Whirlpool Corp /De/ Q2 FY2024 Earnings Call

Good morning and welcome to Whirlpool Corporation's second quarter 2024 earnings call. Today's call is being recorded. Joining me today are Marc Bitzer, our Chairman and Chief Executive Officer, and Jim Peters, our Chief Financial and Administrative Officer. Our remarks today track with a presentation available on the Investors section of our website at whirlpoolcorp.com. Before we begin, I wanted 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 the non-GAAP measures outlined in further detail at the beginning of our earnings 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 on the Investor Relations section of our website for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. At this time, all participants are in listen-only mode. Following our prepared remarks, the call will be opened for analyst questions. As a reminder, we ask that participants ask no more than two questions. With that, I’ll turn it over to Marc.

Thanks Scott, and good morning everyone. We demonstrated strong sequential global margin expansion in the second quarter. This global margin expansion of 100 basis points is an important step towards continued margin expansion throughout 2024. MDA North America also delivered sequential margin expansion supported by our pricing actions announced in our first quarter earnings call. Our pricing actions in North America delivered as expected with sell-through trends improving throughout the quarter. This reflects our execution capabilities and confirms the strength of our products and brands, and we’re confident in our ability to execute with pricing actions by maintaining our MDA North America market share for the full year. We continue to be very pleased with the performance of our SDA global and international MDA business. Our SDA global business saw strong top line growth and margin expansion as we benefited from the momentum of new product launches and continued to grow our direct-to-consumer business. We’re excited about the future potential of this business. In our MDA Latin America and MDA Asia businesses, we continue to gain share in key countries and we continue to see meaningful long term growth potential in those businesses. We were disciplined with our cost management and successfully completed our organizational simplification this quarter, putting us on track to achieve our full year cost takeout guide of $300 million to $400 million. We are confident there are additional cost takeout opportunities ahead, as we shared at our investor day, such as manufacturing supply chain efficiencies including automation across our business, and continuing to optimize our input costs back to pre-COVID levels. For full year guidance, we are reiterating flat net sales of $16.9 billion driven by new product launches, strong replacement demand, previously announced MDA North America pricing actions, and continued strength in our international businesses, offsetting the challenging macro environment in the U.S. given elevated mortgage rates, which have led to continued weakness in home sales and overall discretionary demand. We are revising our ongoing EBIT margin to 6% from 6.8% previously as we expect continued discretionary demand pressure from a soft housing market impacting full year price mix negatively. However, at the same time, the previously announced pricing and cost takeout actions are expected to deliver sequential margin expansion with a solid exit rate of approximately 7.5% ongoing EBIT margin in Q4. In turn, we expect to deliver $12 ongoing earnings per share this year. As we look ahead, we are confident in our strategy and the favorable long-term fundamentals of our business. Our view of the housing market remains unchanged, given the well-documented structural under-supply of houses in the U.S. and existing home sales at multi-decade lows, elevated home equity values which are near all-time highs, and our strong position with eight of the top ten U.S. builders. We are very well positioned to benefit from the eventual housing rebound and we continue to innovate and have a strong line-up of new products this year that I’m personally excited about, which will support the strength of our brands. Turning to Slide 6, I will provide an overview of our second quarter results. Organic net sales excluding the Europe divestiture increased by over 1% in the quarter. The growth across our international businesses and SDA global offset the expected decline in North America, which was also impacted by the carry-over of the second half 2023 normalized promotion environment but still resulted in an unfavorable price mix in the second quarter, along with continued suppressed discretionary demand. This negative macro environment was partially offset by our pricing actions taken within the quarter, which are fully on track. We delivered ongoing earnings per share of $2.39 with ongoing EBIT margin of 5.3%, representing solid sequential margin expansion of 100 basis points, which we expect to continue throughout the second half of the year. Within the quarter, we made meaningful progress in our working capital and inventory management, resulting in $275 million of cash generation. We remain confident in our ability to improve free cash flow in the second half of the year to deliver approximately $500 million on a full year basis. As a reminder, free cash flow year to date was negatively impacted by non-recurring cash outflows associated with the Europe transaction of $250 million to $300 million in the first quarter. This cash consumption will no longer impact our results in 2025, structurally strengthening our free cash flow delivery going forward. Our free cash flow delivery enables us to continue to return cash to shareholders with our capital allocation priorities unchanged. Finally, continuing our nearly 70-year history of steady or increasing dividends, we paid $1.75 per share in the second quarter and expect to return $400 million to shareholders in the form of dividends this year. Turning to Slide 7, I will review second quarter ongoing EBIT margin drivers. Price mix impacted margin unfavorably at 300 basis points with negative mix resulting from lower discretionary demand, and as we look ahead, we expect the second half price mix comparison to sequentially improve with our executed pricing actions, in addition to lapping a more normalized promotion environment from the second half of 2023. Our cost takeout actions delivered 100 basis points of margin expansion, led by the completion of our organization simplification actions. As expected, raw materials did not have a meaningful impact on the quarter. We continue to invest in marketing and technology, supporting product launches such as a fully and semi-automatic KitchenAid espresso machine. Finally, foreign currency negatively impacted margin as the Brazilian real and the Canadian dollar experienced some weakening relative to the U.S. dollar. Ultimately, we delivered 100 basis points of ongoing EBIT margin expansion sequentially to 5.3% in the second quarter. Now I will turn it over to Jim to review our second quarter results and full year guidance.

Thanks Marc. Good morning everyone. Turning to Slide 8, I’ll review second quarter results for our MDA North America business. Net sales were down 6% year-over-year driven by unfavorable price mix. Our pricing actions are fully on track, as evidenced by price mix turning positive in June. These actions drove approximately 70 basis points of sequential EBIT margin expansion. Overall, the segment delivered a 6.3% EBIT margin for the quarter. We expect that our pricing and cost takeout actions will continue to drive greater than 100 basis points of sequential margin expansion each quarter in the second half of 2024, and expect a Q4 EBIT margin of approximately 9%. Turning to Slide 9, I will provide an update on our pricing actions and cost actions, which remain on track. As you may recall, last quarter we discussed the promotional investments in the U.S. that were not achieving the expected incremental volume lift. The current environment of strong replacement demand typically brings a lower mix and limits promotional effectiveness. To address the environment, we announced a 5% weighted average increase to our promotional pricing programs in MDA North America which went into effect on April 25, demonstrating our commitment to only participate in value-creating promotions. We are confident in our pricing actions. Although we have continued to see discretionary demand impacted by depressed existing home sales and a weary consumer, we have already driven 70 basis points of sequential margin expansion in the second quarter and expect the net margin benefit from our price actions to be fully realized in the third quarter. As noted in our first quarter earnings, with persistently high inflation impacting manufacturing and supply chain, we are experiencing a slower realization of our incremental cost actions. While we remain on track to deliver $300 million to $400 million of cost savings in 2024, we continue to trend towards the lower end of the range. The North America MDA portion of this is approximately 60%. We completed our organizational simplification in early May and expect to fully realize the margin benefit from these actions in the third quarter. Despite the macro environment, we delivered approximately $150 million of cost takeout globally in the first half of 2024, and we expect our manufacturing and supply chain initiatives to deliver the majority of the cost takeout in the second half. Turning to Slide 10, I’ll review the results of our MDA Latin America business. The segment saw strong net sales growth of 15% year-over-year, excluding currency, driven by industry growth and continued share gains in both Brazil and Mexico, more than offsetting unfavorable price mix. We delivered a solid EBIT margin of 5.8% in the quarter. Turning to Slide 11, I’ll review the very strong quarter from our MDA Asia business. The segment saw significant net sales growth of 21% year-over-year, excluding currency, driven by industry growth and continued share gains. We delivered a 6.2% EBIT margin driven by our strong cost actions and fixed cost leverage, delivering significant year-over-year and sequential margin expansion. Turning to Slide 12, I’ll review the solid results for our SDA global business. Despite industry decline, net sales increased 12%, excluding currency, year-over-year driven by new product launches and growth in our direct-to-consumer business. We delivered a solid EBIT margin of 13.9% through cost actions and volume growth, partially offset by incremental marketing investments for our recent espresso product launches. The SDA business is well-positioned for the selling season in the second half of the year, where we expect approximately two-thirds of its demand and profitability to occur. Turning to Slide 13, I’ll review our revised full year 2024 guidance. Our net sales guidance of $16.9 billion is unchanged. We are revising our full year ongoing earnings per share to approximately $12 and refining our free cash flow guidance to approximately $500 million. In addition, our product mix in North America is impacted by low consumer sentiment and suppressed existing home sales. As a result, we now expect to deliver a full year ongoing EBIT margin of 6%. Our guidance also includes updated expectations for our adjusted effective tax rate. Now that we have closed the Europe transaction, we are able to more appropriately estimate the benefits of our tax planning strategies. We now expect an ongoing full year tax rate of approximately negative 8%. On Slide 14, we show the strong progression of our quarterly ongoing EBIT margin. The sequential margin expansion of approximately 100 basis points quarterly in the second half is driven by on track MDA North America pricing actions, incremental global cost takeout actions such as part complexity reductions and manufacturing efficiencies, continued strength across our international businesses, and SDA global seasonality. Our decisive actions and operational execution are expected to deliver a Q4 exit EBIT margin of approximately 7.5%. Turning to Slide 15, 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 200 basis point impact, reflecting a negative product mix driven by lower than expected discretionary demand in the U.S. that is expected to continue into the second half. Net cost takeout reflects the expectation of delivering on the lower end of the $300 million to $400 million range. Lastly, currency is anticipated to have a slight impact for the full year at 25 basis points due to weakening Brazilian real and Canadian dollar. We now expect an ongoing EBIT margin of approximately 6% for the year. Turning to Slide 16, I’ll review our updated segment expectations. Globally, we now expect the total industry to be approximately flat. In MDA North America, the recent restatement of AHAM information has created some quarterly comparability issues; however, we are in alignment with the year-to-date reported AHAM results of down approximately 2% year-over-year. This links well to the sell-through results we have experienced in the first half of 2024. Replacement demand remains strong, however discretionary demand continues to experience macro headwinds. As a result, we expect the industry to remain approximately flat for the year. MDA Latin America has seen significant demand recovery in both Brazil and Mexico more than offsetting a very challenging economic environment that persists in Argentina. We now expect the industry to be up 5% to 7% in Latin America. MDA Asia industry remains unchanged as we continue to see demand improvement in India, as expected. Finally, SDA global continues to be impacted by discretionary demand weakness in the U.S. and Europe, resulting in the expected industry for the year to be approximately flat. We have adjusted EBIT margin to reflect the discretionary demand softness in the U.S. negatively impacting price mix. We expect full year MDA North America margins of approximately 7% with a Q4 EBIT margin of approximately 9%. With the strong share growth and cost actions in MDA Latin America and MDA Asia, we now expect higher EBIT margins of approximately 7% and approximately 4% respectively. SDA global's strong EBIT margin of 15.5% remains unchanged. Turning to Slide 17, I’ll review our free cash flow guidance. We have updated our cash earnings and other operating accounts consistent with full year EBIT guidance. We have further refined our capital expenditure expectations and remain confident in achieving 100-plus new products launched in 2024. In the second quarter, we made meaningful progress on our working capital leading to an improvement of over $200 million of cash versus the first quarter. As we move through the year, we expect to further reduce inventories. We also expect to see accounts receivable and accounts payable return to similar levels as the end of 2023, allowing us to deliver sequential free cash flow from working capital throughout the back half of the year. Finally, we updated the restructuring impact of the previously announced organizational simplification actions. Overall, we expect free cash flow of approximately $500 million for the year. Turning to Slide 18, let me recap our commitment to our capital allocation priorities. We’ve completed actions to strengthen our balance sheet in 2024. In the first quarter, we completed the sale of 24% of Whirlpool India’s outstanding shares while retaining a majority interest. Additionally, the planned divestiture of our Brastemp branded water filtration business in Brazil closed on July 1, generating over $50 million of cash. Combined, these two actions generated more than $500 million of cash. Coupled with our beginning cash on hand of $1.6 billion and free cash flow generation of approximately $500 million, we are well positioned to pay dividends of approximately $400 million in 2024 and continue our debt reduction initiatives, demonstrated by a $500 million term loan repayment in April. With these actions, we are fully on track to deliver our 2024 capital allocation priorities. Now I will turn the call over to Marc.

Thanks Jim. Turning to Slide 19, let me recap what you heard today. We are pleased to have delivered sequential margin expansion globally and in North America, primarily driven by our pricing actions. We continue to navigate a soft macro environment, but we’re executing well and are confident in our strategy. In 2021 and 2022, we incurred over $2.5 billion of cost inflation, and we have been relentless in addressing these cost challenges. We took out $500 million of fixed costs since 2019, and with the organizational simplification delivering $100 million in cost savings alone in 2024, we are on track to achieve $300 million to $400 million of cost savings for the year. As we look forward, we continue to see significant opportunity to take additional cost out of our products through input costs, manufacturing, and supply chain. At the same time, the soft macro environment and in particular the U.S. housing market will eventually turn positive, and our North America business is well positioned for future growth and further margin expansion. We’ve seen the downturn of consumer discretionary demand intensify since 2022 and existing home sales hit multi-decade lows in 2023 and 2024. There is no doubt that we have been and still are at a low point in the U.S. housing market. With interest rate reductions, this will ease at some point, and we are well positioned to benefit from improving demand. Replacement demand remains strong, and we expect this to continue due to its strong installed base and increased usage of appliances, which remains higher than pre-pandemic norms. Overall, we have the right strategy and operational priorities to navigate the challenging environment in our North America business. Our SDA and international businesses continue to perform ahead of previous expectations, delivering sizable market share gains. These businesses have a long runway for growth and continue to be very important to our overall portfolio. Finally, we are delivering strong cash generation in the quarter and are expecting significant improvement from the back half of 2024. We have good line of sight to our approximately $500 million free cash flow target for the year. We continue to return cash to shareholders through our attractive dividend and have a long track record of shareholder-friendly capital allocation. We are confident in our strategy and the steps we are taking, both the short and long term, to deliver value for our shareholders. That concludes our formal remarks, and we will now open it up for questions.

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

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

Good morning Sam.

Morning Sam, good.

Two questions, both related to North America MDA. First one, you originally were looking at a 10% or 11% margin exit rate in the fourth quarter. How long do you figure it will take to return the segment to that 10% or 11%, and what specifically would have to happen for those levels to be achieved? Then I’ve got a follow-up.

Sam, let me just take that question. The revised guidance which we issued basically points to a roughly 9% exit margin, which is different from our previous 10% to 11% which we had in mind. That is all entirely driven by the delay of the housing recovery. As you know, we entered the year assuming, like many other people, that there would probably be two or three interest rate reductions, and let’s see how many will actually happen, so. In reality, we talk about the delay of a recovery, which is reflected in our guidance. The simple answer to your question, when will it happen or what needs to happen, the housing recovery needs to happen. As you know, we’re disproportionately benefiting from any housing recovery because of our strength in the builder channel, and that is a really important element in getting to this run rate. In the meantime, we do what we can do in our own control - that was the promotion price increase, we’ve taken aggressive steps in cost actions, but the housing market at the same time needs to recover in order to get to these double-digit run rates again.

Got you. My second question is actually related to your answer there. It was notable, at least to me, that mix alone created such a large cut to North American margins, at least versus the expectations previously. At a high level, I’m trying to get a sense of what informed your assumption of such a margin benefit in the back half originally from mix. I guess it would be, I guess, 200 basis points or so, especially knowing that you’re in the process of raising price, which could inhibit mix, and your early interest rate cuts typically actually give homeowners a pause until they wait for interest rates to stabilize. I’m just trying to get a sense of why mix was originally expected to be such a positive benefit in the back half.

Yes, there’s obviously multiple elements going on, on the pricing side and regarding the difference year-over-year versus a sequential perspective. First of all on the pure pricing, and I will just come back to mix, as you know, we have not seen a lot of like-for-like price change, but obviously the carryover of the deep promotional discount in the second half of 2023 that was very visible and maybe more visible than we originally assumed in the first half, and that by definition impacted full year numbers, so. As you also know, we issued our promotion price program changes late April. We see the benefits of that fully coming into our business in June, and that will on a go-forward basis drive quite a bit of pricing. But the promotional impact in the first half, frankly that was one element which was probably even bigger than we originally assumed. The second part to your question about mix, what you have right now going on, and I think you even pointed towards this one in your report, is there’s almost two offsetting dynamics going on in the marketplace. You have on the one hand the replacement market, which is very strong, driven by higher appliance usage, and you’re also now comping against good baseline numbers, so that is strength but it comes with a very weak mix. Just think about the consumer - the consumer who wants to replace their refrigerator or washing machine in one or two days, typically you don’t have a lot of opportunities to get them to higher price points to explain the new technology or bigger products, because it typically has to fit a cut-out. The other side of it, the discretionary demand, that is the really weak side, even weaker than you would see right now in the overall industry numbers - quite a bit weaker. The discretionary side comes with a fundamental remodel or existing home sales or new housing, and of course the moment you have a planned kitchen which is designed, you have much, much bigger mix opportunities, and that’s the element which has really changed versus the beginning of the year assumption.

Your next question comes from the line of Mike Dahl from RBC Capital Markets. Your line is open.

Thanks for taking my questions. Just a follow-up on North America. Marc, can you talk to the competitive responses you’re seeing so far, because I completely understand your point on the restatement to AHAM, but you do have a competitor that posted some better trends, and it looks like that competitor and maybe one of your retailers has talked about promotional activity maybe staying stable at the heightened levels. If you could just give us a little more color on what you’re seeing - are people following your actions, and how does that inform your second half implied guide?

Mike, let me just maybe respond to the broader industry and the results from our promotional price program changes. For the broader industry, as we pointed out and I think some of you also reported in your own analyst reports, there has been more noise than usual in the reported industry data. As you know, we were not exactly representing the industry data in Q1 and also in Q2, we have a slightly different picture, so the year-to-date number we’re pretty confident in roughly minus-2% on a volume basis, which by way, what I’ve seen on the competitor’s investor relations communication is very similar, so everybody pretty much points to a down market in units, and probably because of the promotional price environment quite a bit more on the revenue side, or on the ASP side. We came out with our promotional price program changes late April, as I’ve said before. We see the full impact, the positive impact response starting in our June results, and of course whenever you come out with these promotional program changes, because you are kind of less promotional, if you want to say so, of course you expect some volatility in your market share. But frankly, we see that stabilizing towards the end of the quarter, and knowing our product launches which we have in Q3 and Q4, we feel very good about our full year market share will be pretty much stable, and also year to date, there’s not so much noise. Honestly, I can’t tell you what the competitors do or might do - you’ve got to ask them. We do what’s right for our company, and that is continuing on the course of margin expansion, and pricing is a key element in this one.

Got it, okay. Thanks for that, Marc. Then my second question, maybe just taking that and back to the margin bridge, in terms of the getting from 6.3% to approximately 9%, I know the price actions only helped half your quarter in 2Q, so there’s still half that to come through in 3Q. Can you just help us maybe just bucket out the walk, because it’s still a pretty steep walk, so how much is the incremental benefit from the price actions, how much is the incremental benefit from the cost-outs, and then what is the remaining delta in the bridge to get up to the 9% by 4Q?

Yes Mike, this is Jim. The first thing to note is that the pricing is only partially reflected in the results for Q2. Once we see the full run rate in Q3 and Q4, which is a significant factor, we’ll also need to consider costs. About 60% of the cost benefits we’re experiencing are contributing positively to the North America bottom line. These cost savings are increasing sequentially as we completed many of our cost actions in the second quarter. The full impact won’t be realized until Q3. You can think of the contributions from pricing and costs as roughly equal in driving us from a 6% to a 9% exit rate.

Mike, it’s Marc. There’s also one additional element, just echoing Jim’s point, is keep in mind our very profitable small domestic appliance business has a seasonality which is heavily skewed towards the back half. That historically would have been sitting in the North America and to some extent European margin. That is now showing up in the segment results, so obviously the profit which comes with that heavily skewed business in Q3 and Q4, that also is another element which explains the margin walk.

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

Thank you, good morning everyone.

Morning Susan.

My first question is about the realization of the promotional price increase. Can you discuss how North America performed in the quarter compared to the price mix you reported? I understand you usually don't provide that level of detail, but given the recent shift, any additional information would be helpful. Also, are we still on track for the 1% to 2% realization that you initially targeted? Does that still seem like a reasonable goal, or has there been any change due to the implementation and the way this has started to develop?

Yes Susan, without getting to exact details of North America, it was a global number, but both in the year-to-date, call it year-to-date May negative pricing North America, U.S. was the lion’s share, and also now with improvement, North America is the lion’s share. It’s heavily driven by the North American market. We had significant negative carryover, if you want to say so, on promotional price environment from the back half last year, and we see that fully now turning, and we saw that turning in kind of late May and fully in June, so we feel very good about certainly the sequential pricing trends in North America, and by definition that now will start in Q3 and Q4, turning to also year-over-year positive benefit. In terms of a net impact, we’re fully on track towards that net impact which we referred to earlier, so we feel very good about what the team has done and we will remain disciplined on this one. That’s what we communicated, and that’s what we’re seeing.

Okay, that’s helpful. Then when you think about the global footprint that you have today, I know you mentioned that you closed the sale of the Brazilian assets in early July, can you talk a bit about the cash generation of the business given where these markets are all operating and how you think about the contributing, and perhaps with that, the path to deleveraging over time?

Yes Susan, this is Jim. I would say if you really step back and you look at our international businesses right now, what I would say is you’ve seen strong margin performance in the first half of the year on both our Asia business, as well as our Latin America business. On a full year basis, both of those will be positive cash generators for us, unlike what we’ve talked about in the past with our EMEA business, that was a cash consumer, but that was more because of continuous investment and restructuring. On the other hand, today our Asia and our Latin America businesses actually are positive cash generators. They generate enough cash to support their own investments. They don’t require significant restructuring, and if you think about right now just the growth we’re seeing in those markets, that growth is leading to both the higher margins that we’ve talked about but absolute higher cash generation, so they are positive cash generating businesses for us and really, if you think about it, the easiest way to take one of those is just take what they generate from an EBIT perspective and then tax-affect it, and that’s about what they generate from a free cash flow perspective on a full year type of basis. They obviously have some seasonality to them with their working capital, but outside of that, there’s no other significant investments we need to make in them.

Maybe just adding, Susan, to this, onto your question about the deleveraging, as you’ve seen before, we did not change fundamentally in terms of capital allocation ’24, and even though we’re far away from giving ’25 guidance, that’s pretty much the theme which we would also see for ’25. What I mean with that is in ’24, I think we have a very good balance between returning cash to shareholders, a larger pool, a very attractive dividend, and we pay down half a billion dollars of long term debt. Again, absent having a board discussion, but I would right now assume that in ’25, we will have a similar picture, i.e. a moderate reduction of long term debt, and we want to be very attractive and continue to be very attractive in returning cash to shareholders.

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

Yes, good morning everyone, and thanks for taking the questions.

Morning David.

I have a couple of high-level strategic questions. We're discussing 9% margins for the end of the year in North America, but also 9% margins on a consolidated basis for 2026. Given your guidance of 6% for 2024, could you explain how you plan to achieve that 9% using price mix, net costs, and raw materials?

Yes, David, it’s still early to provide guidance for 2025, as your question suggests. However, there are a few key points to consider. If we break it down by our business units, our operations in Latin America and Asia are on a solid trajectory. We expect to see margin expansion of over half a point to a full point over time. Our small domestic appliance business is focused on growth and is performing at a healthy margin of about 15.5% to 16%. This growth is strong, especially compared to what we discussed at investor day, and with our new product launches, we anticipate this momentum to continue. The growth from our SDA business and its effect on our overall margin will be crucial as we move into 2025 and 2026. However, the cornerstone of our strategy remains in North America. We are making the right moves regarding pricing and cost management to turn around margins there. While we will need some support from the housing market, that will be a critical aspect of our approach. Looking ahead to next year in North America, our main focus is not so much on revenue growth but rather on achieving margin expansion.

David, this is Jim. To add to what Marc mentioned, during our investor day, we emphasized that the significant change from 7% to 9% was driven by costs. Currently, the difference between 6 and 7 is largely due to a lower mix in North America and the discretionary aspect of the business. We anticipated a slight improvement in this area in 2024. I expect that between now and 2026, we will see improvements that align with what we initially projected for 2024, which will assist in enhancing our starting position. However, the primary focus will be on continuing to reduce costs in our business through simplification over multiple years.

That’s helpful, thank you. I guess secondly, there’s been talk in the market of a Whirlpool sale, and I’m not asking you, just to be clear, to comment on market rumors - I’m not asking for that, but also just being mindful that at the right price, everything is for sale, is there a plausible scenario whereby Whirlpool exits most or all of its core six white goods business in North America, Latin America and Asia, and goes forward with small domestic appliances and commercial appliances, similar to what you envisioned in your transformation strategy, or are the economics of the small domestic appliance business and the commercial appliance businesses just so dependent on the white goods business that it would render them inseparable?

David, that's a question that goes well beyond just an earnings call. As you've correctly pointed out, we will not comment on speculation or rumors, as we've never done that and we will continue this approach. The key point is to look at the portfolio transformation we’ve achieved over the last couple of years. Whether it's in China, the divestiture from Europe, or our current businesses, we are the number one in all our segments in North America, Latin America, and SDA. India may be an exception, but it remains a highly attractive growth market. In our portfolio, we now have a collection of businesses that few companies can claim to be number one in virtually every market they operate. This provides us with a solid and sustainable foundation moving forward. Currently, particularly when considering Latin America in relation to North America, there are many connections and synergies. We see strong links between the KitchenAid SDA and our KitchenAid major appliances business, which reinforces our integrated approach. Hence, after our portfolio transformation, we believe we have a robust core business with numerous growth opportunities ahead.

Your next question comes from the line of Laura Champine from Loop Capital. Your line is open.

Hi guys. Is there any meaningful shift in your mix in the North American business by major appliance category or brand?

You know, Laura, what I would say is probably if you look at the shift that we’ve had in terms of mix, as we talked about with the discretionary sales being lower and going to more of a replacement market, what I’d say is the shift has gone away from selling things such as suites and we’re not seeing as much in terms of at the super premium and maybe at the top of the premium area, because again we’ve got a lot more consumers that are coming in as duress purchasers - they’re looking for a replacement. That also naturally drives a little bit more mix to certain products that a consumer can’t live without in terms of in a short period of time, so obviously it will help you from a refrigeration perspective and also from a washer perspective, a laundry perspective, where you see that a consumer can wait a little bit longer to replace something such as a dishwasher or a cooking product. Again, we are seeing some shifts, but it’s being driven really by much more of a replacement market right now, which does move the mix down some, and that’s just less discretionary.

Got it, and then on raw materials, I know you’re trying to get raw materials cost back to pre-COVID, but I’m also curious about your comments that you had no change in raw materials in the quarter. When should we start to see improvement there? That’s all from me, thanks.

Laura, it’s Marc. We didn’t see significant changes in raw material costs compared to our previous expectations. Our earlier assumption for the full year indicates that it won’t have a substantial negative or positive impact. To elaborate, our primary raw material is steel, which represents a major expense for us, close to $2 billion. The difference from our initial projections for steel isn’t significant. We rarely purchase steel on the spot market; in North America, we primarily engage in larger contractual agreements that can last a year or even longer, with fixed terms and some variable elements. We haven’t observed major fluctuations in this area. Currently, there’s confusion surrounding hot rolled versus cold rolled steel. There has been some positive movement in cold rolled steel, which slightly benefits our contracts, but it's not substantial. Oil and plastic prices have remained stable, although we did experience some negative effects from other materials like zinc. Overall, compared to our original expectations, the situation is balanced. This means we don't have a significant advantage in raw materials at the moment. Looking ahead to 2025, while it's too early to predict, there might be a slight benefit, but I wouldn't rely on it being significant.

Your next question comes from the line of Michael Rehaut from JP Morgan. Your line is open.

Thanks, good morning everyone. I wanted to clarify the reasons behind the reduction in the North American margin guidance for the year. About 90 days ago, you mentioned that discretionary demand has not returned, which has primarily affected the mix. This has led to a notable change in the outlook for the second half of the year. I want to ensure we understand the factors contributing to this guidance adjustment, specifically if it’s solely based on the mix assumptions that led to the new guidance of 7% for the year compared to the previous 9%, or if there are other changes we need to consider, such as pricing trends, operational leverage, or a slight decrease in the North American shipment outlook, along with any additional factors that may be relevant.

Yes Mike, it’s Marc. Of course, there’s always a lot of components, but in very simple terms versus the original guidance, the single biggest change is we originally assumed, like most people, that we would start seeing a housing recovery in ’24, and it’s not happening. That was based on the assumption that we would see interest rates and therefore mortgage rate reductions, and it didn’t happen. Most visible is actually existing home sales, which as we several times pointed out, is the single biggest driver of overall appliance demand, and existing home sales dropping to now, what was it - 3.89 million units? Frankly, we did not have that in our original guidance assumption. We would have counted more on a number 4.5 to 5 million in the back half, and it’s just not happening. Now, it will happen at one point, but it’s not a ’24 event, so that’s the single biggest driver of the guidance change. Now, as a result of that, yes, you have an overall slight decline of the industry, you have a more negative mix, all of the subsequent effects, but the number one cause is the delay of the housing recovery. The second part of what is the fundamental driver between first half and second half margins in North America, 80% of that change is pricing because we had a huge negative carryover from the promotional pricing in the first half. We corrected that with our actions in late April, they become visible in June, and that explains the vast majority of the improvement in the second half versus the first half.

Thank you, Marc, I appreciate that. Regarding the SDA global industry outlook, you've revised it from a growth of 2% to 4% to roughly flat, likely due to reduced discretionary spending compared to earlier expectations. However, you've managed to maintain your margin outlook for the year at 15.5%. I'm curious if this ability to uphold margins is linked to your ongoing sales growth efforts and if your sales growth forecasts remain consistent even in a weaker industry. Are there other factors contributing to this outlook that you have been able to leverage in a softer market? I'd love to hear your thoughts on maintaining margins and whether your continued execution of sales growth aligns with your previous expectations despite the challenging market conditions.

Yes, Michael, we really value our SDA business. Among our robust brands, KitchenAid stands out as the most prominent. It is an exceptionally strong brand in both major and small domestic appliances. When we talk about small appliances, it's worth mentioning that industry data may not be as relevant to our SDA business compared to major appliances. This is primarily because the SDA market is quite diverse, ranging from inexpensive toasters to $2000 automatic espresso machines. That diversity makes us somewhat less influenced by general industry trends. Instead, I view industry trends as more reflective of overall consumer confidence in that segment. What we show with our SDA business is that it's not just about strong products; meaningful innovation in the market drives sales. For instance, our fully automatic espresso maker, priced between $1400 and $1900, isn’t considered cheap, but it has a consumer rating of 4.8. The same goes for our rice and grain cooker, a smaller segment, which also succeeds with significant innovation. This illustrates our ability to somewhat separate ourselves from the broader sentiment in the SDA market. A strong brand, good innovation, and high quality lead to sales. In terms of margins, I want to highlight that in Q2, we invested significantly in marketing for KitchenAid SDA, and we still experienced margin expansion. We foresee this positive trend continuing into the second half of the year. Our SDA business is very strong, and I have no concerns about margins; it's really about how much we can grow the business.

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

Thanks, good morning.

Morning Eric.

A housekeeping question first. Just North American revenue, it looks like it’s down roughly 7% in the first half, and you talked about the full year market being flat and progress with price. Does the math then suggest we should be thinking about the second half North American revenue growing 3% or 5%? Is that reasonable, or is there something that I’m missing?

Yes Eric, just some directional color. On our, call it mid-single digit revenue down, there’s a big element which is the pricing carryover, and then you have a small unit decline. I would say year to date down mid-single digits. Three-quarters of that is pretty much pricing carryover on promotions, and the rest is units, so the unit decline is obviously a little bit less than we showed in revenue, and the same thing now flips as we look at the second half, because we had the promotion price increase and we will start getting positive comps against last year, and that stabilizes. On the unit side versus the trend which we had so far, I wouldn’t expect too much change, but the difference on the revenue side between first and second half is coming from price realization per unit sold.

Then secondly on market share in North America, there was a comment made about a bit of a greater focus on margin relative to market share, and then also comments about full year stable market share. I guess I’d just love you to talk a little bit about what your strategy and path is on holding, or even gaining share in the back from what looks to maybe be a little bit of dislocation in 2Q, and also just to make sure that I’m framing the strategic plan on market share and what you’re trying to do in North America.

Eric, as we said before, we are planning to hold our market share this year, and we have a high degree of confidence on this one. Now, zooming out a little bit, the fundamental reason why we did all these promotional price change actions was in a replacement market, if you invest heavily in promotions, you typically don’t get the lift because the replacement consumer doesn’t wait for a July 4 holiday to get a deal. The fundamental economic return you get on promotion investments is just different right now than in any comparable year. Do we expect some volatility in market share in the short term? Yes, of course, but it’s already kind of leveled out and we feel pretty good about how we exited the market share in June. The real big driver of market share stable is maybe less promotions, but at the same time, we have a strong product pipeline. The products which we launch now are some majors in North America. We will have an all-new front load washer coming in Q3, etc., so we have a strong product pipeline and it sells, so that’s what gives us the confidence on our market share being stable. Keep in mind that does not yet have any positive market share impact which will come with the builder business. The moment the housing recovers, because of our disproportionate strong share on the housing side, of course you will get automatically a lift on the market share, but that’s not factored in for ’24.

Your next question comes from the line of Rafe Jadrosich from Bank of America. Your line is open.

Hi, good morning. Thanks for taking my question. I just wanted to ask about some of the comments you’ve made on mix so far. Is there any way you could help us understand the margin difference between the replacement business and then the discretionary business, and then where is the discretionary mix today versus where it’s been historically? How depressed is that business, just so we can get an idea of how much that’s pressuring margins right now?

Sure, I can start by addressing your second question and then we can discuss margin progression within our portfolio. Typically, replacement accounts for about 50% to 55% of our business, while new housing covers around 10% to 15%. This leaves approximately 30% to 35% for discretionary spending. Currently, replacement has risen to over 60%, which means discretionary spending has fallen to the mid or low 20% range of our overall business. This represents a notable shift, even with relatively flat volumes, as our replacement sector remains strong. Regarding margins, we do not provide specific margin details for our various product categories due to the many influencing factors. However, we have always highlighted the margin progression within our portfolio, which ranges from value products with lower margins to premium and super premium products that offer higher margins. In a downturn for discretionary spending, the super premium and premium segments are impacted more severely, leading to a shift towards lower-margin value products. Additionally, within our product portfolio, refrigeration typically has the lowest margins and is highly competitive, followed by laundry, then cooking and dishware. Consumers often replace refrigerators or washers promptly after they break, which drives demand in lower-margin categories. Lastly, sales from existing home sales and remodels tend to involve suite sales that lean towards premium brands and higher-margin items, including cooking and dish products. While we don’t provide specific guidance, when the focus is on replacement, it generally leads to a movement into lower-margin areas. However, we expect to see growth in higher-margin sectors as discretionary spending and new housing pick up.

Okay, that’s really helpful color. Then Jim, I wanted to follow up on some of the debt financing. You’ve been successful in refinancing, you just paid down $500 million, but you are reducing the cash flow outlook. How do you think about balancing the IG credit rating you have today with capital return to shareholders, and just remind us when the next debt payment you have due is, and just how you think about cash flow relative to your maturities and managing the dividend.

Yes, so Rafe, here’s what I would say. We did reduce the cash flow some for this year. Now, we still are confident as we go into next year that we have the $300 million incremental on top of where we are this year. That comes just by not having EMEA within the portfolio and the divestiture of EMEA. When you step back and you look at that, we will have, as usual, some long-term debt coming due in the first quarter, and then we have the remainder of the term loan related to InSinkErator that will also come due next year. We’re very confident in terms of our ability to pay down and refinance whatever we need to of that as we go into next year, and we don’t get into specifics ahead of that, but just saying that that’s what we’ve talked about as we look to next year. We are confident in terms of our ability to handle that, also looking at where that will put us. As we expand margins, part of the whole thing of getting back to the leverage levels and leverage ratios we’ve talked about, yes, we will continue to focus on returning debt and prioritize that. We will prioritize the dividend and reducing debt, but de-prioritize share buyback. As we go into next year, that will be the continued priority. But as our EBITDA grows, it will also help us from reducing debt and growing EBITDA to get closer to the metrics that we’ve talked about by 2025 and 2026, so we’re very confident with our path to deleveraging, and I would say that right now, the reduction in cash flow this year is probably only having a small impact on that.

All right, I think that concludes our Q&A session. I appreciate all of you joining us. As you heard today, we are still experiencing a somewhat negative cycle in North America from a broader macro environment perspective. However, the rest of the world has already transitioned to a much more favorable cycle. Despite the negative market conditions in North America, we are executing our plans effectively. We are seeing success in our pricing strategies and cost reductions, and we remain committed to expanding our margins. The market environment I mentioned earlier will eventually improve, which should position us well for 2025. With that being said, have a wonderful day, and I look forward to speaking with you soon.

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