Earnings Call: Q3 2020

Oct 22, 2020

Good morning, and welcome to Whirlpool Corporation's Third Quarter 2020 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, Roxanne Warner. Thank you, and welcome to our Q3 2020 conference call. Joining me today are Mark Vitsa, our Chairman and Chief Executive Officer and Jim Peters, our Chief Financial Officer. Our remarks today track with a presentation available on the Investors section of our Web site at whirlpoolcorp.com. Before we begin, I remind you that as we conduct this call, we will be making forward looking statements to assist you in understanding Wopu Corporation's future expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10 Q and other periodic reports. We also 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 results from our ongoing business operations. We also think the adjusted measures will provide you 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. Also, as we highlight on Slide 2, there is significant uncertainty about the duration and potential impact of the COVID-nineteen pandemic. Therefore, our discussion of the potential impact of COVID-nineteen on the company's business results reflects our best estimate based on what we know today. At this time, all participants are in a listen only mode. Following our prepared remarks, the call will be open for analyst questions. As a reminder, we ask that participants ask no more than 2 questions. With that, I'll turn the call over to Mark. Thanks, Roxanne, and good morning, everyone. Now turning to Slide 4, we discuss our Q3 2020 highlights. We delivered organic net sales growth of 7%, driven by industry demand improvement across the globe. While pent up demand and low inventory levels with our trade customers partially drove demand within the quarter, Increasingly, we are seeing the benefit from home nesting and a recovering housing market. Additionally, the flawless execution of our early and decisive COVID-nineteen response actions to protect our business and dollars a $2.94 improvement year over year ongoing EBIT margin of 12%, a year over year improvement of 4.80 basis points significant margin expansion in our North America, Latin America and EMEA region and a positive year to date free cash flow of $170,000,000 a $1,000,000,000 improvement driven by strong net earnings and disciplined working capital management. Due to these strong results, the confidence we have in our business and reasonable year end visibility, we are reinstating our full year 2020 guidance. We now expect to deliver net sales decline of 5% to 7% and organic net sales decline of 1% to flat, an improvement from our previous full year perspective. Ongoing EPS of $70.50 to $18 above our original guidance of $16 to $17 And finally, free cash flow of approximately $900,000,000 at the high end of our original guidance range. Additionally, as a reflection of our strong liquidity position, we announced an increase in our quarterly dividend, resulting in the 8th consecutive year of dividend increases. Further, we intend to repay all COVID-nineteen related short term borrowings by year end as we continue to progress towards our long term leverage target of 2x. Turning to Slide 5, we show the drivers of our 3rd quarter margin. Price mix positively impacted margins by 2 75 basis points, primarily driven by reduced promotional investments given our supply chain constraints. Also sequentially, we continue to see improving mix trends as consumers slowly shift from duress and prices purchases to upgrading and investing in their homes. Our cost takeout actions delivered approximately 200 basis points of margin expansion as a result of structural actions we took in 2nd and third quarter as well as ongoing cost productivity initiatives. Additionally, favorable raw material trends positively benefited margins by approximately 150 basis points. Lastly, the impact of continued investments in marketing and technology initiatives, along with unfavorable currency, negatively impacted margins by approximately 150 basis points. Overall, we believe our 3rd quarter results highlight the strength and resiliency of our underlying business and the effectiveness of our COVID-nineteen response plan. Now I'll turn it over to Jim to review our regional results. Thanks, Mark, and good morning, everyone. Turning to Slide 7, I'll review our Q3 regional results. In North America, continued COVID related supply constraints resulted in a revenue decline of 2%. Looking forward, we remain confident in the strong demand for our products as our order backlog remains very high. We delivered record EBIT and EBIT margin driven by flawless execution of our cost take and go to market actions, including the reduction of marketing investments. From an operational standpoint, we continue to experience COVID related disruptions in our supply base, at our factories and in our logistics network. However, we are seeing gradual sequential improvements in line with our expectations. Overall, the region's outstanding results demonstrate the fundamental strength of our North America business, delivering record margins despite ongoing COVID-nineteen disruptions. Turning to Slide 8, I'll review our 3rd quarter results for our Europe, Middle East and Africa region. Continued demand recovery across the region and flooring gains drove year over year volume growth of nearly 7%, with double digit growth in France, Italy and the UK. Additionally, the region delivered year over year improvement in EBIT of $47,000,000 as increased demand and strong cost takeout offset unfavorable currency. Overall, we are very pleased with the strong recovery delivered in the Q3. The region's Q3 EBIT margin of 3.4% solidly demonstrates the impact of our strategic actions to date and the progress we have made to restore profitability in the region. Turning to Slide 9, I'll review our Q3 results for our Latin America region. Net sales increased 14% with organic net sales growth of 40%, led by strong demand rebound in Brazil and share gains across Brazil and Mexico. The region delivered very strong EBIT margins driven by increased demand and disciplined go to market actions, including continued growth in our direct to consumer business, offsetting significant currency devaluation. Overall, we are very pleased with the region's ability to deliver outstanding margin results, further reinforcing the long term margin potential of Latin America. Turning to Slide 10, I'll review our Q3 results for our Asia region. In India, we delivered net sales and EBIT growth, driven by demand recovery and share gains despite the continued impact of COVID-nineteen across the broader economy. In China, while we delivered Whirlpool branded share growth, demand softness resulted in negative EBIT. Overall, we are pleased to see a rebound in our India business and expect regional results to gradually improve as the impact of COVID-nineteen lessens throughout the year. Turning to Slide 12, Mark and I will discuss our reinstated full year 2020 guidance. I will now turn it over to Mark to begin. Thanks, Jim. As mentioned before, our very strong third quarter results and our confidence in our business going forward, coupled with a reasonably good visibility for the 4th quarter, has led us to the decision to reinstate our full year 2020 guidance. As a result of increased global demand in the 3rd quarter and positive 4th quarter expectations, net sales guidance improved from a decline of 10% to 15% to a decline of 5% to 7%. And on an organic a year over year increase of approximately 160 basis points. Further, we expect to deliver free cash flow of approximately $900,000,000 or 4.7 percent of sales towards the high end of our original guidance range. In total, we expect to deliver full year ongoing earnings per diluted share of $70.50 to $18 an increase even compared to our original guidance range from the beginning of this turbulent year. Turning to Slide 13, we show the drivers of our ongoing EBIT margin guidance. We expect price mix to deliver approximately 75 basis points of margin expansion as effective go to market actions offset the negative mix impact of COVID-nineteen. Additionally, our $500,000,000 cost takeout program remains on track with $350,000,000 in cost takeout year to date. Our cost takeout program will result in approximately 75 basis points of net cost improvement and approximately 100 basis points of raw material deflation to favorable impact margins. Further, as we continue to invest in the future, we expect increased marketing and technology investments drive a negative margin impact of 25 basis points, while unfavorable currency, primarily in Latin America, is expected to impact margins by approximately 75 basis points. In total, we expect these actions to deliver approximately 8.5% ongoing EBIT margin, a 160 basis point improvement. Now I'll turn it over to Jim to discuss our 2020 free cash flow guidance on Slide 14. Thanks, Mark. With strong momentum and expectations of continued margin expansion, we anticipate driving incremental cash earnings of approximately $100,000,000 We expect capital expenditures of approximately $475,000,000 as we continue to launch innovative products and prioritize investments in world class manufacturing and our digital transformation journey. Additionally, we will end the year with sustainably low working capital levels. We anticipate restructuring cash outlays approximately $260,000,000 primarily due to the impact of COVID-nineteen related restructuring actions. Further, we expect to continue optimizing our real estate portfolio, resulting in similar levels of sale of asset transactions as seen in recent years. Lastly, we expect 2 previously discussed one time items to negatively impact free cash flow. Overall, we expect to drive free cash flow of approximately $900,000,000 as we focus on driving strong cash earnings and effectively prioritizing our capital investments. Turning to Slide 15, we provide an update on our capital allocation priorities for the remainder of the year. We are fully committed to funding the business and prioritizing investments, including our digital transformation journey. Additionally, we are focused on returning cash to shareholders highlighted by our recent dividend increase announcement. Also, our share repurchase program remains temporarily paused as we prioritize the repayment of all short term debt by the end of the year. As a result, we anticipate our gross debt to EBITDA to be approximately 2.4x by year end, progressing towards our long term goal of 2x. Turning to Slide 16, we highlight our continued commitment to returning cash to shareholders. As previously mentioned, we announced a quarterly dividend increase in October, resulting in 8 consecutive years of dividend increases. This reflects our strong liquidity position, commitment to shareholders and is in line with our dividend target approximately 30% of trailing 12 months ongoing net earnings. Now on Slide 17, I'll turn it back over to Mark to summarize our key messages. Thanks, Jim, and let me just recap what you heard over the past few minutes. Our outstanding Q3 performance demonstrates the impact COVID-nineteen response plan, which continues to be successfully executed across the globe. Further, the $500,000,000 plus cost takeout program we implemented early this year is firmly on track, delivering $175,000,000 in benefits this quarter for a year to date total of $350,000,000 Additionally, while we did benefit from pent up demand in key countries, we also captured the benefits of more structural demand improvements by leveraging our trusted brand portfolio and proven track record of innovation. It is because of these strong results to date and our unique ability to capitalize on these structural trends that we feel confident reinstating our full year 2020 guidance, which is at the high end or above our original guidance for free cash flow and ongoing earnings per diluted share. In closing, our Q3 performance serves as another proof point in our long term value creation strategy, highlighting our ability to drive margin expansion and strong levels of cash despite the challenging macroeconomic environment. And now we will end up our formal remarks and open up for questions. Our first question is from David MacGregor with Longbow Research. I guess just looking at North American margins, just trying to understand that there's obviously benefits here associated with implementation on the cost takeouts, but also you've got go to market expense reduction. And if we think about kind of going forward and as volume comes back in the marketplace and maybe the backlogs ease a little bit, the go to market expenses start to come back, How should we think about kind of the new normal North American margin level? I mean, you reported 'nineteen, you've been at kind of a 13%, you're tapping on the door of 13%. Should we be thinking somewhere in the 14% to 15% level or just help us think through the new normal there? So David, it's Mark. So let me maybe just a couple of comments on the North America margin. First of all, coming back to the big picture. In Q3, North America had a 47% increase of EBIT. That came on top of last year's Q3 where we had 12 point 8 percent EBIT margin. So I would say over an exceptionally strong margin improvement, which to your point came essentially from 2 sources. 1, the progress on the cost reduction, well, the cost reduction program delivered. And 2 is related to price margin progress. Price margin itself falls into 2 buckets. 1 is, yes, we have significantly reduced promotion expenses. That is a decision which we took essentially in Q2 to kind of curtail pretty much most promotions. But the second point in the price margin is also related to mix. As we alluded to in our prepared remarks is, as we are going through this COVID crisis, we see sequentially positive mix trends. And what I mean with that is kind of initial demand was freezers, microwaves, etcetera, which is still present, but we see more and more demand to higher ticket items. So that sequentially also helped us on the PMR. So these were the fundamental drivers behind our outstanding Q3 margin in North America. Now to your question about what is normalized, I didn't know we used the word normal in this year. But having said that, I would say I would more point to Q2 actually, David. Q2, which by any definition was the worst quarter ever from a demand perspective, and North America delivered over 12% margin, which just tells you even if our volumes, our North America business and our global business is in a completely different structural position. And I think we've certainly demonstrated the trough margin, which were Q2 in a very impressive way. So and I think now we're just seeing the benefits of this structurally different business model. Okay. Second question, just on Europe. A lot of progress here, obviously. Can you just talk about the flooring experience? You mentioned in passing that flooring has been a contributing factor, but can you just talk about progress on winning new listings and regaining retail support? Yes. So David, again, it's Mark. On Europe, as opposed to going to individual trade partners, where we had some good progress, I think for us, the most important thing is, as you know, very certain Europe not one market, it's a market of many different countries. And there are certain countries where we absolutely have a strategic position, which are critical to our future. France, Italy, U. K, among of them, in all three countries, we had actually very good market share progress in August September. So we feel really, really good. And again, that's not just market share, but it is also floor expansion pretty much across the board. So we feel very good about the progress in particular in these strategic countries. There's been also progress in other markets. So we see, I would say, markets aftermarket that we're kind of regaining the share, which lost over the last 2 or 3 years. Our next question is from Sam Darktosh with Raymond James. Your line is open. Good morning, Mark. Good morning, Jim. I hope you both are well and terrific results, obviously. Thank you, Sam. Good morning. Two questions if I might. First off, with respect to the capacity constraints both for you and for the industry, based on the current trajectory, ballpark in what quarter do you think that the industry returns to normal lead times? And what's the primary bottleneck right now? Sam, it's Mark. And I appreciate the question. I guess my question is pretty much on everybody's mind. So let me spend a little bit more time and then probably Jim will also add some comments on supply chain constraints. First of all, stepping back where the supply chain constraints are coming from. They are ultimately COVID related, which is obvious. Geographically, we're particularly focused on North America, Europe, to a lesser extent, South America and India, and there's almost no supply chain constraint coming out of China, Vietnam, Thailand. So it is geographically different. It is ultimately coming from, in particular, North America and Europe, it comes from labor constraints, which you have in the factories, social distancing measures, which you have in the factories, which just reduce the line pacing, which you have in the factories and what's the output. It comes from supplier and component shortages who have to deal with similar issues in their factories. And it is increasing coming out from logistic constraints, in particular in the U. S. Way, it's just, you have a couple of bottlenecks. So these are the fundamental constraints, which frankly are getting better every week. But ultimately, as long as COVID is around us, we have to be prepared for supply chain disruptions, and that's just the nature of it. Having said that, we are getting more and more yields despite these constraints out of our factories week after week. Now the other part which is probably going through everybody's mind is when we refer to backorders or backlog. Let me also give you a little bit more color on this one because, again, it's a relevant fact in the current environment. As you know, typically, we don't refer to our order book. Our order book typically as a company is 1 or 2 weeks. It's so little that we typically don't refer to that in earnings calls because typically we have a lot of build to order, real customer orders. So it's a very short order book. Right now across the globe, our order book is about 7 to 8 weeks. So it's significantly bigger than any time before, which you can read as good news, because we have strong demand in our sales in Portugal that doesn't go into Q4. But at the same time, it's frustrating, because we're letting consumers down. Many of these orders are back orders and all I can do is apologize for the delay of certain customer orders. So yes, it's good that we have an exceptionally strong order book, but we are, of course, trying to minimize any customer frustration that we have out there. So the short answer, Sam, is as long as COVID will be around us, we have to be prepared for supply chain constraints across the entire industry. This is not whole unique. However, we are getting better week by week and getting more yields despite all these constraints. Yes. I think Mark hit the key points there that 1, we are improving and 2, as we look out further with that order book, as we go into the end of the year and then into Q1, we begin we intend to begin to work some of that down obviously, but will give us momentum going into next year. I'm trying to get a sense of how much of the demand that we're seeing right now in the States is really pull forward based on heavy break replace activity because of increased usage. And I'm using Procter and Gamble saying that their Tide detergent sales were up 14% in the quarter, which is obviously extraordinarily elevated. Any sense of how much demand right now is maybe like 1v2v type of units versus full suite sales, which would indicate more of a large scale kitchen remodel? Sam, I appreciate the question, which again, good question, it's probably on everybody's mind. First of all, when I hear comments about pull forward, I smile because pull forward and back orders are a little bit of contradiction in terms. I will be happy to pull forward orders or deliver orders, but we have right now back orders. We have the opposite situation. From a structural demand perspective, and this is your question, yes, we saw at the beginning of Q3, there was pent up demand. And frankly, there is even right now, trade inventories are super low. So there is a little bit of element coming from this one. But what I meant very important also is we look into the future. We are encouraged by structural healthy home and house trends. And what I mean with that, and let me spend a little bit more time on this one. We all know people are spending a lot more time at home. People are investing in the home and house. They're investing in nesting. And initially, you saw at the beginning of the crisis a lot of investing in what I would call more small ticket items. Obviously, you first change the light bulb before you change the lamp. And we see that now across the entire home that people are starting to invest in home upgrades. People are rethinking the purpose of the home because they know we spend more time over an extended time period. So we do start seeing structurally positive trends for the home. Or to put it even in another way, you have structural positive demand trends coupled with high disposable income and low mortgage rate. So you put these two facts together, you have a very, very healthy mix, which kind of, again, gives us confidence beyond this quarter. And there is a reason why some people start referring to the Golden Age of Housing, because there is a lot of positive trends coming together, and we do not see restructured demand trends and the refocus on home and nesting going away short term. COVID is hopefully at one point will be behind us. These trends will stay. And Sam, maybe even to your question on replacement, I'd say the thing we have to think about here is remember, we're coming out of the trough of when you look back 10 years of where the replacement industry is starting. So this could be to your point with the usage that consumers are experiencing now accelerating some of that, but it's just accelerating us into what will be a positive replacement curve from a demand perspective. So that could be another positive trend as we look forward. Our next When you take a step back and think about the margin performance in your international segments, particularly Europe and Latin America, I realize there's some seasonality, but your Q3 margin was meaningfully better than some of your longer term guidance for regional margins or at least your margins coming into the year. So can you just help us parse out maybe what's more transitory there and how you're thinking about maybe the longer term margins for those segments now that you've seen some of the traction with your cost takeout items? Yes, Seldon. And this is Jim. And maybe I'll start and then Mark can add some commentary. And I'll kind of take the 2 regions you talked about there. First with EMEA, we had said that EMEA would return to profitability this year and obviously the start of the year with the COVID disruptions made that very difficult. But the positive thing coming out of that now as we see the demand picking up and we talked about a little bit earlier in terms of gaining share back in certain markets is we believe that we've been able to put that business back on track to where we thought it would be at this point in time exiting the year, which is a positive thing. Now that what that does is that reinforces our longer term thoughts that this is a high single digit type of margin business in the midterm and that we can get it to. So again, the cost takeout has been a very positive trend there, but that will continue because the actions take a little bit longer to implement there. So they're coming on the tail end and that will help them. Also, as we said, demand is positive there and we're seeing positive market share gain within there. So I think this is a good sign that we're on track and we're still confident in the longer term margins. If I take Latin America, we've always talked about that Latin America and historically it has had periods of time where it's been above 10%. And I believe right now what you're seeing is the effect of positive demand, especially in Brazil, also with cost takeout and our ability to drive pricing within those countries there as we've experienced currency impacts and cost fluctuations. So I think both of those are on a positive trend. I still think our longer term margin guidance that we've given to them applies, But that's what where we stand right now. So let me maybe also zoom out a little bit on your question, which I think is a very good one. Remember, several years ago, we established long term value creation targets. We talked about the long term value creation target of 10% EBIT. And probably rightfully, we were challenged over a couple of years about how do you get there, show me, demonstrate me. We have many discussions about how do you even get to 10%. Well, the back half of twenty twenty, we will be about 11% EBITDA higher. That's pretty much embedded in our guidance. So I would read Q3 and Q4 as a proof point of our long term value creation that it's not only doable that we demonstrate it. We all do recognize Q3 and Q4, there are some operational but still exceptional elements in there. Having said that, they fall on a structurally different business model as we demonstrated in Q2. There is a lot of structural changes in our business, which makes certain elements not comparable to 5 or 10 years ago, and then we're in a very healthy position from that perspective. Okay. That's helpful. And then just switching gears for a second. As it relates to your free cash flow bridge, if you go back and look at original guidance this year, you're just under $1,700,000,000 of cash earnings versus today, you're about $40,000,000 lower in cash earnings. But your EPS guidance is obviously a bit higher than what you're talking to start the year. I know your overall free cash flow guidance is towards the higher end, but I'm just talking about this cash earnings piece. So could you just help us think through some of the moving parts there and maybe what's driving that delta? And then if we look at some of these other buckets, how should we think about the progression for, call it, net CapEx, jobs and either the one timers or restructuring costs as we move into 2021? Yes. And Seldon, this is Jim. And I think you've kind of hit where some of the things are as we look at the cash flow coming out of this year. We are on the higher end of the original guidance we gave, a lot of that is driven by more positive earnings. At this point in time, the working capital seasonality has been different than we expected throughout the year and obviously we've had a benefit from inventory coming out earlier. But as we look at that going into the 4th quarter, we'd say right now that some of that we won't see as big of a lift within the Q4 as we normally do due to that working capital seasonality. Now I think you hit the kind of the important point there is what we are seeing is increased restructuring cash payoffs due to many of the cost actions that we took. And that's the biggest driver of the difference from where we would have started the year and what we thought we'd generate in free cash flow to now when you take into account the additional earnings is that we did have some costs, some cash costs that will come out this year and then obviously next year restructuring cash costs will be significantly lower. Our next question is from Susan Clari with Goldman Sachs. Your line is open. Thank you. Good morning and congratulations on a great quarter. Thanks Susan. Thank you. My first question is around the margins and maybe thinking about it a little bit more near term. If we consider the 8.5% guide or so that you gave us, it implies that there is some sequential deceleration that you're looking for in the Q4 there. Can you just give us a little color on that? Is it just a level of conservatism that you're baking in? Is there anything you're assuming around mix or costs or anything within some of those factors that that's kind of coming through there? Yes, Susan, maybe I'll start off here and then Mark can add if he wants to. I'd say Mark kind of made a good point earlier. As we look at the back half of the year, we kind of look at it and say we're going to be about 11% total EBIT margin for the back half of the year. And obviously, there is a lot of variability in here and there are still unknowns as we head into the year, end of the year, but we feel very confident in the guidance that we've given. I think the one thing you have to take into account here, especially in the Q3, and we talked about this when we talked about the cost takeout program, is that there were some non structural temporary things and then structural things. And so we had more benefits probably within the Q3 from some of those non structural temporary type of things. Then you see within the Q4, we more normalized to the effect of what the structural cost takeout. And we've said for next year, we expect that to continue to benefit us with tailwinds of $50,000,000 to $100,000,000 So I think those are probably the biggest things. But as I said, you've really got to look at the back half of the year kind of in total rather than on a quarterly split type basis. Susan, it's Mark. This is Molly for your entertainment purposes. If you would have seen us on your question, we smiled, frankly, because I don't think we imagined half a year ago where we would ever be asked a question about a deceleration down to 10% EBIT margin, because that's basically pretty much it. I think to Jim's point, I'll joking aside, I think you should look at the back half margin total because there's still a couple of moving items left and right. And the back half margin is around 11% EBIT, which is very, very strong. Yes, I know it kind of does really speak to the year, right, that we've seen and the strength there. My follow-up is just thinking about the cost takeout, right? Obviously, you've done an exceptional job this year. We've seen that those costs come through. Can you talk about maybe, were there any inefficiencies given the accelerated rate of production that's coming through? As that normalizes, will we lose some of those? And could those possibly be offsets to some of these nonstructural benefits that we've gotten in the Q3 as we think about kind of the forward outlook maybe to 2021? Yes, Susan, I'll take a shot at it and then maybe Jim you can add. Susan, as we already indicated in Q2 when we laid out the €500,000,000 program, we said there are certain elements like raw materials, but you just don't know exactly how they will materialize next year. But then the remaining piece, there is a fairly significant amount of structural cost, and we fully expect these structural cost takeout to carry over into next year. So if you do the math, it's roughly $50,000,000 to $100,000,000 cost carryover into next year. Particularly to your question around the production, the production productivity was, of course, it's very, very challenging Q2 because first, you don't have volume, you have under occupation and now you're working 6 shifts or 6 days a week with 3 shifts, which is not the most efficient way to produce. So actually from a pure factory productivity, this has been an incredible tough year. So in a certain way, that actually should improve next year once we get to more normalized production volumes throughout the year. Yes. And maybe to add to that, as Mark talked about, we started to see the production volumes match up to what our shipments are and start to even slightly exceed that, but get a more normalized level. So as we head into next year, realize we're going to start off the year with a lower level of inventory than we have on any other year. And so you're not if anything, the production could be slightly higher next year even as we normalize some of those inventory levels go forward. So I see that as a continuing positive for us production levels. Our next question is from Adam Baumgartner with Credit Suisse. Your line is open. Hey, guys. Thanks for taking my questions. Just given the strong margin profile you guys are seeing in North America and perhaps maybe some of your competitors as well, Do you expect any change in industry competitive behavior even when things maybe normalize, just given everyone's benefiting from the lower promotions? Here's Adam, this is Jim. And maybe here's where I'd start with that. As I'd say that, as we said, right now the industry is constrained and the global promotions has been less significant. And as COVID continues on, we continue to see that as a possibility that obviously as we operate at a constrained level, the promotional environment will stay at the levels it is. Once things begin to improve, right now, I can't necessarily say how much the dynamics will change and when that will start to change. But what I would say is if you look at us in our history and especially within North America, no matter what the environment has been, we've been able to create value and we've been able to keep our margins over recent years at 12% plus and Mark talked about the potential of where they could go to. So I think there's a lot of dynamics you've got to take into consideration there. Additionally, as we just talked about, as things begin to improve and you head forward, there are some incremental costs we're incurring today that may not be there go forward also. So there's a lot of variables that play in as it begins to normalize. Okay, got it. Thanks. And then just one quick one on EMEA. You guys cited 6.5% volume growth that would imply some pretty hefty pricing. Can you maybe walk through what drove that? Adam, it's Mark. Keep in mind, we report in dollars and we had a euro versus dollar move also. So when you do your pricing calculation, you have to factor in the currency element in there. Having said that, in Europe, we had a good volume growth, as you pointed out. And we also because we had similar like North America, we have reduced promotional investments in the markets, maybe not all way reduced to Wayfair we have in North America. So that is a positive impact on the price margin. And also in Europe, we start seeing every month a slightly better mix. So you have some of the fundamentals, which I explained for North America, also in Europe. But again, you have to add also the pricing and the currency equation to your price calculation. Our next question is from Tom Mahaney with Cleveland Research. Your line is open. Good morning. Good morning, John. I was wondering if you could size the North America structural takeouts inside of the $175,000,000 in the Q3. And I guess just talk again through the moving pieces of why taking those costs out at the end of the second quarter makes sense. And as production increases into 2021, is there any limit on the incremental margin potential, having taken those costs out and as volume returns? Yes, Tom, and this is Jim. And maybe I'll start with that. And we don't get into the specifics by region, but what we typically say is when you look at the overall sizes of them. And probably in the Q3, North America had slightly higher benefits of it just because of our ability to implement those things quicker now. As we've talked about, within there, there were some temporary things that we did earlier in the year, such as furloughs, travel reductions, not having large meetings and stuff that benefit us. But then once we got into the Q3, the structural actions in terms of headcount reduction that came both from a voluntary retirement program that we initiated as well as, then some involuntary reductions that we did after that. So again, those are the nature and the types of things you see within that cost. Now to say, did we cut too deep, I would say no. I think we made very the right decisive actions at the time. As we said, there's still a lot of unknown around the globe. The second thing is our margins reflect the benefits of those decisions that we made. I'd say if you look at especially the question in terms of as production comes back, most of those reductions were made within the white collar and the office environment. So in terms of the blue collar environment, we continue to add workers along with the volumes that we have and we don't see that as a limit on our ability to a reduction of capacity that would affect our ability to service the industry. Understood. And then just to go back to a point, I thought I heard you guys say, you're at a point now where backlog is no longer building or in recent weeks. Is that a function of any slowdown in POS or demand? Or is that purely a function of improvements in the speed of the supply chain? So Tom, of course, the order backlog is a little bit different region by region. Having said that, yes, you're correct. It's stable now over the last couple of weeks, and that is a result of increased production yields and better supply chain management. Is not a slowdown of the demand. Our next question is from Michael Rehaut with JP Morgan. Your line is open. Thanks. Good morning, everyone, and also congrats on the results. Thanks, Michael. First, I just wanted to delve in a little bit more on the industry picture for the Q3. Obviously, you kind of talked through your supply chain challenges. But with positive price mix, I would presume you're looking at volumes down maybe in the mid single digits in North America, which compares not obviously 100 percent one to 1 with Canada, but compares to AHAM shipments up 8%. So just trying to get a sense for if you can if you're losing share and I recognize that obviously you're maintaining floor space and believe it's temporary and we hold that to you as well. Just trying to get a sense who's on the other side of that coin and maybe if there's certain other factors we should consider or be aware of in terms of that your volume growth versus the industry? Michael, it's Mark. So yes, we had in Q3 a small market share loss in the unit base. I wouldn't argue on the value base, but on the unit base. It doesn't make me overly nervous because we know it's not related to the brands of a product and we didn't lose floor space. We did not lose floor space. What it relates to is what I referred to earlier is anybody with Asia production right now had pretty much unconstrained supply chain. And that's just a simple reality of how right now COVID impacted the different regions. Part of the reason why I'm also less concerned is because already exiting Q3 and now as we enter Q4, we see every week our market share coming back up again. So that's considered that temporary, entirely related to the COVID driven supply chain constraints, which impacted particularly North American producers, and it will work its way out of the system and we again I can only reemphasize we did not lose floor share. Right, right. And then I guess just kind of looking forward and obviously very encouraging around the week to week improvement and the stabilization in the order book between that and recovering some of the share. Is it fair to assume positive volume growth in the 4th quarter as you're also talking about demand trends remaining pretty solid? And again, I'm talking particularly here in North America. So Michael, as you know, in our Q4 guidance or the implied Q4 guidance, because we gave a full year guidance, we don't break it down by region. However, if you do the math, we pretty much implied a roughly 5% to 6% organic revenue growth for Q4, which again, we don't go in the details, which should imply or some modest growth in North America. However, that's dependent in terms of how quickly we get out of the supply chain constraints. Right now, the demand is there. However, I would also expect that some of the demand backlog will carry over into Q1. Yes. And I think maybe to add to that, as we talked about earlier, what we do see as a positive in the Q3 and in the Q4 and continuing has been the mix that we see, especially within the U. S. As the consumer is focused on their kitchen and their laundry space. But whether it's be upgrading or rent at home remodeling and things like that, we do believe the trend on mix is improving. Our next question is from Curtis Nagle with Bank of America. Your line is open. Good morning. Thanks very much for taking the questions. So, yes, understanding that capacity is constrained across the board in North America and other regions. But just looking at the U. S. And I guess underlying demand trends, where do you I guess what's the difference between retail and builders? Are they even one stronger than the other? How should we think about that? Curtis, I mean, again, it comes a little bit back to my earlier fundamental point about where is the crisis and the rest demand has been now more and more replaced by structural demand trends. Not in 1 on 1, but we see more and more healthy underlying structural demand, which is both home improvements and new housing. Now by that description already, you can also infer that in particular early side of the demand largely came through the big home improvement stores, and we now see more and more of a demand still being very strong in the home improvement, but we see it also coming through on the builder side or on the high end retailer side. Now on the builder side, you all follow the builders also. Between demand trends and finishing home, there is a couple of months in between. So we don't yet fully see the appliance impact of the increased homebuilding side in our business. That is more something which will play out Q1, Q2 next year. Got it. Okay. That makes sense. And then maybe just a quick one on capital allocation. So cash position is quite strong. You see plenty of free cash flow in 4Q. You're paying down some debt and you increased the dividend. But it doesn't look like you're doing anything with the buyback, again, despite what should still be a pretty strong cash position at the end of the year. When might or how should we think about that being turned back on at some point? Yes. And Kurt, this is Jim. What I would say is, in the Q1 of this year before the crisis hit, we did buy back 121,000,000 in shares. And then we suspended the program effectively in April as all the uncertainty occurred around us. Our short term focus, as we've mentioned, is that we will pay down all of our temporary short term debt by the end of the year. And then as Mark and both myself have talked about, there's still a lot of uncertainty around us around the globe in terms of the effects of COVID and what could occur. And so we'll stay in a rather conservative position at least for a period of time now. And then at some point in the future, we'll begin to talk about what we might do from a share buyback perspective, but we're going to focus right now, as I mentioned, on paying down that short term debt and then continuing to invest in our business as we come out of this crisis here. Our next question is from Mike Dahl with RBC Capital Markets. Mark, I mean fascinating results in terms of kind of the outcome of the go to market strategy. And clearly, in some ways, it's been imposed on you by these supply constraints, but you've reacted in a way that's optimized profitability. I'm wondering just, aside from promotional activity, which may or may not change going forward, have you guys learned anything over the course of these past few months about your supply chain or your SKUs that make you think differently about additional potential for something structural, whether it's SKU rationalization or something else that would allow you to kind of keep some of these benefits for longer even as the supply chain normalizes? Yes. So Michael, it's Mark. Of course, there's a lot of reflection which is happening about the crisis and why we're not just in supply chain on everything. And honestly, I don't think that reflection is yet completed and done now. What is already becoming apparent is not so much the SKU rationalization. I mean, first of all, to give you a little bit of sense, and I know we're getting now operational details. Essentially, our supply chain is a pool system. And given the constraints that you had to face with components and everything else, you had to overnight shift a pull system into a push That is I can't express how difficult of a process that is, but our team at management did really, really exceptionally well given the constraints. So I hope that's not going to happen anytime in the near future, but you have to push or change from pull to a push system. Having said that also, of course, we're rethinking certain decisions which we do about single sourcing with suppliers. Do we go to dual sourcing? We are rethinking, but doesn't help a short term about where do we debottleneck and add additional capacity. So these are the kind of things which we're reflecting right now. However, they don't have an impact in Q4. They are more structural to your point, stepping back in terms of what did we learn and what we will readjust. And we'll continue to see benefit. In fact, we've talked about that, that's what we've talked about. And we'll continue to see benefit. In fact, we've talked about that that's what's going to drive some of the longer term cost takeout benefits for us that we're not even realizing yet is our ability to reduce our number of architectures and platforms across the globe. Got it. Okay, thanks. And second question, you did highlight that you're potentially starting to see some logistics constraints in the U. S. And clearly trucking and things like that. It seemed to be tightening up. I think people remember 2018 logistic challenges, clearly you've had other logistics challenges, clearly you've had other cost tailwinds that are more than offsetting, but what are we what should we be thinking about in terms of A, what the issues are and B, any kind of sizing of magnitude? This is Jim. What I would say is that it's one of the many things we talked about and we're probably more on the that's probably of all the things we've listed, third thing that's really impacting us right now and we do see that as more of a temporary impact as demand has fluctuated, as there's been uncertainty around the impacts of COVID and all that. And so we've been able to really work our way through it, but it is just one of the challenges right now. And from a cost perspective, we are seeing very positive cost takeout, but we've had to be able absorb some of those additional incremental logistics costs that we've had and we've still been able to offset them and still been able to get products delivered. So while it is an issue, I think that's probably something that we don't see as more long term and structural. Our final question comes from Ken Zener with KeyBanc. Your line is open. Good morning. Good morning. Pretty amazing. Look, the huge beat you had in North America was obviously promotion going away and mix shift up along with the cost actions. So can you give like a sixty-forty split on the promo versus mix? Because I think this nesting might have longer tailwind as homeowners' equity goes up with price appreciation, whereas the promo, it seems to be a simple economic concept that suggests it's not going to be a permanent tailwind. Can you kind of split that out so we can understand how much of a benefit it was just directionally? Ken, it's Mark. I think you the fundamental theme you got right, okay, we have in the pricing, there's a less promotional element and there's an increasing positive mix element in there. And they probably will have different longevity. The next promotion is ultimately a reflection of a decision we took in Q2 when we foresaw that the supply chain constraints are real and we pulled back a lot of promotion because in our industry, you don't decide a promotion for next week. You have to decide pretty much 4, 5 months down the road. So we made this decision early in anticipation against the supply constraints. The supply constraints at one point will normalize, but they will not quickly normalize. Now obviously, I can't give you a forward looking statement about our promotion plans for obvious reasons, but judge just on our behaviors in the past in terms of how we manage supply, promotion and value creation in the industry. The encouraging thing is, and this is where we do have confidence, is the structural mix coming from the home nesting and investing in new nesting is good. And I do not believe this is going to go any time away. Right. And then I guess in terms of could you just address, given your high share of new construction, given your contractor channel, I've heard some builders are just taking out appliances because they can't get it. But is that how is that impacting the trade, your delivery? I think construction times are elongated for a variety of reasons. And given that the appliance comes in at the last week before closing, could you kind of address how you're handling that in the new construction market, please? Thank you. So Ken, there's 2 elements. First, in the short term, the only channel which we absolutely still try to prioritize is construction channel because no consumer wants or no customer of a finished home wants to wait for appliances. I mean, so we're trying to prioritize as much as we can. Having said that, I think the real momentum, which I think starts building in the homebuilder market is not yet visible in our Q3 and Q4 numbers, because it's just a backlog, as you mentioned, between housing starts, housing completion and the appliance coming in. So that is not yet a factor in 2020. However, it gives us confidence for 'twenty one because I do believe the new home construction will be fairly healthy as we look into next year, fairly healthy to very healthy. It's ultimately driven similar to our industry by manpower and constraints which we have. I think that will be the limiting factor. Demand will not be the limiting factor on the housing market. Well, I think that was our last question. Let me maybe just, 1st of all, thank you all for joining us on our call today. I'm not going to reiterate all the messages which you heard before. However, I mean, obviously, we're very pleased with an outstanding Q3. We also guide towards an outstanding So we feel very, very good about where we are as a company, which is ultimately a reflection of the decisive actions we took in Q2 and preceding structural actions, which we've done over the last couple of years. So we feel very good about where we are as a company. We see our balance sheet. Our cash flow is in a position which nobody could have expected the way outside of this crisis. So we feel very good and very confident about it. I will be remiss to not take the opportunity to also thank our employees, because frankly, as Jim and myself do the talking, our people do work. And I can't thank them enough for the very, very hard work in this entire Q3, which made all this one possible. So thank you all for joining us, and talk to you next time. Thanks a lot. This concludes today's conference call. You may now disconnect.