Whirlpool Corp

NYSE:WHR

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. And welcome to Whirlpool Corporation’s Second Quarter 2022 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, Korey Thomas.

[Korey Thomas, Senior Director, Investor Relations]

Thank you. And welcome to our second quarter conference call. Joining me today are Marc Bitzer, our Chairman and Chief Executive Officer; Jim Peters, our Chief Financial Officer; and Joe Liotine, our Chief Operating Officer. Our remarks today track with a presentation available on the Investors section of our website at whirlpoolcorp.com.

Before we begin, I want to remind you that as we conduct this call, we will 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 they exclude items that may not be indicative of results from our ongoing business operations. We also think the adjusted measures will provide you a better baseline for analyzing trends in our ongoing business operations.

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 the 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. As a reminder, we ask that participants to ask no more than two questions.

With that, I will turn the call over to Marc.

[Marc Bitzer, Chairman and CEO]

Thanks, Korey, and good morning, everyone. Before I get into the results of the quarter, I’d like to step back and share with you the progress that we are making structurally improving Whirlpool for the better.

We have a clear line of sight on the long-term success of the business and then driving shareholder value. Whirlpool has become a stronger entity today versus historically. We operate in a healthy long-term growing markets and our long-term growth outlook remains unchanged. 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, Whirlpool will exceed the current and temporary industry headwinds and our highest operating performance. Likewise, we are focused on simplifying and transforming our business portfolio to pruning of underperforming assets by investing in high margin businesses.

We are operating in unprecedented times, but thanks to our strong balance sheet, transformation efforts and the hard work of team, Whirlpool continues to perform better today than in past and we will see a 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 its 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 are confident in the actions we have taken to mitigate industry headwinds, including our focus on enhanced operating margins with strong global cost-based pricing and broad cost reduction initiatives throughout the world. And our strong margins, not only in Q2, are evidence that these initiatives are working. We are prepared for near-term pressures and remain focused on delivering over long-term regardless of the 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 am convinced that we have built a new Whirlpool that is stronger and better prepared for future.

In particular, we delivered solid ongoing EPS of $5.97 and 9% ongoing EBIT margins, with ongoing EPS approximately 50% better than the second quarter of 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 stable revenue of down 2%, excluding the impact of currency. Even more impressive, North America delivered over 14% margins, demonstrating the structurally higher profit levels of a region.

Next, with the confidence we have in our business and the strength of our balance sheet, we continue to fund innovation growth, while returning approximately $400 million to shareholders in the quarter.

Additionally, we signed an agreement for the divestiture of Whirlpool Russia business, triggering $747 million of one-time almost entirely non-cash charges. We expect the Russia sale to close in 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 from consumer sentiment led us to revise our full year ongoing EPS guidance from $22 to $24. However, to put it into context, this guidance represents the second highest full year ongoing EPS in the history of the company, despite inflation running at 40-year highs and with additional headwinds that we have been discussing.

Our free cash flow guidance of $1.25 billion remains unchanged. Again, we are confident in the actions we have in place to manage with near-term pressures by remaining focused on delivering over long-term.

Turning to slide five, we show the drivers of our second quarter EBIT margin. Led by our fully executed cost-based price actions across the globe, we successfully delivered positive price mix resulting in 675 basis points of margin expansion. Net cost negatively impacted our margin 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 negatively impacting margin by 750 basis points. This is a very solid performance addressing a challenging environment and delivering operating margin of 9%.

Now, I will turn it over to Joe to review our regional results.

[Joe Liotine, Chief Operating Officer]

Thanks, Marc, and good morning, everyone. Turning to slide seven, I will review the results for our North American region. In the quarter, the industry continued to be negatively impacted by softening consumer sentiment alongside the constrained supply chain.

The industry slowdown we experienced in 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.

We believe the fundamental strength of consumer demand trends remain intact, as we continue to see elevated cooking appliance usage over 2 times above pre-pandemic levels. We were able to largely offset the negative impact of the industry decline with the strong execution of cost-based price increases.

We delivered 14.1% EBIT margins, despite inflationary pressures, alongside the negative impact of operational inefficiencies and temporary volume deleveraging. We remain confident in the strength of our business and our ability to deliver strong results in any environment.

Turning to slide eight, I will review results for our Europe, Middle East and Africa region. The revenue decline was largely attributed to reduced volume, which was negatively impacted by the war in Ukraine, including our operations in Russia flowing to a near shutdown, excluding currency, the region’s revenue declined by approximately 10%.

The region’s strong execution of pricing actions drove 270 basis points of sequential margin expansion. That was more than offset by lower volumes and cost inflation, resulting in the EBIT margin contraction of 2.3 points in the quarter.

Next, as part of our strategic review of EMEA, we announced the pending divestiture of our Russia business. This is a standalone business with localized production and sales offices, positioning it well to be sold as a unique entity. We continue to expect to conclude the strategic conclude the strategic review of our EMEA business by the end of the third quarter.

Turning to slide nine, I will provide additional detail regarding the pending sale of our Russia business. In June, we entered into a share purchase agreement to sell our Whirlpool Russia business. 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 a comprehensive assessment, resulting in a $384 million goodwill and intangible asset impairment in the EMEA region. We are pleased with our team’s ability to navigate and find a solution has furthers our portfolio transformation and represents the best course of action for our employees located in Russia.

Turning to slide 10, I will review results for our Latin America region. Net sales growth of 3%, driven by strong execution of cost-based price increases, fully offsetting expected industry softness. The region delivered strong EBIT margins of 7.2%, once again demonstrating the consistency in which this region delivers results in any environment.

Turning to slide 11, I will review our Asia region. Revenue growth of 26% is largely attributed to higher volumes in India, as the region was impacted by COVID-related shutdowns in the prior year period. 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, fully offsetting cost inflation.

Now, on slide 12, I will turn it over to Jim to discuss our full year 2022 guidance.

[Jim Peters, Chief Financial Officer]

Thanks, Joe, and good morning, everyone. Now turning to slide 13, I will review our updated guidance for 2022. 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 a robust multiyear appliance demand outlook, 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% for the year. This represents a full year ongoing EPS range of $22 to $24. Next, we continue to expect to generate significant free cash flow of approximately $1.25 billion or around 6% of net sales.

Turning to slide 14, we show the drivers of our full year ongoing EBIT margin guidance. 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 expecting negative currency impact of 25 basis points, driven primarily by Brazil and India, all other drivers remain unchanged. Including our expectations of previously announced cost base 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 the right actions in place to deliver approximately 9% 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 second quarter.

Looking beyond 2022, we remain confident in the fundamentals of the demand environment for North America, supported by; one, broader home nesting trends; two, an undersupplied housing market; three, a strong replacement cycle; and four, continued elevated levels of consumer engagement with our appliances.

Regarding our EBIT guidance, we expect North America to deliver approximately 50% EBIT margin, which remains in line with our long-term expectations for the region. 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 planned introduction of over 100 new products this year, including our newly launched Shave 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 will turn it over to Marc to summarize our key messages.

[Marc Bitzer, Chairman and CEO]

Thank you, Jim. And let me recap what you heard over the past few minutes, we have a right global action in place to deliver strong second half, our raw material inflation expectations remain unchanged, and we do expect raw material inflation to peak in the second quarter and third quarter.

Our previously announced cost-based price increase have been fully executed. We expect to exit the year with our existing pricing actions fully offsetting raw material inflation. Additional cost actions, including higher increases have already been initiated. We are prepared and expect to successfully navigate the near-term industry slowdown in 2022.

The long-term fundamental strength in consumer demand remains unchanged. Consumers continue to use our clients that in the elevated rate, alongside strong replacement demand and undersupplied housing market.

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 our outstanding share count by over 10% in the last four quarters alone. These actions demonstrate our confidence in the sustainability of our high margin and strong cash generating business and our commitment to creating shareholder value.

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

[Operator]

[Operator Instructions] And your first question comes from the line of Michael Rehaut from JPMorgan. Your line is open.

[Michael Rehaut, JPMorgan]

Thanks. Good morning, everyone. Thanks for taking my questions, Marc. I wanted to focus first on North America, and obviously, the big driver of the change in your guidance, part in -- part of the second quarter but also in the back half. What do you see in terms of, it’s a pretty decent drop-off in the full year expectation? I was hoping to get a little more granular in terms of what you think is driving that relative to your prior expectations? And also encouragingly how you think about the share going forward, your own share, you mentioned then sequential gain, which is important, obviously, given some of the losses over the past 18 months and how that might progress as well?

[Marc Bitzer, Chairman and CEO]

So, Michael, it’s Marc. Good morning. Multiple questions in one question, let me still try to address them, North America demand and Joe should probably also add some color. Michael, what we are seeing is basically, call it, two trends going on at the same time. There is 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, structurally undersupplied housing markets. So all these factors remain intact and you can’t be in denial about this fundamental positive long-term trend.

But there is a short-term trend, which is kind of overriding that right now. But we did see in pretty much around the late April, May time frame, 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, versus disposable income, it’s the consumer sentiment driven by inflation, all the bad news around war and the pandemic, which is still now behind us. 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 mid-term 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. I will 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 stabilize the share, but in all transparency, we have not regained the share, which will -- and compared to pre-pandemic. It’s however with supply chain constraints becoming less of an issue. We are confident that we can make progress in this dimension going forward.

[Joe Liotine, Chief Operating Officer]

And this is Joe, maybe just to build on comments from Marc. In the back half we do have some upcoming launches that we are excited about that will help spur some growth. In addition to the comments Marc 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.

[Michael Rehaut, JPMorgan]

Okay. I appreciate that. And maybe just as a follow-on, Joe, you kind of hit on promotions there and when -- 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 $0.25 billion, I believe, in non-structural efficiencies and temporary volume deleveraging. But you just mentioned, Joe, in your remarks that, you referred to promotions. I’d love to get a sense of the price environment today, 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?

[Joe Liotine, Chief Operating Officer]

Yeah. Michael, maybe just to clarify your comment, I wasn’t referring to the promotional period, the holiday period, less about promotions themselves. But as you know, we have shared that our price margin and mix, all those kind of fully on track and as kind of offset of the RMI, we 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 the new news that occurred in Q2, so maybe just separating the two.

From a price and promotion standpoint, I think, we have over many years and quarters demonstrated a high ability to manage 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.

[Marc Bitzer, Chairman and CEO]

Hey. Michael, just -- it’s Marc, again. Just to add to Joe’s comments. And I would refer to page 14 of our presentation where we basically show the margin walk in prior guidance and current guidance and that picture it’s for corporation by definition it is 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 outlook in terms of how much we think we can get from price mix.

To Joe’s point, a slight margin drop is largely coming from volume deleveraging, because we have to adjust inventories in line with market demand and that is just -- has a certain cost associated with that volume deleveraging and some temporary cost, which we were pretty convinced will go away in the short-term.

So anyhow, so that’s the difference in margin walk. Now to see the positive, and again, we should put that always in context, with 9% margin in Q2, that was an environment where we had a 40-year high in inflation and market demand being down. That tells you a lot about the resilience of this business and North America at 14% in that environment, I think, speaks to the health and the structural changes of this -- of our business.

[Operator]

Your next question comes from the line of Sam Darkatsh from Raymond James. Your line is open.

[Sam Darkatsh, Raymond James]

Good morning, Marc, Jim, Joe. How are you?

[Marc Bitzer, Chairman and CEO]

Very good morning, Sam.

[Joe Liotine, Chief Operating Officer]

Good morning, Sam.

[Sam Darkatsh, Raymond James]

So I will ask the million dollar question I suppose regarding the EMEA strategic review process. I know you have mentioned that you are expecting to conclude 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 am just trying to get a sense if your -- of your view of the likelihood of a sale in light of the idea that European demand is weakening, the financing markets and the capital markets are also to an extent tightening up and FX is a pressure. So how is this evolved in terms of your expectation to consummate a sale that would be of your liking?

[Jim Peters, Chief Financial Officer]

Sam, this is Jim, and I will start and then Marc 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 will talk further about it, right now we are in the middle of the process.

And so within this quarter and as we mentioned in our remarks earlier, we did at least reached an agreement to divest of our Russia business, which was a necessary step considering the sanctions in the environment that we were trying to operate in and that is a progression along the past in terms of our strategic assessment here.

Now when you asked about the accounting for to putting it in discontinued ops, because we are 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.

[Joe Liotine, Chief Operating Officer]

Yeah. Sam, maybe just adding to this one, as we indicated in the April earnings call, we are looking all options and just to be clarified the options on the table are anything from selling the business to partial sale to keeping business.

Now keeping the business would have to qualify and as is not really the option, keeping the business would be a reduced footprint or a different Whirlpool Europe, pretty much all options on the table, but at this point, it would be pure speculation to see what the likely outcome is.

To Jim’s point, the only change we had in the quarter, we originally assumed that Russia will be part of a broader review. But given all the environment, which we are 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 kind of pretty much come to a conclusion of our strategic review.

[Sam Darkatsh, Raymond James]

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 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 is there -- specifically is there any anticipated promotional leakage? Thanks.

[Joe Liotine, Chief Operating Officer]

Hey. Sam, this is Joe. Just in response to that. There is, obviously, multiple things going on. There is 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 into kind of ramping up as they come on. So that’s kind of essentially what you are seeing.

From a pricing promotion standpoint, as we touched on earlier, obviously, that is very different than, I will say, years ago and we expect that to remain at, I will say, muted or moderated levels and has been in Q2 to-date and that’s kind of where we are 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.

[Operator]

Your next question comes from the line of David MacGregor from Longbow Research. Your line is open.

[David MacGregor, Longbow Research]

Yes. Good morning, everyone. Marc, I wonder if you could just talk about the builder channel and how much of the drag on, how much of that was the drag on 2Q, would you attribute back to the builder channel versus replacement demand and just if you could talk about what you are seeing change there?

[Marc Bitzer, Chairman and CEO]

Yeah. David, let me start and maybe Joe should add some color. As we all witness an experience, I think, there’s a lot of noise and not always the best information about what’s going on the housing market.

I will start with a long-term housing -- U.S. housing market structurally undersupplied. We have talked about this for many years and I still said before the U.S. housing market need several years of housing starts and more housing completion then were between 1.8 million units and 2 million units. Just to re-stabilize that market given demographic trends giving age of housing stock and give them household formation. So nothing has changed on the long-term needs.

Now, obviously, the combination of price increase in housing markets, which were well ahead of the extra 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, this is to be the case, and yes, I would probably say, some correction home prices is necessary to and re-stabilized market. Doesn’t change the long-term outlook, the positive outlook which we have in housing, but I don’t think the next 12 months you see -- we will see a very dynamic market in that respect.

Now when it specifically to a builder 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 our typical completions because appliances coming pretty much less. So we did not see a dramatic drop-off by now in Q2, but we also don’t expect a lot of growth now in Q3 and Q4. Joe?

[Joe Liotine, Chief Operating Officer]

Yeah. Just to build on those points. I didn’t see a dramatic drop off at all on the new home starts. I didn’t see really any material changes from what we are expecting in Q2 and then the remodel area, which is kind of a quasi builder area, didn’t really see any new information there either in Q2. So although there is a lot of information in terms of what’s affecting consumer sentiment that was not one of our drivers in the results for Q2.

[David MacGregor, Longbow Research]

Okay. Just as a follow-up question, I guess, the share repurchase activity, you seem to be running at a pretty good clip here mid-year. I think $800 million if I have got numbers there correct. I guess, the question would be, how would you handle capital likelihood of you coming in above your $1 billion guidance?

[Marc Bitzer, Chairman and CEO]

Yeah. I’d say, David, right now as we emphasize, and I said in the earlier remarks, we still intend to come in where we forecasted at the beginning of the year. And so we are turning about a $1.5 billion to shareholders, which the dividend makes up about $400 million of that and then we did the majority of the share repurchase in the first half of the year with where the market conditions were in all that, as well as where our cash position was, but that doesn’t change our estimate for the full year right now. We are still on tracking at that level.

[Operator]

Your next question comes from the line of Liz Suzuki from Bank of America. Your line is open.

[Liz Suzuki, Bank of America]

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 is the EBIT margin walk look like from the year end guidance to your ultimate goal of 11% to 12% ongoing EBIT margin?

[Marc Bitzer, Chairman and CEO]

Yeah. Liz, obviously, it’s Marc and there’s a couple of components. First of all, on the topline, as we indicated earlier, we do see the current environment is temporary, but doesn’t change our long-term demand outlook.

So we do expect and it’s, obviously, this is not a 2023 or 2024 guidance, but right now we would assume by 2023 and 2024 we would see healthy underling market growth, again driven by replacement needs, housing markets and by higher usage of appliance.

So we continue to assume solid, probably, mid single-digit market growth 2023 and 2024. Again, I want to reiterate, that’s not the 2023 guidance, but that’s right now the current thinking. In that environment, we still expect in particular North America to rebalance our market share back to pre-COVID levels. So beyond the market demand, you will have a certain level of share gain probably over the course of 2023 and to some extent 2024. So that is a big driver of the topline.

In addition, globally, we have several growth markets, which continue to -- in the combination between strong market share and underlying market dynamics like India. We have strong organic growth, more on the high single-digit, that’s on the topline.

On the margin side, Liz, right now, again, we are pretty much guiding this year to a 9%. Keep in mind that 9% also includes several kind of costs which are not typically in the cycle, because you still had expressed shipments all kinds of extra costs, which were related to supply constraint, which obviously will go away and it has a significant volume deleveraging.

So just taking that out of the equation, you start getting a lot closer to 11% coupled that with additional cost action and then focus more and more on high margin businesses that we believe it will be 11% to 12%.

[Jim Peters, Chief Financial Officer]

Yeah. Liz and this is Jim. And just to maybe add to what Marc said there is, we have talked about to as we go forward our focus on higher margin businesses and that’s where we will invest on top of this.

And then even as we talked about the strategic review in EMEA and Marc alluded to that no matter what the scenario is it would not be the same as it is today and so even in a keep situation, you have a turnaround and 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.

[Liz Suzuki, Bank of America]

Great. Thanks very much.

[Operator]

Your next question comes from the line of Susan Maklari from Goldman Sachs. Your line is open.

[Susan Maklari, Goldman Sachs]

Thank you. Good morning, everyone. My first question is focusing a little bit more on the production side of things. 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 are facing today and how you are thinking about those easing as the demand moderates?

[Marc Bitzer, Chairman and CEO]

Hi, Susan. 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 that impacted, but the situation got better as Q2 progressed.

On a going forward basis, we still don’t fully expect a fully normalized supply chain environment, but still significantly better than what we have seen last year, and probably, until April, May.

So we would still have sports or elements, but you will have a disruption for a number of reasons, but not to the same level as before. So in simplistic term, supply chain constraints continue to ease, but were not going to completely go away throughout the year.

Specifically then on production levels and inventory, with the drop-off of the April, May volume, frankly our inventory towards June is probably slightly elevated to what we had in minds, 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, or put it differently, we are correcting production, we did already in June and we will continue to do so going forward and we are not going to wait until year end.

[Susan Maklari, Goldman Sachs]

Okay. That’s helpful. My follow-up question is, you mentioned in your commentary Marc that you are 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 are thinking about balancing that relative to the other goals that you have, as you think about the business especially within North America?

[Marc Bitzer, Chairman and CEO]

Yeah. Susan, I mean, first of all, it starts obviously with a macro assumption you have and I think, it’s -- I mean, it’s true part for many companies. The macro assumptions that we have now in July 2022 are very different from January 2022.

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 we -- right now that is our main scenario and that became very clear in our view, probably, around June, July.

So, accordingly, we have 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, notable extend 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 logistics cost side where we were facing with many express and inefficiencies, but we would also be very disciplined in managing headcount and all associated costs. So we are taking strong actions on cost side, call it, from our recessionary playbook.

In addition, every recession in the past has proven you have got to keep an eye on cash flow. So we are -- you should expect us to be a very disciplined on net working capital and how we manage the net working capital and our cash flow accordingly, and in that context, I am also very pleased that we are -- in our scenario we are able to keep the guidance on the cash flow.

[Operator]

Your next question comes from the line of Chris Kalata from RBC Capital Markets. Your line is open.

[Chris Kalata, RBC Capital Markets]

Hi. Thanks for taking my questions. Just going back to the promotional dynamics, I was hoping if you could help quantify how much of the 420 basis points year-over-year decline in North America EBIT 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 there would be helpful?

[Jim Peters, Chief Financial Officer]

Yeah. Chris, this is Jim. And maybe I will kind of start with that and Joe can chime in here. But 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.

We have really said that in the back half of the year, we still expect to have price mix benefits that are still coming, so 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 have talked about, the impact on margins is 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’s come from volume deleveraging as we have just managed the business to a lower level of demand right now and had to reduce our production levels.

So 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 it is not assuming that there is a higher promotional environment or anything, this is mainly just a reflection of where costs are.

[Joe Liotine, Chief Operating Officer]

Yeah. Maybe just to build on that to Jim’s points, the deleveraging did occur pretty much in Q2 a bit. 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.

[Chris Kalata, RBC Capital Markets]

Understood. And just to drill into the kind of sequential cadence for North America margins. Your guidance for 15% EBIT for the year implies a second half step up. So, yeah, assuming if you could help us break out the key drivers of that assuming the promotional dynamics to stay the same, you guys outlined a cost cutting program, any way you can help provide some quantifications on how much of that is driving the sequential step up there in addition to incremental pricing announcements and then another -- other actions you are taking?

[Jim Peters, Chief Financial Officer]

Yeah. I don’t know that we haven’t broken out and quantified those specifically, and so what I can say is, you really hit the drivers there. As Joe talked about earlier, there are price increases we took in Q2 that fully running in the back half of the year.

You have cost saving programs that we have now kicked off and Marc talked about this, the different things we are doing to prepare ourselves for a recession. 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 are seeing material cost is maybe being stable in the back half of the year that we are hitting the peak now. So those are the bigger drivers when we look from Q2 into Q3 and Q4 in terms of North America margins.

[Marc Bitzer, Chairman and CEO]

And Chris, it’s Marc. And to be -- apologize for being very direct, I think, you are missing the point here. What I mean with that is, first of all, if you look at Q1 and Q2 margins, we are pretty close to 14% in North America, with 15% in Q1 and 14% on Q2. So we are pretty much on the run rate, despite inflation will be just at peak in Q2 and Q3 and despite the volume negative environment.

So, I would say, with this North American margin, given the environment are spectacularly strong. We are well above any historic levels. They clearly demonstrate how strong that underlying business is and again, that’s with all the volume deleveraging and with all the inflationary pressure.

So 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. So I think that is a price, the North American margins and others are concerned going forward.

[Operator]

Your next question comes from the line of Eric Bosshard from Cleveland Research. Your line is open.

[Eric Bosshard, Cleveland Research]

Thanks. Two follow-up questions. First of all, just some clarity, you made a comment about rebalancing market share back at 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 normalizing if not a bit heavy, is it your intention -- it’s an environment that certainly seems right for more promotions either driven by retailers or competitors to try to make up some of the lost volume coming from softer consumers, is the year 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?

[Joe Liotine, Chief Operating Officer]

Eric, this is Joe. Just kind of setting up a response to that question, if you look at what transpired in Q1 to Q2, we did grow share slightly in Q2, even in a depressed environment. So that’s kind of where we are beginning from.

We think we will continue to look for opportunities to improve and rebalance share back to pre-COVID levels in the back half and it’s a -- frankly into 2023, in terms of promotions, I mean, that’s always the case that there is different factors in the market. We always are going to review those and make sure they are value creating.

And so I look at that is a bit more of a constant. I think now that we are past, I will say, some of the disruptions on supply chains. We are able to get the right production where we want it, we are 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, excuse me, 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 will see that transpire into the back half.

[Eric Bosshard, Cleveland Research]

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. I guess you have spoken this, but just to hear you say it again, why does the business delever of less in the back half on a similar volume in a more cautious consumer?

[Jim Peters, Chief Financial Officer]

Yeah. Eric, this is Jim. And I think what you are looking at to 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 in that 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 pressures we did 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 are 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 headwinds that we are 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 are still at about 150 basis points.

[Marc Bitzer, Chairman and CEO]

So, I guess we are 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 is a lot of moving parts. It’s a dynamic. You can call it a challenging environment by any definition. But I think in the Q2 we demonstrate we can perform very well in a tough environment and we will continue to do so.

We changed our guidance, but frankly, we don’t like, but it’s a guidance towards the second best year ever in the history. Yes, we would have like to make it another best year, but we are going to be pretty close and I think all the actions which we 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.

[Operator]

Ladies and gentlemen that concludes today’s conference call. You may now disconnect.