you have any sense of what that might have impacted the top line by in that segment?

Mike, it is Marc Bitzer again.

I would say on a total revenue base, but just a rough estimate, it's low single-digit percentages, very low up to a 2% or 3%, in that ballpark.

That is just because a, the KitchenAid suite launch is a fairly complex undertaking.

It's an entire kitchen set of products across multiple factories and you need to get them all ready to ship it.

And two, we're still on the tail end, but not at the very tail end of the huge laundry and refrigeration change, which as you know we pretty much started Q3 last year.

Now we're at the tail end and we have huge demand against certain products like [Memex] where we're still ramping up production capacity.

That 2% to 3% you're referring to, that is the impact on the North American segment?

That is on the North American.

And again, that is a rough indication.

The margin mix on that kind of product is substantially higher than the line average.

Also, can you describe quickly the acquisition you mentioned at the end of the prepared remarks.

I believe you said it was American Dryer Corporation closed in July?

Yes, it is Marc Bitzer and again, it is the American Dryer Corporation is active in the commercial laundry segments.

It used to be a supplier of ours, so we've known them for many years and it is what we would describe as a nice tuck-in acquisition in our non-core business.

The reason why we like commercial laundry, it is inherently a, it's a healthy margin business, cash accretive.

It fits perfectly in our grow beyond and expand beyond the core business, so it is a nice tuck-on.

We did not reveal or communicate because we have an agreement with the seller of any purchase price.

Obviously it is only a fraction of a previous acquisition, so it is a much smaller one and we now start integration activities.

Just a sense of rough size of revenue and would you say healthy margins below or above the line average in North America?

We typically do not give details, but American Dryer Corporation, I think it is largely published, it's a $40 million or $50 million revenue business.

It is not a huge one and that is why we call it a tuck-in acquisition.

One quick last one.

The Asia margins, I think you referred to continued expectations for continued healthy margins in the back half and you've already done pretty well in the first half.

Does that imply margins in the back half similar to the first half or should it drift higher perhaps with the acceleration of integration benefits?

No, I think, Michael, you can expect that they will be plus or minus within the range that we gave: 7% to 8%, so similar.

We do not see any expansion and as Jeff mentioned, there is seasonal business in Asia.

Third quarter is generally the lowest quarter in terms of volumes and sales and then the fourth quarter it ramps back up.

The margins will be commensurate with that.

Eric Bosshard.

Two things, first of all in North America, I understand the difference between the AHAM and your units.

So curious on how you viewed your market share performance in the second quarter and also what your expectation is in the second half of the year.

Eric, it is Marc Bitzer.

As I mentioned before, our top line revenue, even while growing admittedly lacked in (inaudible) demand, which also implies our market share just in Q2 is slightly down year over year.

That is a fact.

It is, if you read in between the lines of my previous comment, it is not across all products.

These are certain categories where we saw heightened promotional activities or where we ran into some capacity constraints.

Is that our expectation going forward?

No, it is not, but we will also, we basically act on value principles as we have done in the past.

Just to clarify a little bit, the KitchenAid missing out on 2% to 3% of revenue is a pretty material number.

Was that what you expected?

Was there something that was different than expected that did not allow you to come through with the capacity?

I would love to understand that a little bit more, especially considering that you also were taking extended downtime it sounds like elsewhere in the business to balance inventories.

Can you help explain that a little bit?

Eric, it is Marc again.

The 2% to 3% applied to KitchenAid and capacity constraints on the laundry [transition] in particular and a little bit refrigeration, but it's largely laundry, a little bit of (inaudible) and the KitchenAid.

So it is all three businesses, it's not KitchenAid on its own.

Particularly the laundry one, that is very frankly, it is much stronger demand coupled with the shift of industry back into top loaders and that is what we are ramping up in terms of capacity.

On the KitchenAid, to some extent you could say that is as expected because a kitchen suite you don't launch every year.

As I mentioned before, the last KitchenAid suite was launched ten years ago.

So this is a pretty complex undertaking, the flooring of the retailer.

We knew it would drag a little bit for one or two quarters and that is just what it is.

The good news is the reception in the marketplace of the suite is very, very strong.

Your participation in promotions in the back half of the year, is the discipline similar to Q2 such that you could still lag the industry?

Is that how we should be thinking about you strategically?

We typically do not comment on forward promotions et cetera.

But I think we've seen the last three or four years that we had a very good discipline around how we manage our margins, how we expand our margins and how we drive certain promotions and you should expect that going forward.

Eric, we feel pretty good, pretty confident about our ability to win share through our new product innovations by creating demand for them as opposed to buying share.

That is a discipline.

Every quarter it may go up or down, but we think there is a value creating way to do it and that is the way we're doing it.

Secondly, in terms of Europe, the margin progress there has been impressive.

I know that there are announcements that come out over there about your capacity efforts there.

I am wondering if you could give us a little bit more color on what you have accomplished to date and what else is coming here in 2015?

It sounds like there is an expectation there is more synergy benefit there.

If you could expand a little bit on what you are doing with the Indesit and with your core capacity in Europe.

Eric, it is Marc Bitzer again.

First of all, the Indesit acquisition in Europe is a fairly complex and frankly often challenging task, but so far it is very well on track.

It is almost like clockwork, which was not a given.

In terms of the major restructuring announcements, so far in the press and in our filings we basically have referred to three.

One was high level SG&A, which is largely leadership team.

Two, what we call the Italian industrial plan, which is a significant undertaking across our Italian factories in terms of capacity rationalization.

And three was a relocation of an R&D center, the closure of an R&D center in Germany.

These are the three ones which we announced throughout the first half.

They are obviously big elements and big blocks, but they are well on track and we signed these agreements already.

In a broader scheme of things, we are exactly consistent with the framework which we gave at the beginning of the year about the full year restructuring expenses and benefits expected.

I would say yes, it's fully on track, but it also tells you, just by the fact that we just signed some of these agreements now, you obviously don't yet see the benefits in the first half.

And you will only see a fraction of that in third quarter, but now it starts building every quarter because we know it's signed.

It now needs to be implemented and that just takes a certain time.

Jay McCanless.

I wanted to ask, on North America could you give us some color about what you are expecting for the back half of the year in terms of currency translation effects and how much of that did you guys contemplate with the recent move higher in both the Mexican peso and the Canadian dollar?

Dave, it's Marc Bitzer again.

As you point out, obviously for North Americas the peso and the Canadian dollar.

The peso has weakened, yes, but keep in mind we have a certain element of natural hedge because we also produce in Mexico.

So when the peso moves, it hurts us on the top line, it does not necessarily hurt us on the bottom line, so margin-wise a cause of less concern.

Top line, of course, it always hurts you.

That is also embedded in already our Q2 numbers.

Canadian dollars are different because we basically don't produce in Canada.

(Inaudible) But year over year, we have a dramatic change, which fully impacts the margin.

We have now a number of cost-based price increases in Canada which we implemented.

As you can tell also, right now the Canadian dollar weakened to 1.29, which is another deterioration versus Q2.

So yes, that impact will be with us throughout the back half, both on top line which is fairly significant on the North American level, but also the bottom line as we were catching up on the cost-based price increases.

It will be a drag at today's levels in the second half.

But that potential drag you think is already captured in the guidance?

Yes, it is embedded in the guidance.

It should be less, assuming the currency range that we have forecasted remains there as our pricing catches up with that.

I missed some of the comments you made about SG& A. I would assume that SG&A should deleverage in the back of the year.

Did you guys give specific targets for that?

We said we will return to prior year levels for the full year.

So yes, you're right, we will have leverage in the second half.

David MacGregor.

Can you talk a little bit about your North American builder channel business and what you are seeing in terms of demand conditions and growth and the extent to which your share there may be improving?

Secondly, if you could talk a little bit about share repurchase program.

You were active in the quarter.

Is it your intent at this point to maintain a fairly regular cadence or are you trying to approach this a little more opportunistically?

David, you sneaked in two questions.

I'll take the first one.

The first on the North American builder, two components, the demand and I know that has been some noise about the demand.

We continue to see strong, sustained demand on US housing.

I wouldn't see any sign which makes us change our opinion compared to what we said several quarters ago.

To put that clearly, housing starts, we still expect $1.1 million for this year and next year you can probably put us somewhere between $1.3 million, $1.4 million, in that ballpark.

So we sustained or even stronger demand driven by household formation and increased consumer confidence.

Marc, can you remind us what that represents as a percentage of your North American business?

Again, I'm careful about jotting down numbers because you have two parts of the builder business.

You have a (inaudible) builder business, which we do have a national contract.

And of course you have a lot of small builder business, which typically flows through Home Depot or Lowes.

So you have two components, but it is a healthy component of our North American business.

Having said that, in that channel, as you know we made over our three or four years, I would say substantial market share improvements.

And we are certain (inaudible) builder business where we know the contracts that are stable to slightly increasing.

We are very satisfied and very bullish going forward on the North American builder business.

Share repurchase or capital allocation, David.

We want to continue to apply the same methodology we have over the last several years as far as funding the business.

We do have a debt to cap ratio, which we stated 1 to 1.5 times.

We're at well above that with the acquisitions.

We have repurchased over $1 billion of stock over the last several years.

We've recently increased the dividend and as we've shown you again, we opportunistically taken advantage of M&A.

We're not going to give you a target or what we will be repurchasing, but we will balance all of those elements in going forward.

Thank you, David and thank you, everyone.

We look forward to talking to you in October.

Thank you very much.

Thank you.

This does conclude today's conference.

You may disconnect at any time and have a great day.