Max Tunnicliff - Whirlpool Corp. Jeff M. Fettig - Whirlpool Corp. Marc Robert Bitzer - Whirlpool Corp. James Peters - Whirlpool Corp..

Robert Wetenhall - RBC Capital Markets LLC Sam J. Darkatsh - Raymond James & Associates, Inc. Samuel H. Eisner - Goldman Sachs & Co. LLC Michael Jason Rehaut - JPMorgan Securities LLC David S. MacGregor - Longbow Research LLC Susan Maklari - Credit Suisse Securities (USA) LLC Kenneth R. Zener - KeyBanc Capital Markets, Inc.

Megan McGrath - MKM Partners LLC.

Good morning, and welcome to Whirlpool Corporation's Second Quarter 2017 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, Max Tunnicliff..

Thank you, and good morning. Welcome to our second quarter 2017 conference call. Joining me today are Jeff Fettig, our Chairman and Chief Executive Officer; Marc Bitzer, our President and Chief Operating Officer; and Jim Peters, our Chief Financial Officer.

Our remarks today track with the presentation available on the Investors section of our website at whirlpool.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 2 of the presentation. Turning to slide 3, 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 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 the Investor Relations section of our website for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. At this time, all participants are in listen-only mode. Following our prepared remarks, the call will be open for analyst questions.

As a reminder, we ask that participants ask no more than two questions in the first round, and time permitting we will address any follow-up questions after everyone has had a turn. With that, let me turn the call over to Jeff..

Good morning, everyone, and thank you for joining us today. As you saw in our press release, we delivered very strong revenue and margin performance in our North America and Latin America regions despite the impact of higher raw material cost, which did negatively impacted our second quarter results.

We also delivered sequential operating margins improvement in Europe, and overall we did make good progress in Europe on our supply chain initiatives which resulted in improved availability.

At the end of the second quarter, our free cash flow increased by nearly $200 million compared to last year, and we are on track to deliver our full-year free cash flow goal of $1 billion.

This strong level of cash flow generation allows us to continue executing our balanced capital allocation strategy and effectively returning cash to shareholders in the form of dividends and share repurchases. During the quarter, we repurchased $200 million share of common stock bringing our year-to-date total to $350 million.

We also paid an increased quarterly dividend of $1.10 per share. Overall, our strong confidence in our cash generation has enabled us to announce a new $2 billion share repurchase authorization, which brings our current total authorization to $2.350 billion.

This increased authorization gives us ample flexibility to effectively execute our balanced capital allocation plans and continue effectively returning cash to shareholders.

On slide 6 we show our second quarter financial results, where we delivered revenue growth of 3%, ongoing earnings per share of $3.35 a share and a free cash flow improvement of more than $190 million. We have seen cost increases on key raw materials, primary steel and resins across the globe during the first six months of the year.

In North America and Latin America, we've been able to more than offset these headwinds with favorable demand and productivity gains. In Europe and Asia, however, weaker market demand has made it more challenging to offset this during the first half. So I'll turn to slide 7 where we show our 2017 updated guidance.

Again, our free cash flow guidance of $1 billion has not changed. We have updated our 2017 earnings per share guidance to reflect the impact of the expected raw material inflation. So, overall, we now expect to deliver ongoing earnings per share of $14.50 to $15 a share. Turning to slide 8, you'll see that our priorities for the year have not changed.

We remain focused on realizing the benefits of our integration activities in Europe, and we do expect to deliver sequential margin improvement in the third and fourth quarters. We also continue to expect to drive growth at or above industry levels in both the U.S.

and Brazil, and again our focus remains on delivering substantial free cash flow improvements for the year ahead. So, with that, I'm going to turn it over to Marc to talk about our global operations..

Thanks, Jeff, and good morning, everyone. On slide 10, we will review second quarter performance of our North American region. Net sales were $3 billion, an increase of more than 8% versus the prior year. Excluding the impact of currencies, revenues grew 9%.

This growth was driven by a combination of continued industry growth and another quarter of market share gains. We gained nearly 1-point of market share as we continue to see consumer demand for our leading brands outpacing the industry.

In addition to strong unit volume growth in our core business, we also delivered very strong adjacent business growth, particularly in our KitchenAid small domestic business through new product introductions and share gains.

We reported very strong margin of 11.8% for the quarter, fully in line with our full-year guidance as we realize the benefits of double-digit unit volume growth and continued cost productivity. Compared to the prior year, margins were impacted by elevated raw material inflation of more than $14 million as well as $10 million of unfavorable currency.

In summary, we're very pleased with our second quarter operating performance in North America. Turning to slide 11, we show our expectations and operations priorities for North America. We continue to expect industry growth of 4% to 6% for full year behind strong trends in housing, low unemployment and real wage growth.

The industry grew more than 5% in the second quarter and have now grown 4% for first half, in line with our expectations. As we have done in each for the first two quarters of this year, we expect to grow at or above industry levels while driving strong levels of cost productivity.

We continue to believe that we're well positioned to deliver our full-year margin growth of 11.5% to 12%. On slide 12, we will review the second quarter results for our Europe, Middle East and Africa regions. Revenue was approximately $1.2 billion, down 5% versus the prior year excluding the impact of currency.

The sales decline was largely impacted by continued demand weakness in the UK, which was partially offset by growth in Russia. We delivered sequential operating margin improvement of $17 million as we realized the benefits of improved system stabilization and product availability compared to the first quarter.

Compared to the prior year, our operating margins were negatively impacted by approximately $25 million of raw material inflation and approximately $10 million of unfavorable currency impact. Turning to slide 13, we summarize our priorities and expectations for the EMEA region.

We improved system stabilization in the second quarter and remain focused on further improvements across the region this year. As a result, product availability has improved compared to the first quarter and we expect to continue driving improvements for our supply chain initiatives.

We continue to expect 0% to 2% industry growth in 2017, as growth in Russia and Eastern Europe is expected to be offset by weakness in UK. Based on current market rates, we anticipate continued margin impact from currency weakness in the UK. We will continue to reduce inventories, which as a result of product transitions have been slightly elevated.

Our accelerated inventory reduction, combined with competitive intensity in the first half, is expected to drive a negative full-year price mix impact compared to our prior regional guidance. Raw material inflation is expected to remain stable in the second half.

In summary, we expect to deliver sequential improvement to operating margin in each of the next two quarters but the magnitude of improvement will be slightly less than previously expected. We now expect to deliver operating margins of approximately 4% in the second half and approximately 2% for full year.

I will now discuss our Latin America results in slide 14. Sales for the quarter were $848 million, an increase of 3% versus the prior year. Excluding the impact of currencies, revenue decreased 1%. Operating profit was $59 million and margin increased 90 basis points versus the prior year.

Similar to the first quarter, the excellent environment continue to be challenging. We saw further industry declines and raw material inflation had a negative impact of approximately $25 million. However, we were able to expand margins through strong operational performance as we continue to deliver cost productivity and positive price mix.

On slide 15, our 2017 priorities and expectations for Latin America are unchanged. We continue to expect industry demand for the full year to be flat, the first half declines to be offset by flat demand in the third quarter and solid growth in the fourth quarter.

We expect to deliver revenue growth and margin expansion for full year from the continued benefit of brand investments and new product introductions, while remaining focused on strong levels of cost takeout to offset raw material inflation. In total, we continue to expect to deliver 8% to 9% operating margin for full year.

We now turn to our second quarter results for the Asia region, which are shown on slide 16. Net sales were $358 million versus $363 million in the prior-year period. Excluding the impact of currency, sales were flat. Our ongoing operating profit was $8 million and ongoing operating margins were approximately 2%.

We delivered exceptional performance across all key measures in India, and have continued to see strong demand growth and favorable economic trends in that country. In China, the operating environment continued to be challenging in the second quarter. Raw material inflation for the region negatively impacted margins by approximately $20 million.

We also saw high single-digit industry declines, which contributed to elevated competitive pressure and drove unfavorable price mix in China. As you saw in our press release, during the quarter, we recorded an adjustment in our China business, primarily related to trade promotion accruals from prior periods.

The impact of this adjustment on GAAP operating profit for our China business was $40 million. Turning to slide 17, you will see our 2017 priorities for Asia. We continue to expect flat to 2% industry growth for the region, with strong demand in India offset by industry weakness in China.

We expect raw material inflation in China to continue in the second half. We implemented the previously announced cost-based price increase and we're expanding our Whirlpool brand distribution for large retailer, and we are introducing a new lineup of cooking products.

As a result of these actions, we expect to improve price mix by the end of the year, although full-year margin impact will still be negative. We now expect to deliver 3% to 4% ongoing operating margins for the year. Turning to slide 18, we highlight our first half versus second half operating margin improvement drivers.

In the second half, we expect to deliver margin benefits in all regions from cost productivity and seasonally driven volume leverage. We also expect less raw material inflation globally compared to the first half.

In North America, we expect growth in our business to continue positively impacting our margins, and we expect further price mix benefits from the upcoming global launch of our Whirlpool brand Kitchen Suite.

In Europe, we expect to benefit from our simplified brand portfolio and further improvement to product availability, as I discussed earlier, and drive approximately 4% margin in the second half. In Latin America, we expect to continue our margin improvement trajectory and we expect to benefit from positive demand in the fourth quarter.

Finally, we expect to improve Asia margins sequentially through the price mix actions I discussed earlier. On slide 19, we summarize our regional margin guidance goals for the full year.

We continue to expect strong margin in North America and Latin America, and we will deliver sequential margin improvement in Europe and Asia in the second half through our target actions, but full-year margins are reduced due to raw material inflation and price mix. Now, I'd like to turn it over to Jim..

Thanks, Marc, and good morning, everyone. Turning to our second quarter results on slide 21. Net sales were $5.3 billion and grew 3.3% versus the prior year, in line with both our full year and long-term revenue growth expectations of 3% to 5%.

Ongoing EBIT margins declined as strong cost takeout and revenue growth were more than offset by approximately $110 million of elevated raw material inflation and unfavorable price mix, primarily in EMEA and China, compared to the prior year.

Currency impact to EBIT was approximately flat in the quarter as the Mexican peso and British pound weakness offset Russian ruble and Brazilian real favorability.

Also on a GAAP basis, earnings per share were negatively impacted by approximately $90 million in tax expense as compared to the prior-year period due to the timing of our tax planning activities in the prior year. We continue to expect a full-year effective tax rate of approximately 20%.

Turning to slide 22, I will update our expectations for 2017 EBIT margin drivers. We are now expecting slightly higher negative price mix for the full year. We have experienced negative price mix during the first half of the year in EMEA and China, which we expect to partially offset in the second half of the year.

We also now expect slightly higher raw material inflation for the full year. However, we continue to expect that our strong cost productivity and restructuring programs will deliver net benefits through our earnings. And we are reducing our forecast for the impact of marketing, technology and product investments.

We continue to expect the impact of currency to be flat for the full year. As a result, we now expect our EBIT margin to be flat for the full year. On slide 23, we update our expectations for total cost takeout in 2017. Through the second quarter, we have delivered approximately half of our full-year cost takeout goal.

We now expect $350 million of raw material cost inflation for the full year, with the majority of this impact having already been absorbed in the first half. We continue to expect approximately $475 million of gross cost takeout for the year. I will provide a few additional details on these productivity initiatives.

Our complexity reduction initiatives are ongoing, including reducing the number of global product platforms, streamlining our brand portfolio and reducing our SKU count in Europe by more than 40%.

As a result, we are improving our supply chain efficiency, inventory positions and ability to realize the purchasing benefits of our industry-leading scale. We also continue to focus on minimizing raw material cost volatility through supplier contracts and commodity hedging. On slide 24, we show our updated full-year guidance for 2017.

We continue to expect to deliver approximately $1 billion of free cash flow, and our first half free cash flow improvement of almost $200 million has us on track to delivering that goal.

As Jeff discussed earlier, we are adjusting our full-year ongoing earnings guidance to a range of $14.50 to $15 per share to primarily reflect the lower-than-expected price mix and increased raw material inflation. On slide 25, we provide an update on our cash flow and capital allocation priorities.

During the quarter, we repurchased $200 million of common stock, bringing our year-to-date total to $350 million. Given our confidence in our cash flow generation, yesterday we announced a new $2 billion share repurchase authorization. This brings our total available authorization to $2.35 billion.

We remain committed to returning cash to shareholders, consistent with our balanced approach to capital allocation. Turning to slide 26, we updated our full-year free cash flow improvement drivers. Overall, we are on track to deliver $1 billion for the full year. We now expect to deliver cash earnings growth of approximately $150 million.

We continue to expect to generate approximately $250 million in free cash flow through our strong focus on improving working capital efficiency, primarily in Europe and North America. And we expect capital expenditures to be $650 million to $700 million, approximately $25 million more than the prior year.

Turning to slide 27, we remain committed to our balanced capital allocation strategy. We are on track to be at our targeted capital structure. We raised our dividend earlier this year to $1.10 per share, and we intend to continue repurchasing shares throughout the rest of the year. Now, I'd like to turn it back over to Jeff..

Thank you, Jim. I'll turn to slide 29. Let me start by saying we are confident that we will make meaningful progress towards each of our value creation goals this year. Year-to-date, our revenue growth of 3% is in line with our long-term annual growth target of 3% to 5%.

We have very strong actions in place to enable and deliver the second half EBIT margin expansion. And we fully continue to expect strong free cash flow generation and delivering 5% to 6% of net sales by 2018. On slide 30, I would just summarize the key messages from our call today.

Our North America and Latin America regions continue to perform very well. We do expect revenue growth and margin expansion in both of the regions for the full year.

In Europe, despite some challenges that we faced, we delivered sequential operating margin improvements and we believe that our growth, price mix and productivity actions will deliver improved EBIT margins in the second half of the year.

As a result of our strong first half cash improvement, we remain very confident that we'll deliver our $1 billion of free cash flow this year.

More importantly, because of our confidence in ongoing future cash generation, our board has announced a new $2 billion share repurchase authorization, bringing our total authorization to $2.350 billion, which represents more than 15% of our current market capitalization.

And we plan to use this authorization to continue repurchasing shares throughout the year. Finally, I'd like to comment on the important succession news, which we announced last month. As part of our ongoing executive succession process, which is driven and overseen by our board, we announced that I will step down as CEO on October 1.

And then our board has elected Marc Bitzer as our new CEO, the eighth in our 106-year history. I would just say that I and our board could not be more pleased about these succession changes, and we're very confident in Marc and in our entire executive team that they'll do a great job in leading our company in the future.

And I'm very confident that we'll have a very exciting and value-creating future under Marc's terrific leadership. So, for me, after five years of being President and Chief Executive Officer and 13 years of CEO that translates into 72 quarterly earnings call, and so this will be my last one.

And beginning in October, we'll turn this over to Marc and Jim. So, I would like to take this opportunity to thank all of you for your support and confidence and investing in our company. And I look forward to the great future for Whirlpool under Marc's leadership. So, with that, I'd like to end our formal remarks and then open up for questions..

We'll take our first question from Robert Wetenhall of RBC Capital Markets..

Good morning. Jeff, congratulations on a fantastic career and a great tenure. You're leaving the company in better shape than you found it and done a lot to grow it. And, Marc, you got some big shoes to fill..

Thanks, Bob..

Thank you, Bob..

So, for my first question, I'd like to understand how you can bridge from this quarter and current trends you're seeing in the market towards reaching your long-term financial targets. And, Marc, I was hoping you could step me through your action plan to address price mix issues that you're seeing in Europe and Asia..

So, Bob, it's Marc. So let me, kind of – particularly, if you talk about the long-term guidance. Let me start region by region. North America, as Jeff pointed out, we're in a very good shape. I think Q2 shaped up very well.

As you've seen on the slide 18, our guidance for the second half margin is around 12%, which gets us very close to the margin targets which we communicated in the investor call, i.e., the 12% plus. So I think our fundamental view on the long-term dynamics of the North American market have not changed.

If at all, I think with Q2 and what we see is current trends just to reconfirm our kind of bullish view on the long-term trends in the North American market and I would say by any definition we're performing very strong.

On Europe, again, our recovery and the sequential recovery is there, but very frankly it's in Q2 being slightly slow when we're expecting and in Q3 it's also slightly slower than we expected originally, but it's there. So, kind of the exiting margins in Europe, we would say is around 4%.

That does not change our 8-percent-plus long-term targets for Europe. And again, that is more a result of – the outcome of that transition will be a very, very strong cost platform in Europe, and then coupled with a very powerful brand portfolio.

It's the integration process which we go through, so it doesn't change our long-term expectations in Europe. And you also know, we've kind of through the currency kind of cycles in Europe, so at least that seems to be stable. Latin America, if at all, the investor there would be more bullish.

As evidenced in Q1 and Q2, we have very strong operating margins on an EBIT level and on an ongoing level, but even more so internally on what we call the gross margin per product, which are very healthy.

So, once the volume comes, and it will come, our Latin America outlook is a very positive one and I have no question and no doubt on the long-term target. Also same is true for Asia. India, as you can evidence in Q2 and Q1, it is in very strong position.

Our brands are in very strong position and we are, if at all, also even more bullish about the long-term prospects of the Indian market. China is still going through rough waters. I mean, the industry has been down minus 9% year-to-date.

Given the size of the China market, can that continue forever, when you talk about our strategic horizon, it's unlikely, but for this year, 2017, we're not overly bullish on the China market.

And having said that, the market is too big, the penetration growth is still there, particularly outside refrigeration and washer and you're also starting to get into replacement cycle. So it's unlikely that these market trends continue.

We obviously have also our own homework to do in terms of how we mitigate raw material trends with price mix action. I call that more an execution as opposed to a strategic challenge. As such our long-term perspective on where we expect the Asia margins to come up has not changed versus Investor Day..

That's helpful. Thank you for the detail geographically on the segments.

Switching gears a bit, I wanted to ask at a high level what's the potential impact of Amazon's decision to sell Kenmore products on the North American pricing environment and how do you see this effecting industry profitability in the next two to five years?.

And, Bob, let me take this one, and then maybe also Jeff can also add his perspective. As you know, the Kenmore brand is owned by Sears and it's subject to their decision kind of where the brand is being sold.

So, in a very short-term, and I know there has been some reports and comments on this one, in the short-term, given that we produce Kenmore and still have a very significant OEM Kenmore business, they're certainly not a negative impact for us, if at all, neutral to even slightly positive.

In the long-term strategically, I think many things have to be seen. I mean, obviously, they need to be seen how strong the sell-through is on this one. And to what extent it can mitigate the inherent Sears decline. So, I would say from a long-term, a lot has yet to be seen, probably in the second half in terms of how much pick up they actually get.

I would say, it's an interesting development. I would not, at all, see this as a negative development for Whirlpool..

Yeah, Bob. This is Jeff. I absolutely – completely agree with Marc. Short to mid-term, I don't see any good or bad impact for us. Our position is and always has been, we're going to be where customers want to shop. And we're doing that today with the trade partners we deal with. We support their online activities.

Our job is to have great brands, great products and deliver. Now the second part of this, what to do with the industry profitability, I think we've demonstrated over long periods of time that no matter what the model to the consumer is that we are appropriately represented in the value chain. And consumers will decide how big or how little this is.

We will make decisions to make sure we are appropriately represented in the value chain..

Thank you. We'll take our next question from Sam Darkatsh of Raymond James. Your line is open..

Good morning, Jeff, Marc and Jim. And, Jeff, again, best wishes for your next chapter of your life and it's been a pleasure dealing with you for all these years and, Marc, also congratulations, well deserved naming to the new post for you..

Thanks, Sam..

Thank you, Sam..

Two questions if I could. The spending cut for the marketing and technology initiatives, it was an eyebrow razor for me.

Where specifically is that? Why the decision to do so, particularly to such a significant degree and does this potentially jeopardize the Whirlpool brand launch in the back half of this year?.

Sam, I can take this one. And, first of all, I know on the surface as you compare to the earnings slides, it looks like a big number, but let me give you a little bit more detail. One part of our brands, there's a certain timing issue in terms of how much of a brand investment fall into Q4 versus Q1. That has something to do with launch timing.

Year-over-year, our brand investments, the pure brand investments, will still be up as a company. So, of course, we continued to stick to our commitment to strengthening the brand. So, one part is more timing between Q4 and Q1. The other part is in Medline, our technology investments.

One initiative which we didn't talk too much about is, we have reconfigured our entire product development cycle from which with the same or better output we actually have reduced engineering and capital expenditures. That is actually a good thing. So, in a certain way, we get more for less.

We didn't talk too much about it, but that's also behind this one, and frankly that is very well on track and that's why we feel very confident that with even increased output from product development we don't have to invest exactly the same dollars..

And then the final question I would have, can you help quantify the efforts to clear out the inventory in the UK? Can you help quantify what the impact is on margins, both in the second quarter and the back half? I'm trying to parse that out separately from what's happening in the legacy business..

Yeah. And, Sam, first of all to clarify, again, it's Marc, it's not just UK, it's on the European level. As we explained in Q1 and also in Investor Day, as part of integration we offer initially 12,000 SKUs, we bring that down to 5,500 or 6,000 SKUs and we basically had to change about 90% of SKUs.

As you go through that change process in a very short time period, no matter how well you plan your production plans you have, by definition, obsolete inventory, just by definition it's not miss-plan, it's just by definition.

And given that we don't want to carry the inventory too long and also with our strong focus in cash flow, frankly, internally we put a lot of pressure on the European team to kind of sell that out as quickly as possible.

So, yes, it impacted the first half in margins and it will also impact the second half to a slightly lesser extent, because we burned through a lot of that obsolete inventory.

I can't give you the precise number, but I think just the pure impact of burning through that inventory probably in first half was about $10 million or more in terms of margin impact..

We'll take our next question from Sam Eisner of Goldman Sachs. Your line is open..

Yeah, thanks. Good morning, everyone, and Jeff, great working with you, congrats. Look forward to the next step. And Marc looking forward to working with you as well..

Thank you..

So, on North America, volume growth has been pretty strong in excess of, obviously, the industry data and it seems like, as you commented, you guys have been gaining share.

Can you talk specifically about either who that share is coming from, how you're going about gaining share, should we expect that the share gains lessen in the back half of the year as the Koreans actually have product that they're able to bring into the market after their product transition, or their facility transition? I just want to better understand what are the drivers of your ability to see such high volume levels..

Sam, it's Marc. Let me actually first start with our usual boilerplate answer, but the industry sell-in growth is not exactly comparable to the sellout in our overall unit numbers. I mean, we say that's been our market share, it's not so favorable and we say that also has been our market share is favorable.

And what I mean with that, we are internally more focused on the sellout and we're also internally more focused on the entire quality trough sellout. Having said that, we feel very good about where we are on the sellout number as also reflected in the sell-in market share gains.

There is no one single product category which would stand out from a market share. But, frankly, compared – and that's probably the biggest change with 2016, we regained some share also in laundry. Our laundry business, as you know, was under pressure, was injured by foreign imports.

We see the supply chain challenges and we also see maybe some results of early antidumping actions in the announcement. But I also want to clarify, it is absolutely not only constrained or contained to the laundry category. It's across the board.

We're very pleased with our refrigeration and cooking products, and we're very bullish about the Whirlpool brand suite which comes in Q4..

I'd only add to that is, our brand portfolio is really delivering. Again, Maytag and KitchenAid are the fastest growing brands in the market and Whirlpool continues to be the largest. And so that coupled with great products, to Marc's point, it's spread across our entire business..

All right. And then maybe just on Asia given the profit weakness there, Marc, you commented that there was elevated competitive pressures and recognizing that margins are going to be down in the second half versus the first half. And you commented that in the long-term you expect to get back to some long-term average.

But trying to understand what, "long-term" means and how long these competitive pressures are going to last for you guys because it is a pretty sizeable reversal in that segment? Thanks..

Sam, and again, first of all, on Asia, as I explained also at investor call, Asia is largely India and China. So, to simply, yes, there is also some other business in there but it's largely India and China. India had a very strong Q2 and India where, as I said before, we're very bullish about the long-term trends and our market share gains.

China was a combination of, I would say, actually three elements. One, it's the industry decline which was minus 9% on the Q2 until May.

It's hard to read what will happen in the back half, but I would not expect industry growth on a full-year base in China and that's also what is embedded in our guidance so it's probably depressed on the full-year base.

Then you have the other element, which is raw material, maybe not in absolute dollar numbers but as a percentage of sales, we had the biggest impact of raw materials in China but it's partially due to the more short-term nature of raw material swings in China compared to other regions.

And so we saw a huge increase in RMI in Q1 and partially Q2 and right now, I would say, there's uncertainty about the RMI. That's the one thing. And the other thing is, we have not been able to mitigate that through pricing actions.

We have implemented something now, we announced it, but frankly, in the first half the traction was below where we should be given the raw material trend. So I would say that's the China situation. Now the question is to what extent can we address it.

We have announced a price increase and we're driving hard to kind of make sure that this price increase, which we already announced, finds the traction in the marketplace.

On the raw materials, probably as we are going towards the end of the year, we expect more stabilization but we expect it still to be slightly elevated in Q3 if the early signs point to more normalization in Q4.

So, I would say, as we enter 2018, we should see more margin run rate for Asia in total, which we're getting closer and more on track towards our long-term margin goals there..

Our next question is from Michael Rehaut of JPMorgan. Your line is open..

Thanks. Good morning, and I'd also like to add my congrats to Jeff and Marc. Well done on both accounts..

Thank you, Mike..

My first question is on Europe, and obviously you've had great success in North America and there's been different structural problems there over the years, and you've been able to – I mean, it's still a lot of, let's say, at points, structural industry challenges in North America, given some of the competition, you've been able to turn that into a very profitable business over time.

So, when you think about Europe, you made the acquisition and very quickly as things were doing well, you got that line of sight to an 8% margin. Obviously, there's a lot of challenges right now.

I was hoping you could kind of walk me through what gets you from flat in the second quarter to up 4% margin in the back half? And then, going from the back half of 4%, what's the path to 8%?.

So, Mike, it's Marc. So, first of all, on the European margin, again first of all, keep in mind, we were already last year more in 3% or 4% margin levels. So, we're not talking about levels which we have not already achieved post integration.

Q1 and Q2 were significantly impacted by the cumulative effect of a number of integration complexities, largely driven by the SAP introduction. And I think we explained that in Q1 and the earnings call. So I would say a big part of the second half improvement is just the absence of system unavailability issues, which we encountered in the first half.

So, as such, I wouldn't describe the back half margin as spectacular, because that's pretty much the run rate which we had last year. Then we had already the impact of the currency of UK already in the numbers. So, the year-over-year comparison is – from back half it is not so completely different from last year.

So, again, it's the system stabilization around product availability, which we know is, every month, going better. I also indicated during the investor meeting that we had our very important go-live in Poland in July, that went successful. So, we know that's largely behind us. So that makes a big difference.

On top of that, we see kind of every month, we see continued progress on price margin, on a full-year basis, it will still be down and that's what we indicated. On a sequential base, we're getting better on this one.

So, I would say, the combination of more solid top line, not growth, but a solid top line, better margin realization, and frankly also continued progress on cost productivity, that gives us some confidence about the back half margins..

Okay. And then, I appreciate that Marc. And I guess, that kind of gets you to the back half margins. And I'm just curious about the path to 8%. But the second question, also you talk about, I believe earlier on, different actions you're trying to take to offset the raw materials. At the same time I think, you reiterated your total cost takeout.

And it looks like the other big movement here is price mix, obviously, in China and Europe. So, what kind of gets you back, are there actions that you're taking in the back half of the year so that perhaps going into 2018 that price mix would then get back to even to slightly positive, potentially? I noticed you're taking some price actions in China.

But just trying to get a sense of kind of as you look at kind of the incremental challenges here that you're facing, what gets you back to, let's say, neutral or positive as you go into 2018?.

So, Mike, given that I think your question was referring to the global perspective on these questions. So, first of all, let me answer on the cost side.

As Jim also indicated earlier, our gross cost takeout is $475 million, that is consistent this Investor Day, which is the $400 million on kind of ongoing cost and $75 million on restructuring benefits. So that is unchanged, which is on a high level and I would also describe as consistent as our Investor Day.

These are the kind of levels plus/minus what you should expect from us on an ongoing base. The $350 million raw material, as you also know, beginning of the year we started with $150 million then we felt this more like $300-million-plus and now it's $350 million.

If you compare it to our internal forecast, which of course, the full-year outlook, what Jim also indicated and if you do the math, of the $350 million, $210 million is already behind us, roughly $210 million. So, we see that that pressure becoming less and less, which obviously kind of takes some pressure of the margin away.

You also need to always keep in mind on the ongoing cost productivity builds through the year. The raw materials will be less impactful and the cost productivity builds better on its own should drive something also as we go into next year.

Having said that on the price mix and as we indicated in the script, on Europe and Asia in particular, we still have homework to be done on price mix. We initiated actions. I've approved price increase, which we already announced in China and additional actions in Europe.

So, I think these are particularly two areas where we still have work in front us on the price mix and we're very committed to this one. And I would say, you will see that coming through in the second half. And as we enter the next year, we should have a pretty good run rate on that..

Michael, this is Jeff. I would just add to that, because – to Marc's point, we expect to move from, what I would call, operationally challenged issues which negatively impacted our business to more of a stabilization in the second half, which gives us about a 4% run rate return.

But your question about 2018, I would say very simply, again, we've got to assess the environment and all that kind of stuff.

But the absence of the obsolescence that we're having to clear out, which will be largely done, moving back to what I'd call a normal full availability, there's no question we think this is going to drive growth in mix on a year-over-year basis, because we'll move from these integration issues operationally challenging this to a more normal environment that we're used to operating in.

So, I think the big lever you'll see going into next year is growth in mix..

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

Yeah. Good morning. And Jeff, it's been a pleasure working with you. Congratulations on your retirement. And hope a lot of good things coming your way, still..

Thank you, David..

Can you talk about Latin America and one thing that was kind of interesting was the observation that 3Q will be flat before getting to a better 4Q? Maybe just elaborate a little bit around the extent to which that maybe a function of compares versus things that you see unfolding in the market.

And just trying to get a general sense as well, you were talking about positive pricing in that market. I know there's been a number of price initiatives down there.

But as the market recovers and foreign exchange begins to come back into balance, does the pricing power down there begin to fade? If you could just talk about a couple those things, and then I have a follow-up..

Yeah. David, let me take this one and maybe Jeff can add also some comments on this one. So, first of all, and I know there's a lot of noise about Latin America market demand, et cetera. We think we have a pretty good perspective on the Brazil market and as you know also in some upper markets in that environment.

Brazil, we are confident on a full-year flat base. Having said that, as I indicated, that implies Q3 flat and Q4 up on a significant base. To be very transparent, Brazil is a very volatile and erratic market.

So, we even in our past numbers we had one week, one direction, the other week the other direction and there's a lot of, as you know, political noise, headlines which immediately impact consumer demand. So, there is uncertainty associated with the demand guidance, but through our best of our knowledge we would still expect a flat on this year.

What I rather want to point out and you may not see it fully in the numbers, the structural health of our Latin America business is very impressive. Of course, on a top line, given the currencies and volume demand, it is still way off the 2014 numbers.

The one number which we typically don't show externally is what we call the variable product cost of product margin, which is actually even better in the 2014 level. So, we're sitting or we're faced with a very, very healthy P&L. Once the volume comes, we will have a very nice and attractive leverage..

Yeah. David, I'd add to Marc's comments. We do believe we're starting to bounce along in the bottom, which is somewhat difficult to see until you start looking backwards, but it feels like we're bouncing at the bottom, so we see some of these monthly gyrations, which is far from our recovery.

But to Marc's point, and again relating back to Investor Day, we've been through these emerging market trends in the case of Latin America for 60 years.

We have never been in a better position from a market share, margin, fixed cost, structure, product innovation in the marketplace, to come out of this recession stronger than we've ever before than any other recession I've seen. So, it's certainly challenging until you start seeing demand going back up.

We think we're getting closer and closer to that, but we don't know until we see it. But I would say, given that, we're really happy with where our business is, our position is and where our margins are..

Just as a follow-up, if I could, I wanted to ask you about European business and particularly thinking back to the Indesit days, they generated the majority of their EBIT from the UK and Russia.

Can you talk a little bit what you're seeing in your Russian business right now to the extent which similar to your comments on Brazil, do you feel that market is bottomed, and we're in a recovery mode? And if so, what should we be thinking about in terms of the incremental EBIT contribution that's achievable in the European business through that part of it?.

Yeah. David, it's Marc. First of all, you're correct and your observation is very right. Indesit had very significant amount of their profits tied, are driven by UK and Russia.

I think in the last earnings call I also made reference to that even in 2015, or kind of year-over-year in 2016 on a full-year base our UK profits were in the ballpark of $90 million to $100 million. That is certainly not the case and a very significant portion of that has been eradicated in a certain way.

We're slowly starting to claw that back, but it's slower frankly than we originally were expecting. Part of that is the difficulty of getting the traction for price increase in the UK, but we're making still progress. So, first in UK, I would still give it to some time until we see that level of profitability back in the business.

The encouraging thing is, we see now our market shares being back to pre-Brexit which were significantly impacted after we end up at price increases, so it's starting to stabilize but that's not a short-term full recovery UK. Russia is a more, how do I phrase, a more short cycled market. You have more rapid swings up and down in the market demands.

We were very pleased with the Russia recovery of the market demand in first half and also a stabilization of a currency. There is a little noise right now because the ruble now starts moving in the other direction, again, but these are the kind of, I would say, swings which we'd always expect from Russia.

Having said that Russia is, I would say, on the path of the recovery. I would also clarify, in the 2017 guidance, we have not baked in a lot of optimism on either UK and Russia. I think this is more on the strategic horizon, but not on the 2017 guidance..

David, I'd only add to that, on Russia, obviously, we have less time with that as it's only been a market that's been open for a little over 20-some years. But the trends in Russia are unsimilar than Brazil in the sense that whatever they cycle, the recovery has been better than the previous high.

And we have no reason to believe that won't continue, the two bigger, to Marc's point, the bigger factors there that we watch obviously are price of oil and the political factors. But given all that, it is recovery. We have a very strong position, to Marc's point.

And we do believe that Russia or that market will recover as well, but it's hard to pinpoint exactly when..

Our next question is from Curtis Nagle of Bank of America. Your line is open..

Hi. This is Jason Oss (49:12) on for Kurt Nagle. Thank you for taking my question, and I'd also like to add my congratulations to Marc and Jeff..

Thank you..

Thanks, Jason (49:19)..

So my question is focused on volumes in North America. They came in a lot stronger than we hadn't expected and then also relative to the industry. I know that it's not apples-to-apples with the AHAM data, but maybe you could help us bridge the gap for this quarter compared to industry. And then I also have a follow-up..

Jason (49:40), it's Marc. First of all, the T6 industry AHAM in Q2 was 5.2%. Obviously, our total volume growth was quite a bit above that. Again, keep in mind, we have also Canada and Mexico in there, which we had in both countries actually pretty strong performance.

And we have obviously products outside T6 and we also have a KitchenAid small domestic. In my prepared remarks, I indicated that the KitchenAid small domestic had a very strong quarter. So, there is a significant volume portion also of that growth coming from KitchenAid SDA.

Having said that, even on apples-to-apples comparison on the T6, our volume growth outpaced that 5.2%. I would call it high single digits without getting too much on the details. So we outperformed the market even in the core majors, and in addition we got tailwind from SDA, Canada and Mexico..

Thank you.

And then for my follow-up, could you give us an update on how, for the quarter, the retail versus the builder channels performed in North America?.

Jason (50:44), again it's Marc. I mean, it's a little bit back to comments which we made in other meetings, it's only one, a portion of a builder channel is captured in call it the national build, the direct business. There's a big amount of builder business going through the home improvement channel.

So that's why when people refer to builder, it shows up in two different channels, the direct channel and the home improvement channel. I would still argue the total builder business is in line with market or slightly ahead of market. And I know there's sometimes a little bit stop and go in the statistics about housing starts and existing home sales.

The long-term trends and even this year's trends were still pretty positive, and I would say the builder market in total is ahead of the total AHAM shipments..

Our next question is from Susan Maklari of Credit Suisse. Your line is open..

Thank you. Good morning..

Good morning, Susan..

I want to go back to sort of the Amazon-Kenmore situation and just perhaps get a bit more color there. Can you talk to the current magnitude of your online sales and maybe just give us some sense of your ability to operate within that kind of channel.

And with this announcement, have you seen any change in your appetite or the way that you're ultimately thinking about perhaps getting into this and selling more through this way to the consumer?.

Susan, it's Marc. So, let me try to put it maybe in a global context also and then a little bit more North America. The North America online market in appliance is a little bit peculiar relative to the rest of the world.

In rest of the world you have, in some parts of the world fairly, A, the online transactions are actually higher than typically in North America; two, you have a lot more pure players on the online market. You see that very strongly in UK, you see that in China, et cetera.

North America is, the online transactions tend to be lower than rest of the world and whereas largely, I would say, 95% today it's, what we call, bricks and clicks, i.e., it's the existing trade partners who have successful online channels.

So, call it our online presence in the market is largely via the existing trade partners which we have, i.e., would it be Lowe's, Home Depot, or Sears and other ones. That's where our online presence is. On majors, the Whirlpool branded products are not sold in Amazon. We do have a fairly sizeable KitchenAid small domestic business on the Amazon site.

To put it in a little bit of context. And that's why I also said earlier Kenmore at Amazon is right now, I would say, is a neutral to even short-term slightly positive for us. And I think it needs to be seen how that finds traction in the marketplace.

I think it's an interesting development and strategically there could be an interesting aspect for us, but again it's too early to judge it yet..

Okay. And so, it sounds like you haven't really seen any response from your traditional kind of retail partners with this news. They're continuing to partner with you and kind of work on their strategies..

Yeah....

Okay..

Yeah. We haven't seen any abnormal reaction. As you know, the U.S. retail market is a very competitive market, highly competitive with very efficient and strong players, and they have fairly strong online businesses. So as such, we haven't seen any changes and frankly I don't expect a short-term change..

Our next question is from Ken Zener of KeyBanc. Your line is open..

Good morning, gentlemen, and congratulations to both of you..

Thank you, Ken..

Thanks, Ken..

So, can you talk to why raw material was so pronounced now versus 1Q? And to prod you on, it sounds like it was actually more of an inability to get price versus actually a change in raw material costs. So, I kind of want to see if that's correct.

And can you discuss the contract in China, why it wasn't more of an emerging market issue, dollar costs, the terms tend to be shorter, but it seems to be China and not other emerging markets. And then in Europe, so it was mostly UK, again dollar denominated, but it seems like it might be the absence of price realization.

So, can you talk about that actual raw material increase versus 1Q because it seemed to be really sharp in terms of happening very quickly this quarter as opposed to something rolling in, and if it's really just that price mix issue versus raw material inflation..

So, Ken, it's Marc. I think you have multiple questions embedded in one question..

You're correct..

So, let me try to sort it out. Let me first talk about the raw materials in total and then specifically. The raw materials, as we indicated, we started the year thinking it will be around $150 million. Then in the last earnings call, that's where we had to say, $300-million-plus. And now we see it kind of stabilizing around $350 million.

So that's pretty much where we are. The big move in particular from $150 million to $300 million, largely came from the plastics, (56:03) et cetera, all these ones, which as I indicated in Q1, these are contracts which can't set up on a full-year basis.

So, these are typically quarterly or sometimes in spot contracts, where you're just much more exposed to short-term moves. We also said, we saw Q1 and to some extent Q2, plastics prices which were significantly elevated in the outset what you would expect from a normal demand supply in terms if you look at input factors.

The reason why we see it now stabilizing is, very honestly, the plastic prices have come down a lot in June, July and we see it kind of pretty much hovering about at stable level, certainly not in an elevated level. We have a big component, which is big in terms of magnitude but didn't cause a huge surprise is steel.

Steel, we knew coming into the year, is elevated. And there were particularly two factors which were on the high side of our original expectation. One was China, because in China prices moved up very quickly. And the other part was in North America steel prices, which and maybe versus speculative element in there around the Section 232.

We clearly see the North America steel prices above where you would expect from raw material input costs in the demand side. And there is still on, I would say, stubbornly high levels compared to the rest of the world in steel prices. So you take these two factors together, that's why we can right now see the $350 million.

But frankly, the last weeks and for the last two months, we didn't see a big move in terms of our expectation. Right now, it seems to be fairly stable and also what I want to point out again is, there is a majority of raw material costs are already behind us. The $210 million of the $350 million is behind us.

And in particular, as you get more to Q4, it gets to a more normal run rate. Now to your other part of the question, yes, it is correct, we have not been able in some reason to fully offset and mitigate that through price mix.

That's what I communicated in the prepared script, but particularly in Europe, where it's both raw materials and still some currencies in UK and China, where we have not been able to fully mitigate it..

So, we'll take one more question..

We'll take a question from Megan McGrath of MKM Partners. Your line is open..

Good morning. Just a couple of quick ones here. You mentioned the Whirlpool launch in the back half of the year.

So, I wanted to get any detail you can give us, generally speaking, on how we should think about the product launch cycle, maybe over the next, however, you feel comfortable, 6 to 12 months? And then Marc, the follow up is, you sort of off-handedly mentioned possible progress in terms of the pricing environment, in terms of antidumping, maybe if you could give a bit more color on that, that would be helpful.

Thank you..

Yeah. Megan, it's Marc. I mean, obviously, to give you a perspective about our product launch, the next six to eight months we need more than the two minutes which we have left. I mean, in the broader context, as we showed in the Investor Day, we have a very, very strong pipeline and we feel very good about the pipeline which we have.

The Whirlpool Kitchen Suite is a big deal. So, yes, it's part of a normal product pipeline, but it's a single event, it's a significant one because it impacts all Whirlpool kitchen products. It's a full suite, which will be launched in the course of Q4 and Q1.

So that is a big deal, it's also a big deal because it's a, I would say, the first inroad into the mass IoT markets, because we bring connected kitchen suites to the mass markets. So it's significant. Again, as we indicated, it's a Q4/Q1.

Obviously, as you roll out Kitchen Suite throughout the country, which is a big effort because you have to basically – it's a significant stall element also in there.

But as such, I mean you should also, on a forward base, this is not that our pipeline is dry afterwards, we feel very good about what's coming in 2018 on refrigeration, there's a very significant frontload project for North America in 2018, so we feel very good about what we have in the pipeline. So that's on this part..

And on trade, as we announced, I believe it was late May, we've been involved quite a bit particularly on washing machine dumping in the United States where we've won the last two cases. But the companies that are dumping keep moving production, called country-hopping.

We did file under Section 201 of the Trade Act, what we called a safeguard case, which is being worked with the ITC. There is a timeline for that, which we expect to be their final conclusion late in the fall. And based on a positive outcome of that that will go to the administration for a recommendation on how to address this.

So, as I said then and I'll say now, we wouldn't have filed this if we weren't very positive about it. The law absolutely supports what we're doing based on the facts and we're continuing to work the process. So with that, again let me just sum up today. Thank you for joining us.

Again, some challenges in the first half of the year, yet we're making great progress. We do expect to, again, have another record year here at Whirlpool. And we've got a number of activities going on, which we think will take place in the third and fourth quarter to get us back on track. So with that, we're going to conclude the call.

Thank you for joining us, and Marc and Jim will be here to talk to you next time. Thank you..

Thank you..

Thank you..

This does conclude today's Whirlpool Corporation's Second Quarter 2017 Earnings Release Call. You may now disconnect your lines..