惠而浦 (WHR) 2017 Q2 法說會逐字稿

Good morning and welcome to Whirlpool Corporation's Second Quarter 2017 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, Max Tunnicliff.

Thank you, and good morning.

Welcome to our second quarter 2017 conference call.

Joining me today are Jeff Fettig, our Chairman and Chief Executive Officer; Marc Bitzer, our President and Chief Operating Officer; and Jim Peters, our Chief Financial Officer.

Our remarks today track with the presentation available on the investors section of our website at whirlpool.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 these statements due to many factors discussed in our latest 10-K and our other periodic reports as well as on Slide 2 of the presentation.

Turning to Slide 3. 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 supplemental information package posted on the Investor Relations section of our website for the reconciliation of non-GAAP items to the most directly comparable GAAP measures.

(Operator Instructions)

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

Good morning, everyone, and thank you for joining us today.

As you saw in our press release, we delivered very strong revenue and margin performance in our North America and Latin America regions, despite the impact of higher raw material cost, which did negatively impact our second quarter results.

We also delivered sequential operating margins improvement in Europe and overall, we did make good progress in Europe on our supply chain initiatives, which resulted in improved availability.

At the end of the second quarter, our free cash flow increased by nearly $200 million compared to last year, and we are on track to deliver our full year free cash flow goal of $1 billion.

This strong level of cash flow generation allows us to continue executing our balanced capital allocation strategy and effectively returning cash to shareholders in the form of dividends and share repurchases.

During the quarter we repurchased $200 million share of common stock, bringing our year-to-date total to $350 million.

We also paid an increased quarterly dividend of $1.10 per share.

Overall, our strong confidence in our cash generation has enabled us to announce a new $2 billion share repurchase authorization, which brings our current total authorization to $2.35 billion.

This increased authorization gives us ample flexibility to effectively execute our balanced capital allocation plans and continue effectively returning cash to shareholders.

On Slide 6, we show our second quarter financial results, where we delivered revenue growth of 3%, ongoing earnings per share of $3.35 a share and a free cash flow improvement of more than $190 million.

We have seen cost increases on key raw materials, primary steel and resins, across the globe during the first 6 months of the year.

In North America and Latin America, we've been able to more than offset these headwinds with favorable demand and productivity gains.

In Europe and Asia, however,, weaker market demand has made it more challenging to offset this during the first half.

So I'll turn to Slide 7, where we show our 2017 updated guidance.

Again, our free cash flow guidance of $1 billion has not changed.

We have updated our 2017 earnings per share guidance to reflect the impact of the expected raw material inflation.

So overall, we now expect to deliver ongoing earnings per share of $14.50 to $15 a share.

Turning to Slide 8, you'll see that our priorities for the year have not changed.

We remain focused on realizing the benefits of our integration activities in Europe, and we do expect to deliver sequential margin improvement in the third and fourth quarters.

We also continue to expect to drive growth at or above industry levels in both the U.S. and Brazil, and again our focus remains on delivering substantial free cash flow improvements for the year ahead.

So with that, I'm going to turn it over to Marc to talk about our global operations.

Thanks, Jeff and good morning, everyone.

On Slide 10, we will review the second quarter performance of our North American region.

Net sales were $3 billion, an increase of more than 8% versus the prior year.

Excluding the impact of currencies, revenues grew 9%.

This growth was driven by a combination of continued industry growth and another quarter of market share gains.

We gained nearly 1 point of market share as we continued to see consumer demand for our leading brands outpacing the industry.

In addition to strong unit volume growth in our core business, we also delivered very strong adjacent business growth, particularly in our kitchen and small domestic business through new product introductions and share gains.

We reported very strong margin of 11.8% for the quarter, fully in line with our full year guidance as we realized the benefit of double-digit unit volume growth and continued cost productivity.

Compared to the prior year, margins were impacted by elevated raw material inflation of more than $40 million as well as $10 million of unfavorable currency.

In summary, we were very pleased with our second quarter operating performance in North America.

Turning to Slide 11, we show our expectations and operation priorities for North America.

We continue to expect industry growth of 4% to 6% for the full year behind strong trends in housing, low unemployment and real wage growth.

The industry grew more than 5% in the second quarter and has now grown 4% for the first half, in line with our expectations.

As we have done in each for the first 2 quarters of this year, we expect to grow at or above industry levels, while driving strong levels of cost productivity.

We continue to believe that we're well positioned to deliver our full year margin growth of 11.5% to 12%.

On Slide 12, we will review the second quarter results for our Europe, Middle East and Africa regions.

Revenue was approximately $1.2 billion, down 5% versus the prior year excluding the impact of currency.

The sales decline was largely impacted by continued demand weakness in the U.K. which was partially offset by growth in Russia.

We delivered sequential operating margin improvement of $17 million as we realized the benefits of improved system stabilization and product availability compared to the first quarter.

Compared to the prior year, our operating margins were negatively impacted by approximately $25 million of raw material inflation and approximately $10 million of unfavorable currency impacts.

Turning to Slide 13, we summarize our priorities and expectations for the EMEA region.

We improved system stabilization in the second quarter and remain focused on further improvements across the region this year.

As a result, product availability has improved compared to the first quarter and we expect to continue driving improvements through our supply chain initiatives.

We continue to expect 0% to 2% industry growth in 2017 as growth in Russia and Eastern Europe is expected to be offset by weakness in the U.K. Based on current market rates, we anticipate continued margin impact from currency weakness in the U.K.

We will continue to reduce inventories, which as a result of product transitions, have been slightly elevated.

Our accelerated inventory reduction, combined with competitive intensity in the first half, is expected to drive a negative full year price mix impact compared to our prior regional guidance.

The raw material inflation is expected to remain stable in the second half.

In summary, we expect to deliver sequential improvement to operating margin in each of the next 2 quarters but the magnitude of improvement will be slightly less than previously expected.

We now expect to deliver operating margins of approximately 4% in the second half and approximately 2% for the full year.

I will now discuss our Latin America results in Slide 14.

Sales for the quarter were $848 million, an increase of 3% versus the prior year.

Excluding the impact of currencies, revenue decreased 1%.

Operating profit was $59 million and margin increased 90 basis points versus the prior year.

Similar to the first quarter, the external environment continued to be challenging.

We saw further industry declines, and raw material inflation had a negative impact of approximately $25 million.

However, we were able to expand margins through strong operational performance as we continued to deliver cost productivity and positive price mix.

On Slide 15, our 2017 priorities and expectations for Latin America are unchanged.

We continue to expect industry demand for the full year to be flat, with first half decline to be offset by flat demand in the third quarter and solid growth in the fourth quarter.

We expect to deliver revenue growth and margin expansion for the full year from a continued benefit of brand investments and new product introductions, while remaining focused on strong levels of cost takeout to offset raw material inflation.

In total, we continue to expect to deliver 8% to 9% operating margin for the full year.

We now turn to our second quarter results for the Asia region, which are shown on Slide 16.

Net sales were $358 million versus $363 million in the prior year period.

Excluding the impact of currency, sales were flat.

Our ongoing operating profit was $8 million and ongoing operating margins were approximately 2%.

We delivered exceptional performance across all key measures in India, and have continued to see strong demand growth and favorable economic trends in that country.

In China, the operating environment continued to be challenging in the second quarter.

Raw material inflation for the region negatively impacted margins by approximately $20 million.

We also saw high single-digit industry declines, which contributed to elevated competitive pressure and drove unfavorable price mix in China.

As you saw in our press release, during the quarter, we recorded an adjustment in our China business, primarily related to the trade promotion accruals from prior periods.

The impact of this adjustment on GAAP operating profit for our China business was $40 million.

Turning to Slide 17, you will see our 2017 priorities for Asia.

We continue to expect flat to 2% industry growth for the region, with strong demand in India offset by industry weakness in China.

We expect raw material inflation in China to continue in the second half.

We implemented the previously announced cost-based price increase and we are expanding our Whirlpool brand distribution for large retailer.

And we are introducing a new lineup of cooking products.

As a result of these actions, we expect to improve price mix by the end of the year, but the full year margin impact will still be negative.

We now expect to deliver 3% to 4% ongoing operating margins for the year.

Turning to Slide 18, we highlight our first half versus second half operating margin improvement drivers.

In the second half, we expect to deliver margin benefits in all regions from cost productivity and seasonally driven volume leverage.

We also expect less raw material inflation globally compared to the first half.

In North America, we expect growth in our business to continue positively impacting our margins, and we expect further price mix benefits from the upcoming global launch of our Whirlpool brand kitchen suite.

In Europe we expect to benefit from our simplified brand portfolio and further improvements to product availability as I discussed earlier and drive approximately 4% margin in the second half.

In Latin America, we expect to continue our margin improvement trajectory and we expect to benefit from positive demand in the fourth quarter.

Finally, we expect to improve Asia margin sequentially through the price mix actions I discussed earlier.

On Slide 19, we summarize our region margin guidance goals for the full year.

We continue to expect strong margin in North America and Latin America, and we will deliver sequential margin improvement in Europe and Asia in the second half through our targeted actions, but full year margins are reduced due to raw material inflation price mix.

Now I'd like to turn it over to Jim.

Thanks, Marc and good morning, everyone.

Turning to our second quarter results on Slide 21.

Net sales were $5.3 billion and grew 3.3% versus the prior year, in line with both our full year and long-term revenue growth expectations of 3% to 5%.

Ongoing EBIT margins declined as strong cost takeout and revenue growth were more than offset by approximately $110 million of elevated raw material inflation and unfavorable price mix, primarily in EMEA and China compared to the prior year.

Currency impact to EBIT was approximately flat in the quarter as the Mexican peso and British pound weakness offset Russian ruble and Brazilian real favorability.

Also on a GAAP basis, earnings per share were negatively impacted by approximately $90 million in tax expenses compared to the prior year period, due to the timing of our tax planning activities in the prior year.

We continue to expect a full year effective tax rate of approximately 20%.

Turning to Slide 22, I will update our expectations for 2017 EBIT margin drivers.

We are now expecting slightly higher negative price mix for the full year.

We have experienced negative price mix during the first half of the year in EMEA and China, which we expect to partially offset in the second half of the year.

We also now expect slightly higher raw material inflation for the full year.

However, we continue to expect that our strong cost productivity and restructuring programs will deliver net benefits to our earnings.

And we are reducing our forecast for the impact of marketing technology and product investments.

We continue to expect the impact of currency to be flat for the full year.

As a result, we now expect our EBIT margin to be flat for the full year.

On Slide 23, we update our expectations for total cost takeout in 2017.

Through the second quarter, we have delivered approximately half of our full year cost takeout goal.

We now expect $350 million of raw material cost inflation for the full year, with the majority of this impact having already been absorbed in the first half.

We continue to expect approximately $475 million of gross cost takeout for the year.

I will provide a few additional details on these productivity initiatives.

Our complexity reduction initiatives are ongoing, including reducing the number of global product platforms, streamlining our brand portfolio and reducing our SKU count in Europe by more than 40%.

As a result, we are improving our supply chain efficiency, inventory positions and ability to realize the purchasing benefits of our industry-leading scale.

We also continue to focus on minimizing raw material cost volatility through supplier contracts and commodity hedging.

On Slide 24, we show our updated full year guidance for 2017.

We continue to expect to deliver approximately $1 billion of free cash flow and our first half free cash flow improvement of almost $200 million has us on track to delivering that goal.

As Jeff discussed earlier, we are adjusting our full year ongoing earnings guidance to a range of $14.50 to $15 per share, to primarily reflect the lower than expected price mix and increased raw material inflation.

On Slide 25, we provide an update on our cash flow and capital allocation priorities.

During the quarter, we repurchased $200 million of common stock, bringing our year-to-date total to $350 million.

Given our confidence in our cash flow generation, yesterday we announced a new $2 billion share repurchase authorization.

This brings our total available authorization to $2.35 billion.

We remain committed to returning cash to shareholders, consistent with our balanced approach to capital allocation.

Turning to Slide 26, we updated our full year free cash flow improvement drivers.

Overall, we are on track to deliver $1 billion for the full year.

We now expect to deliver cash earnings growth of approximately $150 million.

We continue to expect to generate approximately $250 million in free cash flow through our strong focus on improving working capital efficiency, primarily in Europe and North America; and we expect capital expenditures to be $650 million to $700 million, approximately $25 million more than the prior year.

Turning to Slide 27, we remain committed to our balanced capital allocation strategy.

We are on track to be at our targeted capital structure.

We raised our dividend earlier this year to $1.10 per share, and we intend to continue repurchasing shares throughout the rest of the year.

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

Thank you, Jim.

I'll turn to Slide 29.

Let me start by saying we are confident that we will make meaningful progress towards each of our value creation goals this year.

Year-to-date, our revenue growth of 3% is in line with our long-term annual growth target of 3% to 5%.

We have very strong actions in place to enable and deliver the second half EBIT margin expansion.

And we fully continue to expect strong free cash flow generation, in delivering 5% to 6% of net sales by 2018.

On Slide 30, I would just summarize the key messages from our call today.

Our North America and Latin America regions continue to perform very well.

We do expect revenue growth and margin expansion in both of the regions for the full year.

In Europe, despite some challenges that we faced, we delivered sequential operating margin improvements and we believe that our growth, price mix and productivity actions will deliver improved EBIT margins in the second half of the year.

As a result of our strong first half cash improvement, we will remain very confident that we'll deliver our $1 billion of free cash flow this year.

More importantly, because of our confidence in ongoing future cash generation, our board has announced a new $2 billion share repurchase authorization, bringing our total authorization to $2.35 billion, which represents more than 15% of our current market capitalization.

And we plan to use this authorization to continue repurchasing shares throughout the year.

Finally, I'd like to comment on the important succession news, which we announced last month.

As part of our ongoing executive succession process, which is driven and overseen by our board, we announced that I will step down as CEO on October 1 and that our board has elected Marc Bitzer as our new CEO, the eighth in our 106-year history.

I would just say that I and our board could not be more pleased about these succession changes, and we are very confident in Marc and in our entire executive team, that they will do a great job in leading our company in the future.

And I'm very confident that we'll have a very exciting and value creating future under Marc's terrific leadership.

So for me, after 5 years of being President and Chief Operating Officer, and 13 years as CEO, that translates into 72 quarterly earnings calls.

And this is -- so this will be my last one.

And beginning in October, we'll turn this over to Marc and Jim.

So I would like to take this opportunity to thank all of you for your support and confidence and investing in our company.

And I look forward to the great future for Whirlpool under Marc's leadership.

So with that, I'd like to end our formal remarks and then open it up for questions.

(Operator Instructions) We'll take our first question from Robert Wetenhall of RBC Capital Markets.

Jeff, congratulations on a fantastic career and a great tenure, you're leaving the company in better shape than you found it and done a lot to grow it.

And Marc, you got some big shoes to fill.

Thanks, Bob.

Thank you, Bob.

So for my first question, I want -- I'd like to understand how you can bridge from this quarter and current trends you're seeing in the market towards reaching your long-term financial targets.

And Marc, I was hoping you can step me through your action plan to address price mix issues that you're seeing in Europe and Asia?

So Bob, it's Marc, let me kind of -- particularly talk about the long-term guidance.

Let me start region by region.

North America, as Jeff pointed out, we're in a very good shape.

I think Q2 shaped up very well.

As you've seen on my Slide 18, our guidance for the second half margin is around 12%, which gets us very close to the margin targets, which we communicated in the investor call, i.e.

the 12%-plus.

So I think our fundamental view on the long-term dynamics of the North America market have not changed.

If at all, I think with Q2 and what we see as current trends, just reconfirm our kind of bullish view on the long-term trends in the North American market.

And I would say, by any definition, we're performing very strong.

On Europe, again, we -- our recovery and the sequential recovery is there, but very frankly, it's in Q2 been slightly slower than when we're expecting, and in Q3 it's also slightly slower than we expected originally, but it's there.

So we're kind of the exiting margins in Europe, we would say is around 4%.

That does not change our 8%-plus long-term target for Europe.

And again that is more result of -- the outcome of that transition will be a very, very strong cost platform in Europe, and coupled with a very powerful brand portfolio.

It's the integration process which we go through so it doesn't change our long-term expectations in Europe.

And you also know, kind of, we're kind of through the currency, kind of cycles in Europe, so at least that seems to be stable.

Latin America, if at all versus Investor Day, I would be even more bullish, as evidenced in Q1 and Q2, we have very strong operating margins on an EBIT level and ongoing level.

But even more so, internally on what we call the gross margin per product, which are very healthy.

So once the volume comes, and it will come, our Latin America outlook is a very positive one and I have no question and no doubt behind the long-term targets.

Also same is true for Asia.

India, as you can evidence by -- in Q2 and Q1, is in a very strong position.

Our brands are in very strong position and we are, if at all, even more bullish about the long-term prospect of the Indian market.

China is still going through rough waters, I mean the industry has been down minus 9%, year-to-date.

Given the size of the China market, can that continue forever, when you talk about our strategic horizon?

It's unlikely, but we're kind of -- for this year, '17, we are not overly bullish on the China market.

Having said that, the market is still big.

The penetration growth is still there, particularly outside refrigeration and washer and you're also getting -- starting to get into replacement cycle.

So it's unlikely that these market trends continue, we obviously have also our own homework to do in terms of how we mitigate raw material trends with price-mix actions.

I call that more an execution as opposed to a strategic challenge.

So as such our long-term perspective on where we expect the Asian margins to come up, has not changed versus Investor Day.

That's helpful.

Thank you for the detail geographically on the segments.

Switching gears a bit.

I wanted to ask at a high-level, what's the potential impact of Amazon's decision to sell Kenmore products on the North American pricing environment?

And how do you see this affecting industry profitability in the next 2 to 5 years?

Bob, let me take this one, and then maybe also Jeff can also add his perspective.

As you know the Kenmore brand is owned by Sears and as such it's their decision kind of where the brand is being sold.

So in a very short term, and I know there has been some reports and comments on this one, in the short term, given that we produce Kenmore and has -- still have a very significant OEM Kenmore business, there is certainly not a negative impact on us, if at all, neutral to even slightly positive.

In the long-term strategically, I think many things have to be seen.

I mean obviously, it needs to see how strong the sell-through is on this one.

And to what extent it can mitigate the inherent Sears decline.

So I would say from a long-term, a lot has yet to be seen, probably in the second half in terms of how much pickup they actually get.

I would say it's an interesting development.

I would not at all see this as a negative development for Whirlpool.

Yes, Bob this is Jeff, I would absolutely Marc -- would completely agree with Marc.

Short to mid-term, I don't see any good or bad impact for us.

Our position is and always has been, we're going to be where customers want to shop.

And we're doing that today with the trade partners we deal with.

We support their online activities.

Our job is to have great brands, great products and deliver them.

Now the second part of this, is what's it do with the industry profitability, I think we demonstrated over the long periods of time, that no matter what the model to the consumer is, that we are appropriately represented in the value chain.

And I -- consumers will decide how big or how little this is.

We will make decisions to make sure we are appropriately represented in the value chain.

We'll take our next question from Sam Darkatsh of Raymond James.

Jeff, again best wishes for your next chapter of your life.

And it's been a pleasure dealing with you for all these years.

And Marc also, congratulations.

Well-deserved, naming to the new post for you.

Thank you, Sam.

Thank you, Sam.

Two questions if I could.

The spending cut for the marketing and technology initiatives, it was an eyebrow raiser for me.

Where specifically is that?

Why the decision to do so particularly to such a significant degree?

And does this potentially jeopardize the Whirlpool brand launch in the back half of this year?

Sam, I can take this one.

First of all, I know on the surface as you compare it to varying slides it looks like a big number.

But let me give you a little bit more detail.

One part of the brand, there's a certain timing issue in terms of how much of a brand investment fall into Q4 versus Q1.

That is something to do with launch timing.

Year-over-year, our brand investments, our pure brand investments will still be up as a company.

So we of course continue to stick to our commitment to strengthen the brand.

The one part, it's more timing between Q4 and Q1.

The other part is -- in Medline [there's also] technology investments.

We -- one initiative, which we didn't to talk too much about, is we have reconfigured our entire product development cycle, from which with the same or better outputs we actually have reduced engineering and capital expenditures.

So that is actually a good thing, so in a certain way we get more for less.

We didn't talk too much about it.

But that's also behind this one.

And frankly that is very well on track, and that's why we feel confident that with even increased output from product development, we don't have to invest exactly the same dollars.

And then, the final question I would have, can you help quantify the efforts to clean out -- to clear out the inventory in the U.K. Can you help quantify what the impact is on margins, both in the second quarter and the back half?

I'm trying to parse that out separately from what's happening in the legacy business.

And Sam, just to first of all, to clarify, again it's Marc.

It's not just U.K., it's on the European level.

As we explained in Q1 and also Investor Day, as part of integration, we offered initially 12,000 SKUs, we're bringing that down to 5,500 or 6,000 SKUs and we basically had to change about 90% of the SKUs.

As we go through that change process in a very short time period, no matter how well you plan your production plans, you have by definition obsolete inventory, just by definition.

So it's not misplanned, it's just by definition.

And given that we don't want to carry the inventory too long and also with our strong focus on cash flow, frankly internally we put a lot of pressure on the European team to kind of sell that out as quickly as possible.

So yes, it impacted the first half in margins.

And it will also impact the second half to a slightly lesser extent because we already -- we burned through a lot of that obsolete inventory.

I can't give you the precise number but I think, just the pure impact of burning through that inventory, probably first half was about $10 million or more in terms of margin impact.

We'll take our next question from Sam Eisner of Goldman Sachs.

Jeff, great working with you.

Congrats, look forward to the next step.

And Marc, looking forward to working with you as well.

So on North America, volume growth has been pretty strong in excess of obviously the industry data and it seems like you, as you commented, you guys have been gaining share.

Can you talk specifically about either who that share is coming from or how you're going about gaining share?

Should we expect that the share gains lessen in the back half of the year as the Koreans actually have product that they're able to bring into the market after their product transition or their facility transitions?

So I just want to better understand where the drivers of your ability to see such high-volume levels?

Sam, it's Marc.

Let me actually first start with our usual boilerplate answer.

But industry sales in-growth is not exactly comparable to the sell-out in our overall unit numbers.

I mean we say that when our market share is not so favorable, and we say that also when our market share is favorable.

And what I mean is that, we are internally more focused on the sell-out and we're also internally more focused on the entire quality trough sell-out.

Having said that, we feel very good about where we are in the sell-out number, as also is reflected in the sell-in market share gains.

There is no one single product category which would stand out from a market share.

But frankly, compared -- and that's probably the biggest change for 2016, we regained some share also in laundry.

Our laundry business, as you know, was under pressure, was injured by foreign imports.

We see their supply chain challenges and we also see maybe some results of early antidumping actions and the announcement.

But I also want to clarify, it is absolutely not only constrained or contained to the laundry category, it's across the board.

We're very pleased with our refrigeration and cooking products.

And we're very bullish about the Whirlpool brand suite, which comes in Q4.

I'd only add to that is it's -- our brand portfolio is really delivering.

Again, Maytag and KitchenAid are the fastest growing scoring brands in the market, and Whirlpool continues to be the largest.

And so that coupled with great products, to Marc's point, it's spread across our entire business.

All right.

And then maybe just on Asia, given the profit weakness there, Marc you commented that there was elevated competitive pressures and recognizing that margins are going to be down in the second half versus the first half and you commented that in the long term, you expect to get back some of -- some long-term average.

But trying to understand what "long-term" means and how long these competitive pressures are going to -- to last for you guys?

Because it's a pretty sizable reversal in that segment.

Sam, and again first of all, in Asia, as I explained in our Investor Call, Asia is largely India and China.

So to simplify yes, there's also some other business in there, but it's largely Asia and China -- India and China.

India had a very strong Q2 and India where -- as I said before, we're very bullish about the long-term trends and our market share gains.

China, was a combination of I would say actually 3 elements: one is the industry decline, which was minus 9% on the T2 until May.

It's hard to read what will happen in the back half, but I would not expect industry growth on a full year basis China and that's also what is embedded in our guidance, so it's probably depressed on a full year basis.

Then you have the other element, which is raw material.

Maybe not in absolute dollar numbers, but as a percentage of sales, we had the biggest impact of raw materials in China.

That is partially due to the more short-term nature of raw material swings in China compared to other regions.

So we saw a huge increase in RMI in Q1 and partially Q2 and right now there is -- I would say, there is uncertainty about our RMI.

That's the one thing.

And the other thing is we have not been able to mitigate that through pricing actions.

We have implemented something now, we announced it.

But frankly in the first half the traction was below where we should be given the raw material trends.

So I would say that's the China situation.

Now the question is to what extent can we address it?

We have announced a price increase we're driving hard to kind of make sure that this price increase which we already announced finds good traction in the marketplace.

On the raw materials, probably as we are going towards the end of year, we expect more stabilization, but we expect it still to be slightly elevated in Q3.

The early signs point to more normalization in Q4.

So I would say as we enter 2018, we should see more -- margin run rates for Asia in total, which were -- getting closer and more on track versus our long-term margin goals there.

Our next question is from Michael Rehaut of JPMorgan.

I'd also like to add my congrats to Jeff and Marc.

Well done, on both accounts.

Thanks, Mike.

My first question is on Europe.

Obviously you had great success in North America and there's been different structural problems there over the years and you've been able to, amidst a lot of, let's say, at points, structural industry challenges in North America, given some of the competition, you been able to turn that into a very profitable business over time.

So when you think about Europe, you made the acquisition and very quickly as things were doing well, you got that line of sight to an 8% margin.

Obviously there's a lot of challenges right now.

I was hoping you could kind of walk me through what gets you from flat in the second quarter to up 4% margin in the back half?

And then going from the back half of 4%, what's the path to 8%?

It's Marc.

First on the European margin, again first of all, keep in mind, we were already last year more on 3% or 4% margin levels.

So it's not -- we're not talking about levels which we have not already achieved post integration.

Q1 and Q2 were significantly impacted by the cumulative effect of a number of integration complexities, largely driven by the SAP introduction, and I think we explained that in Q1 and the earnings call.

So I would say a big part of the second half improvement is just the absence of system and availability issues, which we encountered in the first half.

So as such, I wouldn't describe the back half margin as spectacular because that's pretty much the run rate which we had last year.

Then we had already the impact of the currency of U.K. already in the numbers.

So the year-over-year comparison is -- from back half is not so completely different from last year.

So again, it's the system stabilization around product availability, which we know is every month, going better.

I also indicated during the investor meeting that we had a very important go live in Poland in July, that went successful.

So we know that's largely behind us.

So that makes a big difference.

On top of that, we see kind of every month, we see continued progress on price margin, on a full year basis, it will still be down, and that's what we indicated.

On a sequential basis, we're getting better on this one.

So I would say the combination of more solid top line, not growth, but a solid top line, better margin realization and frankly, also continued progress on cost productivity, that gives us some confidence about the back half margins.

Okay.

And then -- I appreciate that Marc.

And I guess, that kind of gets you to the back half margins.

And I'm just curious about the path to 8%.

But the second question, also you talked about, I believe earlier on, different actions you're trying to take to offset the raw materials.

At the same time I think, you reiterated your total cost takeout.

So -- and it looks like the other big movement here is price mix obviously, in China and Europe.

So what kind of gets you back -- are there actions that you're taking in the back half of the year so that perhaps going into 2018, that price mix would then get back to even to slightly positive, potentially?

I noticed you're taking some price actions in China.

But just trying to get a sense of kind of as you look at kind of the incremental challenges here that you're facing, what gets you back to, let's say, neutral or positive as you go into 2018?

So Mike, given that I think your question was referring to the global perspective on these questions.

So first of all let me talk on the cost side.

As Jim also indicated earlier, our gross cost takeout is $475 million, that is consistent with Investor Day, which is for $400 million on, kind of ongoing costs and $75 million on restructuring benefits.

So that is unchanged, which is on a high-level and I would also describe it consistent with our Investor Day.

That is the kind -- these are the kind of levels plus/minus what you should expect from us in an ongoing basis.

The $350 million raw material, as you also know, beginning of the year we started $150 million then we felt it's more like $300 million-plus and now it's $350 million.

If you compare it to our internal forecasts, which of course, we get every couple of weeks, it's now pretty stable.

So I would not expect that to change the full year outlook.

What Jim also indicated and if you do the math, we -- of the $350 million, $210 million is already behind us, roughly $210 million.

So we see that pressure becoming a less and less which of the kind of takes some pressure of the margin away.

You also need to always keep in mind our typical ongoing cost productivity builds through the year.

So raw materials will be less impactful and the cost productivity builds better on its own to drive something off as you go into next year.

Having said that, on the price mix and that -- as we indicated in the script, on Europe and Asia in particular, we still have homework to be done on price mix.

We initiated actions.

I have a approved price increase, which we already announced in China and in addition actions in Europe.

These are particular 2 areas, where we still have work in front us on the price mix and we're very committed to this one.

And I would say you will see that coming through in the second half.

And as we enter the next year, we should have a pretty good run rate on that.

Michael, this is Jeff.

I would just add to that, because -- to Marc's point, we expect to move from what I would call operationally challenged issues which negatively impacted our business to more of a stabilization in the second half, which ought to give us about a 4% run rate return.

Going in -- your question about 2018, I would say very simply, again, we've got to assess the environment and all that kind of stuff.

But the absence of the obsolescence that we're having to clear out, which will be largely done, moving back to what I call a normal full availability, there's no question we think this is going to drive grow in mix on a year-over-year basis, because we'll move from these integration issues, operationally challenging this, to a more normal environment that we're used to operating in.

So I think the big lever you'll see going into next year is growth in mix.

Our next question is from David MacGregor of Longbow Research.

Jeff, it's been a pleasure working with you.

Congratulations on your retirement.

Hope a lot of good things coming your way, still.

Thank you, David.

Can you talk about Latin America, and one thing that was kind of interesting was the observation that 3Q will be flat before getting to a better 4Q.

Maybe just elaborate a little bit around the extent to which that may be a function of compares versus things that you see unfolding in the market.

And just trying to get a general sense as well, you were talking about positive pricing in that market.

I know there's been a number of price initiatives down there.

But as the market recovers and foreign exchange begins to come back into balance, does the pricing power down there begin to fade?

Can you just talk about a couple of those things and then I have a follow-up.

David, let me take this one and maybe Jeff's going to add also some comments on this one.

So first of all, and I know there's a lot of noise about Latin American market demand, et cetera.

We think we have a pretty good perspective in particular on the Brazilian market and as you know, also in some other markets in that environment.

Brazil, we are confident on the full year flat base.

Having said that, as I indicated, that implies Q3 flat and Q4 up on a significant basis.

To be very transparent, Brazil is a very volatile and erratic market, so we even in our past numbers, we had 1 week, one direction, the other week, the other direction.

There's a lot of, as you know, political noise, headlines which immediately impact consumer demand.

So there is uncertainty associated with the demand guidance.

But to the best of our knowledge, we would still expect a flat on this year.

But what I would rather want to point out, and it doesn't -- you may not see it fully in the numbers, the structural health of our Latin American business is very impressive.

Now of course on the top line, given the currencies and volume demand, it is still way off the 2014 numbers.

The one number which we typically don't show externally is what we call the variable product cost of product margin, which is actually embedded in the 2014 level.

So we are sitting -- or we are faced with a very, very healthy P&L.

Once the volume comes, we will have a very nice and attractive leverage.

David, I'd add to Marc's comments.

We do believe we're bouncing -- starting to bounce along in the bottom, which is somewhat difficult to see until you start looking backwards.

But it feels like we're bouncing at the bottom, so we see some of these monthly gyrations, which is far from a recovery.

But to Marc's point, and again relating back to the Investor Day, we've been through these emerging market trends, in the case of Latin America, for 60 years.

We have never been in a better position from a market share, margin, fixed cost structure, product innovation in the marketplace, to come out of this recession stronger than we've ever before, than any other recession I've seen.

So it's -- it's certainly challenging, and until you start seeing demand going back up, we think we're getting closer and closer to that.

But we won't know until we see it.

But I would say given that, we're really happy with where our business is, our position is and where our margins are.

As a follow-up if I could.

I wanted to ask you about European business.

And particularly thinking back to the Indesit days, they generated the majority of their EBIT from the U.K. and Russia.

Can you talk a little bit about what you're seeing in your Russian business right now and the extent to which, similar to your comments on Brazil, do you feel that market has bottomed and we're in a recovery mode?

And so what should we be thinking about in terms of the incremental EBIT contribution that's achievable in the European business through that part of it?

David, it's Marc.

First of all, you're correct.

Your observation is very right.

Indesit has very significant amount of their profits tied -- driven by U.K. and Russia.

I think in the last earnings call, I also made reference to that even in 2015 or kind of year-over-year in '16, on a full year basis, our U.K. profits were in the ballpark of $90 million to $100 million.

That is certainly not the case and a very significant portion of that is -- has been eradicated in a certain way.

We're slowly starting to claw that back.

But it's lower frankly than we originally were expecting.

Part of that is the difficulty of getting the traction for price increase in U.K. But we're making still progress.

So first in U.K., I would still give it some time until we see that level of profitability back in the business.

The encouraging thing is we see now our market shares being back to pre-Brexit, which were significantly impacted, after we end up with price increases.

So it's starting to stabilize.

But that's not a short-term full recovery U.K. Russia is a more -- how do I phrase it -- more short-cycled market i.e.

have more rapid swings, up and down in the market demand.

We were very pleased with the Russian recovery of the market demand first half.

And also a stabilization of the currency.

There's a little noise right now because the ruble now starts moving in the other direction again, but these are the kind of, I would say, swings which we should always expect from Russia.

Having said that, Russia is, I would say, on the path of full recovery.

I would also clarify in the '17 guidance, we have not baked in a lot of optimism on either U.K. and Russia.

I think this is more on the strategic horizon but not on the '17 guidance.

David, I'd only add to that, on Russia, obviously we have less time with that, as it's only been a market that's been open for -- a little over 20-some years.

But the trends in Russia are un-similar than Brazil in the sense that with every cycle, the recovery has been better than the previous high.

And we have no reason to believe that won't continue, that the 2 bigger -- to Marc's point, the bigger factors there that were -- that we watch obviously are the price of oil and the political factors.

But given all that, it is a recovery.

We have a very strong position, to Marc's point.

And we do believe that Russia -- or that market will recover as well.

But it's hard to pinpoint exactly when.

Our next question is from Curtis Nagle of Bank of America.

This is Jason Haas on for Curt Nagle.

I'd also like to add my congratulations to Marc and Jeff.

Thank you.

My question is focused on volumes in North America.

They came in a lot stronger than we had expected and also relative to the industry.

I know that it's not apples-to-apples with the AHAM data, but maybe you can help us bridge the gap for this quarter compared to the industry.

And then I also have a follow-up.

Jason, it's Marc.

First of all, the T6 industry AHAM in Q2 was 5.2%.

Obviously, our total volume growth was quite a bit above that.

Again, keep in mind, we have also Canada and Mexico in there, which we had in both countries actually pretty strong performance.

And we have obviously products out at T6 and we also have a kitchen and small domestic.

In my prepared remarks, I indicated that kitchen and small domestic had a very strong quarter.

So there is a significant volume portion also of that growth coming from the kitchen and SDA.

Having said that, even on a apples-to-apples comparison on the T6, our volume growth outpaced that 5.2%.

I would call it high single digits, without getting too much into details.

So we outperformed the market even in the core majors, and in addition we got tailwind from SDA, Canada, Mexico.

Thank you.

And then for my follow-up, could you give us an update on how, for the quarter, the retail versus the builder channels performed in North America?

Jason, again it's Marc.

It's -- a little bit back to comments which we made in a number of meetings, it's -- only one -- a portion of a builder channel is call -- is captured in the, call it, the national build, direct the business.

There's a big amount of builder business going through the home improvement channel.

So that's why when people refer to build, it goes typically -- it shows up in 2 different channels, the direct channel and the home improvement channel.

I would still argue that the total builder business is in line with market or slightly ahead of market.

And I know there's sometimes it's a bit of stop and go in the statistics about housing starts and existing home sales.

The long-term trends and even this year's trends were still pretty positive, and I say the builder market in total is ahead of the total AHAM shipments.

Our next question is from Susan Maklari of Credit Suisse.

I want to go back to sort of the Amazon Kenmore situation.

And just perhaps get a bit more color there.

Can you talk to the current magnitude of your online sales?

And maybe just give us some sense of your ability to operate within that kind of channel?

And with this announcement, have you seen any change in your appetite or the way that you're ultimately thinking about perhaps getting into this and selling more through this way to the consumer?

It's Marc.

Let me try to put it maybe in a global context also and then a little bit more North America.

The North America online market in appliances is a bit peculiar relative to the rest of the world.

I mean, rest of the world you have, in some parts of the world, fairly -- online transactions are actually higher than typically in North America.

Two, you have a lot more pure players on the online market.

That -- you see that very strongly in U.K., you see that in China, et cetera.

North America is the online transactions tend to be lower than the rest of the world.

And there's largely -- I would say, 95% today it's what we call bricks and clicks, i.e.

it's the existing trade partners who have successful online channels.

So call it, our online presence in the market is largely via the existing trade partners which we have, i.e.

it would be a Lowe's, Home Depot or Sears and other ones.

That's where our online presence is.

On majors -- the Whirlpool branded product are not sold in Amazon.

We do have a fairly sizable kitchen, it's more domestic business on the Amazon side.

That's to put it in a little bit context.

And that's why I also said earlier, Kenmore and Amazon is right now, I would say, is a neutral to even short-term slightly positive for us.

And I think it needs to be seen how that finds traction in the marketplace.

I think it's an interesting development.

And strategically, there could be an interesting aspect for us.

But again, it's too early to judge it yet.

Okay.

And so it sounds like you haven't really seen any response from your traditional kind of retail partners with this news.

They're continuing to partner with you and kind of work on their strategies.

Yes.

We haven't seen any abnormal reaction.

I mean as you know -- the U.S. retail market is a very competitive market.

Highly competitive, very efficient and strong players.

They have fairly strong online businesses so as such we haven't seen any changes, and frankly I don't expect a short-term change.

Our next question is from Ken Zener of KeyBanc.

Congratulations to both of you.

Thanks, Ken.

Thanks.

So can you talk to why raw material was so pronounced now versus 1Q?

And to prod you on, it sounds like it was actually more of an inability to get price versus actually a change in raw material cost.

So I kind of wanted to see if that's correct.

And can you discuss the contracts in China, why it wasn't more of an emerging market issue?

Dollar cost, the terms tend to be shorter.

But it seemed to be China, not other emerging markets.

And then in Europe, if it was mostly U.K, again dollar denominated, but it seems like it might be the absence of price realization.

So can you talk about that actual raw material increase versus 1Q?

Because it seemed to be really sharp in terms of happening very quickly this quarter as opposed to something rolling in.

And if it's really just that price mix issue versus the raw material inflation.

It's Marc.

I'm trying to -- I think you have multiple questions embedded in 1 question.

You're correct.

Let me try to sort it out.

Let me first talk about the raw materials in total and then specifically.

The raw materials as we indicated, we started the year thinking it would be around $150 million.

Then in the last earnings call, that's where we had to say $300 million plus.

And now we see kind of stabilizing around $350 million.

So that's pretty much where we are.

The big move in particular from $150 million to $300 million, largely came from the plastics, [polystyrene and polyethylene], et cetera, all these ones, which as I indicated in Q1, these are contracts which clients set up on a full year basis.

So these are typically quarterly or sometimes even spot contracts.

They're just more, much more exposed to short-term moves.

We also said we saw Q1 and to some extent, Q2 plastics prices, which were significantly elevated in the outset what you would expect from a normal demand supply in terms of if you look at input factors.

The reason why we see it now stabilizing is very honestly that the plastic prices have come down a lot in June, July and we see it pretty much hovering above a stable level, certainly not in an elevated level.

The other big component which is big in terms of magnitude but didn't cause a huge surprise is steel.

Steel we knew coming into the year, is elevated.

And therefore, particularly 2 factors were kind of on the high side of our original expedition.

One was China, because the China prices moved up very quickly.

And the other part was the North America steel prices, which -- and maybe there was a speculative element in there around the Section 232.

We clearly see the North America steel prices above where you would expect from a raw material input costs and the demand side.

And they're still on, what I would say, stubbornly high levels compared to the rest of the world in steel prices.

So you take these 2 factors together, that's why we can right now see the $350 million.

But frankly, the last weeks and for the last 2 months, we didn't see a big move in terms of our expectation.

Right now, it seems to be fairly stable overall.

So -- but I want to point out again is the majority of the raw material cost are already behind us.

The $210 million of the $350 million is behind us.

And in particular, as you get more to Q4, it gets to a more normal run rate.

Now to your other part of the question, yes, it is correct, we have not been able in some regions to fully offset and mitigate that through price mix.

That's what I communicated in the prepared script.

Particularly in Europe, it's both raw materials and still some currencies in U.K. and China, where we have not been able to fully mitigate it.

So we'll take one more question.

We'll take a question from Megan McGrath of MKM Partners.

Just a couple of quick ones here.

You mentioned the Whirlpool launch in the back half of the year.

So I wanted to get your -- any detail you can give us generally speaking on how we should think about the product launch cycle, maybe over the next, however you feel comfortable, 6 to 12 months?

And then Marc, the follow-up is, you sort of offhandedly mentioned possible progress in terms of the pricing environment, in terms of antidumping, maybe if you could give it a bit more color on that, that would be helpful.

Megan, it's Marc.

I mean, obviously, to give you a perspective about our product launch for the next 6 to 8 months, we would need more than the 2 minutes which we have left.

In the broader context, as we showed in the Investor Day, we have a very, very strong pipeline and we feel very good with the pipeline which we have.

The Whirlpool kitchen suite is a big deal, so it's -- yes, it's part of a normal product pipeline but as a single event, it's a significant one because it impacts all Whirlpool kitchen products.

It's a full suite which will be launched in the course of Q4 and Q1.

So that is a big deal, it also big deal because it's a, I would say, the first inroad into the mass IoT markets because we bring connected kitchen suites to the mass market.

So it's significant.

Again as we indicated, it's a Q4/Q1.

Obviously, as you roll out kitchen suites throughout the country, this is a big effort because you have to basically -- it's a significant install element also in there.

But as such, I mean you should also -- on a forward basis, this is not that our pipeline is dry afterwards.

We feel very good about what's coming in 2018 on refrigeration, there's a very significant front-load project for North America in 2018, so we feel very good about what we have in the pipeline.

So for that -- that's on this part.

And on trade, as we announced, I believe it was late May, we've been involved quite a bit particularly on washing machine dumping in the United States, where we've won the last 2 cases.

But the companies that are dumping keep moving production, calling it cross-country hopping.

We did file, under Section 201 of the Trade Act, what we call -- it's called a safeguard case, which is being worked with the ITC.

There's a timeline for that, which we expect to be -- have their final conclusion late in the fall.

And based on a positive outcome of that, that will go to the administration for a recommendation on how to address this.

So as I said then and I'll say now, we wouldn't have filed this if we weren't very positive about it.

The law absolutely supports what we're doing based on the facts and we're continuing to work the process.

So with that, again let me just sum up today.

Thank you for joining us.

Again some challenges in the first half of the year yet we're making great progress.

We do expect again to have another record year here at Whirlpool.

And we've got a number of activities going on, which we think will take place in the third and fourth quarter to get us back on track.

So with that, we're going to conclude the call.

Thank you for joining us and Marc and Jim will be here to talk to you next time.

Thank you.

Thank you.

Thank you.

This does conclude today's Whirlpool Corporation's Second Quarter 2017 Earnings Release Call.

You may now disconnect your lines, and everyone (inaudible).