Good morning, and welcome to Whirlpool Corporation's Third Quarter 2021 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.

Thank you, and welcome to our third quarter 2021 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'll be making forward-looking statements to assist you in better understanding Whirlpool Corporation's future expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K, 10-Q and other periodic reports. We also want to remind you that today's presentation includes non-GAAP measures. We believe these measures are important indicators of our operations as they exclude items that may not be indicative of results from our ongoing business operations. We also think the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations. 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'd ask that participants ask no more than two questions. With that, I'll turn the call over to Marc.

Thanks, Korey, and good morning, everyone. Today, in addition to our third quarter results, I will be sharing our new long-term value creation goals. Despite operating in a supply-constrained and inflationary environment, we continue to consistently demonstrate strong results at or above our previous long-term targets. We want to take the opportunity to share our insights and expectations for our business moving forward. But first, I'll turn it over to Jim to review our global third quarter results and 2021 guidance.

Thanks, Marc, and good morning, everyone. Now turning to our third quarter highlights on Slide 5. We anticipate that in the third quarter, we would face both a constrained supply chain alongside elevated inflation. The exceptional execution of the actions we put in place and the sustained robust consumer demand delivered yet another quarter of very strong results. We delivered revenue growth of 4% year-over-year, which represents growth of 8% compared to 2019. Next, the decisive actions we took early this year delivered strong double-digit margins of 11.1%, which largely offset the expected cost inflation of 650 basis points. Additionally, we generated positive adjusted free cash flow of $1.3 billion, a $1.1 billion increase compared to a year ago. Cash generation was led by strong earnings in the successful completion of divestitures in the first half of the year. Lastly, we opportunistically executed $441 million in share buybacks in the third quarter and added to our previous investments in Elica India by acquiring the majority interest in the Company. Our ability to successfully deliver strong results in a difficult operating environment gives us the confidence to increase our guidance to approximately $26.25 per share. Turning to Slide 6, we show the drivers of our third quarter EBIT margin. Raw material inflation, particularly steel and resins, resulted in an unfavorable impact of 650 basis points. This was fully offset by our combined price mix and net cost actions. Price and mix delivered 600 basis points of margin expansion led by the execution of the previously announced cost-based price increases. Additionally, ongoing cost productivity initiatives delivered 50 basis points of net cost margin improvement. Our ongoing cost initiatives more than offset increased logistics, labor and other supply chain premiums we and many companies are facing. Lastly, increased investments in marketing and technology and the continued impact from currency in Latin America impacted margins by a combined 75 basis points. Overall, we are very pleased to be delivering above our previous long-term EBIT margin commitments and are confident this positive momentum will continue to drive very strong results throughout 2021 and beyond. Now turning to Slide 7, I will discuss our revised full year 2021 guidance. We remain confident in both the actions we have put in place to protect margins and in the strong execution capabilities we continue to demonstrate. We expect to drive strong net sales growth of approximately 13% and EBIT margins of 10.8%. Additionally, we continue to expect to deliver $1.7 billion in adjusted free cash flow, or 7.7% of net sales. Finally, we are raising our ongoing EPS guidance to approximately $26.25, a year-over-year increase of over 40%. Turning to Slide 8, we show the drivers of our increased ongoing EBIT margin guidance. We continue to expect 600 basis points of margin expansion driven by price mix. We have increased our expectation for net cost takeout to 200 basis points as we realize further efficiencies and continue to focus on cost productivity. Within our net cost results, we are fully offsetting the inefficiencies across the supply chain, notably in distribution and labor. While our expectations remain unchanged, we continuously monitor cost inflation globally, largely in steel and resins, and still expect our business to be negatively impacted by about $1 billion, with the peak increase already realized in the third quarter. Inflation is fully offset by our price mix actions. We continue to expect increased investments in marketing and technology and unfavorable currency, primarily in Latin America, to impact margins by 125 basis points. Overall, we are confident in our ability to continue to navigate in this environment and deliver a 10.8% EBIT margin, representing our fourth consecutive year of margin expansion. Turning to Slide 9, we provide an update on our capital allocation priorities for 2021. Our commitment to fund innovation and growth remains unchanged as we expect to invest over $1 billion in capital expenditures and research and development. Next, with a clear focus on returning significant levels of cash to shareholders, we expect to repurchase over $940 million of shares in 2021, which includes over $300 million in the fourth quarter. Including dividends, we expect to return a total of over $1.2 billion to shareholders this year. Now I'll turn it over to Joe to review our regional results.

Thanks, Jim, and good morning, everyone. Turning to Slide 11, I'll review our third quarter regional results. In North America, we delivered 5% revenue growth, with sustained and robust consumer demand in the region. Additionally, we delivered another quarter with strong EBIT margin driven by disciplined execution of cost-based price increases. Demand for our products remains high as we operate in a constrained environment, which we expect to persist into 2022. Lastly, the region's outstanding results demonstrate the fundamental strength and agility of our business model. Turning to Slide 12, I'll review our third quarter results for our Europe, Middle East and Africa region. The region delivered stable revenue year-over-year, which represents growth of over 15% compared to 2019. Cost-based price increases partially offset the impact of inflation in the quarter. We remain confident in the actions we have in place. Our long-term turnaround plan for the region remains on track. Turning to Slide 13, I'll review our third quarter results for our Latin America region. Net sales increased by 17%, led by cost-based price increases and strong demand across Mexico. The region delivered very strong EBIT margins of 8.7% despite supply constraints, inflation and continued negative impact from currency. Turning to Slide 14, I'll review our third quarter results for our Asia region. The region's revenue decline was entirely driven by the Whirlpool China divestiture. Excluding this, the region grew by 3% year-over-year or 10% compared to 2019. As expected, the region continued to recover from COVID-related shutdowns experienced in the first half of the year. The region delivered very strong EBIT margins of 8.6% driven by cost-based price actions and positive impact from our Whirlpool China divestiture. Lastly, our increased investments in Elica PB India enhances our built-in cooking product offering, strengthens our distribution network and is expected to be margin-accretive to the region.

Thanks, Joe. And before I look forward, I will take a moment to look back. We are a 110-year-old company with a legacy of success and a vision anchored on improving life at home. From our introduction of the first electric wringer washer and first stand mixer in the early 1900s to our launch of the first French door built-in refrigerator and our leadership in connected appliances today. We relentlessly reinvent ourselves with consumers at the heart of everything we do. These new long-term value creation goals build on our strong foundation, but reflect the fact that we are a very different Whirlpool than 10 years ago, operating in a very different world. Today, we are operating in a supply-constrained and inflationary environment, which is negatively impacting most industries across the world. Yet, we are on track for a year of record performance. In 2020, the world was impacted by the COVID-19 pandemic, and before that, numerous other unforeseen global challenges. We faced many significantly challenging environments, and yet we're on track for our fourth consecutive year of record results. We have an agile and resilient business model, which enables us to succeed in any operating environment. Our increased value creation goals demonstrate our confidence in our long-term success and that is supported by strong underlying drivers, such as a positive outlook on housing, strong replacement demand and evolving consumer habits. Additionally, our demonstrated value-creating go-to-market approach, lower cost base and compelling innovation pipeline position us for continued success. Our new long-term value creation goals reflect our confidence in the different Whirlpool in this different world. Now turning to Slide 18, I will review our new long-term value creation goals. We now expect revenue to grow at a rate of 5% to 6%, almost doubling our previous goal of approximately 3%. Next, we are increasing our EBIT margin expectations from approximately 10% to a range of 11% to 12%. This is a level of performance that our business is absolutely capable of achieving. Additionally, we expect to continue to convert cash at a high level and have increased our adjusted free cash flow as a percentage of net sales from 6% plus to a range of 7% to 8%. Lastly, we expect to deliver return on invested capital of 15% to 16%, an increase from our previous target of 12% to 14%. We are confident in our future success and achieving these goals will continue to drive significant shareholder return. Now we will end our formal remarks and open it up for questions.

Your first question comes from David MacGregor of Longbow.

Yes, good morning, everyone. And nice to see the long-term value creation goals being updated, obviously, an expression of confidence in your ability to continue growing the financial performance of the Company, so thanks for that. I wanted to talk about a more immediate condition, being cost inflation. You're dealing with a fairly substantial level now. Inflation looks like it will continue into 2022. Can you just talk about your plans to mitigate the impact to profitability, the extent to which you feel further price increases are achievable to offset that pressure?

Good morning, David. It's Marc. So, first of all on the cost inflation, as you know, ever since our Q1 earnings call, we guided to a significant cost inflation. We put out $1 billion as the cost inflation in April, and that's the same $1 billion which we have today, so probably one of the few companies who didn't change the guidance. We saw it coming, and we're dealing with it. In this Q3, also as we expected, we probably saw the highest inflation increase ever year-over-year. I mean 6.5% which is sitting in the Q3 P&L. Frankly, in 22 years, I never had a single quarter with that kind of inflation, but we dealt with it. And I would say, Q3 is certainly a proof point, a strong proof point that we can deal with exceptionally high inflation. So going forward, we don't expect that the inflation will quickly fall off and will be short-term. But by definition, there’s carryover into next year. But by definition, you will also have pricing carryover into next year. So I would say, as you know, around this time of year, we're not yet giving guidance on inflation for next year, we'll do that in January. But I would rather point to Q3 as a proof point. Even an extreme spike of inflation year-over-year like you had in Q3, we're dealing with it without even a blip on our margin. So, I'm pretty confident that we can deal with the carryover, which we will see to some extent from inflation.

Just on that point, do you feel like you still have room to go on pricing before you reach any kind of demand elasticity issues with the consumer? And then I have a follow-up.

Yes, David, as usual, we're not commenting a lot on the go-forward pricing. But again, if you split in several pieces, I think if there's anything which we've seen in the last 18 months is basically the consumer, call it, the category price elasticity is very little. Typically, what you see in price elasticity is more what you see promotional across price elasticity in the store. But the consumer, there is very limited price elasticity. Actually, in fact, over years, we've been running consumer research where we ask consumers before we enter the store how much do you expect to pay versus what they actually paid. And they consistently overestimate how much they have to pay. So, I think it's just the nature of an infrequent purchase that the consumer awareness of the exact price point is somewhat limited. On top of that, let's not also forget the disposable income in households is right now probably at an all-time high. So I think from that perspective, I'm less concerned. Will, at one point, promotional pressure in the market get a little bit bigger? Yes. But right now, we're not seeing it in the current environment. And as long as the broader global supply chain constraints will exist, I think you will see very little pressure from that perspective.

Thank you for that. As a follow-up question, I guess, just with regard to earnings power, sort of at the lower end of the cycle or what a minimum level of earnings power might look like. I mean given all that you've accomplished with regard to cost reductions and exiting underperforming businesses and productivity investments, could you just talk about downside risk to earnings? And what gives you confidence and whatever that level of support might be?

Yes, David, this is Jim. And maybe I'll start off here. And I think you can take the second quarter of 2020 as really a good benchmark out there when we saw a significant drop in volumes around the globe and significant disruption, our overall margins for that quarter only dropped to 5%. If you look at our North America business, it was actually 12% during that. So I think that's one beginning proof point there. I think the second thing that we've always pointed to is when we came out of the recessionary period in 2011, 2012, a lot of the improvements we made really brought our overall margins up to that type of point and got our North America margins up to 8% at that time. And we've kept those fixed costs out and taken more out. So, I think what you saw in a very extreme situation in 2020 proves that we can handle drops in volume as well as we can handle some of the shocks that come with these types of volatile environments.

Your next question comes from Sam Darkatsh of Raymond James.

Good morning, Mark, Jim, Joe, how are you?

Good. Good morning, Sam.

Good morning.

Two questions. First, with respect to market share recovery, within your long-term goals, obviously, you talk about regaining market share in North America. And I'm sure you're talking about beyond just working through your backlog. At what point do you anticipate specifically defending your market share? Is that going to be fiscal '22? And what are the methods by which you plan to do so? Is it more new product rollouts? Or is it defending on price?

Okay. So let me first address your question, and then Joe Liotine, our COO, will provide additional insights. To start, in the long term, we have set a healthy EBIT margin target of 11% to 12% and have significantly increased our revenue growth goal to 5% to 6%. This is driven by both market demand and aspirations for market share. We are very optimistic about our outlook for the mid to long term, particularly due to the housing market, which has been undersupplied for decades and represents a significant strength for us. Our position in the builder channel is among the strongest we have seen in a century, and we feel confident about the housing market. While the replacement market has been challenging in recent years due to comparison against the low sales period during the financial crisis, it is now becoming a positive factor as we're comparing against stronger growth years after the crisis. Additionally, the pandemic has led to increased appliance usage, resulting in higher wear and tear that will fuel replacement cycles. We are also optimistic about discretionary spending, as there is high disposable income and a consumer shift towards home improvement. Overall, it is rare for all three demand components to align positively, which is the foundation of our strong confidence in demand. Moreover, we believe we can gain further market share globally, not just in North America, and Joe will elaborate on that. We also mentioned earlier the importance of diverse revenue streams. For example, a direct-to-consumer business provides higher revenue per unit, and having additional revenue sources like the detergent business or other ecosystem revenue contributes further. So, we’re looking beyond the traditional market share metrics based solely on units. Joe?

Yes. Thanks, Marc. Maybe just a couple of points to add, Sam. On our new product launches, the world has been a volatile place in the last year. And so really our dishwashers that we've launched are best-in-class, have a lot of innovation and they're really yet to be fully seeded in the market. We're very excited about how that product is doing already and will continue to do. In addition, our laundry products in top load we've launched some really fantastic products here just recently in the last quarter or so and those are just getting seeded now and will have the growth trajectory into 2022. We're super excited about those and then Marc touched on it. There's products in the new areas around detergents. Our Yummly Pro that we just recently launched as well that are just now getting in the marketplace and are essentially new areas of growth for us that we've not really participated in historically. So you put that all together with the fundamentals behind demand, we're very optimistic about the overall demand profile.

My second question is regarding the yearly guidance, which suggests that the fourth quarter margin will decline significantly compared to the third quarter, by about 200 to 300 basis points, even though sales are expected to increase sequentially. This is unusual from a historical seasonal perspective. I'm trying to understand the reasons behind that margin decline. I realize that the pricing versus raw materials is becoming a bit more challenging, but I don't believe that accounts for the entire margin drop indicated in your guidance. Could you elaborate on this? Thanks.

Yes, Sam, it's Marc. First, I want to highlight that we have raised our guidance ahead of schedule, which indicates our strong confidence in the business. In response to your question, I advise not to focus too much on the specific numbers of 26 and 25 for the full year. I believe this will represent the lower end of our expectations. We might actually perform better than 26 and 25. There are some minor tactical investments we need to make in Q4 related to capacity and supply procurement, but these are just tactical moves. Also, I would like to mention our historical seasonality; it seems to have smoothed out more this year. This is evident in both our small appliance business and our past trends with large promotional periods in Q4. This year showcased our ability to generate consistent positive results and cash flow throughout the year, indicating that our business is not as seasonal as it once was.

Your next question comes from Michael Rehaut of JPMorgan.

Congrats on the results. First question, I just wanted to maybe bear down on a couple of prior ones and see if we could just revisit and make sure we understand things right. On the market share question, obviously, I appreciate the confidence in the 5% to 6% organic growth and the new products are always a key component of that. Just want to understand and unpack a little bit 3Q results in North America particularly. If you're probably benefiting from, I don't know, you tell me, mid, even high single-digit price increases. It would imply maybe a low single-digit volume decline. So, am I thinking about that right? And that would imply a little bit of continued loss market share, if you might explain the drivers of that.

Michael, let me clarify the situation in North America. We did not make any headway in regaining market share there. That is accurate. To provide some context, this issue is not related to our products or new offerings, as Joe mentioned, nor to pricing. It is entirely about our production capacity. Additionally, in Q3, we finally produced more than we did in Q3 2020 and 2019. You may be wondering why we didn't ship more. In Q3 of last year, we were still in the process of reducing inventory, meaning we were selling off what we had. Now, we have had to rebuild our inventory, which we are doing carefully to ensure the logistics function smoothly. This explains some of the situation. However, we would have preferred to ramp up production further. We are encountering similar constraints as reported in the news, including labor shortages, component shortages, and transportation bottlenecks. Production volumes indicate that things are gradually improving in Q3, and we expect this trend to continue, but it won't happen overnight. Therefore, we will carry some of these constraints into next year. Currently, this remains the main barrier to reclaiming certain levels of market share. We are very confident in our product range, as Joe highlighted, and we believe we are well positioned from a pricing perspective. It all comes down to how much we can further increase production.

Before I move to my second question, I want to clarify something. If the current conditions remain stable, you mentioned that you are beginning to strategically build up some inventory. If the situation we've seen over the past few months continues, do you anticipate being able to start regaining market share in the next quarter or two, assuming everything stays relatively the same as it is today?

Yes. So Michael, and again, it's always a question of demand supply. And right now, I start to pause this. The reason why we have an order backlog is demand is so strong where we can't produce enough. That's a fundamental reason I could give as a positive. Having said that, we also expect to continue to increase production every quarter. Now, it's not going to dramatically increase and that's very simply driven by the shortage of constraints, which we're all better aware of. But we continue to expect to increase production. And even against a continuous increase of the demand, we should be sequentially able to regain some market share. But it's not going to be a dramatic shift overnight because, very simply, just you can't produce enough.

I appreciate that. For my second question regarding share repurchase, I'd like to clarify that the revised 2021 guidance for the fourth quarter does not account for the $300 million. I just want to confirm that we're interpreting this correctly. Additionally, when you mention the amount of share repurchase completed in 2021, is this considered a new benchmark? Given that you're anticipating strong free cash flow generation, this is obviously aside from any opportunistic mergers and acquisitions.

Yes. This is Jim. To start, if you consider the $300 million allocated for Q4, its impact is minimal because the shares are purchased gradually throughout the quarter in the latter half of the year. As Marc mentioned earlier, our guidance leans towards the low end, but we don’t see this as significantly influencing our overall position. Additionally, if we evaluate our performance this year, our free cash flow has been robust, allowing us to increase returns to shareholders through share buybacks and dividends. We have five different priorities for capital allocation moving forward, with share buybacks continuing to be a primary focus, especially since we currently lack strategic needs for cash. We also plan to invest more heavily in our business, particularly as we emerge from this period of limited product launches in some factories, which should lead to increased capital expenditures. We will also remain open to pursuing opportunistic mergers and acquisitions, like the recent additional stake in Elica in India, which illustrates how we balance our various priorities.

And Mike, let me maybe also add a broader comment. As you've seen in our numbers, we are right now having a very strong balance sheet and we have a steady significant cash balance on our balance sheet. That is good because it gives you optionality. As we look at these options, as you can imagine, we have regular reviews with our Board to discuss the capital allocation, which ultimately comes back to where can we create the biggest return for shareholders for each allocated dollar, particularly in the share buyback. The ultimate decision about how attractive a share buyback, it's not a tactical decision. What we basically look at is what is the discounted value of our long-range plan versus market valuation right now for share price? And right now, we do see a fairly significant disconnect between these two numbers, and that's why we have, in accordance with our Board, we made the decision to buy back a significant amount of shares. And as Jim alluded to, you should also expect that in Q4.

Your next question comes from Susan Maklari of Goldman Sachs.

I guess my first question is thinking about the mix shift. In the past, you've talked about this asset, that has really kind of improved for you. Would you say that you're still seeing that improved mix shift, especially in the U.S.? And how you're thinking about that in relation to these longer-term goals that you've put out for us this morning?

Sure. This is Joe. Just in terms of mix shift, we have seen continued improvement there. Part of that is as a consequence of our new product launches that we referred to earlier, which essentially hit more the mass premium segment of the business. In addition, as we've had different constraints across labor and suppliers, we've also prioritized our business in a way that was most advantageous and has helped continue to improve the mix. And so, we feel good about the tools we employ. We've done this successfully in the last few years here. And we expect with the combination of our product launch and our go-to-market to be able to continue to do that in the future. And so generally speaking, that's been a good baseline for us and something we've kind of built the foundation of.

Okay. And then as a follow-up, Marc, you obviously outlined for us how you're thinking about the business today and where you expect it to operate as we think about it from a top line and margin perspective, cash generation, all those factors. Can you talk about when you think that you actually sort of arrive at these levels when we think about 2021? Obviously, you've been operating at a much higher level relative to some of these goals in some quarters. How do we think about all these different moving pieces and what they mean over time?

Yes, Susan, I am smiling because I anticipated your question. If you take a step back, you’ll remember that we set our value creation goals in 2017. Some considered those goals very ambitious and questioned whether we could achieve them, but we delivered on them after four years. I'm not suggesting that the new goals will be met in the same timeframe, but these are our targets. We do have internal plans with a timeline, although we are not prepared to specify an exact year for achieving them. A key point to note, as you mentioned, is related to the margins over the last five quarters. We are confident that we can maintain these margin levels. A significant change is our adjustment of the revenue growth goal from 3% to 5% to 6%, which reflects strong long-term demand trends. While I want to avoid specific timelines, I believe that you should see the 5% to 6% growth numbers sooner, as we recognize the strength of demand in the short, medium, and long term.

Your next question comes from Ken Zener of KeyBanc.

Joe, congratulations. And I'm wondering if you can take that acknowledgment to comment on how supply chains have affected the North American landscape, specifically kind of the sales guidance Peter talked about changing perhaps, obviously, the impact on promotions. And if these supply chain issues might, in your mind, actually be changing the cadence of how retailers address how they get product to consumers, i.e., maybe you don't have these big July 4. Maybe you don't have the Black Friday events. That's my first question.

Thank you, Ken. Looking at supply constraints, if we step back and reflect on the past 18 months, we've faced various challenges during that time. While we haven't managed these situations perfectly, I believe we've handled them successfully overall. Moving forward, we can expect some continued challenges related to factors such as labor, components, and supplier disruptions. This has been a part of our recent experience and is likely to persist in the short term. Regarding our cash flow, these constraints have led to a more consistent revenue flow throughout the year, with less seasonality than we've typically seen during holiday periods or promotions. This shift is a direct result of how we are managing our supply chain and production. While I can't predict how this will affect retailer promotions, I can say that our approach has shaped our current situation. On a positive note, we are witnessing an increase in production both quarter-over-quarter and year-over-year, although it doesn't fully resolve all the challenges we face.

I want to add that from a consumer perspective, the way people view appliances will change significantly going forward. For instance, they will engage with these products more frequently than before. Our connected appliances, with a significant install base of around 700,000 units, provide us with actual usage data. For freestanding ranges and ovens, we observe usage has doubled compared to pre-COVID levels. Washing machines show a 27% increase in usage rates. This trend is likely to persist, especially as more people work from home and spend increased time there. As a result, consumers will see and use these products more often. Additionally, due to nesting trends and a focus on home investments, consumers are becoming more selective about what they buy for their homes, leading to higher replacement cycles and a greater willingness to spend.

Understood. I think I had that issue with some of my appliances. As it relates to the replacement you have to do new construction, but the discretionary is interesting, because in the past we talked about how much of that discretionary is actually someone who is walking out and replacing an appliance that's not broken because they want new features. But also on that discretionary is large remodel projects, so if someone's doing a kitchen. Can you just update us on kind of how you consider your suites, right, where you sell all those appliances together, which looks to go into a kitchen remodel versus one-off purchases? Could you give us any commentary that you feel comfortable disclosing on that?

Yes. Ken, in terms of discretionary and remodel, essentially, a lot of these favorable trends that Marc alluded to, the nesting, being at home, using your appliances more, has really resulted in consumers caring more about that experience. And that caring more results in them wanting to invest in those spaces, customize those spaces, really get exactly what they want to meet their family's needs. And so, we generally see that as a favorable trend in this space in terms of their remodels and likely even suites and ensuring that they have all the right features and functionality. So we don't have perfect data here, but I would say the general trend and the sentiment is one that improves that position for us and makes consumers really want to invest more time and money to get exactly what they need for their family. And so I think we're going to continue to experience that here in the midterm. To Marc's point, people are still going to remain in a hybrid environment here, and so that's going to only bolster that position.

Ken, I want to add that it's interesting to see how as consumers look to buy new homes, the housing market is still facing a significant shortage, which has persisted for 10 years. This ongoing undersupply, despite strong demand, has led to high price increases. As a result, consumers who have the means to purchase homes are likely feeling frustrated by rising prices and the lack of availability, which may lead them to redirect some of their investments towards home renovations, like remodeling their kitchens. It's likely we will see an increase in these trends moving forward, similar to what we observed in previous years. Therefore, the discretionary kitchen remodel segment is expected to be appealing in the future, and with our offerings in both traditional retail and home improvement centers, we have strong options available.

Your next question comes from Mike Dahl of RBC Capital Markets.

Marc, I wanted to follow up on the comment you made in response to Mike Rehaut's question, and you mentioned that you strategically built up a little inventory. I guess I'm kind of wondering, you've got such extended backlogs. Could you give us a little more color on the decision to prioritize inventory build versus kind of shipping out the door and servicing the backlog?

Yes, I can provide an overview. Regarding the U.S. market, we have a significant factory and regional distribution center, but it's also necessary to have smaller distribution centers in the field to serve specific builder channels, the direct-to-consumer business, and various home improvement centers. When we reduced inventory last year, we found it was quite costly for these smaller centers, which ultimately impacts consumer service. We needed to adjust some inventory downstream to improve customer service and decrease wait times. Additionally, transportation has become slower, further complicating the situation. As a result, we are tying up more inventory in transit than usual, which was evident in Q3. Rest assured, we are working diligently to reduce the backlog of orders as swiftly as possible.

Yes. I think, Michael, this is Jim. The other thing to point out when you look at the inventory number, there's a big component in there too that's cost. Raw material costs have gone up in another thing. So the portion that Marc is talking about that we've repositioned, that is only a part of this. The biggest driver of increased inventories is the increase in our input costs.

Okay. And I guess just a quick clarification, and then I had a second question. It seems like your implied fourth quarter guide, which is kind of flattish for total revenues, would still suggest in a positive price environment that that volume dynamic is likely to continue in 4Q. So could you just clarify that? But then the second question is more around your confidence in the inflationary environment. This has been such a dynamic environment for every company, as you acknowledged. So just what are you seeing that's giving you the confidence or the visibility in terms of this kind of being the peak as you look out?

Yes. And I'd say, Mike, if I start with the first question here and say, when we look at Q4 and all that, as Marc alluded to earlier, we believe that, right now, our guidance for the full year is we do believe that that's on the low end of where we'll be. So you take that into Q4 and the assumptions that we have around our ability to produce and get products out of the door continues to increase. And so you can pretty much back into from the guidance we've given on revenues where we expect our sales to be. But as we've said, we expect to continue to see throughput within our factories increase. And then when I look at just the dynamic of the market around us right now and say, okay, with where we are today, obviously we've done a very good job of understanding what the cost environment was going to do and offsetting that with cost-based price increases throughout the year. And as we look forward, and I think Marc alluded to this earlier, we do see some carryover benefits that still will continue to come. I think the other thing that I'd point to more historically even within our business and our ability to handle some of these dynamics, if you look back to like the 2018, '19 timeframe, we also had cost increases within that and many of them were driven by tariffs, which we were able to offset with cost-based pricing back then. So again, the trends that we see right now, we believe we're taking the right actions to offset and we expect to continue to do that.

Mike, I want to add a comment about inflation. It is very dynamic, but I want to reiterate that we anticipated it. In April, we provided an inflation outlook that many might have considered pessimistic, but it proved to be accurate. This shows we had a good understanding of the broader markets, including commodities and short-term trends. This quarter saw a significant year-over-year inflation increase of 6.5 points, yet it did not impact our bottom line, which is noteworthy. Being able to forecast inflation earlier than others allowed us to respond more effectively, and our performance in Q3 demonstrates that. Looking ahead to next year, there will be some carryover effects, but we can also expect to benefit from pricing. Again, Q3 serves as evidence that we can navigate a challenging environment, and we will continue to do so.

Your next question comes from Eric Bosshard from Cleveland Research.

Two things in terms of the longer-term guide. First of all, in terms of the margin guide, if you could just give a bit of clarity, guiding for margin improvement in the coming years, does that assume progress across all markets? And I guess the underlying question is. Does that assume that the margin in North America is sustained or enhanced from here?

Yes. Eric, here's what I would say, if you look at our long-term goals we just laid out, what that assumes is it does assume in our businesses outside of North America, we continue to see margin improvement, and especially within EMEA. And we haven't really changed our targets in terms of our goals in terms of the overall margin profitability there. When you look at our North America business, what it indicates is that we believe that, that business will stay at above a 15% EBIT margin type of range right now. And so, we feel very good about where we are. Remember, our previous guidance was 13% plus for that. So we do believe we've made a step change in the profitability within North America. But a big driver that you shouldn't discount here is that the international, our businesses outside the U.S., will continue to expand margin.

Okay. That's helpful. And then secondly, the increased revenue guide, the goal over the last, I guess, five years was 3%. And you achieved that goal in total, but it felt like there were a few years where you didn't grow 3%. As you look at this 5% to 6%, I guess, what I'm trying to understand is that in the last number of years, when given an opportunity to focus on market share or margin, it felt like you default into margin and that may explain a few years you fell short of that goal. As you move forward, is the accelerated revenue growth representing mostly confidence in faster market growth? Or does that imply a different performance-focused commitment to market share?

Let me address your question. Firstly, regarding the second part, I believe it mainly shows confidence in the market outlook. We see market demand as very strong, similar to before. Reflecting on a couple of years ago when we operated at a 6% or 7% EBIT margin, if you focus on the financials, it’s clear that there's a greater impact on economic value creation from margin expansion rather than revenue growth. We are currently in a different position. For instance, the North America business operates at a 17% or 18% margin. This means, from a basic value creation standpoint, we can generate even more economic value by driving growth. It’s not really a shift; it depends on your margin progression and where you can maximize economic value creation going forward. In Europe, the scenario is different, as we still have work to do on our turnaround, so we’ll continue focusing on margin expansion there. Our strategy will vary by region, determining whether we prioritize margin or revenue expansion. Nevertheless, the key takeaway is our strong confidence in robust market demand both in the short and long term. So with that, I think we're coming to the end of this Q&A session. First of all, I appreciate everybody calling in, dialing in. There was a lot of material to absorb today because it was more than the earnings call and was also above the long-term value creation goals, and I appreciate a lot of questions about these long-term value creation goals. And again, I just want to reiterate what I said on the call. This is now after Q2 last year with five exceptionally strong quarters, but it's not just the five quarters, this is year number four where we have year-after-year all-time record performance. And I think you would all agree, it was not particularly easy trading environment, no smooth sailing, but we delivered. In a certain way, you can almost say, well, give us a rough environment, we'll perform well. And I think that's the confidence you should also see going forward. We're not kind of planning or expecting that it's all going to be nice next year. It will continue to be challenging. But every quarter from this proof point, we have an agile organization, we have an agile business model and we can deal with what comes and we can perform exceptionally well in these circumstances. With that in mind, I thank you all for calling in, and wish you all a nice Friday and a nice weekend.

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