Whirlpool Corp /De/ Q2 FY2023 Earnings Call

Thank you, and welcome to our second quarter 2023 conference call. Joining me today are Marc Bitzer, our Chairman and Chief Executive Officer; and Jim Peters, our Chief Financial Officer. Our remarks today track with a presentation available in 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 the non-GAAP measures outlined in further detail on Slide 3 of the presentation. 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 in 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 opened for analyst questions. As a reminder, we 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. As you will have noted in our earnings release, we did post another quarter of solid sequential improvement, and it was a quarter which puts us firmly on track towards our full year guidance. If you look at the drivers of this improved performance, we did not get a lot of help from a macro environment. The global industry demand was down, but frankly, that is exactly what we expected. It was instead our consistent and disciplined execution of our operational priorities that drove this improvement. We were able to achieve meaningful cost reductions, we improved our supply chain, our product innovations drove strong consumer demand, and we gained market share. In short, we did what we told you we would do. As we are looking towards the second half of 2023, we are leaving our industry demand outlook unchanged. Even though we are starting to see early but clear signs of a strengthening U.S. housing market, which will benefit us disproportionately, broader consumer sentiment is still cautious and not yet pointing towards more discretionary purchases. We are also seeing the operating environment essentially return to pre-pandemic conditions with stabilized supply chains, improved inventories, and a promotional environment that is similar to pre-pandemic levels. Frankly, this is an environment we have demonstrated that we can successfully operate and create value in. Turning to Slide 6, I will provide an overview of our second quarter results. The world we are operating in today is very different from the first half of 2022, where supply chains were fragile, inventories were historically low, promotions were largely absent and inflation was at historically unprecedented levels. In the second half of 2022, we saw a global demand shift with industry declines in key countries. We continue to experience this trend into the first half of 2023, with global demand declines in the mid-single digits. Second quarter year-over-year revenue declined 6% versus the prior year, in line with expectations. The promotional landscape is normalizing at pre-pandemic levels, negatively impacting price and mix. Yet, we continue to gain momentum with year-over-year share gains in the Americas for improved supply chains and our strong product lineup. In Q2, we delivered a strong operating margin of 7.3%. This represents 200 basis points expansion from the first quarter, driven by our strong cost takeout actions. These actions delivered a $150 million year-over-year benefit, and are on track to our full year target of $800 million to $900 million of cost takeout, and delivered strong second quarter ongoing earnings per share of $4.21, in line with expectations. Now turning to Slide 7, I will share more details on our second quarter EBIT margin. The second quarter was unfavorably impacted by normalization of promotions, which reemerged in the second half of 2022 and are now following historical seasonal trends. Sequentially, price/mix negatively impacted margins by 50 basis points with a year-over-year impact of 350 basis points. Our strong cost takeout actions delivered 275 basis points, both sequentially and year-over-year. And as expected, marketing technology and foreign currency negatively impacted margins. Overall, we are pleased with our second quarter performance, delivering ongoing EBIT margin of 7.3%. Turning to Slide 8, you can see we are on track to deliver $800 million to $900 million of the year-over-year cost takeout benefits, including $300 million to $400 million of reduced raw material cost and $500 million of additional cost takeout actions, driven by enhanced supply chain resiliency, reduced parts complexity of approximately 50% fewer parts since 2021, and improved transportation rates and reduced premium freight costs. Additionally, in aggregate, we have reduced our salaried workforce by 7% and remain disciplined with discretionary spending and other indirect costs. With the cost actions we took in past quarters, we are fully on track towards delivering our cost takeout targets. While the chart shows high year-over-year cost reduction in Q3 and Q4, it is important to note that this is entirely driven by the baseline effects in the second half of 2022, and will not require additional new cost takeout actions. Now, I'll turn it over to Jim to review our regional results.

Thanks, Marc. Good morning, everyone. Turning to Slide 10, I'll review results for our North America region. Year-over-year share gains and the addition of InSinkErator was more than offset by industry decline of 1% and increased promotions, resulting in a 5% revenue decline. The region delivered sequential margin expansion with solid double-digit EBIT margins of 10.3%, as our strong cost takeout actions continue to gain traction alongside the integration of InSinkErator. We expect the region to deliver 100-plus basis point margin expansion each quarter, driven by strong cost takeout actions. We are confident in the structural strength of our North America business and continue to expect our actions to deliver strong results, exiting the year with 12% to 13% EBIT margins. Turning to Slide 11, I'll provide additional color around the U.S. housing market. During our earnings call in October of 2022, we presented our upbeat long-term view on the U.S. housing market. Nothing has changed, and we are very optimistic about mid- and long-term housing-driven demand trends, currently representing 15% of the total industry demand. New housing construction has significantly lagged historical averages for more than a decade. For perspective, there was only one year in the 40 years prior to the Great Recession in which fewer than 1.2 million new homes were built. Much of the period between 2007 and 2017 was below this level, leading to the oldest U.S. housing stock in the country's history. In total, we estimate 3 million to 4 million unit under supply of housing. While we do not expect housing starts to reach a steady state of supply to fill this gap in the near term, we do believe housing starts will begin to increase to 1.7 million units annually or higher due to the housing shortage. Turning to Slide 12, you can see we are well positioned to capture this trend as the number one choice for home builders. The combination of: one, the best brand portfolio with multiple $1 billion brands, including Whirlpool, Maytag, and KitchenAid; two, an innovative product portfolio that targets 90% of the consumers; and three, our strong final mile delivery capabilities across the region, strongly positions Whirlpool to drive value creation as the housing market rebounds, with every new home having a full suite of typically five new appliances. It is not surprising that we have become the number one choice for U.S. homebuilders, serving eight of the top 10 national builders. Turning to Slide 13, I'll review our results for our Europe, Middle East and Africa region. Organic second quarter revenue was down approximately 12%, driven by continued industry demand weakness across key countries. EMEA margin expansion was driven by strong cost takeout actions, alongside held for sale accounting benefits due to reduced depreciation that will continue each quarter until the transaction closes, which is expected in Q4 of this year. Turning to Slide 14, I'll review the results for our Latin America region. The region saw demand improvement in Mexico and year-over-year share gains, resulting in a 4% revenue increase. Inflationary pressures were partially offset by higher volumes, resulting in solid EBIT margins of 6.5%. Turning to Slide 15, I'll review results for our Asia region. Excluding the impact of currency, revenue declined approximately 8%, driven by consumer demand weakness. Sequential share gains drove a 15% revenue increase compared to the first quarter. The region delivered EBIT margins of 3.7%, with our strong cost takeout actions offset by negative price/mix. Turning to Slide 16, I will discuss our full year guidance. We are reaffirming our ongoing EPS range of $16 to $18, and free cash flow guidance of approximately $800 million. We continue to expect to deliver approximately 60% of our full year earnings in the second half of the year, driven by our cost structure reset. We now expect to deliver EBIT margins of 7.25%, as promotional spend has slightly increased and demand weakness in EMEA has been greater than anticipated. Our guidance also includes updated expectations for our adjusted effective tax rate, now 10% to 15% for the year. As the Europe transaction progresses, we will continue to assess the adjusted tax rate, which has the potential to be at the low end of our range. We continue to expect to deliver $800 million of free cash flow. Turning to Slide 17, we show the drivers of our updated full year ongoing EBIT margin guidance. We have updated our expectation of price/mix by 25 basis points to a negative 250 basis point impact, reflecting a global promotional environment at pre-pandemic levels. All other margin drivers remain unchanged. We now expect to deliver solid margins of 7.25% for the year. Turning to Slide 18, we show our regional guidance. We see no change to our full year regional industry expectations. While second quarter North America industry shipments were slightly favorable compared to our prior expectation, this was largely driven by retailer restocking and slightly higher retailer inventory levels. The consumer sellout was relatively stable with a low-single digit decline. And while there might be some uptick in consumer demand driven by the housing rebound, consumer sentiment in the region continues to be impacted by macro uncertainty. Therefore, our market assumptions are unchanged. Overall, we expect continued EBIT margin expansion, driven by our strong cost takeout actions as well as raw material inflation tailwinds. In North America, we expect to deliver full year margins of approximately 11.5%, with the region's strong cost takeout actions partially offsetting a promotional environment that is at normal pre-pandemic levels. We expect to partially offset the impact of the promotional environment with positive mix, driven by a strong lineup of new product introductions, delivering year-over-year share gains. We now expect EMEA to deliver approximately 1.5% margins, as the region continues to be impacted by soft consumer sentiment. Lastly, EBIT margin expectations for Latin America and Asia remain unchanged.

Now, I will turn the call over to Marc. Thanks, Jim. Turning to Slide 20, let me provide an update on our portfolio transformation. Whirlpool today is very different from Whirlpool of the past. In the last five years, we've taken several significant steps to transform the company into a higher growth, higher-margin business based on three structural pillars: small appliances, major appliances, and commercial appliances, with steps in changing our company portfolio labor foundation for a company with a double-digit EBIT margin profile, which is very different from our historic mid- to high-single digit profile. As we look forward, we are reassessing our operating segment structure in anticipation of a potential change after the completion of the Europe transaction. During one of our future earning calls, we expect to share more information about our assessment and potential re-segmentation, specifically about our strong value-creating small domestic appliance business. Turning to Slide 21, I will provide an update on InSinkErator and how they're strengthening our portfolio. Our integration efforts are well underway and nearing completion after acquiring InSinkErator in Q4 2022. InSinkErator's rich history and strong product legacy, I am very excited about the brand's largest launch, NextGen, which we presented during our last earnings call. We continue to be pleased with sustained EBIT margins of approximately 20%, contributing approximately 50 basis points to our consolidated EBIT margins. Turning to Slide 22, I will provide an update on our EMEA transaction. In January, we agreed to contribute our European major domestic appliances business into a newly-formed entity with Arcelik. The Europe transaction and the regulatory processes are ongoing and progressing as expected, including executing an agreement to sell our Middle East and Africa business. We continue to expect to close the Europe transaction in the fourth quarter of 2023. Until then, we will continue to focus on EMEA delivering the best products and consumer-preferred brands. Let me also remind you of the benefits of this transaction. We will own approximately 25% of a new company, which will be well positioned to deliver value to consumers through attractive brands, sustainable manufacturing, product innovation, and best-in-class consumer services, and is expected to have over €6 billion of annual sales with over €200 million of cost synergies. We have a potential to unlock long-term value creation through our ability to monetize our minority interest, coupled with a 40-year Whirlpool brand licensing agreement, we expect $750 million net present value of future cash flows. Additionally, post-closing, we expect the transaction to improve our value creation metrics by $250 million of incremental free cash flows and a 150 basis points improvement in ongoing EBIT margin. Turning to Slide 23, I will discuss our capital allocation priorities, which remain unchanged. We remain committed to funding innovation and growth and expect to invest over $1 billion in capital expenditures and research and development this year. Additionally, we are confident in our ability to generate strong free cash flows. This, coupled with our balance sheet strength, provides us with flexibility to support our commitment to returning cash to shareholders. In the first half of 2023, we returned $193 million in cash to shareholders, representing nearly 70 consecutive years of dividends. Turning to Slide 24, let me further discuss our commitment to maintaining our strong investment-grade credit rating. We are confident that we are well on our way to delivering debt leverage to below historical norms and towards our target of 2 times or below, with $1.3 billion cash on hand and strong free cash flow, which, as mentioned earlier, we expect to be $250 million higher after the close of the Europe transaction. We continue to prioritize debt repayment with approximately $500 million of acquisition-related term loan paydown expected by the end of the year. Turning to Slide 25, I will review our healthy debt ladder and how it gives flexibility and de-risks our balance sheet. We have an attractive weighted average interest rate of approximately 4.25%, with 70% of our debt held at a fixed rate of just over 3%. Additionally, over $2 billion of our debt is due after 2030. This gives us balance sheet flexibility to deliver strong shareholder returns and maintain our solid investment-grade rating. Turning to Slide 26, let me close with a few remarks. Despite a dynamic external environment, we delivered another solid quarter of sustained margin expansion. Through strong execution of our operational priorities, we delivered results in line with our expectations and remain on track to deliver $16 to $18 of ongoing earnings per share and approximately $800 million of free cash flow. More importantly, the strength of our brands and products is resonating with consumers to a point of year-over-year share gains. With our strong position as the U.S. builders' number one choice and serving eight of the top 10 national builders, Whirlpool is well positioned to benefit from housing-driven demand recovery, and we continue to unlock value with our ongoing portfolio transformation. Now, we will end our formal remarks and open it up for questions.

And your first question comes from the line of Mike Rehaut from JPMorgan. Your line is open.

Great. Thanks so much. Good morning, and I appreciate all the detail. My first question is about the promotional environment. You mentioned it has returned to pre-pandemic levels, which seems to be slightly higher than you had anticipated at the start of the year, and it seems to be a key factor behind the lowered margin outlook for North America. I would like to understand how this situation might influence price costs in the latter half of the year and into 2024. Additionally, regarding the North American margin, last quarter you were projecting an end-of-year margin of around 14%. I'm interested in how that outlook might change and what the new baseline for the business looks like, aside from any additional price or mix gains in 2024.

Good morning, Mike. It's Marc. Let me address your broad question. Regarding the promotional environment, you asked whether it is higher than we anticipated. I would say that the return to a normal promotional environment came earlier than expected. We always believed it would eventually return to pre-pandemic levels, but we expected that closer to the third or fourth quarter, and it actually happened in the second quarter. This isn't a surprise; it just occurred one or two quarters earlier than we thought. The level of promotional depth aligns with what we saw pre-pandemic, so I don't consider that a major concern. I want to direct everyone's attention to Page 7 of our presentation, as it provides important context. It includes a year-over-year comparison on margin and also a sequential view. In the year-over-year comparison, Jim previously mentioned a significant price/mix decline. However, we should remember that the first and second quarters of last year were mostly free of promotions, which created a sort of promotional gap. Promotions began to pick up in the third and fourth quarters, so while the year-over-year comparisons seem substantial, they are not unexpected given that we anticipated the return of promotions. The more pressing view is the sequential comparison. In the second quarter, we experienced a 0.5-point decline in market share compared to the first quarter. Keep in mind that the second quarter includes Memorial Day and July 4, meaning it's typically more promotional than the first quarter. Thus, this slight decline isn't out of the ordinary. More importantly, we managed to reduce costs by 2.75 points. In other words, we reinvested 20% of our cost savings back into the marketplace. I feel this is a measured approach to handling promotions, and it has proven effective, as we gained market share and improved our overall margin by 2 points. In summary, I believe we are back to pre-pandemic promotional levels, and we know how to navigate that environment successfully, as demonstrated in Q2. Specifically regarding the North American margin, we anticipate it will be around 12% to 13% by year-end, returning to the margin levels we had prior to the pandemic, which was around 12% or higher in North America. We fully expect to reach that level and assess further opportunities for improvement beyond that.

Great. No, I appreciate that, Marc. Thank you very much. Secondly, I wanted to hit on InSinkErator for a little bit. I wanted to get a little color or more granularity on how the product launch is unfolding and what that's contributing to the business? And also just in context of that or maybe in addition to that, I think more broadly, I think you did notch down the full year revenue contribution outlook. So, I wanted to understand the drivers of that as well.

Yes, Mike, again, let me give a context on InSinkErator. First of all, we are very pleased with that business. The margins hold up very strongly. It's up 20%-plus. So, it's a very EBIT-accretive business. We like the team. We like the product lineup. We like the production efficiency. It is a very, very strong business. There's obviously two factors. One is the broad revenue. I would say, InSinkErator is even more exposed to the U.S. housing market than our normal appliance business. And as such, as we always expected, the first half or the first three quarters of this year will be somewhat soft from housing before the housing fully rebounds. So, that is one element, but hasn't changed in terms of where we are from a market share perspective on InSinkErator. The second part, in particular, on the new product introduction of NextGen. First of all, you need to know that NextGen carries margins which are stronger than the rest of the line. So, inherently, it's a margin-accretive product. And right now, you're going through, what we call, the phase-in and phase-out. So, we started the first shipments actually in July. So that is now underway. But in the short term, given that we have product placement cost and the phase-in, phase-out costs, which we do not capitalize, we take it into our ongoing cost, it's actually even a slight burden in both Q2 and Q3. But the inherent margin of NextGen is very attractive, and we're now fully in the process of ramping up the production, and we would expect the full sales element of a new product to be fully visible in Q4.

Yes, good morning, everyone.

Good morning, David.

Good morning, David.

Yes, good morning, everyone. I would like to ask if you could provide some insights into the current volume demand or market demand. I noticed that the core six number mentioned in your prepared remarks included some restocking. Could you share your observations regarding replacement demand compared to the builder channel, which you've noted is becoming increasingly important, especially considering that discretionary demand appears to be declining? I'd appreciate your help in breaking this down to better understand the components contributing to volume growth.

David, that's a great question. First, it's somewhat similar to what we mentioned qualitatively in Q1. The discretionary demand remains soft, particularly in major appliances, and, as noted by one of your colleagues, we also see this trend in small domestic appliances. This reflects the current nature of discretionary demand, which is still influenced by uncertainty in consumer sentiment, remaining in a negative space. However, replacement demand is strong, as we anticipated, because the pandemic has increased the usage of appliances, leading to robust replacement needs. To put it in perspective, in the U.S. industry, shipments were down 1%. We had expected consumer sellout to be slightly lower, around minus 3% to minus 4%, which aligns with our initial guidance for industry shipments. The difference comes from retailers restocking after low inventory levels, which explains the variance. Looking ahead, we have kept our industry assumptions unchanged due to ongoing uncertainties. However, there are clear signs of housing recovery. A well-known builder recently reported strong order intake across the board. Typically, it takes 6 to 10 months for an order to translate into an appliance shipment, as appliances are delivered last when the house is completed. There is significant momentum on the builder side. The question remains how much will materialize in 2023 versus 2024. These orders are substantial, and we have observed impressive order intake from several builders, suggesting potential upside for industry shipments. Nonetheless, we have been cautious in updating our forecasts due to the uncertainties surrounding discretionary demand. That said, we can see that housing momentum is building, which is very positive for us.

Thank you for that. And then just as a follow-up, you talk about the cost takeout program, and you've got some very well-defined goals for 2023. And you mentioned most of that is just coming from the year-ago comp. What does that imply in terms of the 2024 carryover benefit at this point?

Yes, David, this is Jim. I want to start by saying that we are very pleased to be on track to achieve the $800 million to $900 million target, and we are observing what we anticipated in terms of raw materials. Looking ahead, we haven’t provided guidance for next year yet, but we believe some actions we’ve taken, such as reductions in headcount through attrition this year and various cost-reduction projects, will carry over into next year. Generally, we aim for a cost reduction of at least 0.5 to 1 point each year, with about 25% to 40% of that being carryover. At this moment, we don’t have a specific figure, but we expect to enter next year with strong cost advantages.

Thank you. Good morning, everyone.

Hi, Susan.

My first question is around the mix. Are you saying that, that has been changing either positively or negatively for you? And what role is that having within that price/mix shift that we're seeing?

Susan, it's Marc. Overall, we don't observe the significant mix-down effect that some have mentioned, especially in North America. If you look at the details, our JennAir and KitchenAid businesses are performing very well, so we feel optimistic. Additionally, we have some product launches, like the Maytag pad and the dishwasher, which are positively influencing the mix. Going forward, mix will be a key factor to counteract any promotional pressures. Generally, in North America and across most of the region, there's a slight pause in mix, currently balanced by the promotional pressures. However, mix, particularly related to product innovation, has been beneficial for us so far.

Okay. That's helpful. And then, you're targeting the $300 million to $400 million in terms of raw materials for the year. Can you talk about any changes to where you expect to fall within that range, especially as perhaps some of the raws have moved over the last few months and what that could imply for the back half of the year?

Yes, Susan, this is Jim. And what I would say is, if you remember in Q1, as we kind of at the end of Q1, we talked about we thought we were at the lower end of that range as we were looking at where the commodity prices were. Now, as we look at where we are today and what happened within the second quarter, commodity prices have improved some, but we're still within the range. And whether we're at the midpoint or slightly better than the midpoint, we're probably at that point. So, it won't have a significant impact for us in the back half of the year against what we guided before, what we're guiding now, because it's still within that range that we thought. So, I don't think it's going to be a big impact for us. And then, as I mentioned earlier, we won't be guiding for next year until later in January of 2024.

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

Good, Sam. Good morning.

A couple of questions. First off, getting back to North America margins, specific second half versus first half, it looks like you're guiding, I don't know, somewhere around 13% or so in the back half versus the 10% in the first half. I think we can back into the sequential benefits of RMI and cost takeout, and we can guess at pricing. The one thing we really can't see externally is your volume production plans sequentially. There's a lot of moving pieces, obviously, with market share and moving expectations around volumes. But can you be specific as to what you're expecting for volume production, specifically in the second half versus the first half?

Sam, it's Marc. First of all, yes, first half in our margins, we're now in 10.15%, over 10.2% in the back half, and we said earlier, we expect to exit with 12% to 13%, which again, essentially spot on to pre-pandemic level in North America margin. First of all, structurally, as you know, there is a little bit of a seasonal element in the back half of our first half. One is volume related because you tend to ship more in the second half than first half. And the second part is our more seasonal business, particularly KitchenAid, mix of which, as you know, is margin accretive, tends to be a little bit higher in the back half. So these are the structural elements. Now specifically to the question about production level of inventory, I think you're rightfully pointing out to last year, we had to take down production significantly in Q3 and Q4. The trend is a fairly costly manner to do it. I would say right now coming into Q3, I think we're much better balanced. And we feel very good about right now our inventory levels. Our supply chain is basically, except for some very small residual items, is running very smoothly. So, I don't see this kind of the need for this draconian action which we had to undertake in Q3 and Q4. So, as such, we expect a pretty leveled production volume similar to Q1, Q2.

And then my second question, the corporate overhead line bounces around a lot, and it's hard for us to model. And it looks like it was considerably below at least where we were thinking. I would imagine it was going to be maybe a $70 million quarterly run rate, excluding items, and that came in around, call it, around $20 million or so. What was that due to? I'm guessing it was a confluence of items, but what were the primary drivers of that? And how should we model that corporate overhead number going forward, Jim?

Yes, Sam, looking back over the last three years or even further, we've typically averaged between $50 million and $60 million per quarter in that area. So far this year, we're around $47 million to $48 million. I suggest you continue to model that figure, perhaps leaning slightly towards the lower end of the range due to some cost-cutting measures we're implementing. This might bring us below historical averages. There are specific items that can cause fluctuations, such as accruals related to employee expenses or legal cases we're wrapping up in EMEA. These can affect quarterly results, but we anticipate that for the full year, we will remain within our normal range of $50 million to $60 million average per quarter.

So, Sam, to build on what Jim mentioned, the corporate expense base includes two main components. One is the ongoing infrastructure costs, and the other consists of one-time expenses like legal costs and other actions. The latter can be challenging to predict because of its fluctuating nature. However, it’s important to consider the underlying corporate infrastructure. As we noted earlier, our salaried workforce has decreased by 7% year-over-year, which is quite significant and is reflected in our corporate expenses. Also, we are starting to reorganize our corporate headquarters in anticipation of a potential post-Europe environment. We have taken proactive steps, resulting in our ongoing corporate expenses being lower than they were a few years ago. Therefore, there is an element that is structurally lower than it was previously.

Thank you. Good morning.

Good morning, Eric.

Good morning.

I have two questions. First, for Jim, I have a housekeeping question. You mentioned that the mix was stable, but I'm curious about North American organic revenue, excluding InSinkErator, which appears to be down 7%, 8%, or 9%. It seems like your units are performing better than the industry. Is this decline entirely due to price? Can you clarify the reasons behind the discrepancy between your revenue decline and the apparent growth in unit volume?

Yes. As you mentioned, we gained market share year-over-year, which is a positive development. However, during the quarter, the industry experienced a slight decline, which is a negative factor. Additionally, as Marc pointed out earlier, the promotional environment adds another layer to consider. Last year, during the first half, there were fewer promotions, and this has significantly affected the year-over-year comparison. Going into the latter half of the year, the impact of promotions will be less pronounced, which is why the full-year average for price and mix is expected to be lower than this quarter when compared year-over-year.

Eric, it's Marc. I want to add that when we discuss the North America business, we should consider the U.S. core business along with other components like InSinkErator, KitchenAid, and small domestic appliances, including Canada. The performance of the pure U.S. core business was actually better than what we reported for North America. In Q2, we faced challenges due to weak performance in Canada, which has had strong years in the last couple of years, but this year has been much softer compared to the previous year from an industry standpoint. Additionally, the small domestic appliance sector was also weaker than last year. These two factors offset each other, but overall, the U.S. core business performed slightly better than the numbers presented.

Okay. Secondly, I have a strategic question for you, Marc, regarding your thoughts on promotions. Is the promotional environment now stable or more intense in the second half compared to the first half? Additionally, are you planning to focus on maintaining or improving market share, or are you prioritizing margins with less emphasis on promotions and market share? I’m interested in how we should understand this in relation to your guidance.

Yes, Eric. First of all, I would say the promotional environment has returned to normal. I know that may seem unexciting, but that's the situation. We are adept at navigating this environment effectively and efficiently, and we've always indicated that we will engage in promotions as long as they create value. Regarding overall margin and margin expansion, there will always be a need to reinvest some of the cost savings back into the marketplace. We did that in Q2, which worked well for us, leading to an expansion in both market share and margin. Going forward, we aim to maintain that balance of gaining market share while also expanding our margins. Overall, the promotional environment arrived a bit earlier this year, but it's currently at levels we are comfortable managing. We are confident in our ability to reduce costs, and while some of those savings will be reinvested into the marketplace, not all of them will be.

Good morning. Thanks for taking my questions. Marc, just a follow-up on that. Presumably, some of your competitors have some cost tailwinds as well, maybe not to the same extent as you do, given some of your company-specific items and not just the RMI tailwinds. But in an environment where gross prices have still risen substantially the past few years, sellout is a little soft, and costs are down across the industry. How do you handicap the risk of just the other competitors leaning more into promotion and reinvesting more of some of the overall cost tailwinds into promotion here in the back half?

Yes, Mike, I can only reiterate what I mentioned earlier. First of all, it's fair to say that most people are experiencing similar advantages regarding raw materials. However, I should note that North American raw materials have been particularly challenging over the past couple of years, even worse than some Asian raw materials. At this moment, North American production is starting to see a bit more benefit from raw materials compared to Asian production. That’s already a distinguishing factor. Regarding our specific cost reduction efforts, as you've seen, more than half of our cost savings are unique to us. We took actions early and decisively, which has allowed us to achieve some reductions in costs ahead of many of our competitors. We are confident in our cost reduction strategy. We know how to navigate a promotional environment, as we showed in Q2. Therefore, I do not anticipate any significant changes in the latter half of the year compared to what we observed around July 4.

Got it. Okay. And then, just as a follow-up, with respect to inventory in the channel, I mean, inventory was running fairly lean. You called out some restock. How would you characterize inventory at retail now? Is it back to normal? Is it still climbing back toward normal off of levels that you characterized as lean? Or are there any pockets where you think there's now relative to the sellout environment potentially a little too much?

Yes, Michael. First, we need to acknowledge that over the past three years, there have been significant fluctuations in inventory levels for manufacturers and retailers. We've experienced the bullwhip effect during this time. However, I believe we have now returned to a more stable situation in many areas, including trade inventories, which I consider to be back to normal levels. Retailers have spent the last six months restocking to the necessary levels, and that's our perspective on the situation. Currently, we do not observe any excessive inventories. It's worth noting that one of our trade customers doesn't maintain inventory, so overall, there aren't excessive levels out there. I would describe the inventory situation as normal for retailers, which aligns with the trend towards normalcy in the post-pandemic environment.

Great. Thank you. As we consider the ongoing tax rate in 2024 and beyond, what do you think a normalized level might be? It's definitely quite low this year. Looking ahead, even though you're not providing guidance for 2024, in a typical year, what tax rate do you believe we should factor into our models?

Yes. So Liz, this is Jim. And historically, we have said that we thought the tax rate on an ongoing basis and on a cash basis would be closer to the 2025 rate over an extended period of time. Now what I would say is as we go through our divestiture of EMEA, we have a significant amount of tax assets there that have resulted from losses that we've incurred over the years and funded and paid for already. And as we go through this process, we're really looking at our ability to utilize many of those, because like I said, these are losses that we did incur. And what we're finding is that we're finding more and more opportunity to continue to utilize those. And so that's why this year, we think, similar to last year, we're going to be in the 10% to 15% range. I think over a midterm, we could see a rate that's below that historical thing that I was quoting of 20% to 25% and maybe even closer to the 15% to 20% at least for a period of time or closer to the 15%. But until we get to the end of this year, we get through all of this transaction, we look at the global footprint that we have and the remainder and then we look at the assets that we have, it's hard for us to give a longer-term guidance, but I do believe it will be better than we've set historically. And in addition to that, I do believe we'll be able to realize significant amount of just cash benefits over the period of years as we utilize some of those losses that we've already incurred.

Got it. That makes sense. I have a follow-up on the price and mix guidance, which for the year is expected to be lower than what the first half is showing. Is most of that improvement in the latter half of the year due to easier comparisons, or do you think it will be more focused on the homebuilder aspect of the business compared to retail? I'm curious about your thoughts on pricing by channel as we enter the second half of the year.

This is Marc. I can address that. I want to refer back to my previous comments regarding the baseline effects from last year. It's important to note that the first half of last year did not have many promotions, and they began ramping up in the second half. Therefore, the comparisons will become easier as we progress through the second half, especially since promotions have been increasing each quarter. That said, the 2.5 figure on a full-year basis just reflects a one-quarter difference from what we anticipated. Overall, we observed the usual promotional trends occurring a quarter earlier than we originally thought, but nothing significantly different from our baseline expectations for the end of the year. We’ve reached the end of our questions, and I’d like to thank everyone for joining us today. As mentioned earlier, we’re optimistic about Q2. This quarter showed a 200 basis point improvement in margin, which marks a significant recovery to pre-pandemic margins. Additionally, we have started to notice positive signals in market demand towards the end of the year, which will ultimately provide support for our industry. We feel confident about our position in Q2 and are on track to reaffirm our full-year guidance. I look forward to speaking with you again during the Q3 earnings call. Thank you for joining us.

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