Whirlpool Corp /De/ Q2 FY2022 Earnings Call

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.

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.

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 in structurally improving Whirlpool for the better. We have a clear line of sight on the long-term success of the business and in driving shareholder value. Whirlpool has become a stronger entity today compared to historically. We operate in 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 achieve our highest operating performance. Likewise, we are focused on simplifying and transforming our business portfolio by pruning underperforming assets and 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 our team, Whirlpool continues to perform better today than in the 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. 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 the 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 the 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 relatively stable revenue down 2%, excluding the impact of currency. Even more impressive, North America delivered over 14% margins, demonstrating the structurally higher profit levels of the 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 our 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 taken to manage with near-term pressures by remaining focused on delivering over the 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 an operating margin of 9%. Now, I will turn it over to Joe to review our regional results.

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 two 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 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 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 that 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% was 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.

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 multi-year 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 logistics and energy costs. Next, with the strengthening of the dollar, we are now expecting a 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-based price actions driving 725 basis points of margin, fully offsetting raw material inflation, which we expect to peak in the second and third quarters. We are confident that we have 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 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.

Thank you, Jim. And let me recap what you heard over the past few minutes. We have the right global action in place to deliver a 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 increases 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 price 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 products at an elevated rate, alongside strong replacement demand and an 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.

And your first question comes from Michael Rehaut from JPMorgan. Your line is open.

Thanks. Good morning, everyone. Thank you for addressing my questions, Marc. I wanted to start by discussing North America, particularly since it's a significant factor in the change to your guidance, both for the second quarter and the latter half of the year. Could you elaborate on the noticeable decline in your full-year expectations? I'm interested in understanding what you believe is influencing that change compared to your earlier projections. Additionally, I'd like to hear your thoughts on your market share moving forward, especially considering the sequential gain you mentioned, which is crucial given the losses over the past 18 months and how you foresee that evolving.

So, Michael, it’s Marc. Good morning. I’ll try to address multiple questions in one. Regarding North America demand, we are observing two trends occurring simultaneously. There is a positive long-term trend driven by the replacement cycle, high appliance usage, and housing markets that are structurally undersupplied. These factors are consistent, and we cannot ignore this fundamental positive long-term trend. However, there is also a short-term trend that is currently dominating. Around late April and May, we experienced a significant drop in consumer demand, mainly influenced by declining consumer sentiment. It's not that consumers lack cash; rather, it's the negative sentiment stemming from inflation and unfavorable news concerning war and the pandemic, which, while behind us now, continue to affect consumer feelings. This combination has led to a notable decline in consumer sentiment, impacting demand. We anticipate that the underlying issues affecting consumer sentiment will persist until the end of the year due to inflation, war, and the upcoming mid-term elections, which are unlikely to boost sentiment until November. We hope to see something more positive towards the year-end, but this has not altered our outlook for long-term demand in 2023 and 2024, and we remain optimistic about the long-term demand trends. Regarding our market share, as mentioned in our prepared remarks, Q2 showed a slight sequential gain over Q1. If you compare Q3 last year, Q4, Q1, and Q2, we notice a steady trend with a minor increase towards the end of Q2. We have stabilized our share, but to be completely transparent, we have not yet regained our pre-pandemic share. However, as supply chain constraints ease, we are confident in making progress in this area moving forward.

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.

I appreciate that. As a follow-up, Joe, you mentioned promotions, and I would like to understand better what has led to the reduction of the North American margin guidance from 16% to 15%. In the margin analysis, you noted about $0.25 billion coming from non-structural efficiencies and temporary volume deleveraging. However, you also referred to promotions. Can you provide insight into the current price environment? Are promotions increasing and contributing to the decrease in EBIT margin guidance for this region, or is it primarily due to volume inefficiencies and deleveraging?

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 is 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 return 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.

Hey, it's Marc again. I want to add to Joe's comments and refer you to page 14 of our presentation, where we illustrate the margin walk between our prior and current guidance. This depiction is quite similar for the corporation and North America. We have not adjusted our pricing assumptions in the margin walk, which likely addresses a key question. There will always be some promotions, but nothing has changed in our outlook regarding the price mix. As Joe mentioned, a slight margin decline is primarily due to volume deleveraging as we adjust inventories to align with market demand, which incurs certain costs. We are confident that these temporary costs will diminish in the short term. That explains the difference in the margin walk. On a positive note, it’s important to see this in context. A 9% margin in Q2 occurred amidst the highest inflation in 40 years and reduced market demand, highlighting the resilience of our business. North America's 14% margin in that environment further illustrates the health and structural changes within our operations.

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

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

Very good morning, Sam.

Good morning, Sam.

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 the review by the end of the third quarter. It was notable at least to me that it’s not at least yet listed in discontinued operations. So I am just trying to get a sense of your view of the likelihood of a sale in light of the idea that European demand is weakening, the financing markets and the capital markets are also, to an extent, tightening up and FX pressure. So how has this evolved in terms of your expectation to consummate a sale that would be of your liking?

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 reach 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 path in terms of our strategic assessment here. Now when you asked about the accounting for putting it in discontinued operations, 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.

Yeah. Sam, maybe just adding to this one, as we indicated in the April earnings call, we are looking at all options, and just to be clarified, the options on the table are anything from selling the business to partial sale to keeping the business. Now keeping the business would have to qualify as not really the option; keeping the business would be a reduced footprint or a different Whirlpool Europe. Pretty much, all options are 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 would be part of a broader review. But given all the environmental factors, 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 come to a conclusion of our strategic review.

My second question is about your pricing guidance, which appears to indicate better year-on-year figures in the second half than the first half by about one or two points. I'm trying to understand how much of this improvement is due to the timing of pricing changes in the first half, how much is from future incremental pricing, and while I know you've mentioned some promotional aspects, I am particularly interested in whether there is any expected promotional leakage. Thank you.

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 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 final decision was made in the Q2 period.

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

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?

Sure, David. I'll start and then Joe can provide further insight. As we all know, there's a lot of confusion and not always accurate information regarding the housing market. I want to emphasize that the long-term U.S. housing market is still significantly undersupplied. We've discussed this for many years, and I maintain that the U.S. housing market requires several years of new housing starts and completions, between 1.8 million and 2 million units, just to stabilize, considering factors like demographic trends, the age of existing homes, and household formation. The long-term needs have not changed. Right now, however, the combination of rising home prices—outpacing additional supply—and high mortgage rates has severely impacted home affordability, leading to cancellations and a slowdown in the short term. I would expect this to continue over the next year. A correction in home prices seems necessary to realign the market. While this won't alter our positive long-term outlook for housing, I do not anticipate a dynamic market in the coming year. In terms of builders, it is also important to consider the order backlog and cancellation rates. In summary, we haven’t observed a significant change in completions yet. Typically, we see standard completion rates because appliance availability has improved somewhat. So far in Q2, there hasn’t been a dramatic decline in completions, but we do not foresee considerable growth in Q3 and Q4. Joe?

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 any really material changes from what we were 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.

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 the numbers there correct. I guess, the question would be, how would you handle capital likelihood of you coming in above your $1 billion guidance?

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 $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 track at that level.

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

Great. Thank you. How are you just thinking about the path toward your long-term value creation goals and getting back to annual organic net sales growth of 5% to 6%? And then what does the EBIT margin walk look like from the year-end guidance to your ultimate goal of 11% to 12% ongoing EBIT margin?

Yes, it’s Marc here. There are a couple of factors to consider. Firstly, we see the current environment as temporary, but it does not alter our long-term demand outlook. We expect to see healthy underlying market growth by 2023 and 2024, driven by replacement needs, housing markets, and increased usage of appliances. We are anticipating solid, probably mid-single-digit market growth in those years. I want to emphasize that this is not guidance for 2023, but it reflects our current outlook. In this context, we expect North America to regain market share back to pre-COVID levels. Beyond market demand, we anticipate gaining market share over the course of 2023 and into 2024, which will significantly contribute to our topline. Globally, we have several growth markets, particularly in India, where we are experiencing strong organic growth in the high single digits. Regarding margins, we are currently guiding for this year to be around 9%. It’s important to note that this also includes costs that are not typically part of the cycle due to supply constraints, such as express shipments. If we exclude those costs, we get much closer to 11%, supported by additional cost actions and a stronger focus on high-margin businesses, which we believe will help us achieve margins of 11% to 12%.

Yeah. Liz, and this is Jim. And just to maybe add to what Marc said there is, we have talked about too, 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.

Great. Thanks very much.

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

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?

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 supports or elements, but you will have a disruption for a number of reasons, but not to the same level as before. So in simplistic terms, supply chain constraints continue to ease, but are 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 mind because we assumed a higher market demand level. But as you would expect from us, we are adjusting production and inventory in line with what we see right now from industry forecasts, 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.

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?

Yes, Susan. It all begins with the macro assumptions we have, which have changed significantly from January 2022 to now, July 2022. We believe we are currently in a recessionary environment, and while opinions may vary on its severity and duration, this is our primary scenario, which became clear around June and July. Consequently, we have implemented the measures outlined in our recession playbook, primarily focusing on aggressive cost management. We anticipate that the raw material market will become more favorable, especially as we progress through 2022, and we believe that inflation peaked in the second and third quarters. Additionally, we are adopting further cost-cutting measures related to materials and logistics, which have presented challenges. We are also committed to managing headcount and associated expenses carefully. We are taking robust actions on the cost front as outlined in our recessionary playbook. Historically, every recession has highlighted the importance of monitoring cash flow. Thus, we plan to be disciplined with our net working capital and cash flow management, and I am pleased to confirm that we can maintain our guidance regarding cash flow.

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

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?

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 has been driven more 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 reflects that. So it is not assuming that there are higher promotional environment or anything; this is mainly just a reflection of where costs are.

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 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.

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

Thank you. I have two follow-up questions. First, could you clarify your comment about wanting to rebalance market share to pre-COVID levels? In the latter half of the year, if industry volumes are declining and inventories are normalizing or even a bit excessive, are you planning to engage in promotions? This could be driven by retailers or competitors aiming to recover some of the lost volume from weaker consumer demand. Will you participate in promotions, or is your intention to avoid them? What does this mean for your market share outlook during this period?

Eric, this is Joe. To respond to your question, we did see a slight share growth from Q1 to Q2, even in a challenging environment. That’s our starting point. We plan to seek opportunities to improve and bring our market share back to pre-COVID levels in the latter half of the year, continuing into 2023. Promotions are always influenced by various market factors, and we will evaluate them to ensure they are creating value. With the supply chain disruptions behind us, we can manage our production and inventory effectively and go to market in a way that maximizes value. As I mentioned, we experienced slight growth in Q2 and expect that trend to continue into the latter half of 2022 and into 2023. Our approach to promotions will remain consistent, driven by a strict assessment of what is beneficial, and you will see this reflected in the second half of the year.

Yeah, Eric, just to build on Joe's comments as well; I mean, overall, yes, we expect at times to maybe play a little bit more in promotions. But again, that’s going to depend on the situation, and we always balance those decisions with what are our overall goals for margins, and that still remains intact.

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 to this, but just to hear you say it again, why does the business deleverage less in the back half on a similar volume in a more cautious consumer?

Yeah. Eric, this is Jim. And I think what you are looking at 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 as 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.

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 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 it; but it’s guidance towards the second best year ever in the history. Yes, we would have liked 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.

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