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spk12: of Investor Relations, Corey Thomas. Thank you, and welcome to our second quarter conference call. Joining me today are Mark Bitzer, our Chairman and Chief Executive Officer, Jim Peters, our Chief Financial Officer, and Joe Liatini, our Chief Operating Officer. Our remarks today track with a presentation available on the Investor section of our website at whirlpoolcorp.com. Before we begin, I want to remind you that as we conduct this call, we'll be making forward-looking statements to assist you in better understanding Whirlpool Corporation's future expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K, 10-Q, and other periodic reports. We also want to remind you that today's presentation includes non-GAAP measures. We believe these measures are important indicators of our operations. As a food item, they may not be indicative of results from our ongoing business operations. We also think the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations. Additionally, price increases or pricing actions referenced throughout this call reflect previously announced cost-based price increases. 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 our most directly comparable GAAP measures. At this time, all participants are in a listen-only mode. Following our prepared remarks, the call will be open for analyst questions. I'll turn the call over to Mark.
spk09: Before I get into results,
spk06: I'd like to step back and share with you the progress that we're making structurally improving Whirlpool for the better.
spk09: We have a clear line of sight on the long-term success of our business and on driving shareholder value. Whirlpool has become a stronger entity today versus historically. We operate in a healthy, long-term growing market, and our long-term growth outlook remains unchanged.
spk06: Our brands are strong and consumers use them daily and will use them even more in the future. Based on the initiatives that we are taking, Mopul will exit the current and temporary industry headwinds and our highest pooling of underperforming assets by investing in high-margin businesses.
spk09: We are operating in unprecedented times, much thanks to our strong
spk06: On balance sheet, transformation efforts, and the hard work of the team, Whirlpool continues to perform better today than in the past and will see record performance over the medium term. Today, we will discuss our second quarter results and highlight how we continue to successfully manage our business despite near-term pressures while at the same time remaining focused on delivering towards our value creation goals over the long term. We are operating in a dynamic world marked by rapid cost inflation, a war, and geopolitical tensions, as well as broader economic uncertainty and a subsequent negative impact on consumer sentiment. Throughout the past years, we have demonstrated that we take needed actions early and decisively, and we have done so again in the second quarter. We're confident in the actions we've taken to mitigate industry headwinds, including our focus on enhanced operating margins with strong global cost-based pricing and broad cost-reduction initiatives for upper world. And our strong margins, not only in Q2, are evidence that these initiatives are working. We're prepared for near-term pressures and remain focused on delivering over long-term, regardless of our circumstances. Turning to slide four, I will review our second quarter results. Our performance this quarter showed yet again some of our best results ever. I'm convinced that we have built a new world that is stronger and better prepared for the future. In particular, we delivered solid ongoing EPS of $5.97 and 9% ongoing EBIT margins. With ongoing EPS approximately 50% 2019, even in the face of historic levels of cost inflation and the demand slowdown. We experienced mid-single-digit to double-digit demand slowdown in key countries in the second quarter, alongside a rapidly strengthening dollar. And yet, we impressively delivered relative to stable revenue of down 2%. Expressive, North America delivered over 14% margin, demonstrating the structurally higher profit levels of the region.
spk09: We continue to fund innovation and growth while returning approximately $400 million to shareholders in MacArthur.
spk06: Additionally, we signed an agreement for the divestiture of local Russia business, triggering $747 million of one-time, almost entirely non-cash charges. We expect the Russia sale to close during the third quarter, and we believe it to be the best course of action for our employees, shareholders, and overall business. Lastly, the near-term impact on demand could put it into context.
spk09: This guidance will present the second highest full-year ongoing EPS in the history of the company, despite inflation running at 40-year highs and the additional headwinds that we've been discussing. Our free cash flow guidance of $1.25 billion remains unchanged.
spk06: Again, we are confident in the actions we have in place to manage the near-income pressures. By slide five, we show the drivers of our second quarter EBIT margin.
spk09: Led by our fully executed cost-based price action across the globe, we successfully delivered positive price mix, resulting in 675 base points of margin expansion.
spk06: Net costs negatively impact our market by 175 basis points, largely driven by increased logistics and energy costs, alongside operational inefficiencies from supply disruptions. Lastly, and in line with our expectations, raw material inflation continues to be a significant headwind challenging environment and delivering operating... And I'll turn it over to Joe to review... Thanks, Mark, and good morning, everyone.
spk09: Turning to slide seven, I'll review the results for our North American. The industry continued to be negatively affected by the consumer sentiment alongside the constrained supply chain.
spk08: The second quarter was greater than expected. However, as we implemented operational improvements, we realized sequential share gains as our share position improved throughout the quarter. consumer demand trends remain intact.
spk09: As we continue to see elevated cooking appliance usage over two times the negative impact of the industry decline of cost-based price increases.
spk08: 14.1% EBITD pressures alongside the negative impact of operational inefficiencies and temporary volume deleveraging.
spk09: We remain confident in the strength of our business and our ability to... ...results for Europe, Middle East, and Africa region.
spk08: The revenue decline was largely... ...which was negatively impacted by the... ...war in Ukraine, including our... ...to a near shutdown. Excluding currency, the region's revenue declined, the region's strong execution of pricing actions drove 270 basis points of sequential margin expansion.
spk09: That was more than offset by the increase in the quarter. Next, as part of our strategic review of business, this is a
spk08: standalone business with localized positioning it well to be sold as a unique entity.
spk09: To conclude the strategic review end of the third quarter.
spk08: Turning to slide nine, I'll provide additional detail regarding the pending sale of our Russia business. In June, we entered into a share purchasing We expect the sale to conclude in the third quarter, subject to customary closing conditions. As a result of this transaction, we recorded $747 million of non-recurring, primarily non-cash charges, including $346 million primarily associated with the write-down of Russia assets. which triggered an intangible asset impairment in the EMEA region.
spk09: We are hoping that this report represents the best course of action for our employees located in the region. Moving to slide 10, I will review results for our Latin America region. Net sales growth of 3%, This increases, fully offsetting expected industry softness.
spk08: The region delivered strong EBIT margins of 7.2%, once again demonstrating the consistency in which this. Turning to slide 11, I will review our Asia region. Revenue growth of time contributed to higher volumes in India. as the region was impacted by COVID-related shutdowns in the prior year period.
spk11: The region delivered a significant EBIT improvement of $19 million, resulting in EBIT margins of 6.8%, driven by cost-based pricing actions and higher volumes. Following slide 12, I'll turn it over to Jim to discuss our full year 2022 guidance.
spk14: Thanks, Joe, and good morning, everyone.
spk09: Now turning to slide 13, I'll review our updated guidance for 2022.
spk14: We have revised our full year guidance to reflect the larger than expected industry slowdown. While there is no change to our expectation for long-term growth, including we have adjusted our 2022 guidance to reflect the current environment. As a result, we now expect a revenue contraction of approximately 5% to 6% and ongoing EBIT margins of approximately 9%. This is the full-year ongoing EPS range.
spk09: Next, we consider the revenue contraction and free cash flow of approximately 9%. Turning to slide 14, we show the drivers of our full-year ongoing EBIT margin guidance.
spk14: We have increased our expectation of negative net cost by 50 basis points to a negative 150 basis points, reflecting the added inefficiencies resulting from temporarily reduced volumes and additional logistic and energy costs. Next, with the strengthening of the dollar, we now expect a negative currency impact of 25 basis points, driven primarily by Brazil and India remain unchanged. including our expectations of previously announced cost-based price actions driving 725 basis points of margin, fully offsetting raw material inflation, which we expect to peak in the second and third quarters. We are confident that we have a 10% ongoing EBIT margin. Turning to slide 15, we show our regional guidance for the year. We are reducing our global growth expectations to negative 6% to negative 4%, reflecting updated industry expectations for North America in 2022. In North America, our near-term growth expectations are negative 7% to negative 5%, with a second-half industry performance in line with the fundamentals of the demand environment. for North America, supported by, one, broader home nesting trends, two, an undersupplied housing market, three, a strong... ...with our appliances. Regarding our EBIT guidance, we expect North America to deliver approximately 15% EBIT margin, which remains in line with our long... Our industry and EBIT... margin expectations for EMEA, Latin America, and Asia remain unchanged. Turning to slide 16, we will discuss the drivers of our 2022 free cash flow. We continue to expect to generate significant free cash flow of $1.25 billion, with cash earnings of approximately $2 billion and a modest level of inventory supply recovery while funding innovation through our capital investments. These investments are in line with our target of approximately 3% of net sales. This supports our plan to increase our ice attachment in time for summer as we create new ways for our consumers to engage with our iconic KitchenAid stand mixer. Lastly, we anticipate minimal cash outlays related to restructuring as these actions have been largely completed. This performance, along with our strong balance sheet, positions us with significant optionality and flexibility. We repurchased approximately $300 million of our stock in the second quarter, bringing us to over $800 million year-to-date. We are on track to return $1.5 billion in buybacks and dividends to shareholders in 2022. Now on slide 17, I'll turn it over to Mark to summarize our key messages. Thank you, Jim.
spk06: And let me recap what you heard over the past few minutes.
spk09: We have a right global actions in place to deliver a strong second half. And we do expect raw material inflation to peak in the second and third quarter.
spk06: Our previously announced cost-based price increase has been fully executed. We expect to exit the year with our existing pricing actions fully offsetting raw material inflation. Additional cost actions, including hiring
spk09: We are prepared and expect to successfully navigate a near-term industry slowdown in 2022. The long-term fundamental strength in consumer demand remains unchanged. Consumers continue to use their appliances at an elevated rate alongside strong replacement demand and an undersupplied housing market.
spk06: We are progressing in our portfolio transformation, focusing on high-growth, high-margin businesses. We are very pleased with the divestiture of our Russia business and expect to conclude our strategic review of Europe within the next few months. Lastly, we are on track to return approximately $1.5 billion in cash to shareholders in 2022, and we have reduced this alone. These actions strengthen cash-generating business and our commitment to creating shareholders. We will end our formal remarks and open up for questions.
spk13: At this time, I would like to remind everyone, in order to ask a question, press star and the number one in your telephone keypad.
spk09: Line of Michael Rico from JP Morgan.
spk13: Your line is open.
spk08: I wanted to focus first on
spk09: part in parcel of the second quarter, but also the back half.
spk02: What do you see in terms of, you know, it's a pretty decent drop-off in the full year expectations. And also, encouragingly, how you think about share going forward, your own share. You mentioned the sequential.
spk09: Multiple questions in one question.
spk06: Let me still try to address them. Let me first talk about North American demand, and Joe should probably also add some color. Michael, what we're seeing is basically, call it two trends going on at the same time. There's a long-term trend, which, as Jim alluded to, we see very positive. The long-term trend, the positivity is driven by replacement cycle, which is favorable, high usage of appliance, a structurally undersupplied housing market. So all these factors remain intact, and you can't be in denial about these fundamental positive long-term trends. But there's a short-term trend which is kind of overriding that right now. What we did see in pretty much around the late April, May timeframe, a pretty strong drop in consumer demand, which is ultimately driven with consumer sentiment dropping off. And we all know it. I mean, it's consumers. It's not that consumers have no cash available. I think there's disposable income. It's the consumer sentiment driven by inflation, all the bad news around war and the pandemic, which is still not behind it. That together dropped or led to a significant drop of consumer sentiment impacting demand. we do not see both fundamentals of consumer sentiment going away probably for year-end, because the fundamental drivers between inflation, war, and probably upcoming midterm elections don't help consumer sentiment probably pretty much until November. Maybe towards the year-end we see something more positive. But again, that has not changed our outlook, what it means for 2023-2024 in terms of long-term demand, and we continue to remain bullish on the long-term demand trends. Now, when it comes to share, as we alluded in our prepared remarks, Q2 saw a small sequential gain over Q1. Or put it differently, pretty much if you look at Q3 last year, Q4, Q1, and Q2, it's pretty steady with a slight, slight increase towards the end of Q2. So in a certain way, we stabilized the share, but in all transparency, we have not regained the share compared to pre-pandemic. However, with supply chain constraints becoming less of an issue, we're confident that we can make progress in this dimension going forward.
spk11: And this is Joe, maybe just to build on comments from Mark. In the back half, we do have some upcoming launches that we're excited about that will help spur some growth. In addition to the comments Mark made, we really saw the sentiment impact, the promotional period, the holiday period in Q2, and so that was the factor that contributed to our outlook changing for the back half. But if we look at the fundamentals, that still remains in a very positive light, and so our outlook there remains as it has been, but the back half really is where the increased sentiment depression occurred.
spk02: Okay. Okay. I appreciate that. As a follow-on, Joe, you kind of hit on promotions there. It would be very helpful, I think, to kind of unpack the drivers of reducing the North American margin guidance from 16% to 15%. I know in the margin walk, you talked about a quarter of a billion, I believe, in non-structural efficiencies, and temporary volume deleveraging. But, you know, you just mentioned, Joe, in your remarks that you referred to promotions. You know, I'd love to get a sense of the price environment today. You know, if that's holding, if promotions are increasing, and that's part of the reduction in EBIT margin guidance for the region, or is it more volume, inefficiencies, and deleveraging.
spk11: Yeah, Michael, maybe just to clarify a comment, you know, I wasn't referring to the promotional period, the holiday period, less about promotions themselves. But as you know, you know, we have shared that our price margin and mix all is kind of fully on track and has kind of offset our of the RMI and expect that to continue for the rest of the year. So we feel that that really is, as stated previously, the deleveraging is kind of what we were talking about in terms of impacting margins and also the inefficiencies as a consequence of some of that lower volume. That really kind of is the new news that occurred in Q2. So maybe just separating the two. From a price and promotion standpoint, I think we've, you know, over many, many years and quarters demonstrated a high ability to man that space. only participate when ROI positive or a positive returns to the company. So I think that approach, that mentality, nothing's really changed there from a company standpoint. We expect to do that and manage that well no matter what the environment is.
spk06: Hey, Michael, it's Mark again. Just to add to Joe's comments, And I would refer to page 14 of our presentation where we basically showed the margin walk in prior guides and current guides. And that picture, even though it's for a corporation, by definition, it's very similar to North America. So what we showed there that we did not change our pricing assumptions in the margin walk, which probably answers already the big question. Of course, there will be always some promotions, but nothing has changed versus our prior in terms of how much we think we can get from price mix. To Joe's point, the slight margin drop is largely coming from volume deleveraging because we have to adjust inventories in line with market demand. And that is just, you know, has a certain cost associated with that, volume deleveraging. And some temporary costs, which we were pretty convinced will go away in the short term. So, anyhow, so that's the difference in margin mark. Now, to see the positives, And again, we should put it all in context. We had 9% margin due to matters in an environment where we had a 40-year high in inflation and market demand being down. And it tells you a lot about the resilience of this business. And North America, 14% in that environment, I think speaks to the health and the structural changes of our business.
spk13: Your next question comes from the line of Sam Darkash from Raymond James. Your line is open.
spk07: Good morning, Mark, Jim, Joe. How are you?
spk14: Good morning, Dan.
spk07: So I'll ask the million-dollar question, I suppose, regarding the EMEA strategic review process. I know you mentioned that you're expecting to conclude the review by the end of the third quarter. It was notable, at least to me, that it's not at least yet listed in DISC OPS. So I'm just trying to get a sense of your view of the likelihood of a sale in light of the idea that European demand is weakening, financing markets and the capital markets are also, to an extent, tightening up, and FX is a pressure. So how has this evolved in terms of your expectation to consummate a sale that would be of your liking?
spk14: Sam, and this is Jim, and I'll start, and then Mark or Joe could chime in. But to begin with, as we said last quarter, we expect the process to go through the third quarter, and after that we'll talk further about it. And right now we're in the middle of the process. And so within this quarter, and as we mentioned in our remarks earlier, we did at least reach an agreement to divest of our Russia business, which was a necessary step considering the sanctions and the environment that we were trying to operate in. And that is a progression. along the path in terms of our strategic assessment here. Now, when you asked about the accounting for it or putting it in discontinued ops, because we're not at a point where we have a definitive answer to give yet in terms of the situation and many options are open, it wouldn't be the appropriate time, but we did move Russia into held for sale because we do have an arrangement there. So that's where we are today. And I don't know that there's any more that we can really share on this until we get past the third quarter. Yes, Sam, maybe just adding to this one.
spk06: As we indicated in the April earnings call, we look in all options. And just to be clarified, the options on the table are anything from selling the business to partial sale to keeping the business. Now, keeping the business, I would have to qualify, and as is, is not really the option. Keeping the business will be a reduced footprint or different role for Europe. But pretty much all options are on the table. At this point, it will be pure speculation to say what the outcome is. To Jim's point, the only change we have in the quarter, we originally assumed that Russia will be part of a broader review, But given all the environment which we're well aware of, we had to decouple that and move on the Russia transaction earlier. But as we stated before, we do expect by the end of Q3 to pretty much come to a conclusion of our strategic review.
spk07: My second question, mathematically, it looks like your guidance for pricing year on year is going to be better in the second half than in the first half by about a point or two. Just trying to get a sense of how much of that sequential improvement is just the timing of first half pricing rollover, how much of that is from incremental pricing on the come. And I know you mentioned a little bit of promotional, but specifically, is there any anticipated promotional leakage? Thanks.
spk11: Hey, Sam, this is Joe. Just in response to that, yeah, you know, there's obviously multiple things going on. There is a rolling over of pricing actions taken earlier in the year that kind of roll in. There was additional pricing actions across the globe in different countries taken in Q2, also kind of factoring in and kind of ramping up as they come on. So that's kind of essentially what you're seeing. From a pricing promotion standpoint, as we touched on earlier, you know, obviously that is very different than, you know, I'll say years ago, and we expect that to remain, you know, at, I'll say, muted or moderated levels. It has been in Q2 to date, and, you know, that's kind of where we're at from a pricing promotion standpoint. The bigger factor is your first point, which is how things affect or take on throughout the year, kind of the cumulative impact of that as each of the final decisions were made in the Q2 period.
spk13: Your next question comes from the line of David McGregor from Longbow Research. Your line is open.
spk05: Yes, good morning, everyone. Mark, I wonder if you could just talk about the builder channel and how much of the drag on 2Q would you attribute back to the builder channel versus replacement demand? And just if you could talk about what you're seeing change there.
spk06: David, let me start, and maybe Joe should add some color. As we all witness and experience, I think there's a lot of noise and not always the best information about what's going on in the housing market. I start with the long-term. The U.S. housing market is structurally undersupplied. We've talked about this for many years, and I still stay with the statement which we said before. The U.S. housing market needs several years of housing starts or housing completion between 1.8 and 2 million units just to re-stabilize the market. given demographic trends, given age of housing stock, and given household formation. So nothing has changed on the long-term needs. Now, obviously, the combination of price increase in the housing market, which were well ahead of the actual supply, and the mortgage rate put a big dent on home affordability, which led to cancellations and, I would say, slowdown in the short term. so i would expect that also going forward call it the next 12 months so to be the case and yes i would probably say some correction home prices is necessary um to kind of re-stabilize the market doesn't change the long-term outlook on the positive outlook which we have in housing but i don't think the next 12 months you see will see a very dynamic market in that respect now when it comes specifically to a bill that you also need to understand the order backlog the pace of cancellations But in a nutshell, we did not see a dramatic change on the completions. Keep in mind, what we see are typical completions because the blinds come in pretty much last. So we did not see a dramatic drop-off right now in Q2. But we also don't expect a lot of growth now in Q3 and Q4. Joe?
spk11: Yeah, just to build on those points, didn't see a dramatic drop-off at all on the new home starts. didn't see really any material changes from what we were expecting in Q2. And then the remodel area, which, you know, is kind of a quasi-builder area, didn't really see any new information there either in Q2. So, you know, although there's a lot of information in terms of, you know, what's affecting consumer sentiment, that was not one of our drivers in the results for Q2. Okay.
spk05: Okay. Just as a follow-up question, I guess the share repurchase activity seemed to be running at a pretty good clip here mid-year, I think $800 million, if I've got the numbers there correct. I guess the question would be, how would you handicap the likelihood of you coming in above your $1 billion in guidance?
spk14: Yeah, I'd say, David, right now, as we emphasized and I said in the earlier remarks, we still intend to come in where we forecasted at the beginning of the year. And so, you know, we're turning about a billion and a half to shareholders, which, you know, the dividend makes up about $400 million of that. And then, you know, we did the majority of the share we purchased in the first half of the year, you know, with where the market conditions were and all that, as well as where our cash position was. But that doesn't change our estimate for the full year right now. We're still... on track and at that level.
spk13: Your next question comes from the line of Liz Suzuki from Bank of America. Your line is open.
spk00: Great, thank you. How are you just thinking about the path toward your long-term value creation goals and getting back to annual organic net sales growth of 5% to 6%? And then what does the EBIT margin walk look like from the year-end guidance to your ultimate goal of 11% to 12% ongoing EBIT margin?
spk06: Yeah, this is marked in a couple of components. First of all, on the top line, as we indicated earlier, we do see the current environment as temporary, but doesn't change our long-term demand outlook. So we do expect, and obviously this is not a 23 or 24 guidance, but right now we would assume that 23 and 24, we would see healthy underlying market growth. again driven by replacement needs housing markets and the higher usage of the blind so so we continue to assume solid probably missing a digital market growth 23 and 24. again i want to reiterate that's not the 23 guys but that's right now the current thinking In that environment, we're still expecting, particularly in North America, we balance our market share back to pre-COVID level. So beyond the market demand, you will have a certain level of share gain, probably over the course of 2023 and 2024. So that is a big driver of the top line. In addition, globally, we have several growth markets which continue to be in the combination between strong market share and underlying market dynamics. Like India, we have strong organic growth, more than a high single digit. That's on the top line. On the margin side, this right now, again, we're pretty much guiding this year to a 9%. Keep in mind that 9% also includes several kinds of costs which are not typically miscipled because you still have express shipments, all kinds of extra costs which relate to supply chain constraints, which obviously will go away. And it has a significant volume in leveraging. So just taking that out of the equation, you start getting a lot closer to the 11%. Couple that with a different cost action, and then I'll focus more and more on high-margin businesses. That will lead you to 11% to 12%.
spk14: Yeah, listen, this is Jim. And just to maybe add to, you know what, Mark, said there is is you know we've talked about too as we go forward our focus on higher margin businesses and that's where we'll we'll invest on top of this and then you know even as we talked about the strategic review and amia and mark alluded to that no matter what the scenario is um it would not be the same as it is today and so even in a keep situation you have a turnaround in a fundamentally different business structure there. So all of these are kind of the contributing factors that get us from the 9% to that 11% to 12% in the future.
spk00: Great. Thanks very much.
spk13: Your next question comes from the line of Susan McClary from Goldman Sachs. Your line is open.
spk01: Thank you. Good morning, everyone. My first question is focusing a little bit more on the production side of things. You know, you mentioned that you did gain a bit of share this quarter. Can you just talk about the state of the supply chain? What are the key headwinds that you're facing today and how you're thinking about those easing as the demand moderates?
spk06: And this is more North America focused, but it's a little bit reflective of what we see globally. We still saw quite significant supply chain disruption pretty much i would say until april to early may it's very impacted but the situation got better as q2 progressed on a going forward base we still don't fully expect a fully normalized supply chain environment but still significantly better than what we've seen last year and probably until april may so we will still have spots or elements where you will have a disruption for a number of reasons, but not to the same level as before. So in simplistic terms, supply chain constraints continue to ease, but will not completely go away throughout the year. Specifically, then, on production levels and inventory, with a drop-off of the April-May volume, frankly, our inventory towards June is probably slightly elevated to what we had in mind, because we assumed a higher market demand level. But as you would expect from us, we are adjusting production and inventory in line with what we see right now from industry forecast. I'll put it differently. We are correcting production, or we did already in June, and we'll continue to do so going forward, and we're not going to wait until the year end.
spk01: Okay. That's helpful. My follow-up question is, You mentioned in your commentary, Mark, that you're taking decisive actions as you do see the macro changing. Can you talk a little bit more about the playbook that you have in a weaker macro environment, and especially maybe as it relates to thinking about the promotional side of things? To what extent is the consumer responding to that and how you're thinking about balancing that relative to the other goals that you have as you think about the business, especially within North America?
spk06: Yeah, Susan, I mean, first of all, it starts, obviously, with a macro assumption you have. And I think it's true for many companies. But macro assumptions that we have now in July 22 are very different from January 22. So in our scenario, and I know there's different opinions around this one, we do assume a recessionary environment around us. You can argue about the depth of a duration, but right now that is our main scenario. And that became very clear in our view probably around June, July. So accordingly, we've taken the actions which we have in our recession playbook, which are largely focused on being very aggressive on cost side. We do believe The raw material market will turn favorable, not to the extent as we like in 2022, but it starts turning more favorable. And that's why I said earlier we do think inflation peaked in Q2 and Q3. But above and beyond, we are taking additional cost actions. On the material side, on the logistic cost side, where we were faced with many express and inefficiencies, but we will also be very disciplined in measuring headcount and all associated costs. So we are taking... strong actions on the cost side, call it from our recessionary playbook. In addition, every recession in the past has proven you've got to keep an eye on cash flow. So you should expect us to be very disciplined on net working capital and how we manage our net working capital and our cash flow accordingly. And in that context, I'm also very pleased that we are, in our scenario, we are able to keep a guidance on the cash flow.
spk13: Your next question comes from the line of Chris Collada from RBC Capital Markets. Your line is open.
spk04: Hi. Thanks for taking my questions. Going back to the promotional dynamics, I was hoping you could help quantify how much of the 420 base point year-over-year decline in North America even margin came from the increased seasonal promotional activity and How do you expect that to trend in the back half? Are you assuming kind of a similar magnitude of promotions or any color that would be helpful?
spk14: Yeah, Chris, this is Jim. And maybe I'll kind of start with that and Joe can chime in here. But, you know, as we talked about earlier, when we look at price mix for the year, for the total company, which is very reflective of North America because it's about half of our business, you know, we've really said that in the back half of the year we still expect to have price mix benefits that are still coming. That would imply that we don't see, whether it's now or in the back half of the year, promotions being a big impact on our margins overall. As we've talked about, the impact on margins has more been driven from, one, a cost inflation perspective, which has come, whether it be materials or logistics or labor or freight and warehousing costs, again, or that it's come from volume deleveraging as we've just managed the business to a lower level of demand right now and had to reduce our production levels. Those are the two big drivers within there, and even if you look at our overall company gross margins, that's what reflect that. So, you know, it is not assuming that there's a higher promotional environment than anything. This is mainly just a reflection of where costs are.
spk11: Maybe just to build on that, to Jim's points, the deleveraging did occur pretty much in Q2, but that was the new news that we had kind of referenced earlier in the call, and so that's really what's impacting the cost. From a price promotion standpoint, expectations remain, didn't see elevated levels in Q2, so those are more static than anything else.
spk04: Understood. And just to drill into the sequential cadence for North American margins, your guidance for 15% for the year implies a second-half step up. So, yeah, assuming you could help us break out the key drivers of that, assuming the promotional dynamics stay the same, you guys outlined a cost-cutting program. Any thoughts? will you help provide some quantifications on how much of that is driving the sequential step up there in addition to incremental pricing announcements and other actions you're taking?
spk14: Yeah, I don't know that we haven't broken out and quantified those specifically. And so what I can say is, though, you really hit the drivers there. As Joe talked about earlier, there are Price increases we took in Q2 that fully run in in the back half of the year. You have cost-saving programs that we've now kicked off, and Mark talked about the different things we're doing to prepare ourselves for a recession. And so as you look at that, those begin to become larger savings within the back half of the year. And then as we talked about, too, we see material costs as maybe being stable in the back half of the year that we're hitting the peak now. So, you know, those are the bigger drivers when we look from, you know, Q2 into Q3 and Q4 in terms of North America margins.
spk06: I apologize for being very direct. I think you're missing the point here. And what I mean with that is, first of all, if you look at Q1 and Q2 margins, we are pretty close to 15% in North America. We're at 15% in Q1 and 14% on Q2. So we're pretty much on the run rate despite inflation, what we just said, peaking Q2 and Q3, and despite the volume negative environment. So... I would say these North American margins, given the environment, are spectacular strong. They're well above any historic levels. They clearly demonstrate how strong the underlying business is. Again, that's with all the volume deleveraging and with all the inflationary pressure. Also, if you look at the competitive environment, I don't think you will find any competitors who are even close to these North American margins. I take that as a pride, the North American margins, and not as a concern going forward.
spk13: Your next question comes from a line of Eric Bussard from Cleveland Research. Your line is open.
spk03: Thanks. Two follow-up questions. First of all, just some clarity. You made a comment about rebalancing market share back to pre-COVID levels. And so what I wanted to understand in the back half of the year, if industry volumes are softer and inventories are normalized and if not a bit heavier, Is it your intention? It's an environment that certainly seems ripe for more promotions, either driven by retailers or competitors, to try to make up some of the lost volume coming from software consumers. Is it your intent to participate in promotions, or is it your intent to not participate in promotions? And what does that suggest for your market share outlook through that period of time?
spk11: Eric, this is Joe. Just kind of setting up your response to that question. If you look at what transpired in Q1 and Q2, we did grow share slightly in Q2, even in a depressed environment. So, you know, that's kind of where we're beginning from. We think we will continue to grow. look for opportunities to improve and rebalance, share back to pre-COVID levels in the back half, and frankly into 2023. In terms of promotions, I mean, that's always the case that there's different factors in the market. We always are going to review those and make sure they're value-creating. And so I look at that as a bit more of a constant. I think now that we're past I'll say some of the disruptions on supply chains, we're able to get the right production where we want it. We're able to put inventory levels to where we want it and then go into the market the way we think is most value-creating. And as I said, we slightly grew in Q2, and we expect to kind of continue that into the back half of 2022 and into 2023. Promotions is a bit of a constant. How we participate is also a bit of a constant in that we have a very – rigid approach, rigid or formal approach on what creates value and what doesn't. And I think that you'll see that transpire into the back half.
spk03: Okay. And then the other follow-up just related to cost productivity, I think the assumption or the guidance implies the second half is roughly half the headwind it was in the first half, but the volume sounds like it's similar to I guess you've spoken to this, but just to hear you say it again, why does the business de-lever less in the back half on a similar volume and a more cautious consumer?
spk14: Yeah, Eric, this is Jim. And I think what you're looking at, too, here is the year-over-year. And when you take year-over-year, it would imply that year-over-year, the back half of the year cost, especially net cost, is a little bit less of an impact. Now, a lot of that is because we saw a lot of these inflationary pressures beginning to ramp up throughout the back half of last year. And so that's part of the thing on a year-over-year. The first half of the year was comping against the first half last year. That didn't see as much inflationary pressure as we get in the back half. That's a part of it. The second thing is when we look at the back half of the year and we talk about it's not as much the volume deleveraging here, but you're getting an offset with some of the cost reduction actions that we talked about earlier, the things such as reducing our hiring, the things such as looking at some of our discretionary expenses in other areas. That helps to offset some of those net cost actions. headwinds that we're seeing in the back half of the year. And that's why it implies that the back half would be slightly better year over year. But for the full year, we're still at about 150 basis points.
spk06: So I guess we're coming to the end of a Q&A session. So first of all, I want to thank you all for joining us today. Obviously, as you heard today, there's a lot of moving parts. It's a dynamic. You can call it a challenging environment by any definition. But I think due to we demonstrate we can perform very well in a tough environment, and we will continue to do so. We changed our guidance, which frankly we don't like, but it's a guidance towards the second best year ever in our history. Yes, we would have liked to make it another best year, but we're going to be pretty close. And I think all the actions which we'll talk about now for the back half of 2022 will line up our business very well for 2023 and going forward. So, again, thank you all for joining us today, and have a wonderful day.
spk13: Ladies and gentlemen that concludes today's conference call. You may now disconnect.
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