惠而浦 (WHR) 2018 Q2 法說會逐字稿

Good morning, and welcome to Whirlpool Corporation's Second Quarter 2018 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.

Welcome to our second quarter 2018 conference call.

Joining me today are Marc Bitzer, our Chief Executive Officer; and Jim Peters, our Chief Financial Officer.

Our remarks today track with the presentation available on the Investors section of our website 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.

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 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) Following our prepared remarks, the call will be open for analyst questions.

(Operator Instructions)

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

Thanks, and good morning, everyone.

On Slide 3, we show our second quarter highlights.

As you saw on our press release, we expanded our ongoing EBIT margin in a very challenging cost environment.

We delivered second quarter ongoing EBIT margin of 6.7% and ongoing earnings per share of $3.20.

Since mid-May, a number of elements in the macro environment worsened significantly.

In addition to continued raw material inflation, we experienced a temporary but significant decline in U.S. industry demand, headwinds related to U.S. tariffs as well as the Brazilian trucker strike and currency fluctuations in Russia and Latin America.

While these macro challenges impacted our results negatively, the actions we put in place over the past few quarters, including cost-based price increases and targeted cost reduction throughout the world, enabled us to largely offset these challenges and expand ongoing EBIT margins year-over-year.

We're very pleased with strong price/mix, driving significant year-over-year and sequential improvement on a global basis and positive in all regions.

In Europe, we were unable to overcome macro headwinds due to slower progress than expected as we work to recover volumes in the region.

As a result, we are taking strong actions to restore growth and profitability in the region, which I will discuss in further detail later in the call.

We drove strong performance in our North American region, delivering almost 12% EBIT margin despite a 5% decline in second quarter industry demand, continued raw material inflation and rising freight costs.

As previously announced, during the quarter, we agreed to sell our Embraco compressor business, and in anticipation of the proceeds from that sale, we executed a tender offer during the quarter and repurchased approximately $1 billion of common stock.

GAAP results were negatively impacted in the second quarter by approximately $860 million due to asset impairment charges primarily related to our Europe results, which did not improve as anticipated, and a preliminary settlement on a previously disclosed French Competition Authority investigation.

Turning to Slide 4. I will discuss our second quarter results and 2018 guidance.

Our revenues declined approximately 4% during the quarter.

Sales were impacted by weaker-than-expected industry demand in the U.S., slow progress on volume recovery in Europe and the Brazilian trucker strike.

Ongoing EBIT margins were 6.7%, 20 basis points above the prior year, as strong global price/mix more than offset unit volume declines and significant cost inflation.

Year-to-date free cash flow is below the prior year, primarily driven by working capital timing related to lower production volumes.

Regarding our full year forecast, we reduced our guidance components due to weaker-than-expected second quarter results and increasing cost headwinds in the second half, which we now expect to be more significantly than previously forecasted.

We will discuss our guidance in more detail later in the call.

While our second quarter results were below our original expectations due to additional headwinds towards the end of the quarter, we are at the same time encouraged by the strong price/mix progress and margin expansion year-over-year.

This gives us the confidence that the underlying fundamentals of our global business are strong, and we, therefore, continue to expect to deliver significant shareholder value in the coming quarters.

On Slide 5, we show the drivers of our second quarter margin performance.

Our global price/mix improved both sequentially as well as year-over-year and was positive in all 4 regions.

I will discuss price/mix further on the next slide.

We delivered positive gross cost takeout as our restructuring and fixed cost reduction actions continued to progress.

However, these benefits were partially offset by rising freight costs, primarily in the U.S. and Brazil, due to oil price inflation and fleet shortages; as well as the conversion impact of short-term volume weakness in multiple regions.

Raw material inflation continued to be a significant year-over-year headwind, impacting second quarter margins by 125 base (sic) [basis] points.

Turning to Slide 6. We demonstrate our commitment to delivering significant price/mix performance.

In total, second quarter price/mix improved by approximately 200 base points compared to our prior year, and we delivered positive price/mix in all regions.

This represents a sequential improvement of 100 basis points as we continue to realize the benefits of global cost-based price increases implemented late last year and into the second quarter.

Average price per unit improved over 5% on a global basis, including a double-digit improvement in Europe and 8% improvement in North America.

Finally, we recently announced additional cost-based price increases in Canada and Latin America, which are effective during the third quarter.

Given the weak second quarter performance in Europe,

I'd like to discuss the Europe business in more detail on Slide 7. Over the past several quarters, challenges related to the Indesit integration, continued execution issues and changes in the macroeconomic environment have led to weak business performance.

During the integration, we experienced product availability issues as we completed factory, platform and system integration.

During the first half of 2018, trade customer negotiations which position us well for the future had a significant impact on volume, especially when combined with our implementation of cost-based price increases.

At the same time, our business continues to be impacted by raw material inflation and currency volatility in the region.

While these challenges have led to results well below our expectations, we continue to have confidence in our structural position in Europe.

The Indesit integration activities are now complete.

Our factories are optimized, platforms and systems are integrated and our streamlined brand portfolio is well positioned to build upon our leading positions in many European countries.

While we're encouraged by our structural position, we have made slower-than-expected progress to regain volumes in the region.

As a result, we have identified strong actions necessary to address disappointing execution and drive value creation.

While we were pleased with our progress in improving price/mix, including double-digit average price per unit improvement in the second quarter, we will now balance our efforts around stabilizing and recovering volume through targeted actions on a country-by-country basis.

We are also redefining our overall business strategy in the region to drive value creation, including a stronger focus on the profitable kitchen business, the implementation of additional opportunities for cost reduction and a focused portfolio optimization.

Finally, we're implementing broad leadership changes in the Europe region, including a change in the region president.

While our short-term focus in the second half is on restoring a breakeven business, we now expect to deliver roughly 4% to 5% margin by 2020, and in the long term, we continue to expect 8% margin in Europe.

With that, I'd like to turn it over to Jim to review our regional results.

Thanks, Marc, and good morning, everyone.

Turning to Slide 9, we review the second quarter results for our North America region.

We delivered strong margins demonstrating the fundamental strength of our North America business while overcoming significant external headwinds.

Net sales of $2.8 billion were impacted by soft unit volumes, primarily driven by weaker-than-expected industry demand in the U.S. We believe this current quarter weakness largely represents a volume shift between the first and second quarters related to competitor stockpiling of inventory to avoid the safeguard remedy on washers and cost-based price increases in laundry.

As we move into the second half, we believe that industry shipments will return to more normalized levels as the underlying drivers of the U.S. industry remain favorable.

Overall, we delivered strong 11.9% margins through significant price/mix improvement, which offset significant industry demand weakness, unfavorable conversion due to volume reductions and a $40 million impact from cost inflation.

We expect to continue benefiting from our previously announced price/mix actions in the second half as well as innovative new product launches and strong cost takeout programs.

Turning to Slide 10.

We review the second quarter results for our Europe, Middle East and Africa region.

Net sales were down 9% versus the prior year.

Ongoing EBIT margin declined versus the prior year as positive price/mix was more than offset by unit volume declines, significant raw material inflation and currency headwinds.

In total, the combination of raw material inflation and unfavorable currency impacted results by approximately $30 million or 300 basis points.

While we are pleased with double-digit improvement in our average price per unit and strong price/mix, we are not satisfied with our progress on recovering volume following the trade negotiations and private-label volume actions we took during the first quarter.

As a result, we are taking strong actions -- the strong actions Marc discussed earlier.

These actions are the right next steps for our business and will enable us to get back on track to our long-term goals for the region.

Turning to Slide 11.

We review the second quarter results for our Latin America region.

Net sales and EBIT were both down versus the prior year.

Our cost-based pricing actions continue to progress as we delivered positive price/mix in the quarter.

However, unit volumes declined versus the prior year primarily due to the Brazilian trucker strike, which impacted both our home appliance and compressor businesses in Brazil.

In total, the strike unfavorably impacted volumes by approximately 300,000 units and EBIT by approximately $20 million.

Due to the timing and scope of the trucker strike, we were unable to recover the volumes in the quarter, but we do expect some recovery in the second half of the year.

In addition to the trucker strike impact, continued weak global compressor demand led to a $10 million EBIT decline.

As a result of continued cost pressures in June, we announced new cost-based price increases in Brazil, Mexico and Argentina effective July 1. We will continue to focus on balancing price/mix and volume in the region while aggressively managing cost to improve profitability.

Now we turn to the second quarter results for our Asia region, which are shown on Slide 12.

Ongoing net sales increased 6% versus the prior year.

We delivered ongoing EBIT of $43 million, a significant improvement versus the prior year.

Our second quarter results were positively impacted by double-digit unit volume growth and positive price/mix.

We delivered strong results despite raw material inflation and currency impacts totaling approximately $15 million.

We continue to deliver strong results in India, with double-digit unit volume growth, share gains and positive price/mix.

In China, we delivered positive price/mix, and the net impact of discrete items favorably impacted both GAAP and ongoing EBIT by approximately $15 million, primarily driven by government incentives.

We continue to focus on improving profitability in China through price/mix and disciplined cost management.

Now I'd like to turn it back over to Marc to review our guidance.

Thanks, Jim.

And turning to Slide 14, we review our updated guidance assumption.

As I mentioned earlier, we have revised our 2018 guidance as a result of stronger macro headwinds and weaker-than-expected performance in the second quarter.

We now expect flat revenue for the year as our strong global price/mix is expected to be offset by volume weakness, primarily in Europe.

We are reducing our global growth expectations, but we expect the U.S. industry to recover and contribute to growth in North America in the second half.

We now expect to deliver ongoing EBIT margin of approximately 6.9% for the year.

I will discuss the updated drivers of our EBIT margin guidance on the next slide.

As a result of lower earnings expectations, we have reduced our cash flow guidance to approximately $850 million, and overall, we now expect to deliver record ongoing earnings of $14.20 to $14.80 per share.

Turning to Slide 15.

We show the updated drivers of our EBIT margin guidance.

We now expect to deliver approximately $400 million or 2 points of net benefit from improved price/mix as our global cost-based price increases have delivered strong results.

We reduced our expectations for gross cost takeout.

And volume weakness in multiple regions has impacted conversion, and fuel price inflation in certain countries has impacted our freight costs.

However, our fixed cost reduction actions remain on track to deliver $150 million benefit for this year.

Finally, we now expect raw material inflation to be approximately $350 million in 2018.

We continue to see significant inflation across a number of commodities and in particular with our biggest purchase items, steel and resins.

The global steel costs have risen substantially, and in particular in the U.S., they have reached unexplainable levels.

While the U.S. steel has also started price at a premium to the rest of the world, most recently, the U.S. steel is 50% more expensive than the rest of the world and simply cannot be explained by the input costs.

Our annual steel contracts and hedging contracts with our base metals give us some protection, but they do not insulate us from these more material trends.

And recently, we also experienced cost inflation increases due to rising oil prices and U.S. supply capacity constraints.

And as we mentioned in prior earnings calls, we cannot hedge resins and [are was] exposed to the quarterly price inflation.

Finally, uncertainty related to tariffs and global trade actions have also led to increased cost for certain strategic components and finished goods imports and exports.

While these increased raw material headwinds are significant, we've also demonstrated our ability to overcome these types of challenges in the past through a variety of means, including cost-based price increases, cost reductions and efficiency improvements and we will continue to do so.

Now Jim will cover our regional guidance and cash priorities.

Thanks, Marc.

On Slide 16, we show our regional industry and EBIT margin guidance.

We have slightly reduced our expectations for full year industry growth in the U.S. and Brazil as a result of the weakness in the second quarter.

In North America, we are encouraged by the strength of the U.S. economy, including low unemployment and healthy housing demand.

We believe the industry is well positioned for growth in the second half of 2018.

Despite significant raw material inflation, we expect to deliver approximately 12% margin in North America with industry growth now expected to be approximately 1% to 2%, given the Q2 softness.

In EMEA, we now expect to deliver ongoing EBIT margin of approximately negative 1% as a result of soft volumes and continued external headwinds.

In Latin America, we expect to recover a portion of the trucker strike impact in the second half and now expect to deliver EBIT margin of approximately 6%.

Finally, we continue to expect to deliver approximately 5% EBIT margin in Asia.

Turning to Slide 17.

We review our updated free cash flow guidance for 2018.

We have reduced our guidance for cash earnings as a result of slower recovery in Europe, increased cost inflation expectations and unfavorable currency fluctuation.

The asset impairment Marc discussed earlier does not have an impact on cash, and the preliminary French Competition Authority settlement is expected to impact cash in 2019.

In total, we now expect to deliver free cash flow of approximately $850 million.

Turning to Slide 18.

We show our capital allocation priorities for 2018, which are unchanged.

During the quarter, we announced the sale of our Embraco business and continue to expect to close the deal in early 2019.

In anticipation of the closing of the sale of our compressor business and the receipt of the sale proceeds, we entered into a term loan facility and repurchased $1 billion of common stock in the second quarter.

And we expect to continue repurchasing shares in the second half.

Now we will end our formal remarks and open it up for questions.

(Operator Instructions) We'll take a question from Curtis Nagle of Bank of America Merrill Lynch.

So I guess my first is just can you talk a little bit more about the balancing between volumes and pricing?

And I guess, specifically, what are the strong actions you guys plan to take to narrow that gap and how you think you'll achieve that given that -- it appears that competitors aren't being quite as aggressive on pricing?

Curtis, it's Marc.

So I presume you ask the question on global and not particularly on a specific region level.

And of course, the situation also in competitive environment and what's the timing of our price increases is different region by region.

So let me maybe try to address it for both North America and Europe, and then we can also go, if you wish so, more into Latin America or Asia.

In North America, as you know, we went out with a kitchen price increase, which was effective in the first quarter, and a laundry price increase in the second quarter.

As you can tell from our remarks and from our numbers, we had a very strong pricing progress year-over-year and sequentially.

And we also -- going into the promotion period around July 4, we decided to stand firm on our price increases and we executed accordingly.

Obviously, I cannot comment on what competitors are doing or not doing.

That's their decision.

We've seen over the July 4 period that not everybody was sticking to similar price increases, but that's -- again, that's normal promotion environment, and I'm not reading too much into this one.

Again, I can only reaffirm we are standing firm on our price increases and -- because we're convinced it's the only right thing to do with such a cost inflation environment.

On Europe, I would say we kind of envisage country by country very different.

We started going out with some price increases in October and executed a lot of them until February but, again, on a country-by-country base.

I would say here -- and again, the competitive environment is highly fragmented and it's country by country, very different so there's no generic comment.

I think we saw a volume impact, but I wouldn't only tie it back to a price increase because, at the same time, we were trying to address terms in certain unfavorable trade contracts which we have with certain trade partners.

I wouldn't put it all on pricing.

But again, also here, and this is what we communicated before, now our job is to hold firm on these price increases and rebound some of the volume and some of the volume losses in the second half.

Okay.

Maybe that just, that segues into, I guess, my next question on EMEA.

So just from an EBIT perspective, another disappointing quarter.

It sounds like a lot of the same issues that dragged earnings in 2Q were still there.

So I guess, what is or isn't happening?

Why has it been so difficult to retain those [slots as] -- or regain the slots as you've mentioned?

And can you be a little more specific about some of the actions you plan to take aside from what sounds like some leadership changes and a change in strategic direction?

So Curtis, obviously, in Europe, and we said that before, we're disappointed that Q2 was not yet any better.

First of all, to put it in global context, the same inflationary challenges that we have throughout the rest of world also impacted our European numbers, as you've seen in some of the numbers.

So that's an additional burden which we had on this one.

On the volume side, it frankly took us a very long time to resolve some of these trade contracts, which are now, by and large, resolved.

But as you also note, in a competitive environment, it's not that easy to just regain the floor spots which we lost over last 6 months quickly overnight.

We're making progress, and right now, even in a disappointing Q2, it got better month over month over month.

But again, that's #1 priority for second half, that we regain the floor spots; rebound without giving up our price increases; and at the same time, refocus our strategy, particularly on the -- what is in Europe very profitable, the kitchen business.

Our next question is from David MacGregor of Longbow Research.

Just to start off with a question on raw materials.

I guess the guidance had been $250 million to $300 million.

And it was supposed to reflect not where raw material inflation was at the time that you posted that guidance, but rather where you thought it might eventually get to, so presumably some cushion in there.

Now that you increased to $350 million can you just talk about where in the world, which geographic segments or which materials did you see the incremental inflation that's responsible for the upwards adjustment?

And how much cushion do you have now?

Yes, David.

So this is Jim.

And I think if we go back to our previous guidance, what we've seen since then is we've seen continued pressure on steel costs, primarily in the U.S., but also some globally; resin costs, especially as oil has risen in the last -- in recent times, we've seen an increase in oil prices that have pushed that up on a global basis, but some of it concentrated more within the U.S. market right now.

Additionally, even as we look across many of the base metals, those have all gone up from our assumptions earlier in the year.

So it's been rather broad-based with a significant concentration in steel and a disproportionate amount hitting us in the U.S. at this point in time.

So maybe, David, also to add on this one.

First of all, you are correct, when we give a raw material guidance, it's a forward-looking assumption.

So this is not reflecting spot market of the past, which also tells you our forward-looking assumptions for the year have changed.

And it's coming back to what Jim said before.

It's -- if I basically put it in, call it, 4 different buckets, they almost follow the size of our respective raw material purchase.

The biggest concern structurally is steel.

Steel (inaudible) across the world but particularly in the U.S. have increased.

Now we have some protection due to our annual contracts, but as I said before, we're not completely insulated.

Two is the resins which have risen substantially.

And as you know, and we indicated that before, we cannot hedge for resins, so we basically are exposed to quarterly inflation.

And the resins have not come down.

And then three and four, almost the same order is kind of the freight, not just impacted by fuel but also by freight shortage.

That has risen substantially in kind of the second quarter.

Now technically, that's not sitting in our raw material, it sits in our ongoing cost productivity, but it's also an element.

And lastly, and again, that has only a limited impact Q2 but, on a forward base it has some impact, is we are impacted by the tariffs, either when we are importer of record or via our suppliers who have to basically pay the tariffs.

So that is an impact going forward, but to a lesser extent in the second quarter.

There has been -- one of your competitors has gone through a small price increase effective in August.

Can you just talk about the extent to which you feel -- or maybe you have already raised prices again here this summer for a second half benefit.

Yes.

And David, as you know that's consistent with all our prior earnings calls, obviously, I cannot and will not comment on future price increases.

And so you need to judge us from the past.

I would say throughout the world, but also, in particular, in the U.S., we -- when we saw the first signs of cost inflation throughout the business, we decided to go forward with price increases.

That's what we've done in the U.S. and throughout the world.

And of course, we're monitoring the situation very closely.

And as I said in my prepared remarks, whenever you're faced with significant raw material inflation, you look always at a multiple set of options, cost-based price increases, cost reduction programs, supplier negotiations, as one of them, and we intend to do so.

Second question, if I could, was just on Europe.

You talked about sort of a consolidation of a lot of different markets.

It strikes me that maybe the U.K. was a disproportionately negative contributor to the results there and the problems that you're facing.

Could you just sort of deconstruct the European aggregate for a moment and just talk about which countries are a particular problem and how you're planning to remedy that?

Yes.

And David, again, without breaking down into last detail, but more in a, call it, 2 years perspective as opposed to just the quarter, historically, our European business, particularly the Indesit side of the business, used to make a lot of profit in Russia and U.K. Both markets have, as you know, significant currency and also demand volatility to a downward.

And that is still structurally a burden because, obviously, with all products being imported in the U.K., you just don't realize the same margins.

On top of that, the demand is very slow in U.K. To some extent, the same is true for Russia, where we had a significant currency exposure over 2 years.

I would say, U.K. in the second quarter was not necessarily the decisive factor.

Russia impacted us because the currency got a lot weaker, but we also had some challenges in other markets.

I would say the encouraging thing is, I think, our historical core markets, like France, to some extent like Italy and Germany, have started to stabilize, so we've seen some positive signs there.

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

A few questions I wanted to make sure I'm clear with.

So what you're saying, Marc, is that subsequent pricing from here is not in the guidance, and so if you were to take pricing from here, it would be incremental to guidance.

Is that how to understand your commentary?

Well, again, Sam, we can't -- obviously, we cannot communicate, for a number of reasons, on future price increases.

Apart from the law, there's also competitive reality, which I don't want to put all our cards on the table.

Having said that, our margins -- our guidance assumptions right now include a current raw material assumption of $350 million and, of course, includes the continued discipline on the cost-based price increases.

And as you've seen, we upped what we assume on a full year price benefit from 1.25% to 2.0%.And so we have included in the guidance -- also technically, we included already the Canada and the Latin America price increase because we have announced them but not anything beyond.

Okay.

And then my question here -- my real question would be twofold.

First off, when do you expect laundry margins, specifically washing machine margins, to approach or approximate fleet average for North America?

And then secondly, for raw materials, I know you said that you're insulated this year based on contracts and hedging and forward purchasing, but if you were to mark to market what you're seeing right now, what would '19, 2019 inflation look like at present?

Sam, these are 2 questions.

So let me first talk about raw materials.

Obviously, we're not giving 2019 guidance on raw materials at this point and also to be -- because I think it's important to be clear on my earlier remarks.

On steel, we have annual contracts.

They protect us to some extent, but given that there's some element of indexing, they don't completely insulate us.

So there is still some steel elements.

Second of all, not all parts of the world you have annual steel contracts, so in some of them, you buy short.

Certainly, there are certain steel parts, not necessarily the cold-rolled steel but specialty steels like black stainless steel, where we don't have annual contracts.

So we are impacted by steel prices on a current base.

The other big-ticket item are resins.

We are not on annual contracts in resins because you simply can't get annual resins contract.

So we are fully exposed to the quarterly inflation what we see in these markets.

And all the other base metals, which, as Jim mentioned earlier, where we have also inflation, we have hedges in place but, of course, you -- at one point, you run out of hedges, and you're not 100% hedged at any given time.

So there are certain exposure, and we've got to see also how the future price trends evolve.

Having said that, we are also convinced that certain spot prices which we see right now, in particular on steel, we do not believe are sustainable in the external market because they are simply disconnected from the input costs and they're also disconnected from the rest of the world.

Now coming back to the washer margins.

And again, we -- as you know, we don't reveal margins by region or by product platform.

Having said that, we -- the washer business as such in Q2 was impacted by very slow market demand in Q2, which you probably can relate back to strong demand in Q1.

So probably over the first half, it was more balanced, but Q2 demand in washers was very soft.

And we have a benefit from the cost-based price increases.

So I would say our EBIT margins on laundry have improved, but they have not yet reached fleet average.

Our next question is from Susan Maklari of Crédit Suisse.

I guess, first, I wanted to get a little bit more color on North America.

You said that you expect things to recover.

So coming out of the quarter, have you started to see volumes improve for either your business or for the industry broadly?

And how do you think about that coming together in the back half of the year?

Yes.

Susan, this is Jim.

I think as we mentioned before, the first way we look at it is that in Q1 was significantly strong, and some of that, we believe, was due to some load-in especially of laundry products during that quarter, which balanced itself back out in the second quarter.

As we look at the third quarter, we're very early in the quarter at this point in time.

And so as we look at what we believe the underlying drivers of demand are and sell-through and other things, what we've really reflected and said as we've taken our industry guidance from 2% to 3% down to 1% to 2% is we do believe a little of that softness within Q2 will not be made up in the back of the year, but we expect at least U.S. demand to normalize back closer to the levels where we had expected for the full year.

Just realizing that the first half of the year was flat, and that we probably won't make that up.

Susan, it's Marc.

So let me maybe also add some additional color.

So as Jim indicated, Q1 industry was very solid.

Q2, it was down by 5%.

So in the first half it was approximately flat.

Frankly, we did expect some rebalancing of the inventory, which was also related to the price increase and the prebuy.

We expected some rebalancing in the April, May.

I think the -- if you want to say so, the surprising element was that June demand was slow, which is an indication of July 4 as an overall period was softer than usual years.

So I think that's impacting the first half.

Having said that, and of course, we look at housing data and everything else, we still believe the fundamentals of a healthy U.S. market are in place, but of course, we're observing all parameters.

But with that first half softness, if you want to say so, particularly the June one, we took our full year guidance, despite the confidence in the structural health of the market, down to 1% to 2%.

Okay.

And then, I guess, in thinking about the pricing, have you seen a mix shift as a result of that?

Do you see consumers sort of moving down in terms of price?

And is that changing any of the broader market share positions out there?

Susan, again, it's Marc.

And it's, of course, different region by region.

But if I stay focused on North America, typically, when you go out with these cost-based price increases, you sometimes have a mix element, i.e.

the risk which you sometimes have is that you mix down.

Having said that, on this one, because it's so heavily cost-based, we have driven price increase for our entire product range.

So we didn't see a massive mix shift, if you want to say so.

What it did impact, we lost some volume from the low end, in particular around the promotion period, because we sell typically the most advertised and promotion-active product in the SKU.

So it's not necessarily, from ongoing basis, we lost mix, but yes, throughout the promotion period, on the low end, we lost some volume.

Our next question is from Ken Zener of KeyBanc Capital.

I would like to just take a step back.

I really want to try to put this quarter and your outlook in the right context.

So if I think back to 2011, going into 2012 when you pursued pricing then, your margins (technical difficulty) focusing on North America.

Your margins were 3% going to ultimately 8% in 2012, which was good.

So as you fought -- and now you're looking to get price to attain your 12% margin target.

So in '12 -- 2012, AHAM fell about 2% that year.

Can you talk to the implied elasticity in appliance demand?

Because, obviously, you're talking about a "normalizing" second half, and I'm just trying to discern the, perhaps, elasticity on pricing, you talked about July 4 promotional weakness, as opposed to a cyclical softening.

I just want to kind of clarify your macro thoughts there, first of all.

And Ken, before Marc kind of goes into some of the elasticity, let me just take you to that 2011 and '12 that you talked about.

The margin expansion there, yes, there was significant pricing and there were multiple cost-based price increases during that time, but also, there was a significant amount of fixed cost takeout.

So you can't compare the pricing results necessarily of 3% to 8% to what we have now.

But you are correct on the margin expansion there, but there were multiple drivers.

So Ken, let me maybe also add a couple of comments.

First of all, before we can get to the price elasticity, also you should take it in broad historical context.

Of course, these Q2 numbers were not in line with our expectation or your expectation.

At the end of the day, we've also got to recognize that despite an extremely challenging cost environment, we have expanded our ongoing margin.

And I'm really encouraged by the actions which we've taken in October and the first quarter around the fixed cost reduction and price increase because it just showed, even in the extreme environment, we can lever and we can expand the margin, and these actions will also give us quite a bit of momentum in the back half.

So as much as we are kind of disappointed about the short term, we're encouraged by how the total business was able to expand the margin in this environment.

Now specifically on the price elasticity, and again, this is -- a lot has been written.

And there's a lot of moving parts obviously, and this is very different by category by category.

The fundamental thing which you need to keep separate is what is kind of, call it, category price elasticity, i.e.

industry as such versus cross-price elasticity, i.e.

versus our competitor at a given price point.

Of course, you have a substantial cross-price elasticity particularly when you come to laundry low-end price points, not necessarily the high-end price points.

And that's just -- given that's the reality of the competitive environment.

The category price elasticity, we repeatedly said that in the past, I don't think is very high, i.e., of course, in the short term, you may some -- see some moving pieces.

But in a developed, mature market like the U.S., where so much is -- particularly on the laundry side, it's not necessarily all housing related.

It's replacement related, innovation related.

You typically don't see, on a full year base, a massive or a big price elasticity on the entire category.

Kind of month-to-month, you might see it, but not on a full year base.

Yes.

I think, Ken, the one other thing to point out too and -- if you look back historically, the price increases that you had referred to earlier, we had taken more at the tail end of the commodity inflation period.

Right now, as Marc pointed out, we're taking the -- we've taken cost-based pricing in the middle of the commodity inflation period that's continued.

And it's allowed us to expand our margins this quarter year-over-year despite the fact that we're dealing with significant raw material headwinds.

And I think that's a positive to point out here, that we've really -- we've taken these cost-based price increases much earlier in the process.

My second question is regarding your considering the 4% margin in 2020.

If we think back to the Indesit acquisition, how much is kind of -- could you isolate some of that shortfall just to the U.K. and competitive situations there?

Or is there something -- I heard you say the 8% long-term margin as well, but it seems like it's getting farther away.

So is there something structural that changed within the different countries?

You're -- obviously, you lost floor space, so your relationship to the retailers was weakened within country, which I think is very important.

But could you talk about why that seems -- that 8% seems so far away now, if it was a structural change or if it was the U.K. or really the IT transition that led to the market share that's not as quickly recoverable?

And Ken, let me try to address it, even though obviously, that is -- probably at one point, either at an analyst conference, we got to give you the full story.

But the short one is, first of all, when we talk about the 4%, let's also not lose sight of we have the business already at 4% post the Indesit acquisition.

Actually, in '14, '15, we had a 4%, 4.5%, so it's not kind of -- it's not a new number.

We had it.

You also look at our competitive set.

You would easily conclude 6% to 7% margins in this environment are achievable.

Now to your question about the sources of the losses, I'm not trying to blame it all on U.K. and Russia.

I would say that is approximately half of the losses which we have, and that's just a currency which we don't think will recover in the short term.

The other half is also what I would call broader internal execution issues, which are related to supply chain and some other elements.

So now to your question why does it take us longer to get to 8%, a, yes, because we don't expect the U.K. and Russia to recover in a 1- or 2-year period.

I think, ultimately, it will come back, but it will take a little bit longer.

The other element, and this is just a reflection of a long integration with some, call it, internal focus as opposed to external focus, we lost a little bit of sight of our profitable kitchen business.

That has been structurally the most profitable business in Europe, but that takes longer to regain because we sell typically annual contracts, and it's more than just a floor spot.

These are annual contracts which you have to regain, and that will take us a little bit longer.

But that's the key element to get this business to 8%.

Our next question is from Mike Dahl of RBC Capital Markets.

Marc, the first question, I want to follow up on the EMEA discussion.

And you talked about some of the rebalancing in -- around the kitchen.

But it sounded like there's kind of some retrenchment and reallocation of resources there as well.

Could you give us a little more detail around whether there is an underlying cost plan and whether we should expect some pullback in some of the non-kitchen-related businesses as you kind of shift your focus back here?

Mike, let me just try to address it, I mean.

So first of all, there's a short-term rebalancing of a volume which is more related to specific trade actions and floor spaces where we can get it, which is typically more of a freestanding.

The kitchen takes, as I mentioned before, a little bit longer.

I think what you referred to is, in my prepared remarks, in terms of, call it, focused portfolio optimization.

And it basically comes back to the European business is very different market by market, asset by asset, and of course, we are looking at certain very specific assets in terms of the way to generate the kind of value which we expect.

Is there an alternative way to get some value out of this one?

Or should we do alternative paths for some of these access -- assets?

That is not across Europe but very specific either countries or product categories where you just structurally need to step back and say, "Does it make sense from a shareholder perspective?" And that's part of the effort which we're looking at, coupled with further cost reductions.

Europe has had actually -- and unfortunately it's a little bit lost in the results, but its cost takeout was on track, in line with what we had in mind for the integration acquisition.

But obviously, given the volume trends over the last 18 months, you have to dig deeper, and that's the effort which we are undertaking right now.

Got it, okay.

And on a broader note around the cost takeouts, I think you guys have mentioned that there are some offsets around your ability to obtain the gross cost takeout targets originally envisioned, just given the lower volumes.

But I think if I look across our coverage and what companies are typically doing in the face of these rising raw materials, rising freight costs, it is digging deeper across the portfolio to, if anything, lean into cost actions and -- whereas now we're seeing the cost takeout figure come down against a rising inflation environment.

Can you just help us bridge that and -- a little bit more?

And are there other -- outside of what we just talked about in EMEA, what are some other actions you can take to recapture some of this?

Yes.

So Michael, this is Jim.

And let me kind of start, and then Marc can fill in here.

To begin with, late last year, we announced $150 million fixed cost takeout program for this year, which we are on track to achieve.

And halfway through the year, we've got about half of the benefits we expect to see in there.

The second thing is, on our ongoing cost productivity, and we've kind of talked about this earlier, while we are seeing progress, we're seeing some of that offset with the increased freight and warehousing and oil costs that we see, and we don't put that in our raw material bucket.

So right now, that is an offset.

The third thing is, especially within the second quarter here, and I talked about this some with the free cash flow outlook, is we are bringing our inventories in line and reducing some of our working capital levels, but that's primarily by bringing our inventory levels in line with where sales have been and demand has been in the first half of the year.

And that's caused us to incur a conversion -- to take a hit within our conversion costs within our factories.

Additionally, with -- as we look at -- within the first half of the year with the Brazilian truck strike, most of the costs of that is we were unable to produce and deliver goods sitting within that.

So we do expect the second half of the year to see a more positive type of picture from an ongoing cost productivity.

Yes, Mike.

I will echo what Jim was saying.

First of all, what is really important for you, from an analyst perspective, to look at is, when companies talk about inflation, you've got to keep in mind inflation hits us across a number of parts of our business.

What we put in raw material is literally only steel, the direct resins and some base metals, by and large.

All our inflationary elements sit technically, and how we show it, on ongoing cost productivity.

So if we have higher freight costs because of shortages or if you have labor inflation, obviously, as an aspect, they reduce the ongoing cost productivity.

Of course, that impacts us.

The second part is -- what Jim was alluding to, was really important.

We exited the year with elevated inventory levels, and we decided to take down inventory levels in a very aggressive manner.

And as you've seen, our inventories are flat to even down versus last year at the end of Q2.

What it also basically means, beyond the volume decline in Q2, we took additional actions to reduce our production and of course, as such, had a deleveraging in our conversion costs.

And that was material and significant, and what was reducing the ongoing cost productivity.

On a go-forward base, and that gets back to your question, of course, we're doubling down on all cost initiatives, and we're shifting some resources into what further cost reductions we can do, either on variable cost or on fixed cost.

We'll take our next question from Alvaro Lacayo of Gabelli & Company.

I just wanted to touch on Latin America.

The full year guidance seems to incorporate a rebound in the second half.

Maybe if you could just go over the dynamics that impacted the second quarter and maybe make some comment around what gives you the confidence that you'll be able to improve from Q2, given that consumer confidence seems to be declining over the last few months, and in Brazil particularly.

Alvaro, it's Marc.

So first of all, structurally, I mean, the Q2 results were impacted by Brazil.

What we call LAR North; i.e., from Mexico down, was actually in a very healthy state.

And we had a good business there, and we also expect that going forward.

We do consider -- and we said that in the remarks before, despite all the [ins and outs], the Brazil truck strike was a temporary one.

Now to be more specific, in May, it cost us almost 30% of the sales in Brazil, so that was substantial.

And the industry and us, I'm talking about the broader industry, not just appliances, was slow to recover from that one because it took quite a while to get the trucker availability back, et cetera, et cetera.

So that loss in Q2 is just there, but at the same time, we consider it temporary because not -- what we see from June and July trends, it's back to normal trends.

Having said all that, probably until the elections in Brazil are over, I think you should not expect a big boost from consumer confidence.

I think there is -- so we still expect the -- Brazil industry to be about flat on a full year base, so no major momentum probably until the elections.

But again, I want to echo, I -- we do consider the Q2 impact temporary.

And then you've got to keep in mind Brazil had solid Q1.

If you take out the trucker strike, it would have been a solid Q2, and that's what we expect on a full year base.

Got it.

And then with regards to EMEA and all the additional actions that are being taken, maybe if you can discuss when you'll begin to see, in a meaningful manner, sort of the benefits from the additional actions being taken and how you see that -- you reset 4% to 5% by 2020, but maybe if you can give a little bit more color in terms of timing of how you see these benefits flowing through the business and when you'll begin to show improvements as time goes on.

So Alvaro, first of all, I want to come back to 2018.

In our guidance, we adjusted the European margin guidance to minus 1%.

That's what we have right now baked in the numbers, and that's what you see there.

You put that on top of the first half.

It basically tells you the second half, we expect to be above breakeven.

And that is based on our current actions and the short-term levers which we can pull in the second half.

So again, the second half, we expect to be above breakeven.

And we also guided towards with 2020 4% to 5%.

And I would expect 2019, even if it's too early to give specific regional numbers, to be somewhat midpoint, in between.

Our next question is from Michael Rehaut of JPMorgan.

First question, I just wanted to kind of better understand a couple of the comments around Europe.

And Marc, you just mentioned that you're expecting maybe closer to breakeven in the back half as opposed to down 2% to 3% in the first half.

At the same time, you commented that it will be hard to regain some of the floor space in the meantime, I guess, particularly around the kitchen business.

And you have leadership changes going on.

So I was just trying to understand what are the specific actions that give you confidence in getting to breakeven in the back half?

You'd mentioned a little bit of cost, maybe a little bit of other businesses getting some floor space back.

And also, how does this interact with the leadership changes?

Because it seems like you're kind of already putting into motions different elements of a strategy, how does -- do you have new leadership in place already?

Or is it internal movement and you're already kind of pushing some strategy forward and you're just kind of putting in the personnel to implement that?

So Michael, let me just address it.

So like in any business, there are certain things you can do in the short term and there's certain things which take a little bit longer.

In the short term, again, we're guiding to breakeven and above and that's implied in the entire full year margin for Europe.

[In that] there are certain floor spaces and trade business which you can regain in the short term, particularly around the freestanding business.

And there's also certain markets that just -- certain things that are moving faster than other markets.

What takes longer is to regain the structural profitability of the kitchen business because, again, as I said before, that is typically tied to either annual contracts or, what is also very typical in kitchen, that the floor spaces are negotiated on an annual base.

It's not something to regain shorter.

So again, the freestanding business and I would say, in particular, in some of Eastern European markets but also, to some extent, Italy, we can regain floor spaces a little bit faster.

Other parts take a little bit longer.

So we have a reset in strategy.

That is not something which we're counting on completely in the back half of '18, but there's operational measures which we can take in the back half of '18.

What is encouraging is that at least our volume loss got a little bit less every month in the quarter, and that's what we pretty much see also now for Q3.

So things are slowly getting in place.

The other element is we have taken additional cost action towards the end of the quarter in Europe and got some benefit out of this one, and that will carry also into Q3 and Q4.

So we have added some further cost actions for the back half which will help us to regain that breakeven.

And just in terms of the leadership changes, could you give us any color there?

How much is in place?

How much will be in place over the next few months?

And then I had a follow-up on -- a second question just on inventory levels.

You had mentioned kind of a reduction, trying to get that in line.

Does not further impact margins in 3Q versus 2Q as you have some inventory rationalization and that kind of reduces factory optimization?

Or can we expect, across the board, kind of more of a stable narrative there?

I think, Michael, let me -- I'll take -- this is Jim.

I'll take the inventory one first here and just say that, as we mentioned, we believe we took most of the actions within Q2 to bring our inventories in line with -- as they -- at the end of Q1, where they were higher than the prior year.

Once we got to the end of Q2, they were even to the prior year or better.

So we've worked that higher inventory level out.

And then throughout the back half of the year, we expect to continue to reduce inventories, but it will be on what we expect to be a slightly higher level of demand than we saw in certain markets within the first half of the year.

So we don't expect significant impacts within the back half of the year due to reducing inventories.

So Michael, the short answer to your leadership change is we announced that internally, last week, we have a change of presidents in Europe.

And until we name a successor, I will, at interim, run it.

I've run Europe before so I know the market very well.

But of course, that's not a permanent and long-term solution.

But expect us to announce a formal successor in the next 1 or 2 quarters.

And this does conclude our question-and-answer session.

I'd be happy to return the call to our hosts for any closing comments.

So as we wrap up here the call, let me also try to summarize some of the key messages on this call, which is also on Page 20.

First of all, we delivered strong global margins -- or not strong, but we delivered solid global margin expansion despite the significant macro challenges.

We will continue to take actions to mitigate those headwinds and are pleased with strong sequential improvement to global price/mix.

We've also delivered strong margins in North America despite cost inflation and what we believe is a temporary soft U.S. industry, and this performance highlights the fundamental strength of our business.

And we are taking, finally, strong actions to restore profitability in Europe region.

And we remain confident that our global business is well positioned to deliver improved ongoing margin expansion and an all-time record ongoing EPS in 2018.

So thank you for joining us today, and we look forward to speaking with you again on our third quarter earnings call on October 25.

This does conclude our conference call.

You may now disconnect your lines, and everyone, have a great day.