Whirlpool Corp

NYSE:WHR

Earnings Call Transcript 2018-Q2

[Operator]

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.

[Max Tunnicliff, Senior Director, Investor Relations]

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 with a better baseline for analyzing trends in our ongoing business operations. Listeners are directed to the supplemental information package posted on the Investor Relations section of our website for the reconciliation of non-GAAP items to the most directly comparable GAAP measures.

At this time, all participants are in listen-only mode. Following our prepared remarks, the call will be opened for analyst questions. As a reminder, we ask that participants ask no more than two questions.

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

[Marc Bitzer, Chief Executive Officer]

Thanks and good morning everyone. On Slide 3, we show our second quarter highlights. As you saw in our press release, we expanded our ongoing EBIT margins 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 have put in place over past few quarters, including cost-based price increases and targeted cost reductions throughout the world enabled us to largely offset these challenges and expand ongoing EBIT margins year-over-year.

We are very pleased with strong price mix driving significant year-over-year and sequential improvement on a global spot 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 over 12% EBIT margin despite a 5% decline 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 should not improve as anticipated and a preliminary settlement on a previously disclosed French Competition Authority and Mitigation.

Turning to Slide 4, I would 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 below the prior year primarily driven by working capital time 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 four regions. I will discuss price mix curve on the next slide. We delivered positive gross cost take-out as our restructuring and fixed cost reduction actions continue to progress. However, these benefits were partially offset by rising freight cost, primarily in the U.S. and Brazil due to oil price inflation and fleet shortages as well 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 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 basis points compared to the 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 would 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 for a customer negotiations which positioned us well for future had a significant impact in 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 continued 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 are 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 are pleased with our progress in improving price and 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 regions 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 are implementing broad leadership changes in the Europe region, including a change in the Norwegian President. While our short-term focus in the second half is on restoring the breakeven business, we now expect to deliver roughly 4% to 5% margins by 2020 and in the long-term, we continued to expect 8% margin in Europe.

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

[Jim Peters, Chief Financial Officer]

Thanks, Marc and good morning everyone. Turning to Slide 9, we reviewed 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 weaknesses largely represents the volumes shipped between the first and second quarters related to the 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 reviewed 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 mix 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 reviewed 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 continued 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 costs to improve profitability.

Now we will turn to the second quarter results for our Asia region which were 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 relative 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.

[Marc Bitzer, Chief Executive Officer]

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 would 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. 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 growth cost takeout and volume weakness in multiple regions, have impacted conversion and fuel price inflation in certain countries has impacted our freight cost. 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. that have reached unexplainable levels. While the U.S. steel has also historically priced at a premium to the rest of the world most recently, the U.S. steel is 50% more expensive than rest of the world and simply cannot be explained by the input costs. Our annual steel contract and hedging contracts with our base metals give us some protection, but 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 chain capacity constraints. As we mentioned in prior earnings calls, we cannot hedge resins and it was exposed to the quarterly price inflation.

Finally, uncertainty related to tariffs and global trade actions have all led to increased cost of certain strategic components and finished goods imports and exports. While these increased raw material headwinds are significant, we have also demonstrated our ability to overcome these types of challenges in the path for a variety of means, including cost-based price increases, cost reductions and efficiency improvement and we will continue to do so.

Now, Jim will cover our recent guidance and cash priorities.

[Jim Peters, Chief Financial Officer]

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 continued 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]

[Operator Instructions] We will take a question from Curtis Nagle of Bank of America/Merrill Lynch.

[Curtis Nagle, Bank of America/Merrill Lynch]

Thanks so much for taking the question. So just 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 will achieve that given that it appears that competitors aren’t being quite as aggressive on pricing?

[Marc Bitzer, Chief Executive Officer]

Curtis, it’s Marc. So I presume you asked the question on global and not particularly on the specific region though. And of course, the situation from competitive environment and what’s the timing of our price increase is different region by region. So let me maybe try to address it for both North America and Europe and when we can also go – if you wish so more into Latin America or Asia. In North America, as you know we went out of the kitchen price increase, which was effective from the first quarter and the longer price increase in the second quarter. As you can tell from our remarks and from the numbers we had very strong pricing target year-over-year and sequentially, we also go into the promotion period around July 4. We decided to stand firm in our price increases and we executed accordingly. Obviously I cannot comment on what competitors are doing or not doing, it’s their decision. We have seen over the July 4 period, but not everybody was sticking to similar price increases, but again that’s normal promotional environment and I am not reading too much into this one. Again, I can only reaffirm we are standing firm on our price increases and because we have committed the only right thing to do in such a cost inflation environment. On Europe I would say we would kind and this country-by-country very different. We started going up with some price increases in October and executed a lot of them until February, but again on a country-by-country basis, I would say here and again the competitive environment is highly fragmented into country-by-country, very different, there is no generic comment. I think we saw volume impact, but I wouldn’t only tie it back to the price increase, because at the same time we were trying to address terms and certain unfavorable trade contractors or certain trade partners, I wouldn’t put it all on pricing. But again also here and this is what we have communicated before, now our job is to hold firm on these price increases and rebound some of our volumes and some of the volume losses in the second half.

[Curtis Nagle, Bank of America/Merrill Lynch]

Okay. Maybe just to segue and 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, we are still there. So I guess what is there is happening, why has it been so difficult to retain those slots or regain those slots as you have 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?

[Marc Bitzer, Chief Executive Officer]

So Curtis obviously in Europe and we have said that before, we are disappointed by Q2 what’s not yet any better. First of all putting global context the same inflationary challenges that we have throughout the rest of the world also impacted our European numbers as you have seen in some of the numbers, so that’s an additional burden which we have had in this one. On the volumes side frankly it took us a very long time to resolve some of these trade contracts which are not by and large results, but as you also know 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 are making progress and right now even in a disappointed Q2 we got better month over month over month, but again that’s the number one priority for the second half as we have regained the floor spots, rebalanced without giving up our price increases and in the same time re-focused our strategy particularly on the what is in Europe very profitable in the kitchen business.

[Operator]

Our next question is from David MacGregor of Longbow Research.

[David MacGregor, Longbow Research]

Yes. So good morning.

[Marc Bitzer, Chief Executive Officer]

Good morning Greg.

[David MacGregor, Longbow Research]

Just start off with a question on raw materials I guess the guidance has been 250 to 300, 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 they increased to 350, can you just talk about where in the world which geographic segments or which materials did you see the incremental inflation is responsible for the upwards adjustment and how much cushion do you have now?

[Jim Peters, Chief Financial Officer]

Yes, David. So this is Jim and I think if we go back to our previous guidance what we have seen since then is we have seen continued pressure on field costs, primarily in the U.S. but also some globally. Resin cost, especially as oil has risen and the last – in recent times we have 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 the significant concentration in steel and a disproportionate amount hitting us in the U.S. at this point in time.

[Marc Bitzer, Chief Executive Officer]

So maybe David, I will also add on this one. First of all, you are correct when we give a raw material guidance, it’s a forward-looking assumption and 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, if I basically put it in call it four different buckets, we almost follow the size of our respective raw material purchase. The biggest concern structurally is steel, steel across the world, but particularly in U.S. have increased. Now, we have some protection due to our annual contracts. But as I said before, we are not completely insulated. Two, it’s 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 3 and 4 almost the same order is kind of the freights, not just impacted by few, but by freight shortage that has risen substantially in kind of a second quarter not technically, but it’s not sitting in our raw materials, but sits in our ongoing cost productivity, but it’s also an element. And lastly – and again that has only limited impact Q2, but on the forward basis, it has some impact, is we are impacted by the tariffs, either when we are import of records 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.

[David MacGregor, Longbow Research]

There has been one of your competitors has gone for small price increase effective in August, can you just talk about the extent to which you feel when you have already raised prices again here this summer for second half benefit?

[Marc Bitzer, Chief Executive Officer]

Yes. And David as you know that’s consistent with all our prior info, obviously I cannot and will not comment on future price increases and so you need to judge us from the past, I would say, across the world, but also particularly in U.S. when we saw the first sign of cost inflation throughout the business, we decide to go forward with price increases and that’s what we have done in U.S. and probable and of course we are monitoring the situation very closely. And as I said in my prepared remarks, whenever you faced there is a significant raw material inflation, you look always at it, multiple set of options cost based price increases, cost reduction programs, supplier negotiations as one of them and we intend to do so.

[David MacGregor, Longbow Research]

Second question if I could was just on Europe, you talked about sort of consolidation of a lot of different markets as it strikes me that maybe UK was just proportionately negative contributor to the results there and the problems that you are facing, can you just sort of deconstruct the European aggregate for a moment and just talk about which countries are of particular problem and how you are planning to remedy that?

[Marc Bitzer, Chief Executive Officer]

Yes. I mean, David again without breaking down the last detail, but more in a call it 2 years perspective as opposed to just the quarter. Historically, our European business particular in Indesit out of the business used to make a lot of profits in Russia and UK. Both markets have, as you know, significant currency and also demand volatility to downward and that is still structurally burden them, because obviously this all products being imported to UK, we just don’t realize the same margins on top that demand is very slow in UK. To some extent, same is true for Russia, where had a significant currency exposure over 2 years. I would say, UK 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 historically core markets, like France to some extent like Italy and Germany, but have started to stabilize that we see some positive signs there.

[Operator]

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

[Sam Darkatsh, Raymond James]

Good morning, Marc. Jim, how are you?

[Marc Bitzer, Chief Executive Officer]

Good morning.

[Sam Darkatsh, Raymond James]

A few questions I wanted to make sure I am clear with. So what you are 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?

[Marc Bitzer, Chief Executive Officer]

Well, again, Sam, obviously, we cannot communicate for number of reasons upon future price increases. Apart from it all, there is also competitive reality which I don’t want to put all our cards on the table. Having said that, our margins, our guidance assumption right now includes current raw material assumption of 3.50 and of course includes the continued discipline on the cost based price increases and as you have seen we upped what we assume on a full year price benefit from 1.25 to 2.0. So we have included in the guidance also technically we included already in the Canada and the Latin America price increase, because we have announced them, but not anything beyond.

[Sam Darkatsh, Raymond James]

Okay. And then my question, here my real question would be twofold, first off, when do you expect laundry margins, specifically wash machine margins to approach or approximate fleet average for North America? And then secondly for raw materials, I know you said that you are insulated this year based on contracts and hedging and forward purchasing, but if you were to mark-to-market what you are seeing right now, what would 2019 inflation look like at present?

[Marc Bitzer, Chief Executive Officer]

Sam, these are two questions. So let me first talk about raw material, obviously we are not giving 2019 guidance on raw materials at this point and also to be – because I think it’s important to be clear in my earlier remarks. On steel, we have annual contracts, they protect us to some extent, but given that there is some element of indexing, they don’t completely insulate us. There is still some steel elements. Second of all, not all parts of what we have annual steel contracts and some of them you buy short. Certainly, there are certain steel parts, not necessarily the cold-rolled steel, but specialty steels like duct stainless steel, where we don’t have annual contracts. So we are impacted by steel prices on our current base. The ever big ticket item are resins, we are not on the annual contract in resins, because you simply can’t get annual resins contract. So, we are fully exposed to the quarterly inflation what we see in this market. And on the all the ever base metals which as Jim mentioned earlier, where we have also inflation, we have hedges in place, but of course at one point you run out of hedges and you are not 100% hedged at any given time. So there are certain exposures and we have got to see also how the future price trends evolve. Having said that, we also convinced that certain spot prices which we see right now in particular on steel we do not believe are sustainable in the external markets, because they are simply disconnected from the input costs and they are also disconnected from 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, 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 first half was more balanced, but the Q2 demand in washers were very soft and we have a benefit from a cost-based price increases. So, I would say our EBIT margins on loan we have improved, but they have not yet reached fleet average.

[Operator]

Our next question is from Susan Maklari of Credit Suisse.

[Susan Maklari, Credit Suisse]

Good morning.

[Marc Bitzer, Chief Executive Officer]

Good morning.

[Susan Maklari, Credit Suisse]

I guess, first I wanted to get a little bit more color on North America you know you said that you expect things to recover. So, coming out of the quarter, have you started to see volumes improved 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?

[Jim Peters, Chief Financial Officer]

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 the second quarter. As we look at the third quarter, we are 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 in and sell-through and other things, what we have really reflected and said as we have taken our industry guidance from 2% to 3%, down to 1% to 2% as 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 that closer to the levels where we had expected for the full year, just realizing that the first half of the year was flat and we probably won’t make that up.

[Marc Bitzer, Chief Executive Officer]

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 in the pre-buy. We expected some rebalancing in April, May. I think the – but if you want to say the surprising element the June demand was slow which is an indication of July 4, but 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 healthy U.S. market are in place but of course we are observing all parameters. But missed that first half softness if you wanted to say particularly June 1 we took out full year guidance despite the confidence in the structure of the market down to 1% to 2%.

[Susan Maklari, Credit Suisse]

Okay. And then I guess in thinking about the pricing have you seen a mix shift as a result of that, do you see consumer sort of moving down in terms of pricing, is that changing any of the broader market share positions out there?

[Marc Bitzer, Chief Executive Officer]

Susan and 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 obviously these cost base price increases you sometime have a mix elements. I used sometimes to have – that you mix down. Having said that on this one, because it’s so heavily cost base, we have driven price increase for our entire product range, so we didn’t see a massive mix shift if you want say so, what it did impact we lost some volume from the low ends in particular around the promotion period and vis-à-vis typically the most advertising promotion active product in ASU. So it’s not necessary, but from an ongoing basis we lost mix, but yes we have the promotion periods, on the low end we lost some volume.

[Operator]

Our next question is from Ken Zehner of KeyBanc Capital.

[Ken Zehner, KeyBanc Capital]

Good morning gentlemen.

[Marc Bitzer, Chief Executive Officer]

Good morning.

[Ken Zehner, KeyBanc Capital]

If I could 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 to 2012 when you pursue pricing then your margin focusing on North America, your margins were 3% going to ultimately 8% in 2012 which was good, so as you thought and now you are looking to get price to attain your 12% margin targets, so in ‘12, 2012, fell like 2% that year, can you talk to the implied elasticity in appliance demand because obviously you are talking about a normalizing second half and I am just trying to discern the cost elasticity on pricing you talked about of July 4 promotional weakness as opposed to cyclical softening I just want to kind of clarify your macro thoughts there first of all? Thank you.

[Jim Peters, Chief Financial Officer]

And Ken before Marc kind of goes into some of the elasticity, let me just take you to that with 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 the 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.

[Ken Zehner, KeyBanc Capital]

Okay.

[Marc Bitzer, Chief Executive Officer]

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 with Q2 numbers were not in line with our expectation or your expectation, at the end of the day we also got a recognized that despite an extremely challenging cost environment we have expanded our ongoing margin. And I am really encouraged by the actions which we have taken in October and in the first quarter around the fixed cost reduction price increase because it just showed even in extreme environment, we can weather and we can extend 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 are encouraged by how the total business was able to expand the margin in this environment. Not specifically on the price elasticity and again this is a lot has been written and there is 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 is such versus cost-price elasticity i.e. versus our competitor to get price point. Of course you have a substantial cross-price elasticity in particular when you come to laundry low end price points, not necessary the high end price points. And that’s just the – given that’s the reality of the competitive environment. The category price elasticity, we repeatedly said that in the past, I don’t think it’s very high yield. Of course in the short-term we may see some moving pieces, but in the developed mature markets like U.S. there is so much, particularly on the laundry side, it’s not necessarily all housing related, its replacement related, innovation related, you typically don’t see on a full year basis, the massive of a big price elasticity on the entire category. Kind of months-to-months you might see it, but not on a full year basis.

[Jim Peters, Chief Financial Officer]

I think Ken one other thing to point out too and if you look back historically that 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 are taking the – we have 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 that we are dealing with significant raw material headwinds. And I think that’s the positive point out here that we have really we have taken these cost based price increases much earlier in the process.

[Susan Maklari, Credit Suisse]

Thank you. My second question is regarding you are 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 UK in 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 your – obviously you lost watch floor space, so your relationships, 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, so what’s the structural change as it was UK or really IT transition that led to the market share that’s not as quickly recoverable? Thank you.

[Marc Bitzer, Chief Executive Officer]

And Ken let me try to address it even more obviously [ph] but it’s probably – at one point 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 not also not lose sight we have in the business already 4% posted in this acquisition. Actually in ‘14, ‘15 we had 4%, 4.5%, so it’s not kind of – it’s not a new number, we had it we are also looking at our competitive sets, you would easily come to 6% to 7% margins in this environment are achievable. Now to your question about the sources of the losses, I am not trying to blame at all on UK and Russia, I would say that is approximately half of the losses which we have and that’s just the currency which we don’t think that 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 UK and Russia to recover in a 1 year 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 called internal focus as opposed to external focus. We lost a little bit aside of our profitable kitchen business, that is structurally the most profitable business in Europe, but that takes longer to regain because of 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%.

[Operator]

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

[Mike Dahl, RBC Capital Markets]

Good morning. Thanks for taking my questions. Marc, the first question and I want to follow-up on the EMEA discussion and you talked about some of the rebalancing around the kitchen, but it sounded like there is 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 pull back in some of the non-kitchen related businesses as you kind of shift your focus back here?

[Marc Bitzer, Chief Executive Officer]

Mike, let me just try to address it. I mean first of all there is a short-term rebalancing of the volume which is more related to specific trade actions and floor spaces where we can get it which is typically more of a free stand. The kitchen takes as I mentioned before a little bit longer. I think what you referred to in my prepared remarks in terms of call it focus portfolio optimization and basically it 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 we have generated the kind of value which we expect is an alternative way to get some value out of this one or should we do alternative paths for some of these assets. That is not across Europe but very specific out of countries of product categories where just structurally you need to step back and say does it make sense from a shareholder perspective and that’s part of the effort which we are looking at. Coupled with further cost reductions, Europe has had actually an unfortunate little bit loss in results, but it’s the cost take out was on track, in line with what we had in mind from integration and acquisition. But obviously given the volume trends over the last 18 months you have to dig deeper and that’s the effort which are undertaking right now.

[Mike Dahl, RBC Capital Markets]

Got it, okay. And on a broader note around the cost takeouts I think you guys 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 are seeing the cost takeout figure come down against a rising inflation environment, can you just help us bridge that a little bit more and are there other outside what we just talked about in EMEA, what are some other actions you can take to recapture some of this?

[Jim Peters, Chief Financial Officer]

Yes. So Michael this is Jim and let me kind of start and then Marc can fill in here. To begin with it late last year we announced the $150 million fixed cost takeout program for this year which we are on track to achieve and halfway through the year we have got about half of the benefits we expect to see in there. The second thing is on our ongoing cost productivity and we have kind of talked about this earlier while with what we are seeing progress we are seeing some 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. But the third thing is especially within the second quarter here and I talked about this some with the free cash flow outlook. As 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 as we were unable to produce and deliver goods is sitting within that. So we do expect the second half of the year to see more a positive type of picture from ongoing cost productivity.

[Marc Bitzer, Chief Executive Officer]

Yes. Michael again, I will echo what Jim was saying. First of all, what is really important for you from an analyst perspective if you look at it, when companies talk about inflation you got to keep in mind inflation which hits 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. And by and large all our inflationary elements sits technically as we showed on this ongoing cost productivity, so we have higher freight costs because of the shortages or if you have labor inflation, all these aspects they reduce the ongoing cost productivity of course that impacted 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 have seen our inventories are flat to even down versus last year end of Q2. What is also basically beyond the volume decline in Q2 we took additional actions to reduce our production and of course as such had a de-leveraging in our conversion costs and that was material and significant and that was reducing the ongoing cost productivity. On a go forward basis and that gets back to your question, of course we are doubling down on all cost initiatives and we are shifting some resources into what further cost reductions you can do either on variable costs or on fixed costs.

[Operator]

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

[Alvaro Lacayo, Gabelli & Company]

Good morning, I just wanted to touch on Latin America, the full year guidance seems to incorporate a rebound in the second half, maybe if you can just go over the dynamics that impacted the second quarter and maybe make some comment around what gives you the confidence that you will be able to improve from Q2 given that consumer confidence seems to be declining over the last few months and in Brazil particularly?

[Marc Bitzer, Chief Executive Officer]

Alvaro, it’s Marc, first of all structurally I mean that the Q2 results were impacted by Brazil. What we call lower North i.e. from Mexico down was actually in a very healthy state and we had good business there and we also expect that going forward. We do consider and we have said that in our remarks before despite all things [ph] out, the Brazil trucker strike was temporary one. Now to be more specific in May it cost us almost 30% of the sales in Brazil and so that was substantial. And the industry and us, I am talking about the broad industry not just appliance was slow to recover from that one because it’s still quite a while to get the trucker availability back etcetera, etcetera. So that’s loss in Q2 is just there but at the same time we considered temporary, because what we will see from the June and July trended back to normal trend. Having said all of that, probably until the elections in Brazil are over I think you should not expect a big boost from consumer confidence. I think that we would 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 we do consider the Q2 impact temporary and then you 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 basis.

[Alvaro Lacayo, Gabelli & Company]

Got it. Thank you. And then with regards to EMEA and now the additional actions that are being taken maybe if you can discuss when you will 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 will begin to show improvements as time goes on?

[Marc Bitzer, Chief Executive Officer]

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 based into the numbers and that’s what is you see there. You put that on top of a first half, it basically tells you the second half we would expect to be above breakeven. And that is based on our current actions in short-term, levers which we can pull in the second half. So again in the second half we expect to be about breakeven and we also guided towards this 2020 4% to 5% and I would expect with 2019 it’s too early to give specific region numbers is somewhat midpoint in between.

[Operator]

Our next question is from Michael Rehaut of JPMorgan.

[Michael Rehaut, JPMorgan]

Thanks. Good morning everyone. First question I just wanted to kind of better understand a couple of the comments around Europe and Marc you have just mentioned that you are expecting may be closer to breakeven in the back half as opposed to down 2% to 3% in the first half, at the same time you have commented that it will be hard to regain some of the floor space in the meantime, I guess particularly on 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 had mentioned a little bit of cost, maybe a little bit of other businesses getting some poor space back and also how does this interact with the leadership changes, because it seems like you have kind of already putting in promotions, different elements of the strategy, do you have had new leadership in place already or is it internal movement and you are already kind of pushing some strategy forward and you are just kind of putting in the personnel to implement that?

[Marc Bitzer, Chief Executive Officer]

So Mike let me just address it. So like in any business there are certain things you can do in the short-term and there are certain things which take a little bit longer. In the short-term, again we are guiding to breakeven and above amidst implied in the entire full year margin for Europe. There are certain floor spaces and trade businesses which you can regain in the short-term, particularly around the free standing business and there is also certain markets that just – certain things are moving faster than other markets. What takes longer to regain the structural profitable of the kitchen business, because again as we have said before that is typically tied to either annual contracts or what is also very typically in kitchen that the floor spaces are negotiated on an annual basis, it’s not something to regain shorter. So again the freestanding business and I would say in particular in some of the Eastern European markets, but also to some extent, we can regain floor spaces a little bit faster other parts take a little bit longer. So the reset in strategy that is not something which we are counting on completing the back half of ‘18. but there is 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 have pretty much seen also now for Q3, so things are slowly getting in place. The every element is we have taken additional cost action towards the end of a 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.

[Michael Rehaut, JPMorgan]

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 second question just on inventory levels you had mentioned kind of a reduction in trying to get that in line. Does that further impact margins in 3Q versus 2Q as is 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?

[Jim Peters, Chief Financial Officer]

I think Michael, let me – I will take – this is Jim, I will 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 us that 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 have 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.

[Marc Bitzer, Chief Executive Officer]

So Mike, the short answer to you, these are changes we announced, but internally last week, we have a change of President in Europe until we name the successor, I will at interim run it. I have run year 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 the former successor in the next one or two quarters.

[Operator]

And this does conclude our question-and-answer session. I’d be happy to return the call to our host for any closing comments.

[Marc Bitzer, Chief Executive Officer]

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 on the front, 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 have also delivered strong margins in North America despite cost inflation in what we believe is a temporary soft U.S. industry and this performance highlights the fundamental strength of our business and we are taking finding 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 in our third quarter earnings call on October 25.

[Operator]

Thank you. This does conclude our conference call. You may now disconnect your lines and everyone have a great day.