Whirlpool Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2022

Key Takeaways

  • Strong Q2 results: Delivered 9% ongoing EBIT margin and $5.97 ongoing EPS, ~50% higher than Q2 2019 despite historic cost inflation and mid‐to‐high‐single‐digit demand slowdown.
  • Cost‐based price actions effective: Global pricing lifts drove +6.75 bp of margin expansion, largely offsetting a 7.6 bp raw material inflation headwind and 175 bp of net cost pressure.
  • Revised full‐year outlook: Now sees 2022 revenue down 5–6%, ongoing EPS of $22–$24 (2nd highest ever) and ~$1.25 billion in free cash flow, reflecting softer near‐term demand.
  • Portfolio transformation: Agreed to divest the Russian business (~$747 million non‐cash charges) and will conclude an EMEA strategic review by end of Q3 to focus on high-margin assets.
  • Robust shareholder returns: Returned ~$400 million in Q2 and ~$800 million YTD via buybacks, on track for $1.5 billion in dividends and repurchases for 2022.
AI Generated. May Contain Errors.
Earnings Conference Call
Whirlpool Q2 2022
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good morning, and welcome to Whirlpool Corporation's Second Quarter 2022 Earnings Release Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Senior Director of Investor Relations, Corey Thomas.

Speaker 1

Thank you, and welcome to our Q2 conference call. Joining me today are Mark Bitzer, our Chairman and Chief Executive Officer Jim Peters, our Chief Financial Officer and Joe Liatini, our Chief Operating Officer. Our remarks today track with a presentation on the Investors section

Speaker 2

of our website at whirlpoolcourt.com.

Speaker 1

Before we begin, I want to remind you that as we conduct this We also want to remind you that today's presentation includes non GAAP measures. We believe these measures are important indicators of Operations. As they exclude items, they may not be indicative of results from our ongoing business operations. We also think the adjusted measures Chris will provide you with a better baseline for analyzing trends and our ongoing business operations. Additionally, price increases or pricing actions Reference throughout this call reflect previously announced cost based price increases.

Speaker 1

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 our most directly comparable GAAP measures. At this time, all participants are in a listen only mode. Following our prepared remarks, the call will be open for analyst questions. As a reminder, we ask that participants ask no more than 2 questions. With that, I'll turn the call over to Mark.

Speaker 2

Thanks, Corey, and good morning, everyone. Before I get into the results of the quarter, I'd like to step back and share with you the progress that we're making structurally improving Whirlpool for the better. We have a clear line of sight on the long term success of the business And then driving shareholder value. Roku has become a stronger entity today versus historically. We operate in a healthy long term growing market And our long term growth outlook remains unchanged.

Speaker 2

Our brands are strong and consumers use them daily and will use them even more in the future. Based on the initiatives that we are taking, Mobile will exit the current and temporary industry headwinds and our highest operating performance. Likewise, we're focused on simplifying and transforming our business portfolio to pruning of underperforming assets by investing in high margin businesses. We are operating in unprecedented times, but thanks to our strong balance sheet, Transformation efforts and the hard work of the team, Whirlpool continues to perform better today than in past and will see record performance over the medium term. Today, we will discuss our 2nd quarter results and highlight how we continue to successfully manage our business despite New term pressures, while at the same time remaining focused on delivering towards our value creation goals over the long term.

Speaker 2

We are operating in a dynamic world Marked by a rapid cost inflation, a war and geopolitical tensions as well as broader economic uncertainty and its subsequent negative impact on consumer sentiment. Throughout the past years, we have demonstrated that we take needed actions early And decisively, and we have done so again in the Q2. We're confident in the actions we've taken to mitigate industry headwinds, including Our focus on enhanced operating margins, the strong global cost based pricing and broad cost reduction initiatives throughout the world. Now strong margins, not only in Q2, are evidence that these initiatives are working. We are prepared for near term pressures And remain focused on delivering over long term regardless of the circumstances.

Speaker 2

Turning to Slide 4, I will review our 2nd quarter results. Our performance this quarter showed yet again some of our best results ever. I'm convinced that we have built a new Whirlpool that is stronger and better prepared for our future. In particular, we delivered solid ongoing EPS of $5.97 9% ongoing EBIT margins. With ongoing EPS approximately 50% better than the Q2 of 2019,

Speaker 3

even in the

Speaker 2

face of historic levels of cost inflation and the demand slowdown. We experienced mid single digit to double digit demand slowdown in key countries in the Q2 alongside a rapidly strengthening dollar. And yet, we impressively delivered relatively stable revenue of down 2% excluding main package currency. In more impressive, North America delivered over 14% margin, demonstrating the structurally higher cost levels of the region. Next, With the confidence we have in our business and the strength of our balance sheet, we continue to fund innovation growth by returning approximately $400,000,000 shareholders in the quarter.

Speaker 2

Additionally, we signed an agreement for the divestiture of Voprol Russia Business, triggering $747,000,000 of one time almost entirely non cash charges. We expect the Russia sale to Lastly, the near term impact on demand from consumer sentiment, that is to revise our full year ongoing EPS guidance to $22 to $24 However, to put it into context, this guidance represents the 2nd highest full year ongoing EPS in the history of the company Despite inflation running at 40 year highs and the additional headwinds that we've been discussing, our free cash flow guidance of $1,250,000,000 remains unchanged. Again, we are confident in the actions we have in place to manage the near term pressures, while remaining focused on delivering over the long term. Turning to Slide 5, we show the drivers of our 2nd quarter EBIT margin. Led by our fully executed cost based price actions across the globe, We successfully delivered positive price mix resulting in 6.75 basis points of margin expansion.

Speaker 2

Net cost negatively impacted our margin by 175 basis points, largely driven by increased logistics and energy costs, alongside operational inefficiencies from supply disruptions. Lastly, and in line with our expectations, Raw material inflation continues to be a significant headwind, negatively impacting margin by 7.60 basis points. This is a very solid performance addressing a challenging environment and delivering operating margin of 9%. And now I'll turn it over to Joe to review our regional results.

Speaker 4

Thanks, Mark, and good morning, everyone. Turning to Slide 7, I'll review the results for our North American region. In the quarter, the industry continued to be negatively impacted by softening consumer sentiment alongside the constraining supply chain. The industry slowdown we experienced in the Q2 was greater than expected. However, as we implemented operational improvements, We realized sequential share gains as our share position improved throughout the quarter.

Speaker 4

We believe the fundamental strength Our consumer demand trends remain intact as we continue to see elevated cooking appliance usage over 2 times above Pre pandemic levels, we were able to largely offset the negative impact of the industry decline with the strong execution of cost based price increases. We delivered 14.1 percent EBIT margins despite inflationary pressures alongside the negative impact of operational inefficiencies and temporary volume deleveraging. We remain confident in the strength of our business and our ability to deliver Strong results in any environment. Turning to Slide 8, I'll review results for our Europe, Middle East and Africa region. The revenue decline was largely attributed to reduced volume, which was negatively impacted by the war in Ukraine, including our operations in Russia slowing to a near shutdown.

Speaker 4

True currency, the region's revenue declined by approximately 10%. The region's strong execution of pricing actions drove 270 basis points of sequential margin expansion that was more than offset by lower volumes and cost inflation, resulting in the EBIT margin contraction of 2.3 points in the quarter. Next, As part of our strategic review of EMEA, we announced the pending divestiture of our Russia business. This is a standalone business with localized production and sales offices, positioning it well to be sold as a unique entity. We continue to expect to conclude the strategic review of our EMEA business by the end of Q3.

Speaker 4

Turning to Slide 9, I'll provide additional detail regarding the pending sale of our Russia business. In June, we entered into a share purchase agreement to sell our Whirlpool Russia We expect the sale to conclude in the Q3, subject to customary closing conditions. As a result Of this transaction, we recorded $747,000,000 of non recurring, primarily non cash charges, including $346,000,000 primarily associated with the write down of Russia assets, which triggered a comprehensive assessment resulting in a $384,000,000 goodwill and intangible asset impairment in the EMEA region. We are pleased with our team's ability to navigate and find a solution that furthers our portfolio transformation and represents the best course of action for our employees located in Russia. Turning to Slide 10, I will review results for our Latin America region.

Speaker 4

Net sales growth of 3% driven by strong execution of cost based price increases, fully offsetting expected industry softness. The region delivered strong EBIT margins of 7.2%, once again demonstrating the consistency in which this region delivers Results in any environment. Turning to Slide 11, I'll review our Asia region. Revenue growth of 26% is largely attributed to higher volumes in India as the region was impacted by COVID related shutdowns in the prior year period. The region delivered a significant EBIT improvement of $19,000,000 resulting in EBIT margins of 6.8%, driven by cost based pricing actions and higher volumes, fully offsetting cost inflation.

Speaker 4

Now on Slide 12, I'll turn it over to Jim to discuss our full year 2022 guidance.

Speaker 5

Thanks, Joe, and good morning, everyone. Now turning to Slide 13, I'll review our updated guidance for 2022. We have revised our full year guidance to reflect the larger than expected industry slowdown. While there is no change to our expectation for long term growth, Including a robust multiyear appliance demand outlook, we have adjusted our 2022 guidance to reflect the current environment. As a result, we now expect a revenue contraction of approximately 5% to 6% and ongoing EBIT margins of approximately 9% for the year.

Speaker 5

This represents a full year ongoing EPS range of $0.22 to $24 Next, We continue to expect to generate significant free cash flow of approximately $1,250,000,000 or around 6% of net sales. Turning to Slide 14, we show the drivers of our full year ongoing EBIT margin guidance. We have increased our expectation of negative net cost by 50 basis points to a negative 150 basis points, reflecting the added inefficiencies resulting from temporarily reduced volumes and additional logistic and energy costs. Next, with the strengthening of the dollar, We now expect a negative currency impact of 25 basis points, driven primarily by Brazil and India. All other drivers remain unchanged, Including our expectations of previously announced cost based price actions driving 7 25 basis points of margin, fully offsetting raw material inflation, which we expect to peak in the second and third quarters.

Speaker 5

We are confident that we have the right actions in place to deliver 9% ongoing EBIT margin. Turning to Slide 15, we show our regional guidance for the year. We are reducing our global growth expectations to negative 6% to negative 4%, reflecting updated industry expectations for North America in 2022. In North America, our near term growth expectations are negative 7% to negative 5%, with a second half industry performance in line with the Q2. Looking beyond 2022, we remain confident in the fundamentals of the demand environment for North America supported by 1, broader home nesting trends 2, an undersupplied housing market 3, a strong replacement cycle and 4, continued elevated levels of consumer engagement with our appliances.

Speaker 5

Regarding our EBIT guidance, we expect North America to deliver approximately 50% EBIT margin, which remains in line with our long term Our industry and EBIT margin expectations for EMEA, Latin America and Asia remain unchanged. Turning to Slide 16, we will discuss the drivers of our 2022 free cash flow. We continue to expect to generate significant Free cash flow of $1,250,000,000 with cash earnings of approximately $2,000,000,000 and a modest level of inventory supply recovery, while funding innovation through our capital investments. These investments are in line with our target of approximately 3% of net sales. This supports our planned introduction of over 100 new products this year, including our newly launched shave ice attachment in time for summer as we create new ways for our consumers to engage with our iconic KitchenAid stand mixer.

Speaker 5

Lastly, We anticipate minimal cash outlays related to restructuring as these actions have been largely completed. This performance Along with our strong balance sheet positions us with significant optionality and flexibility. We repurchased Approximately $300,000,000 of our stock in the 2nd quarter, bringing us to over $800,000,000 year to date. We are on track to return $1,500,000,000 in buybacks and dividends to shareholders in 2022. Now on Slide 17, I'll turn it over to Mark to summarize our key messages.

Speaker 2

Thank you, Jim, and let me recap what you heard over the past few minutes. We have a right global actions in place to deliver strong second half. Our raw material inflation expectations remain unchanged And we do expect raw material inflation to peak in the second and third quarter. Our previously announced cost based price increase have been fully executed. We expect to exit the year with our existing pricing actions fully offsetting raw material inflation.

Speaker 2

Additional cost actions including hiring freezes have already been initiated. We are prepared and expect to successfully navigate a near term industry slowdown in 2022. The long term fundamental strength in consumer demand remains unchanged. Consumers continue to use their appliances in elevated rates alongside strong replacement demand and an undersupplied housing market. We are progressing in our portfolio transformation focusing on high growth, high margin We're very pleased with the divestiture of our Russia business and expect to conclude our strategic review of Europe within the next few months.

Speaker 2

Lastly, we're on track to return approximately $1,500,000,000 in cash to shareholders in 2022. And we have reduced our Outstanding share count by over 10% in the last 4 quarters alone. These actions demonstrate our confidence in the sustainability of our high margin and strong cash generating business and our commitment to creating shareholder value. Now we will end our formal remarks and open it up for questions.

Operator

Your first question comes from the line of Michael Rehaut from JPMorgan. Your line is open.

Speaker 3

Thanks. Good morning, everyone.

Speaker 2

Good morning, Michael.

Speaker 3

I wanted to focus first on North America And obviously, the big driver of the change in guidance, I don't know, was part and parcel of the second quarter What do you see in terms of it's a pretty decent drop off in the full year Expectations, I was hoping to get a little more granular in terms of what you think is driving that relative to your prior expectations. And also encouragingly, how you think about share going forward, your own share. You mentioned Sequential gains, which is important, obviously, given some of the losses over the past 18 months and how that might progress as well.

Speaker 6

So, Michael, it's Mark.

Speaker 2

Multiple questions and one question, let me still try to address them. Let me first talk about North America demand and Joe should probably also add some color. Michael, what we're seeing is basically, call it, Two trends going on at the same time. There's a long term alluded to, we see very positive. The long term trend, the positivity is driven by Replacement cycle, which is favorable, higher usage of appliance, structurally undersupplied housing market.

Speaker 2

So all these factors remain intact And you can't be in denial about these fundamental parts of long term trends. But there's a short term trend, which is kind of overriding that right now. What we did see in pretty much around the late April, May time frame, a pretty strong drop in consumer demand, which is ultimately driven With consumer sentiment dropping off, and we all know it, I mean, it's consumers it's not that consumers have no cash available, I think, versus Exposable income, it's a consumer sentiment driven by inflation, all the bad news around war and the pandemic, which is still not behind That together dropped or led to a significant drop of consumer sentiment impacting demand. We do not See both fundamentals of consumer sentiment going away probably for year end, because the fundamental drivers between inflation, war and probably upcoming midterm elections don't help consumer sentiment, probably pretty much until November, maybe towards the year, we see something more positive. But again, that has not Change our outlook, what it means for 'twenty three, 'twenty four in terms of long term demand, and we continue to remain bullish on the long term demand trends.

Speaker 2

Now when it comes to share, as we alluded in our prepared remarks, Q2 saw a small sequential gain over Q1. I'll put it differently, pretty much if you look at Q3 last year, Q4, Q1 and Q2, It's pretty steady, with a slight, slight increase towards the end of Q2. So in a certain way, we stabilized the share, But in all transparency, we have not regained the share, which we compared to pre pandemic. However, with supply chain constraints becoming less of an issue, We're confident that we can make progress in this dimension going forward.

Speaker 4

And this is Joe. Maybe just to build on comments from Mark. In the back half, we do have some upcoming launches that we're excited about that will help spur some growth. In addition to The comments Mark made, we really saw the sentiment impact the promotional period and holiday period in Q2. And so that was the factor that Our outlook changing for the back half, but if we look at the fundamentals, that still remains in a very positive light.

Speaker 4

And so Our outlook there remains as it has been, but the back half really is where the increased sentiment depression occurred.

Speaker 2

Okay. I appreciate that. And maybe just as

Speaker 3

a follow Joe, you kind of hit on promotions there. And

Speaker 2

when it would be very

Speaker 3

helpful, I think, to kind of unpack The drivers of reducing the North American margin guidance from 16% to 15%. I know in the margin walk, you talked about $250,000,000 I believe in Nonstructural efficiencies and temporary volume deleveraging, but you just mentioned, Joe, in your remarks that You referred to promotions. I'd love to get a sense of the price environment today. If that's holding, if promotions are increasing and that's part of the reduction in EBIT margin guidance for the region or is it more volume inefficiencies and deleveraging?

Speaker 4

Yes, Michael, maybe just to clarify a comment, I was referring to the promotional period, the holiday period, less about promotions themselves. But as you know, we have shared that our price margin and mix all is kind of fully on track and has kind of offset All of the RMI, we expect that to continue for the rest of the year. So we feel that that really is as stated previously. The deleveraging is kind of What we were talking about in terms of impacting margins and also the inefficiencies as a consequence of some of that lower volume, that really kind of is the new news That occurred in Q2, so maybe just separating the 2. From a price and promotion standpoint, I think we've over many, many years and quarters demonstrated A high ability to manage that space, only participate when ROI positive or positive returns to the company.

Speaker 4

So I think that approach, that mentality, nothing's really changed there from a company standpoint. We expect to do that and manage that well no matter what the environment is.

Speaker 2

Hey, Michael, it's Mark again. Just to add to Joe's comments, and I would refer to Page 14 of our presentation that will basically show the margin walk In prior guidance and current guidance, and that picture is similar to North America. So What we showed there was we did not change our pricing assumptions in the margin walk, which probably answered already the big question. Of course, there will be always some promotions, but nothing has changed versus our prior outlook in terms of how much we think we can get from pricemix. To Joe's point, the slight margin drop is largely coming from volume deleveraging because we have to adjust inventories in line with market demand.

Speaker 2

And that is just has a certain cost associated with that volume deleveraging and some temporary Costs which we're pretty convinced we will await in the short term. So, anyhow, so that's the difference in margin. Now to see the positive, Again, we should put that always in context. We had 9% margin in Q2. That is an environment where we had a 4th year high in inflation and market demand being down.

Speaker 2

That tells you a lot about resilience of this business and North America at 14%. In that environment, I think speaks To the health and the structural changes of our business.

Operator

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

Speaker 7

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

Speaker 1

Good morning, Sam.

Speaker 7

Good morning, Sam. So I'll ask the $1,000,000 question, I suppose, regarding the EMEA strategic review process. I know you mentioned that you're expecting to conclude the review by the end of the Q3. It was notable, at least to me, that it's not At least yet listed in disc ops. So I'm just trying to get a sense of your view of the likelihood of a sale in light of The idea that European demand is weakening, the financing markets and the capital markets are also, To an extent tightening up and FX is a pressure.

Speaker 7

So how has this evolved in terms of your Expectation to consummate a sale that would be of your liking?

Speaker 5

Sam, and this is Jim, and I'll start and then Mark or Joe could chime in. But To begin with, as we said last quarter, we expect the process to go through the Q3 and after that we'll talk Further about it and right now we're in the middle of the process. And so within this quarter and as we mentioned in our remarks earlier, We did at least reach an agreement to divest of our Russia business, which was a necessary step considering The sanctions and the environment, the regression along the path in terms of our strategic assessment here. Now, when When you asked about the accounting for it or putting it in discontinued ops, because we're not at a point where we have a definitive answer to give yet in terms of the situation and many options are open, It wouldn't be the appropriate time, but we did move Russia into held for sale because we do have an arrangement there. So that's where we are today.

Speaker 5

And I don't know if there's any more that we can really share on this until we get past the Q3.

Speaker 2

Sam, maybe just adding to this one. As we indicated in the April earnings call, we look in all options. Just to be clarified, the options on the table are Anything from selling the business to partial sale to keeping the business. Now keeping the business, I would have to qualify. And as is, is not really the option.

Speaker 2

Keeping the business will be a reduced footprint or different world pool Europe, but pretty much all options on the table. But at this point, it will be pure speculation to say what the likely outcome is. To Jim's point, the only change we have in the quarter, we originally assumed that Russia will be Part of a broader review, but given all the environment which we're well aware of, we had to decouple that and move on the Russia transaction earlier. But as we said before, we do expect by the end of Q3 to kind of pretty much come to a conclusion of our strategic review.

Speaker 7

My second question, mathematically, it looks like your guidance for pricing year on year is going to be better in the second half In the first half by about a point or 2. Just trying to get a sense of how much of that sequential improvement is just the timing of first half Pricing rollover, how much of that is from incremental pricing on the come? And I know you mentioned a little Promotional, but specifically is there any anticipated promotional leakage? Thanks.

Speaker 4

Hey, Sam, this is Joe. Just in response to that, there's obviously multiple things going on. There is rolling over of pricing actions taken Earlier in the year, that kind of roll in, there was additional pricing actions across the globe in different countries taken in Q2, Also kind of factoring in and kind of ramping up as they come on. So that's kind of essentially what you're seeing. From a pricing promotion standpoint, as we touched on earlier, obviously, that is very different than, I'll say, years ago, and we expect that to remain, I'll say muted or moderated levels has been in Q2 to date and that's kind of where we're at from a pricing promotion standpoint.

Speaker 4

The bigger factor is your first point, which is how things affect or take on throughout the year, kind of the cumulative impact of that As each of the final decisions were made in the Q2 period.

Operator

Your next question comes from the line of David Gregor from Longbow Research, your line is open.

Speaker 4

Yes. Good morning, everyone. Mark, I wonder if

Speaker 8

you could just talk about the builder channel and how much of the drag on how much of that was the drag on 2Q would get to be back to the builder channel versus replacement demand? And if you could talk about what you're seeing change there?

Speaker 2

David, let me start and maybe Joe should add some color. As we all witness and experience this, I think there's a lot of noise and not always the best information about what's going on in the housing market. I'll start with the long term. The housing U. S.

Speaker 2

Housing market is structurally undersupplied. We've talked about this for many years And that's still stable for the sales housing market needs several years Of housing starts in or housing completion anywhere between 1,800,000 2,000,000 units. Just to restabilize the market, Given demographic trends, given age of housing stock and given household formation, so nothing has changed on the long term needs. Now obviously, the combination of price increase in the housing market, which were well ahead of the actual supply And the mortgage rate put a big dent on home affordability, which led to cancellations and I would say slowdown in the short term. So I would expect that also going forward, call it, the next 12 months or so to be the case.

Speaker 2

And yes, I would probably say Some correction on home prices is necessary to kind of restabilize the market. It doesn't change the long term outlook or the positive outlook, which we have in housing, But I don't think the next 12 months you see we'll see a very dynamic market in that respect. Now when it comes specifically to the build that you also need to understand The order backlog, the pace of cancellations, but in a nutshell, we did not see a dramatic change on the completions. Keep in mind, what we see are typically completions because appliance is coming pretty much last. We did not see a dramatic drop off right now in Q2, But we also don't expect a lot of growth in our Q3 and Q4.

Speaker 2

Joe?

Speaker 4

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

Speaker 8

Okay. Just as a follow-up I guess the share repurchase activity seem to be running at a

Speaker 1

pretty good clip here mid year, I

Speaker 9

think $800,000,000 if I got the numbers there correct.

Speaker 8

I guess the question would be how would you handicap the likelihood of you coming in above your $1,000,000,000 in guidance?

Speaker 5

Yes. I'd say, David, right now, as we emphasized and As I said in the earlier remarks, we still intend to come in where we forecasted at the beginning of the year. And so we're turning about $1,500,000,000 to shareholders, Which the dividend makes up about $400,000,000 of that. And then we did the majority of the share repurchase in the first Half of the year with where the market conditions were and all that as well as where our cash position was, but that doesn't change our estimate for the full year right now. We're still On track and at that level.

Operator

Your next question comes

Speaker 4

from the

Operator

line of Liz Suzuki from Bank of America. Your line is open.

Speaker 10

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

Speaker 2

Yes, it's Marcin. There's a couple of components. First of all, on the top line, As we indicated earlier, we do see the current environment as temporary, but doesn't change our long term demand outlook. So We do expect and it's obviously, this is not a 'twenty three or 'twenty four guidance, but right now we would assume that 'twenty three and 'twenty four, we would see Healthy underlying market growth, again driven by replacement needs, housing markets and by higher usage of appliance. So we continue to assume solid, probably mid single digit market growth 23% 24%.

Speaker 2

Again, I won't reiterate that's not a 23% but that's Right now, the current thinking. In that environment, we're still expecting particularly North America to rebalance our market share back to pre COVID level. So beyond the market demand, you will have a certain level of share gain, probably over the course of 'twenty three and to some extent, 'twenty four. Zabex is a big driver of the top line. In addition, globally, we have several growth markets, which continue to In the combination between strong market share and underlying market dynamics like India, we have strong organic growth more on the high single digit, Back to the top line.

Speaker 2

On the margin side, this right now again, we're pretty much guiding this year to a 9%. Keep in mind that 9% also includes several kind of costs which are not typically in the cycle because you still had express shipments, All kinds of extra costs which were related to supply constraints, which obviously will go away, and it has a significant warranty leverage in. So just taking that out of equation, you start getting a lot closer to be 11%, coupled then with additional cost action And then our focus more and more on high margin businesses that we believe it to be 11% to 12%.

Speaker 5

Yes, listen, this is Jim. And just to maybe add to what Mark said there As you know, we've talked about too as we go forward our focus on higher margin businesses and that's where we'll invest on top of this. And then even as we talked about The strategic review in EMEA and Mark alluded to that no matter what the scenario is, it would not be the Same as it is today. And so even in a keep situation, you have a turnaround in a fundamentally different business structure there. So all of these are kind of the contributing factors that get us From the 9% to that 11% to 12% in the future.

Speaker 5

Great.

Speaker 10

Thanks very much.

Operator

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

Speaker 11

Thank you. Good morning, everyone. My first question is focusing a little bit more on the production side of things. You mentioned that you did gain a bit of share this quarter. Can you just talk about the state of the supply chain?

Speaker 11

What are the key headwinds that you're facing today and how you're thinking about those easing as the demand moderates?

Speaker 2

And this is more North America focused, but it's a little bit reflective of what we see globally. We still saw Quite significant supply chain disruption, pretty much I would say until April to early May, it's very impacted. But the situation got better as Q2 progressed. On a going forward base, We still don't fully expect a fully normalized supply chain environment, but still significantly better than what we've seen last year and probably until April, May. So we would still have Spots or elements where you would have a disruption for a number of reasons, but not to the same level as before.

Speaker 2

Since in simplistic term, Supply chain constraints continue to ease, but will not completely go away throughout the year. Specifically, I mean, on production levels and inventory, With the drop off of the April, May volume, frankly, our inventory towards June is probably Slightly elevated to what we had in mind because we assumed a higher market demand level. But as you would expect from us, we are adjusting production and inventory In line with what we see right now from industry forecast. I'll put it differently, we are correcting production, what we did already in June, And we'll continue to do so going forward, and we're not going to wait until the year end.

Speaker 11

Okay. That's helpful. My follow-up question is, You mentioned in your commentary, Mark, that you're taking decisive actions as you do see the macro changing. Can you talk a little bit more about the playbook that To have in a weaker macro environment, and especially maybe as it relates to thinking about the promotional side of things, to what extent is Consumer responding to that and how you're thinking about balancing that relative to the other goals that you have as you think about the business, especially within North America?

Speaker 2

Yes, Susan, I mean, first of all, it starts, obviously, with a macro assumption you have, and I think it's I mean, it's true for many companies. Macro assumptions which we have now in July 2022 are very different from January 2022. So in our scenario, and I know there's different opinions around this one, We do assume a recessionary environment around us. You can argue about the depth of the duration, but we right now that is our Main scenario, and that became very clear in our view probably around June, July. So accordingly, we've taken The actions which we have in our recession playbook, which are largely focused on being very aggressive on We do believe the raw material market will turn favorable, not to the extent As we like in 'twenty two, but it starts turning more favorable.

Speaker 2

And that's why I said earlier, we do think inflation peaked in Q2 and Q3. Inflation peaked in Q2 and Q3. But above and beyond, we are taking additional cost actions. On the material side, on the logistic cost side, efficiencies, but we will also be efficiencies, But we will also be associated costs. So we are taking associated costs.

Speaker 2

So we are taking, I'd call it, from our recession in play, but I'd Call it from our recession in Playbook. The recession in the past has proven you got to keep an eye on cash flow. So we are you should expect us to be very disciplined on net working capital and how we manage

Operator

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

Speaker 6

Hi. Thanks for taking my questions. Just going back to the promotional dynamics, I was hoping you could help quantify how much of the kind of 4 20 basis points year over year decline in North America EBIT margin came From the increased seasonal promotional activity and how do you expect that to trend in the back half? Are you assuming kind of a similar magnitude of promotions Sure. Any color there would be helpful.

Speaker 5

Yes. Chris, this is Jim. And maybe I'll kind of start with that and Joe can chime in here. But As we talked about earlier, when we look at price mix for the year, for the total company, which is very reflective of North America because it's about half of our business, We've really said that in the back half of the year, we still expect to have price mix benefits that are still coming. So that would imply that we don't See whether it's now or in the back half of the year, promotions being a big impact on our margins overall.

Speaker 5

As we talked about, the impact Housing costs, again, or that's come from volume deleveraging as we've just managed the business to a lower level of demand right now and had to reduce our production level. So those are the 2 big drivers within there. And even if you look at our overall company gross margins, that's what reflect that. So it is not Assuming that there's a higher promotional environment than anything, this is mainly just a reflection of where costs are. Yes.

Speaker 5

Maybe just to build on that to Jim's points,

Speaker 4

The deleveraging did occur pretty much in Q2, but That was the news that we had kind of referenced earlier in the call. And so that's really what's impacting the cost. From a price promotion standpoint, expectations remain, Didn't see elevated levels in Q2, so those are more static than anything else.

Speaker 6

Understood. And just to drill into the kind of sequential cadence for North America margin cadence and for North America margin percent EBIT For the year implies a second half step up. So, yes, assuming you could help us assuming you could help us Can you break up the dynamics, they stay the same? I mean, you guys outlined a cost cutting program. Any way you could help provide Some quantifications on how much of that is driving the sequential step up there in addition to the sequential step up there in addition and then another Other actions you're taking?

Speaker 5

Yes, I don't know that we haven't broken out and quantified those specifically. And so What I can say is though you really hit the drivers there. There's as Joe talked about earlier, there are price increases we took in Q2 that fully run-in, in the back half of the year. You have cost saving programs that we've now kicked off and Mark talked about this, the different things we're doing to prepare ourselves for a recession. And so As you look at that, those begin to become larger savings within the back half of the year.

Speaker 5

And then as we talked about too, we see material costs as maybe being stable in the back half We're hitting the peak now. So those are the bigger drivers when we look from Q2 into Q3 and Q4 In terms of North America margins.

Speaker 2

And Chris, it's Mark. And to be I apologize for being very direct. And I think you're missing the point. I apologize for being very direct. Think you're missing the point that is, 1st of all, if you look at Q1 and Q2 margins, we are pretty close to 15% in North America.

Speaker 2

We had 15% in Q1 and 14% now in Q2. So we're pretty much on the run rate despite inflation, what we just said peak in Q2 and Q3 and despite the volume negative environment. So I would say with these North American markets, given the environment, are spectacular strong. They're well above any historic levels. They clearly demonstrate how strong that underlying business is.

Speaker 2

And again, that's with all the volume deleveraging and with all the inflationary pressures. So Also, if you look at the competitive environment, I don't think you will find any competitive really close to these North American margins. I take matters of pride, the North America margins, and not as a concern going forward.

Operator

Your next question comes from the line of Erik Bassard from Cleveland Research. Your line is open.

Speaker 2

Thanks. Two follow-up questions. First of

Speaker 9

all, just some clarity. You made a comment about rebalancing And inventories are normalizing, if not a bit heavy. Is it your intention it's an environment that certainly seems right for more promotions, It's either driven by retailers or competitors to try to make up some of the lost volume coming from softer consumers. Is it your intent to participate in promotions? Or is it your intent to not participate in promotions?

Speaker 9

And what does that suggest for your market share outlook through that period of time?

Speaker 4

Eric, this is Joe. Just kind of setting up your response to that question. If you look at what transpired in Q1 to Q2, We did grow share slightly in Q2 even in a depressed environment. So that's kind of where Well, beginning from, we think we will continue to look for opportunities to improve and rebalance share back to Pre COVID levels in the back half, I need to frankly into 2023. In terms of promotions, I mean, that's always the case that there's different Factors in the market, we always are going to review those and make sure they're value creating.

Speaker 4

And so I look at that as a bit more of a constant. I think now that we're past, I'll say, some of the disruptions on supply chains, we're able to get the right production where we want it, we're able to put inventory levels to where we want it and then go into the market the way we think is most value creating and we think is most value creating in Q2 We expect to kind of continue that into the back half of twenty twenty two and into 2023. Promotions is a bit of a constant. How we participate It's also a bit of a constant in that it was a very rigid approach, rigid or formal approach on what creates value and what doesn't. And I think that You'll see that transpire into the back half.

Speaker 9

Okay. And then the other follow-up just related to Cost productivity, I think the assumption or the guidance implies the second half is roughly half the headwind it was in the first half, but the volume sounds like it's Similar. I guess you've spoken this, but just to hear you say it again, why does the business delever less in the back half on a similar volume and a more Cautious consumer.

Speaker 5

Yes, Eric, this is Jim. And I think what you're looking at too here is the year over year. And when you take year over year, it would imply that year over year, the back half of the year cost, especially net cost, is a little bit less of an Now a lot of that is because we saw a lot of these inflationary pressures beginning to ramp up throughout the back half of last year. And so that's part of the thing on a year over year. The first half of the year was comping against the first half last year that didn't see as much inflationary pressure as we did in the back half.

Speaker 5

That's a part of it. The second thing is, when we look at the back half of the year and we talk about it's not as much the volume deleveraging here, but you're getting an Offset with some of the cost reduction actions that we talked about earlier, the things such as reducing our hiring, the things such as looking at some of our discretionary And other areas that helps to offset some of those net cost headwinds that we're seeing in the back half of the year and that's why it implies For the year, and that's why it implies year over year, but for the full year, we're still at about 150 basis points.

Speaker 2

So I guess we're coming to the end of the Q and A session. So first of all, I want to thank you all for joining us today. Obviously, as you heard today, there's a lot of moving parts. It's a dynamic. You can call it a challenging environment by any definition.

Speaker 2

But I think in that Q2, we demonstrated we can perform very well in a tough environment, And we will continue to do so. We're changing to do so. We changed our guidance, but frankly, we don't like ever in our history. Yes, we would have liked to make it another best year, but we're going to be pretty close. And I think all the actions which we'll talk about now for the back half Of 'twenty two, we line up our business very well for 'twenty three and going forward.

Speaker 2

So again, thank you all for joining us today and have a wonderful day.

Operator

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

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