Whirlpool's (WHR) CEO Jeff Fettig on Q2 2016 Results - Earnings Call Transcript

| About: Whirlpool Corporation (WHR)

Whirlpool Corporation (NYSE:WHR)

Q2 2016 Earnings Conference Call

July 22, 2016 10:00 AM ET

Executives

Chris Conley - IR

Jeff Fettig - CEO

Larry Venturelli - CFO

Marc Bitzer - COO

Analysts

Denise Chai - Bank of America

Samuel Eisner - Goldman Sachs

Michael Rehaut - JP Morgan

Sam Darkatsh - Raymond James

Ken Zener - KeyBanc Capital

Rob Wetenhall - RBC Capital Markets

David MacGregor - Longbow Research

Alvaro Lacayo - Gabelli & Company

Megan McGrath - MKM Partners

Operator

Good morning and welcome to Whirlpool Corporation's Second Quarter 2016 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, Mr. Chris Conley. Please go ahead.

Chris Conley

Thank you and good morning. Welcome to the Whirlpool Corporation second quarter 2016 conference call. Joining me today are Jeff Fettig, our Chairman and Chief Executive Officer; Marc Bitzer; our President and Chief Operating Officer and Larry Venturelli, our Chief Financial Officer. Our remarks today track with the presentation available on the Investors section of our Web site at whirlpoolcorp.com.

Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements to assist you in 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 and our other periodic reports, as well as on Slide 1 of the presentation.

Turning to Slide 2, we want to remind you, that today's presentation includes non-GAAP measures. We believe these measures are important indicators of our operations, as they exclude items that may not be indicative of or are unrelated to 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 our Investor Relations website for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. Following our prepared remarks, the call will be open for analysts' questions. As a reminder, we ask that participants not ask more than two questions in the first round and we will address any follow up questions after everyone has had a turn.

With that, let me turn the call over to Jeff.

Jeff Fettig

Good morning, everyone and thank you for joining us today. As you saw in our press release this morning, we reported record operating results for the second quarter driven by strong ex currency revenue growth and substantial margin expansion of 1.6 points. Our integration activities in Europe and Asia continue to progress well and we remain on track to deliver significant soft cost synergies for the balance of the year.

Our strong operational execution more than offset currency and demand challenges around the world. And as a result, we delivered another record quarter of performance. Following a strong first half performance we're increasing our full year guidance for ongoing earnings per share to $14.25 to $14.75.

Before we move to the details of the quarter results, I'd like to highlight an important ruling by the Commerce Department on our washer trade fair-trade case. We are very pleased that this ruling confirmed that LG and Samsung continue to dump washing machines in the U.S. market. Both companies are now required to pay substantial deposits for these products which they import from China.

As we previously discussed, this unlawful behavior clearly had a negative impact on our washing machine market share and earning in 2015 and in the first half of 2016. But despite this we are pleased that we’re still able to deliver record results through the strength of the rest of our portfolio of products and brands.

I’ll now turn the Slide 5, where I’ll -- we’ll take a look at the financial results for the second quarter. Our revenues overall grew 3% versus last year ex-currency. Our ongoing earnings per share grew by 30% to a record $3.50 per share. And this came through strong execution of acquisition synergies, volume growth and ongoing cost productivity program and free cash flow improved versus last year.

Turning to Slide 6, you’ll see that we are raising, our 2016 guidance volume due to strong first half of performance. Again, we now expect ongoing earnings per share to be $14.25 to $14.75 per share. We are reaffirming our expected free cash flow generation of $700 million to $800 million, which represents a significant improvement over the prior year. We are confident that our continued focus on execution and strong second half actions will enable us to deliver another year of record results.

On Slide 7, you’ll see that our 2016 priorities remain unchanged. We do remain confident in our ability to manage economic volatility and have deploy strong operational plans, which we believe, will enable us to grow revenues and continue to expand our operating margins.

On Slide 8, our capital allocation strategy remains also unchanged. We continue to prioritize funding the business along with delivery’s strong return to shareholders and we continue to evaluate opportunistic value creating M&A opportunities.

During the second quarter, we did purchase $100 million in shares during the quarter. We intend to continue repurchasing stock through the year and we currently have $900 million of remaining share repurchase authorization. So overall, we do remain confident in our ability to deliver long-term value creation through strong cash generation and the execution of our balance capital allocation process.

Before I move on to our regional businesses, I wanted to comment on the leadership announcements which we made in late June. As you probably know our Chief Financial Officer, Larry Venturelli has announced his planned retirement. We also have announced the Jim Peters currently our Vice President, Corporate Controller and Chief Accounting Officer will succeed Larry as Chief Financial Officer.

First of all, I’d like to take this opportunity to thank Larry for his over 15 years of service to our company in a number of leadership roles including the last five years as Chief Financial Officer. Larry has played an integral part of our executive management team and in helping us in our global expansion, including most recently the successful acquisitions in Indesit Europe and Hefei Sanyo in China.

At Whirlpool, Larry will be greatly miss, but we all wish [indiscernible] and his family the very best in this upcoming retirement. At this time, I’m also pleased welcome Jim Peters into his new role Chief Financial Officer. Jim does have a very broad background in our global finance leadership in a number of roles and in our business operations and I’m very confident that under his leadership we will continue execute our global value creation plans.

So with that, I’ll stop here and turn over to Marc Bitzer to review our global operations.

Marc Bitzer

Thanks, Jeff, and good morning, everyone. Turning to Slide 10, we will review North America’s performance in the second quarter. We delivered record operating profit by growing ex-currency revenues 4% and expanding operating margin of 12.3%. We improved key fixed market share versus prior year and saw strong consumer demand for our products.

Our record second quarter operating margins were driven by our ongoing cost productivity programs and operating leverage from revenue growth which more than offset $20 million in unfavorable currency impact in Canada and Mexico.

Turning to Slide 11, we outline our 2016 operational priorities for the North American region. We continue to expect the industry to grow 5% to 6% for the full year. As we’ve done consistently, we will make targeted investment to grow profitably at or above the industry rates. We continue to leverage our strong cost productivity programs to drive marked improvement and we remain focused on growing our adjacent businesses. We are confident that these actions will allow us to deliver the higher end of our margin targets of 12% to 12.5%.

Turning to Slide 12, we highlight our exciting new French-Door Bottom Mount Refrigerator platform. The jumbo capacity products feature the most shelf-space among leading brands in the industry. It offers a first to market flexible pantry-inspired shelving system delivering both the capacity and flexibility our customer desire.

Beginning on Slide 13, I will review second quarter results for our Europe, Middle East and Africa region. Sales were $1.3 billion, down slightly from prior year, excluding the impact of currencies sales were flat. Ongoing operating margin was 4.6%, a 40 basis point increase compared to prior year. This margin expansion included a 200 basis point unfavorable currency impact primarily from a British pound and a Russian ruble. We have deployed previously announced cost based price increases to offset this currency impact.

Turning to Slide 14, we want to put our European business in context by providing additional detail of our first half performance and the plan for the second half. We made significant progress on the integration of the Indesit, demonstrated by the substantial first half restructuring and synergy benefit that Larry will discuss in more detail. We are confident in our ability to deliver planned 2016 synergies evenly in the third and fourth quarters.

We experienced a negative first half currency impact primarily in UK and Russia and have deployed previously announced cost based price increases to improve our operating margins as we progress throughout the second half of the year. We are in the process of integrating product platform across Europe and expect to make strong progress by year-end. We expect to grow second half revenues with fully deployed marketing and sales activities.

We do believe we have the right actions to address the operating environment and as a result we expect operating margins to improve throughout the second half. We expect our exit rate on operating margins in the full quarter to be more to be more consistent with our long range expectations of 7% to 8%.

On Slide 15, in addition to the second half actions we discussed, our 2016 priorities remain largely unchanged, with a continued focus on integration activities, ongoing cost productivities and growth from adjacent businesses. We also continue to expect the industry to be flat to up 2% for the full year while clearly there is some uncertainty in the European region. Through the strength of our operating plans and continued acquisition benefits we remain confident in our long-term guidance of 7% to 8% operating margins by 2018.

On Slide 16, we’re proud to feature award winning build-in oven of our new build-in kitchen suite. This product incorporates advanced cooking technology and on demand recipes with elegant, contemporary aesthetics for sophisticated customers.

Turning to Slide 17, I will discuss our Latin America results. Sales for the quarter were $826 million, excluding the impact of currency sales increased 4%. The industry in Brazil continues to be challenging, however our topline performance in Brazil was strong, as we continue to leverage our leading portfolio of brands to drive growth and outperform the industry. We were able to gain several point of market during the second quarter while substantially improving our operating margins. Our operating profit for the quarter totaled $50 million, a 190 basis points increase compared to prior year.

The actions we have taken over past year's improved margins and challenging environment and grow market share have been successful and we now expect to deliver the higher end of the range of our margin targets of 7% to 7.5%.

On Slide 18 we summarized our priorities in Latin America which have not changed. As we've done consistently, we will manage economic volatility through strong cost productivity programs and by leveraging our right sized fixed cost structure. We will continue to invest in new product and remain well positioned to capitalize on growth in Brazil when consumer demand does return.

On Slide 19, we're highlighting our reward winning Brastemp brand. This year Brastemp was recognized in a nationwide study as Brazil’s most engaging consumer clients brand building on six decades of inspirational performance and through pure design.

Now we turn to our second quarter results in the Asia region which are shown on Slide 20. Net sales were $363 million in comparison to $381 million in the prior year period. Excluding the impact of currency, sales were flat. Our ongoing operating profit was $29 million compared to $31 million the prior year period. Ongoing operating margins were 8.1% flat to prior year as continued record performance in India and ongoing cost productivity offset weak demand in China.

Turning to Slide 21, you will see that our 2016 priorities for Asia have not changed. We remain focused on growth through distribution expansion and ongoing cost productivity program. We also continue to focus on the longer term opportunity in China as we navigate through demand uncertainties.

On Slide 22, we showcase our new front load washing machine for China. We leverage the integration between Hefei, Indesit, and Co. and Whirlpool using the best of the best to provide consumers with world class laundry performance.

Finally, on Slide 23, we summarize our regional margin guidance for the full year. Given continued global volatility in some regions and strong first half performance in others, we've adjusted our margin expectations as follows. North America increased to 12% to 12.5%, Latin America increased from 7% to 7.5%, Europe decreased to 5.5% to 6% due to negative currency impacts and the expected timing of our offsetting actions.

Asia remains unchanged at 7% to 8%. It is important to note that we are on track for strong margin expansion in all regions and have not changed our overall operating margin guidance. We remain confident in our ability to manage for global volatility and to deliver our strong second half plans.

Now, I'd like to turn it over one last time to Larry.

Larry Venturelli

Thanks Mark and good morning, everyone. Let me start with our second quarter results on Slide 25. As Jeff mentioned, we had strong performance in the second quarter despite a challenging external environment. Net sales were $5.2 billion excluding the impact of currency revenues were up 3%. We achieved record ongoing earnings of $3.50 per share which was up 30% primarily driven by acquisition synergies, yield volume growth and ongoing cost productivity.

In the second quarter, currency impacted our revenues by approximately $150 million, EBIT margin by about a point and net earnings by $0.50 per share. Our ongoing EBIT margin improved by more than one point and we're fully on track for our full year guidance of 8% to 8.5%.

On a GAAP basis, our second quarter tax rate was driven by the timing of tax settlements and planning activities and does not impact our previous guidance of 22% from full year. Our ongoing tax rate for the quarter was 22% consistent with our previous guidance. Overall, we are very pleased with the results for the quarter and/or at the appropriate run rates to deliver a very strong second half.

Turning to Slide 26, let me take a moment to discuss the expected impact of currency on our results for this year. You may recall in our original guidance for 2016, we assumed a negative impact of $2.50 per share. During our first quarter call, as currencies began to improve, we indicated that if April fell, we would expect $0.50 per share lower currency headwinds for the year. Well, there was significant volatility in the key currencies in the second quarter, the net results for the basket of currencies were expose to have not change substantially since our last call.

We expect the impact of currency to be approximately $2 per share for the full year. We will continue to execute previously announced cost based price increases and deliver cost reductions to offset negative currency impact and our ongoing hedging programs continue to be an effective tool for us to reduce short-term volatility.

On Slide 27, you’ll see an update on the progress of restructuring and acquisition integration activities. Through the first half, we incurred restructuring expense of $87 million and delivered $120 million in benefits. We now expect $200 million in expense for the year and are increasing benefits to $200 million. Overall, we are on track to deliver or previously announced synergy goals through 2017.

Turning to Slide 28, I will discuss our expectations for full year EBIT margin expansion. As previously communicated, we expect to expand our margin by over 1 point, primarily driven by ongoing cost productivity and cost in capacity reductions. Our first half year-over-year EBIT margin improvement continues to support our full year expectation. We expect to continue funding our global brand and product innovation and to absorb approximately 1 point of margin impact from currency.

On Slide 29, we highlight the cadence of second half earnings drivers. Consistent with historical trends, we expect a meaningful step-up in the seasonality of our volumes between Q3 and Q4. We expect negative currency impact to continue in Q3, but will lessen in Q4. As a result of these trends, we expect our second half earnings to approximate 45% in the third quarter and 55% in the fourth quarter, which is very consistent with what you saw last year.

On Slide 30, we share some details on our first half free cash flow results and capital allocation actions. Our free cash flow improved versus prior year primarily due to the improved earnings. Consistent with our strategy, we executed a balanced approach to capital allocation by funding the capital needs of our business and returning cash to shareholders in the form of dividends and previously announced share repurchase program. We plan to buyback additional shares throughout the year.

Turning to Slide 31, we’re adjusting our full year guidance in response to our strong first half results. As Marc discuss in the regional reviews, we have confident in our operational plans and as a result expect to deliver 15% plus growth in ongoing earnings per share in 2016 approximately 700 million to 800 million in free cash flow.

Finally, on a personal note, regarding my retirement. I’ve had the opportunity to work with many of you in the financial community over the past several years, it’s been an honor and privilege representing Whirlpool and I wish you all continued success in the future.

Now I’d like to turn it back over to Jeff.

Jeff Fettig

Thanks Larry. I’ll summarize on Slide 33, which shows again our 2016 priorities, which haven’t changed and our plan is to drive revenue growth, margin expansion and to generate strong free cash flow for the year. Overall, I think our ongoing efforts to deprive margins especially in the areas of volatility run roll have demonstrated our ability to manage the needed actions within our control in response to this global volatility and I think the first half of the year is a really good example of that because we had many changes that we’re able to adapt to.

We do believe we are well positioned in the second half and we have deployed strong operational plans across the world to ensure we deliver our goals. So, overall we do expect to deliver record results and while at the same time executing the balance of capital allocation approach.

Finally, on Slide 34 and we do continue to execute our long-term value creation strategy overall we remain confident in our goals, we do expect to be able to continue to leverage our industry leading brands, keep bringing in a strong portfolio of innovation in the marketplace and our best cost position to ensure that we’re delivering strong returns to our shareholders.

So with that I’d like to end our formal remarks and open this up for Q&A.

Question-and-Answer Session

Operator

And we’ll take our first question from Denise Chai from Bank of America.

Denise Chai

Okay, thank you so much and congratulations on a great quarter. I wanted to start with the anti-dumping rulings that came out, what’s different this time compared to 2 years ago and could you just walk us through the mechanics of how duties apply and what it theoretically means for market pricing.

So for example is Samsung & LG moved production back to Korea and Mexico would the old duty still apply and really what are the next steps, so any color around that would be very helpful.

Jeff Fettig

Yeah, Denise this is Jeff. Yeah, the current fair trade action is for washing machines in the U.S. market. In one, since this is a continuation of the 2013 situation, but at the time dumping is -- the law is appeased to countries, not companies and the countries involved then were South Korea and Mexico and we won very decisively in that case. But the companies which are LG and Samsung basically moved their production to China immediately to work around this and continue dumping and so our new case is for dumping against manufacturers in China, but it specifically effects LG and Samsung.

So that required a new action, we’re going through the process, we believe the evidence is compelling as evidenced by commerce department preliminary judgment with the duties they levy, they are now having to pay cash deposits on all imports and in fact one of them is actually retroactive through the last 3 months because of all the products they buy in the marketplace, there is a very clear commerce department process that is followed, they will make the final determination and duties in December, then it goes to the international trade commissions to evaluate injury and we expect that judgment to be mid-January.

Marc Bitzer

Denise this is Mark, so maybe just one additional comment specific to questions of the 2013 order is still active and in place. So to your question, if they were moving back to Korea or Mexico, it doesn’t help them because the old order is still active and in place.

Denise Chai

Okay, so what flexibility I guess do they have in terms of market pricing? I’m just wondering with these rulings --.

Jeff Fettig

I can’t speak to competitors market pricing, I’m just saying based on the evaluation by the commerce department, they have -- their primary conclusion is they are dumping again from China, they’ve already proven they’re dumping from South Korea and Mexico and based on that they’re going to charge substantial tariffs and I guess the company can either adjust their pricing or continue to pay these substantial tariffs, but that's really their decision.

Denise Chai

Okay. And sorry just last one, so to illustrate is a washing machine -- the Samsung or LG washing machine is retailing for say a $1,000 what are the tariff, of 110% and 50%?

Jeff Fettig

Well, if you just take only on the value forget retail price, you take the value it's somewhere in the neighborhood of -- in the case of the lower level probably $175 to $180 to the higher level of over $300. So, it's substantial.

Operator

And we'll take the next question from Samuel Eisner with Goldman Sachs.

Samuel Eisner

Yeah. Good morning, everyone. So, going back to the EMEA commentary here I wanted to get a better understanding on FX. Obviously the detrimental, I think what you call that is about a 200 basis point, two point headwind to the quarter, but looks like detrimental for the total company were around 35% and we were close to the 25%. So just curious if you can talk a little bit about the transactional exposure within the EMEA business and how we should think about that going forward?

Marc Bitzer

Sam it's Marc Bitzer, so let me may be just provide some clarity on it and yes you're correct the currency predominantly impacts the margin and to put that in context, there is obviously a number of currency moves and currency baskets in the what flows via European regions. The most impactful one just given the size and movement have been the British pound and the Russian ruble. There are upper ones as well, but these are the most impactful one.

And what it means operationally in the UK, like us most competitor don't produce in UK, almost nobody produce in UK. So basically any currency weakness of a British pound turns into kind of lower margin for us that's the present immediate impact. It's somewhat similar in Russia may be to a lesser extent because we produce more in the Russia. The combination of these two ones just to put it in absolute terms was basically $30 million just in the quarter, just these two big markets. So we're talking about massive and substantial, so you calculate it back on a European level that' s more than 200 basis, so that's where the number comes from.

Now and just for clarity I am referring to year-over-year impact of a currency. As you also know the Russian ruble even though on a weak level has stabilize. So I think sequentially we don't see big surprise, but still a year-over-year impact. And as you also know the British pound for the quarter average has deteriorated, but obviously particularly post Brexit, the decline has been significant and it has a significant effect on our margins.

Jeff Fettig

And we're adjusting our actions accordingly.

Marc Bitzer

So to that point, obviously what you -- what we're doing as a company in this kind of environments we basically have cost based price increases which we have communicated and largely implemented in some of these markets, obviously the UK one is fairly recent, but we expect in the second half to fully compensate the currency losses through these cost based price increases.

Samuel Eisner

That's very helpful Marc thanks. And then when I think about the North American business, if I see back into the pricing, pricing looks to be down about 1% and the second quarter is slightly down than the first quarter. So it seems as though you could argue that you are using price as a tool to accelerate volumes. If we look out to 2017 where may be raw materials are not as [technical difficulty] how do you think about that dynamic going forward and your ability to continue to gain share when raw materials are maybe not as much of a toll for you guys anymore?

Marc Bitzer

Sam it's Marc again. So let me first talk about the Q2 pricing that you observed in North America and there is actually a very straight forward and easy explanation for this one, Phase 2 components. One is Mexico, the impact of Mexico, keep in mind in the North America we have three countries along through overall North America revenues.

You have Mexico’s significant currency decline year-over-year. And also still in Canada, even though now to a less extent. So roughly, we had an $8 decline in the quarter of the AC more than half of that is just coming from currency. Also combined with a little bit of mixed impact with growth we have pretty strong volume go from Mexico, profitable volume growth in Mexico, but it had the mix impact on the ASV.

The other part and go straight back to Jeff’s earlier comments. Yes, we are exposed to continued and sustained dumping practices in the washer business and that has an impact on our ASV. I’m pleased that despite all that we delivered very strong operating margin, which just shows you how strong the underlying business is. But these two factors explain the ASV in Q2.

Jeff Fettig

Adding in just on the washer side, as we’ve said it had a significant negative impact on our market share, which is volume, but also on our earnings. So that’s embedded in there based on the kind of type of promotion we saw in the second quarter.

Operator

And we’ll take the next question from Michael Rehaut with JP Morgan. Please go ahead.

Michael Rehaut

Thanks. Good morning and best of luck for you Larry, great working with you.

Larry Venturelli

Thanks Mike.

Michael Rehaut

Question on just kind of going back to North America with the sales growth and clearly this has been an area of focus for Whirlpool and reaccelerating that. With roughly a 4% revenue growth rate ex-currency in 2Q, as you look forward -- I mean, this is obviously also a big focus over the next couple of years to get to the 2018 goal. I mean is this sort of a number that you are expecting to be sustainable or perhaps even accelerate excluding currency as you continue to get some momentum on the new product front and perhaps a little more stability with the anti-dumping?

Marc Bitzer

Michael, its Marc. Let me maybe just comment on this. So yes, in Q2 we had a 4% excluding FX revenue growth and a very, I would say solid volume growth of 5% and you also know the ins and out of market [indiscernible], it was our unit, so we’re very pleased with the market share progress and revenue growth. I would also -- and that probably gives us confident or full year points out to be what you’re seeing is our sale in unit growth from selling market share our sell out trend are very strong, and probably out pacing even the selling in pace.

So obviously a very positive development which we are seeing and as I also said in my remarks earlier, our commitment is to grow at or above market for 2016 and we’ll reaffirm on that commitment. It’s obviously way too early to talk about ’17 and ’18 target, but I would expect tender guidance from our sale, that we grow at or above market.

Michael Rehaut

That’s very helpful Marc. I appreciate that. And then just on the restructuring benefits increased by 25 million for ’16. How should we think about the total amount of benefit over the entire period? If you could just remind us of that number and does that number change at all as well?

Larry Venturelli

Mike, this is Larry. We did increase the restructuring benefits from $175 million to $200 million for 2016. As you know what we committed to is $350 million by 2017 and we’re fully on that path.

Operator

Thank you, we’ll go next to Sam Darkatsh with Raymond James. Please go ahead.

Sam Darkatsh

Good morning Jeff, Mark and Larry and Larry I’ll also say it’s been a real pleasure dealing with you over the number of years now, congratulations and kudos to you.

Larry Venturelli

Thank you.

Sam Darkatsh

Couple of questions if I could, first the washing machine profitability or at least the ability to expand margins if you were able to normalize washing machine profitability. I think you mentioned in the petition that you’re not -- that you’re losing money currently in washers. If you were able to return the washer part of the segment in North America to appropriate margins, what might be your margin upside for overall North America margins?

Marc Bitzer

Sam its Marc. First of all and I hope that was clear in our earlier comments, washers as defined in the anti-dumping case don’t equate to what we call laundry, okay. Laundry is broader has other driers, has other capacities and there is a very specific definition of the washer case. So don’t equate this two ones. Having said that, if you look at the pure washers, their profitability is clearly, clearly below where we would expect at any normal time and we’re losing money on top of the volume impact.

So your question unfortunately for short-term probably is a more theoretical question. The reason I am saying this one as evidenced by the ruling, there has been a significant amount of stockpiling by LG, Samsung at the end of the Q2 and the inventory loading and unfortunately we see that still entering the market in Q3. So there is still an impact and that’s just a reality, I would also not be surprised even go to some extent that speculation that both players continue to circumvent. So I would see some relief on our margins, on washers but it needs to be seen to what extent LG and Samsung actually follow the order and that’s not our decision.

Jeff Fettig

Yeah, it’s safe to be clear. Short-term we have to get through the year and get this completed successfully, gauge the reactions on but to your point, the theoretical question it’s worth a loss on North America business, at least a couple of points.

Sam Darkatsh

And then my second question, if I could re-ask what one of my peers asked, in terms of 2017 the ability or willingness of either of the consumer or the retailer channel partner to accept pricing increases. What do you think the willingness might be and the elasticity would be over the industry if you do have to raise prices or the industry participants have to raise price next year.

Jeff Fettig

Yeah, Sam we’ve had this discussion in the past and the reality is there are -- the price points won’t change, model feature per content change, okay. So it’s not affordability and therefore not an elasticity question at all. Whatever number, 5% increase on it, 500 ASP is $25, there will still be a 499 and so on.

So first we have made no decisions nor are we talking about any future price increases. We’re going to see how the environment evolves and we’ll make the decisions as well. We have great levers to improve margin through mix and many other tools, But the one I guess directly to your question I'll point out is, I don't see any price elasticity at the kind of levels that we've historically looked at.

Marc Bitzer

Sam its Marc. Also may be in addition to this one, I guess you wouldn't have asked the question if you developed a context of concerns about material price trends. So let me proactively also address this one because we're seeing some of the earlier comment about material price. Of course we do observe material trends and of course there are certain elements in the global material markets like the steel prices which are somewhat of a concern.

I want to just comment two things on this one. A, we have long term contracts particularly in steel. We have on several commodities very strong and now favorable head positions, so we're I'd say for 16 certainly very well positioned on the material side. And I'd saw right now it's way too early to speculate about the ’17 material trends. We of course see certain spot prices, but I'd also argue of a demand on certain materials is just not strong enough to see that going into fully into 2017.

Jeff Fettig

And the only other thing Sam would be if you go back at history you follow this for a long time. When we've had material inflationary environments before, we've been able to overcome that through a lot of different tools and continue to improve our earnings and our margin also. But it's too early to call on pricing.

Operator

And we'll go to next to Ken Zener with KeyBanc Capital. Please go ahead.

Ken Zener

Just for one and I'm going to go back in the queue. So, I'm not going to ask too many all at once. Europe, you guys talked about 30 million EBIT hit in 2Q the margin guidance revision to 5.5% to 6% implies more than 30 million. Could you please tell us what that dollar value is and how that would fall kind of sequentially 3Q and 4Q within that guidance?

Marc Bitzer

Ken, its Marc. And there is obviously a number of timing and moving parts. So the 30 million refers to the exact what we lost in Q2 predominantly due to British pound and ruble. Obviously that is an average currency rate of a quarter and you need to be aware that the exit run rate of a British pound was way below the average. So version the impact of a British pound if we wouldn't do anything going well in Q3 and Q4. The offsetting element of, I have previously announced [indiscernible] already implemented or ones which we have not just fully implemented, but announced might take to certain ramp up here.

So, the negative part of a currency which right now we just have to assume it’s going to be with us for rest of the year. We're starting to offset that every month more through previously cost price increases.

Jeff Fettig

That we will fully answer that in the third quarter.

Marc Bitzer

Just the time doesn't work because in most markets and every market is different you have certain pre lead time between many communicator trade [ph] when you can actually implement there are certain contracts in place. So you have a ramp up time of these price increases. The important thing is however, by particularly as we go in Q4 and the exit run rate we expect to be this fully offset by cost based price increases.

Ken Zener

So the 30 million would be obviously higher given the run rate spot versus the average is my assumption. Do you have a dollar value that you're kind of are assuming in that margin degradation then just so we can be clear in [Multiple Speakers].

Jeff Fettig

Ken if you look, someday the original [ph] is at, midpoint 7.5 we’re seeing 5.5 to 6, so you're talking about 1.7 points time our revenues in Europe is about $85 million, we took 30 million hit at the very end of Q2. Again as Marc said we put it into actions in placing it through so it would be -- if everything stays the same actually the biggest impact will be in Q3.

Ken Zener

Right. Okay, that’s I’m going. Marc’s comment about the run rate, if it’s December versus the average of obviously it makes a difference, but it seems like at current volume currency et cetera, you are actually going to be a lot closer in 4Q margins then to what you are actually targeting.

Jeff Fettig

Right. Right.

Ken Zener

Now how much of that is volume base. I know in Brazil you guys were very exclusive and we had that 250 earnings hit in terms of the inventory being higher than price. And I guess that’s Marc, what you’re referring to about, it takes a little while to recover that. It’s not so much -- can you address, I guess a lot of investors I speak with the other cases, who knows what Europe’s going to do, I think reply is that’s a lot of industry restructuring. Could you kind of give us a sense about how the volume assumptions and what gives you comfort right now around that piece? And then I’ll get back in the queue? Thank you.

Marc Bitzer

Okay. And again let me zoom out on European total. First of all, I really want to reiterate the synergies and the integration is fully on tract. So the cost side is to save that i.e. what we control, we do control and actually we deliver more as evidenced by Larry’s earlier comments, so the increase of restructuring benefit that’s largely Europe. So because that it’s fully on track might just be going very well.

You have two elements in Europe, there is a little bit overlap. One is the currency, the currency impact to the operating margin. The offsetting action are cost based price increase that takes the time to ramp up. So I expect the margin impact in this month to go with every months be less in this, but of course right now it’s a Q3 pending issue.

The volume impact is to a lesser expense. We’re not in Q1, if you may recall when in Q1 a volume decline of 4%, now in Q2 with plus 2.1%, so it’s getting better. But it’s not yet fully at the pace of the market. That is largely expandable directly by the platform integrations. And again that something, which to some extent is expected, but it’s still a pain as you go through it. We’re basically replacing 80% of our SKUs in Europe this year.

These are massive factory moves, product platform moves. That is basically, we expected it to be largely completed by the end of the year. That is probably the single biggest drive behind the top-line issue. But again, I want to reiterate the top-line has the -- we don’t like to see it but it has a lesser impact in the bottom-line than the currency.

Operator

Thank you. We’ll go next to Rob Wetenhall with RBC Capital Markets.

Rob Wetenhall

Hi. Good morning, everyone and nice quarter. And Larry good luck, you’ve been a big contributor and you’ll be missed. Just wanted to see if you guys could step me through what’s going on, in the slide deck on Page 27. You’re taking down your expenses by 50 million for restructuring and you’re boosting the benefit this year by 25 million. Then I’m trying to understand and to just tie this maybe the Marc’s comments about where is this kind of trade off occurring? It’s obviously a very positive development. Can you step us through kind of the puts and takes share?

Larry Venturelli

Bob, this is Larry. On the restructuring size, we did take down the restructuring expense for this year down about $50 million. Now part of that is currency related, but some of that has -- quite frankly has to do with timing between years. So and we’ll provide, obviously provide guidance for next year in a few months. But overall some point towards the integration being going well, restructuring being going well.

The benefit of then just we’ve been able to accelerate some of the benefits from the acquisition in the integration, that continues to go well and we remain fully committed and what we communicated back 2017 to 350 million plus.

Marc Bitzer

Bob its Marc, keep also in mind that there is always a time lag between the expenses and the benefits. So I think the way you should read this one is the increase of benefits has largely to do with actions taken in ’15 which are really and we get the strong yield out of this one and the expense that there is one or two little pieces which we had in mind which would probably be do in ’17 and we will announce it at the appropriate time.

Rob Wetenhall

Okay, so this just sounds like a timing issue. Zooming out a little bit on the next slide on Page 28, you took your price mix down from 50 basis points to 1% up to 0 to 0.5. I was trying to understand why you kind of tweaked that downward a little bit and your volume growth in Asia and Latin is excellent and you didn’t move up your outlook in terms of industry shipments or what you guys could do there and I was trying to understand if for attending weakness in the second half or just an abundance in caution?

Jeff Fettig

Bob, I would just say there has been a number of moving parts in the first half of the year and we’re assuming there will be a number of moving parts in the second half of the year. The compositive the margin walk simply is our 6 months actual versus run rates going forward and we’re doing a little bit better and as we’ve said on the cost synergy side we’ve seen a little bit of -- I won’t say weakness, but lessening of the total on the pricing.

Volume nets out about the same in total, but it varies a lot. You know I think as I looked in the first half of the year and for the full year it will be another great example of having our balanced global representation offering platform allows us to take advantage of markets that are going well and offset markets that face challenged during the year and second quarter is a great example of them, I imagine in the second half will be the same way. So there is no real big changes in any of our assumptions with the one exception that Marc pointed out in terms of short-term European markets.

Marc Bitzer

And Bob let me maybe also add a Brazil because they specifically asked for Brazil also. Don’t read our performance in Q2 as an indication of the overall market environment, the market environment continues to be very challenging, I would read it a bit as, we were decisive on actions early on, maybe earlier in the cycle, took maybe also some hits early in the cycle and now we’re starting the benefit of these actions earlier than maybe other people. So I would say right now given the unfortunate confidence of political, economic and ultimate consumer confidence quite in Brazil, I don’t think we can count any recovery in this one in ’16.

Operator

Then we’ll go next to David MacGregor with Longbow Research. Please go ahead.

David MacGregor

Yes, good morning and congratulations on a good quarter Jeff. Larry congratulations on your retirement. Hope things go well for you, best wishes. A couple of questions here, first of all, you know your competitor talked a lot about weakness in private label business in North America, I was just wondering if you could comment whatever trends you’re seeing in the private label business this quarter?

Marc Bitzer

David its Marc. I don’t know and I can’t comment on competitors comment, what I can comment is on our own private label brand and business. So did we see over the last five years a trend from our private label business to our brand business, absolutely and that’s ultimately the reflection of the strength of our brand portfolio. That trend is continuing and so it’s nothing shocking or surprising or all of a sudden it’s been I would say a multi-year erosion and again that’s a variable portfolio strong brand helped us very strongly. I would say also in addition and I think we’ve been talking about this repeatedly where we take pride in our very balanced distribution footprints. What it means we have I would say a very similar balance of trade partners [ph], most of our national trade partner. So whenever you see movements or wins and losses of one trade partner in the market we typically don't feel the pain because we have a very well balanced distribution footprints which obviously also helps us mitigate any trends you might see in the marketplace by private label or OEM business.

David MacGregor

Okay. So you don't see anything that was really kind of discontinuous or would be different from the trend you've been seeing over that past five years just to discuss.

Marc Bitzer

Very specifically we did not see a sudden acceleration of the trends. We did see a continuation of a trend, what it basically means our private label also in Q2 went down and we saw a very strong growth of our Maytag business and that worked for us.

David MacGregor

Good to hear. Second question is just if you think about all the volume that you're doing in North America over the course of the quarter or even you can talk about this at the industry level if you want to at the end level, but is there a growth in the percentage of the quarter's volume that's being sold into the markets through retail sales events versus day-to-day non discounted business. Is that changing materially year-over-year?

Marc Bitzer

Dave again its Marc here. Not, short answer no, we didn’t see massive change. Again the expanded answer is and it's my usual comment is the AM sell-in is not reflective of our total volume and there is always like in every quarter there are inventory moves and differences between the sell in and the so called sell out. I would say in this quarter some of these numbers may be a little more distorted just because of a stock buying by LG and Samsung, is just the reality. But I would say from every single truth even if we take all data points into account that's why we still say that we still say a 5% to 6% steady state in the growth this year.

Operator

Now, we will go next to Eric Bosshard, Cleveland Research. Please go ahead.

Eric Bosshard

Thanks. In terms of the sell through, Marc to continue that point the AM shipments were notably softer in 2Q relatively to 1Q and it sounds like they may them stock piling that benefitted within that shipment number. I guess what I am trying to understand is in terms of the sell through pace that you've observed through the first half of the year. And what you're seeing in terms of expectations and activity in the back half of the year. Any change in that relative pace is the question.

Marc Bitzer

And Eric it's Marc. My comments particularly refer to our sell through we don’t have unfortunately there are no reliable industry sell through data it's just a data source issue. So we have sell through data in about 65% of our customers are there. So we have a pretty good proxy of what happens in our business.

And that pace has been ahead of our sell in volumes and though it always stays quite [ph] a bit ahead of our overall market. To your point earlier, it's hard to gauge the exact market sell through, yes you could say July 4, may be a little a bit slow and some partners expected, on the other hand the rest of the quarter was a little bit stronger and I wouldn't read anything into what it would mean for Labor Day or any of the other promotional periods.

There will be ups and downs and of course the more aggressive people will be like on events like memorial day you may see an offsetting item on July 4, but these are the normal, what I will call the normal promotional ups and downs and I don't think that changes any of our view on the full year industry guidance.

Eric Bosshard

So, I guess just to make sure I understand from a sell through perspective throughout the first six months of the year ups and downs, but is there a trend is it strengthening as the same as weakening that's what I am trying to figure out?

Marc Bitzer

I would say it's actually pretty constant there is probably more noise actually in the sell in and the inventory data, than there is in sell-through that. So that's I think it's pretty steady now. Again there is differences by promotion, there is also difference by channel. For example, we continue to see very strong sell through and sell in on the builder and contract segment. The very subtle difference is across the different channels. But the sell through is actually pretty steady.

Operator

And we’ll go next to Alvaro Lacayo with Gabelli & Company.

Alvaro Lacayo

Good morning. I just want to get a little more color on Latin America. How you saw demand progression in the second quarter? And then maybe talk about for taking any competitive actions and better leading to that the market share gains, you guys are seeing in the market?

Marc Bitzer

And let me take this again. First of all, as a reference point, the minus 10%, which we gave as guidance refers to Brazil. That is not Latin America in total and I would argue from the outside Brazil, the rest of Latin America is probably stronger than the minus 10%. So minus 10% particularly in Brazil, I would say given the extreme volatile which we’ve seen in Brazil over the last five, six quarters. I would right now say close to impossible to predict exactly what happens by quarter or/and if we know, we probably wouldn’t give that guidance. But right now it’s actually, we still expect the full year industry will be down minus 10% nearing to one about the worse. So maybe stabilizing, but bear in mind it’s stabilizing in a very low level, because last year was over the significant reduction.

So we do not see any recovery or any significant recovery in Brazil in the back half of this year. To your question about competitors direction, we simply do not know, we do not ask them. And frankly we focus in our own profitability. We did the actions a year ago, this all be associated pain and I would say our business is very well and keep also in mind, this are not just mechanics of pricing up and down, this are new product, product introduction and innovations, which would go through the markets.

Jeff Fettig

I just add to that. In Brazil, as we talked about last year, we had three waves of disruptions. The demand has been constant carry -- negative demand has been constant and is carried over in this year. We have three major currency valuations. The last one being in September and October and we had to adjust each time to those and then thirdly is the inflation.

So this year demand is pretty much playing out as we expected and we expected it to be down, were both through costs and cost based price actions, we’re dealing with both currency and inflation. But the third factor is we continue despite the environment to invest very strong in a new portfolio and brand innovation. That is enabling us to improve our market position. The cost and the price position are allowing us to improve our margins, but the market share gains are purely the fact that we continue to bring new products in marketplace.

Alvaro Lacayo

Okay. And I just clarification on guidance. So and Q1 you didn’t include the $0.50 of currency or any share repurchases. Is any of that already included in the guidance you provided in the second quarter?

Larry Venturelli

Well everything is all up. Remember our original guidance, in our original guidance we said we would exhaust our previous share repurchase during 2016, which is 225 million repurchase you saw in Q1. We did do $100 million on a new authorization in the second quarter that will have a modest impact on our guidance, which is included in there and then the currency piece is now -- the 200 million is now in our guidance and that’s reflected in each of the regions that Marc took you through from a margin perspective.

Operator

We’ll go next to Megan McGrath with MKM Partners.

Megan McGrath

Good morning. Thanks. I guess, I’ll touch on a region that we haven’t touched on a lot so far today, which is Asia. Wondering if could walk through you view of the market demand in China and India and I know you’ve said in your presentation that China was down, do you think that you are gaining share yet from your distribution expansion or is still too early for that to be happening?

Marc Bitzer

Megan its Marc. As you pointed out, first of all let me zoom out a little bit on Asia. We are very pleased and satisfied with our operating margin. 8% in such a volatile region and a competitive region it’s non-frivolous, we are very pleased with that progress. But you’re also right, it’s a little bit a tale of two stores right now.

India in particular which is a big part of that region and we had exceptionally strong results they’re both strong markets, but we also make very good progress in markets with cost productivity in new product introductions and we gain shares. So I would say India is really a very bright spot in that Asia one. China is impacted even though the integrations is on track, but it’s impacted by a soft market demand. And then I talk about China market demand took the year to so called T-2, so it’s not the same destination as North America. But right now even though we don’t have the latest June data, I would right now assume Q2 China was high single-digits negative. So this is also obviously non-trivial in a very competitive market which is characterized by little bit over capacity.

So specifically to your question, our distribution expansion yes translate into market share gains, I would say not yet because they are also underlying two opposing moves. We’re expanding the local brands distribution and we’re actually gaining volume of local brands but at the same time we’re staging out or reducing some value brand business. So there is two offsetting items and that’s why net-net you don’t get to see the market share growth, which overtime you should expect.

Megan McGrath

Okay, thanks that’s really helpful. And then switching gears a little bit of a follow-up on the UK, we’re sorry to hear some groaning about construction starting to already pull back or folks are talking about, can you give us a sense of your exposure to the new construction business in the UK versus retail and if you’re also starting to see any early signs of weakness.

Marc Bitzer

Megan, its Marc. So first of all every market around the world is slightly differently set up, so the kind of construction business which we have in U.S. what we refer typically to as a buildup of contract channel, same magnitude in UK because there is no typical, there is fewer national builders, so you don’t have the national build business.

Having said that of course like any other markets in particular when you talk about kitchen demand, it’s still impacting the housing stability. I would say not to the same extent as North America in terms of statistics and correlation but there is an impact. Do we see any signs of a pullback, here yet? No, I just simply do not see it and so -- but could you expect that overtime? Maybe, I would say it’s too early to tell.

As you also know and just right now try to draw the analogy of other markets where you had certain currency swift. You may see odd behaviors on the market demand. We have -- it wouldn’t be the first market where short-term you will see an increase of demand because people are still going for lower price appliances and when you see the opposite effect. So it’s too early to see that in UK and it’s speculation but best pattern which we’ve seen in many markets. So you may see the odd combination of first increasing demand and then softness of demand.

Operator

And it appears we have no further questions at this time. I’ll return the floor to Jeff Fettig for closing remarks.

Jeff Fettig

Well, again thank you for joining us today and we look forward to talking to you next time. Thank you very much.

Operator

And this will conclude today's program. Thanks for your participation. You may now disconnect and have a great weekend.

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