Good morning, welcome to Whirlpool Corporation's second quarter 2018 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.
Welcome to our second quarter 2018 conference call. Joining me today are Marc Bitzer, our Chief Executive Officer, and Jim Peters, our Chief Financial Officer. Our remarks today track with a presentation available on the investor 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. We want to remind you that today's presentation includes non-GAAP measures. We believe these measures are important indicators of our operations as they exclude items that may not be indicative of or are unrelated to results from our ongoing business operations.
We also think the adjusted measures will provide you 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. With that, let me turn the call over to Marc.
Well, thanks, good morning, everyone. On slide three, we show our second quarter highlights. As you saw in our press release, we expanded our ongoing EBIT margins in a very challenging cost environment. We delivered second quarter ongoing EBIT margin of 6.7% and ongoing earnings per share of $3.20. Since mid-May, a number of elements in the macro environment worsened significantly. In addition to continued raw material inflation, we experienced a temporary but significant decline in U.S. industry demand, headwinds related to U.S. tariffs, as well as the Brazilian trucker strike, and currency fluctuations in Russia and Latin America. While these macro challenges impacted our results negatively, the actions we put in place over the past few quarters, including cost-based price increases and targeted cost reductions throughout the world, enabled us to largely offset these challenges and expand ongoing EBIT margins year-over-year.
We're very pleased with strong price mix, driving significant year-over-year and sequential improvements on a global basis and positive in all regions. In Europe, we were unable to overcome macro headwinds due to slower progress than expected as we work to recover volumes in the region. As a result, we are taking strong actions to restore growth and profitability in the region, which I will discuss in further detail later in the call. We drove strong performance in our North American region, delivering almost 12% EBIT margin despite a 5% decline in second quarter industry demand, continued raw material inflation, and rising freight costs. As previously announced, during the quarter, we agreed to sell our Embraco compressor business, and in anticipation of the proceeds from that sale, we executed a tender offer during the quarter and repurchased approximately $1 billion of common stock.
GAAP results were negatively impacted in the second quarter by approximately $860 million due to asset impairment charges, primarily related to our Europe results, which did not improve as anticipated, and a preliminary settlement on a previously disclosed French Competition Authority investigation. Turning to slide four, I will discuss our second quarter results and 2018 guidance. Our revenues declined approximately 4% during the quarter. Sales were impacted by weaker than expected industry demand in the U.S., slow progress on volume recovery in Europe, and the Brazilian trucker strike. Ongoing EBIT margins were 6.7%, 20 basis points above the prior year, as strong global price mix more than offset unit volume declines and significant cost inflation. Year-to-date, free cash flow is below the prior year, primarily driven by working capital timing related to lower production volumes.
Regarding our full year forecast, we reduced our guidance components due to weaker than expected second quarter results and increasing cost headwinds in the second half, which we now expect to be more significantly than previously forecasted. We will discuss our guidance in more detail later in the call. While our second quarter results were below our original expectations due to the additional headwinds towards the end of the quarter, we are at the same time encouraged by the strong price mix progress and margin expansion year-over-year. This gives us the confidence that the underlying fundamentals of our global business are strong, and we therefore continue to expect to deliver significant shareholder value in the coming quarters. On slide five, we show the drivers of our second quarter margin performance.
Our global price mix improved both sequentially as well as year-over-year and were positive in all four regions. I will discuss price mix further on the next slide. We delivered positive gross cost takeout as our restructuring and fixed cost reduction actions continued to progress. However, these benefits were partially offset by rising freight costs, primarily in the U.S. and Brazil, due to oil price inflation and fleet shortages, as well as the conversion impact of short-term volume weakness in multiple regions. Raw material inflation continued to be a significant year-over-year headwind, impacting second quarter margins by 125 basis points. Turning to slide six, we demonstrate our commitment to delivering significant price mix performance. In total, second quarter price mix improved by approximately 200 basis points compared to the prior year, and we delivered positive price mix in all regions.
This represents a sequential improvement of 100 basis points as we continue to realize the benefits of global cost-based price increases implemented late last year and into the second quarter. Average price per unit improved over 5% on a global base, including a double-digit improvement in Europe and 8% improvement in North America. Finally, we recently announced additional cost-based price increases in Canada and Latin America, which are effective during the third quarter. Given the weak second quarter performance in Europe, I'd like to discuss the Europe business in more detail on slide seven. Over the past several quarters, challenges related to the Indesit integration, continued execution issues, and changes in the macroeconomic environment have led to weak business performance. During integration, we experienced product availability issues as we completed factory, platform, and system integration.
During the first half of 2018, trade customer negotiations, which positioned us well for the future, had a significant impact on volume, especially when combined with our implementation of cost-based price increases. At the same time, our business continues to be impacted by raw material inflation and currency volatility in the region. While these challenges have led to results well below our expectations, we continue to have confidence in our structural position in Europe. The Indesit integration activities are now complete. Our factories are optimized, platforms and systems are integrated, and our streamlined brand portfolio is well-positioned to build upon our leading positions in many European countries. While we're encouraged by our structural position, we have made slower than expected progress to regain volumes in the region. As a result, we have identified strong actions necessary to address disappointing execution and drive value creation.
While we are pleased with our progress on improving price and mix, including double-digit average price per unit improvement in the second quarter, we will now balance our efforts around stabilizing and recovering volume through targeted actions on a country-by-country base. We are also redefining our overall business strategy in the region to drive value creation, including a stronger focus on the profitable kitchen business, the implementation of additional opportunities for cost reduction, and a focused portfolio optimization. Finally, we're implementing broad leadership changes in the Europe region, including a change in the region president. While our short-term focus in the second half is on restoring a break-even business, we now expect to deliver roughly 4%-5% margins by 2020, and in the long term, we continue to expect 8% margin in Europe. With that, I'd like to turn it over to Jim to review our regional results.
Thanks, Marc, and good morning, everyone. Turning to slide nine, we review the second quarter results for our North America region. We delivered strong margins demonstrating the fundamental strength of our North America business while overcoming significant external headwinds. Net sales of $2.8 billion were impacted by soft unit volumes, primarily driven by weaker than expected industry demand in the U.S. We believe this current quarter weakness largely represents a volume shift between the first and second quarters related to competitor stockpiling of inventory to avoid the safeguard remedy on washers and cost-based price increases in laundry. As we move into the second half, we believe that industry shipments will return to more normalized levels as the underlying drivers of the U.S. industry remain favorable.
Overall, we delivered strong 11.9% margins through significant price mix improvement, which offset significant industry demand weakness, unfavorable conversion due to volume reductions, and a $40 million impact from cost inflation. We expect to continue benefiting from our previously announced price mix actions in the second half, as well as innovative new product launches and strong cost takeout programs. Turning to slide 10, we review the second quarter results for our Europe, Middle East, and Africa region. Net sales were down 9% versus the prior year. Ongoing EBIT margin declined versus the prior year as positive price mix was more than offset by unit volume declines, significant raw material inflation, and currency headwinds. In total, the combination of raw material inflation and unfavorable currency impacted results by approximately $30 million or 300 basis points.
While we are pleased with double-digit improvement in our average price per unit and strong price mix, we are not satisfied with our progress on recovering volume following the trade negotiations and private label volume actions we took during the first quarter. As a result, we are taking the strong actions Marc discussed earlier. These actions are the right next steps for our business and will enable us to get back on track to our long-term goals for the region. Turning to slide 11, we review the second quarter results for our Latin America region. Net sales and EBIT were both down versus the prior year. Our cost-based pricing actions continue to progress as we delivered positive price mix in the quarter. However, unit volumes declined versus the prior year, primarily due to the Brazilian trucker strike, which impacted both our home appliance and compressor businesses in Brazil.
In total, the strike unfavorably impacted volumes by approximately 300,000 units and EBIT by approximately $20 million. Due to the timing and scope of the trucker strike, we were unable to recover the volumes in the quarter, but we do expect some recovery in the second half of the year. In addition to the trucker strike impact, continued weak global compressor demand led to a $10 million EBIT decline. As a result of continued cost pressures in June, we announced new cost-based price increases in Brazil, Mexico, and Argentina effective July 1st. We will continue to focus on balancing price mix and volume in the region while aggressively managing costs to improve profitability. Now we turn to the second quarter results for our Asia region, which are shown on slide 12. Ongoing net sales increased 6% versus the prior year.
We delivered ongoing EBIT of $43 million, a significant improvement versus the prior year. Our second quarter results were positively impacted by double-digit unit volume growth and positive price mix. We delivered strong results despite raw material inflation and currency impacts totaling approximately $15 million. We continue to deliver strong results in India with double-digit unit volume growth, share gains, and positive price mix. In China, we delivered positive price mix and the net impact of discrete items favorably impacted both GAAP and ongoing EBIT by approximately $15 million, primarily driven by government incentives. We continue to focus on improving profitability in China through price mix and disciplined cost management. Now I'd like to turn it back over to Marc to review our guidance.
Thanks, Jim. Turning to slide 14, we will review our updated guidance assumptions. As I mentioned earlier, we have revised our 2018 guidance as a result of stronger macro headwinds and weaker-than-expected performance in the second quarter. We now expect flat revenue for the year as our strong global price mix is expected to be offset by volume weakness, primarily in Europe. We are reducing our global growth expectations, but we expect the U.S. industry to recover and contribute to growth in North America in the second half. We now expect to deliver ongoing EBIT margin of approximately 6.9% for the year. I will discuss the updated drivers of our EBIT margin guidance on the next slide. As a result of lower earnings expectations, we have reduced our cash flow guidance to approximately $850 million.
Overall, we now expect to deliver record ongoing earnings of $14.20-$14.80 per share. Turning to slide 15, we show the updated drivers of our EBIT margin guidance. We now expect to deliver approximately $400 million or two points of net benefit from improved price mix as our global cost-based price increases have delivered strong results. We reduced our expectations for gross cost takeout and volume weakness in multiple regions has impacted conversion, and fuel price inflation in certain countries has impacted our freight costs. However, our fixed cost reduction actions remain on track to deliver $150 million benefit for this year. Finally, we now expect raw material inflation to be approximately $350 million in 2018. We continue to see significant inflation across a number of commodities, and in particular with our biggest purchase items, steel and resins.
The global steel costs have risen substantially, in particular in the U.S., they have reached unexplainable levels. While the U.S. steel has also historically priced at a premium to the rest of the world, most recently, the U.S. steel is 50% more expensive than the rest of the world and simply cannot be explained by the input costs. Our annual steel contracts and hedging contracts with other base metals give us some protection, but they do not insulate us from these raw material trends. Recently, we also experienced cost inflation increases due to rising oil prices and U.S. supply capacity constraints. As we mentioned in prior earnings calls, we cannot hedge resins and are thus exposed to the quarterly price inflation. Finally, uncertainty related to tariffs and global trade actions have also led to increased cost for certain strategic components and finished goods imports and exports.
While these increased raw material headwinds are significant, we have also demonstrated our ability to overcome these types of challenges in the past through a variety of means, including cost-based price increases, cost reductions, and efficiency improvements. We will continue to do so. Now Jim will cover our regional guidance and cash priorities.
Thanks, Marc. On slide 16, we show our regional industry and EBIT margin guidance. We have slightly reduced our expectations for full-year industry growth in the U.S. and Brazil as a result of the weakness in the second quarter. In North America, we are encouraged by the strength of the U.S. economy, including low unemployment and healthy housing demand. We believe the industry is well positioned for growth in the second half of 2018. Despite significant raw material inflation, we expect to deliver approximately 12% margin in North America, with industry growth now expected to be approximately 1%-2% given the Q2 softness. In EMEA, we now expect to deliver ongoing EBIT margin of approximately negative 1% as a result of soft volumes and continued external headwinds.
In Latin America, we expect to recover a portion of the trucker strike impact in the second half and now expect to deliver EBIT margin of approximately 6%. Finally, we continue to expect to deliver approximately 5% EBIT margin in Asia. Turning to slide 17, we review our updated free cash flow guidance for 2018. We have reduced our guidance for cash earnings as a result of slower recovery in Europe, increased cost inflation expectations, and unfavorable currency fluctuation. The asset impairment Marc discussed earlier does not have an impact on cash, and the preliminary French Competition Authority settlement is expected to impact cash in 2019. In total, we now expect to deliver free cash flow of approximately $850 million. Turning to slide 18, we show our capital allocation priorities for 2018, which are unchanged.
During the quarter, we announced the sale of our Embraco business and continue to expect to close the deal in early 2019. In anticipation of the closing of the sale of our compressor business and the receipt of the sale proceeds, we entered into a term loan facility and repurchased $1 billion of common stock in the second quarter. We expect to continue repurchasing shares in the second half. Now we will end our formal remarks and open it up for questions.
At this time, if you would like to ask a question, press star one on your touch-tone phone. That is star one now on your touch-tone phone. We'll take a question from Curtis Nagle of Bank of America Merrill Lynch.
Great. Thanks very much for taking the question. I guess my first is just, could you talk a little bit more about the balancing between volumes and pricing and, I guess specifically, what are the strong actions you guys plan to take to narrow that gap? How you think you'll achieve that, given that it appears that competitors aren't being quite as aggressive on pricing.
Curtis, it's Marc. I presume you ask the question on global and not particular on a specific region level. Of course, the situation also in competitive environment and also the timing of our price increases is different region by region. Let me maybe try to address it for both North America and Europe, then we can also go, if you wish, though, more into Latin America or Asia. North America, as you know, we went out with the kitchen price increase, which was effective in the first quarter, and the laundry price increase in the second quarter. As you can tell from our remarks and from the numbers, we had a very strong pricing progress year-over-year and sequentially. We also, going into the promotion period around July 4th, we decided to stand firm on our price increases, and we executed accordingly.
Obviously, I cannot comment on what competitors are doing or not doing. That's their decision. We've seen, over the July 4th period, that not everybody was sticking to similar price increases, but that's, again, that's normal promotion environment, and I'm not reading too much into this one. Again, I can only reaffirm we're standing firm on our price increases, and because we're committed to it, the only right thing to do with such a cost inflation environment. On Europe, I would say we kind of, and this is country by country, very different. We started going out with some price increases in October and executed a lot of them until February, but again, on a country-by-country basis. I would say here, and again, the competitive environment is highly fragmented, and it's country by country, very different, so there is no generic comment.
I think we saw a volume impact, but I wouldn't only tie it back to the price increase because at the same time, we were trying to address terms, and certain unfavorable trade contracts which we have with certain trade partners. I wouldn't put it all on pricing. Again, also here, and this is what we communicated before, now our job is to hold firm on this price increase and rebalance some of the volume and some of volume losses in the second half.
Okay, maybe that segues into, I guess, my next question on EMEA. Just from an EBIT perspective, another disappointing quarter. Sounds like a lot of the same issues that dragged earnings in Q2 were still there. I guess what is or isn't happening? Why has it been so difficult to retain those slots as, or regain those slots, as you'd mentioned? Can you be a little more specific about some of the actions you plan to take, aside from what sounds like some leadership changes and change in strategic direction?
Curtis, obviously in Europe, and we said that before, we're disappointed that Q2 was not yet any better. First of all, to put it in global context, the same inflationary challenges which we have throughout the rest of world also impact our European numbers, as you've seen in some of the numbers. That's an additional burden which we had in this one. On the volume side, it frankly took us a very long time to resolve some of these trade contracts, which are now by and large resolved. As you also know, in a competitive environment, it's not that easy to just regain the floor spots which we lost over the last six months, quickly overnight. We're making progress, right now, even in a disappointing Q2, it got better month over month over month.
Again, that's the number one priority for the second half, that we regain the floor spots, rebalance without giving up our price increases. At the same time, refocus our strategy, particular on the, what is in Europe, very profitable, the kitchen business.
Our next question is from David MacGregor of Longbow Research.
Yes, good morning.
Morning, David.
I'll just start off with a question on raw materials. I guess, the guidance had been $250-$300. It was supposed to reflect not where raw material inflation was at the time that you posted that guidance, but rather where you thought it might eventually get to. Presumably, some cushion in there. Now the increase to $350. Can you just talk about where in the world, which geographic segments or which materials did you see the incremental inflation that's responsible for the upwards adjustment, and how much cushion do you have now?
David, this is Jim. I think if we go back to our previous guidance, what we've seen since then is we've seen continued pressure on steel costs, primarily in the U.S., but also some globally. Resin costs, especially as oil has risen in recent times, we've seen an increase in oil prices that have pushed that up. On a global basis. Some of it concentrated more within the U.S. market right now. Additionally, even as we look across many of the base metals, those have all gone up from our assumptions earlier in the year. It's been rather broad-based with a significant concentration in steel and a disproportionate amount hitting us in the U.S. at this point in time.
Maybe, David, also to add to this one. First of all, you are correct. When we give a raw material guidance, it's a forward-looking assumption. This is not reflecting spot markets or past, which also tells you our forward-looking assumptions for the year have changed. It's coming back to what Jim said before. If I basically put it in, call it 4 different buckets, they almost follow the size of our respective raw material purchase. The biggest concern structurally is steel. [Steel indices] across the board, but particularly U.S., have increased. We have some protection due to our annual contracts, but as I said before, we're not completely insulated. 2, is the resins, which have risen substantially. As you know, and we indicated that before, we cannot hedge for resin. We basically are exposed to quarterly inflation.
Right.
The resins have not come down. Then 3 and 4, almost the same order. It's the freight, not just impacted by fuel, but also by freight shortage. That has risen substantially in the second quarter. Technically, that's not sitting in our raw material, but sits in our ongoing cost productivity, but it's also an element. Lastly, and again, that has only a limited impact Q2, but on a forward base it has some impact, is we are impacted by the tariffs either when we are importers of record or via our suppliers who have to basically pay the tariffs. That is an impact going forward, but to a lesser extent in the second quarter.
There has been one of your competitors has gone through a small price increase effective in August. Can you just talk about the extent to which you feel, or maybe you have already raised prices again here this summer for second half benefit?
Yeah. David, as you know, that's consistent with all our prior info. Obviously, I cannot and will not comment on future price increases. You need to judge us from the past. I would say throughout the world, but also in particular in the U.S., when we saw the first signs of cost inflation throughout the business, we decided to go forward with price increases. That's what we've done in the U.S. and throughout the world. Of course, we're monitoring the situation very closely, and as I said in my prepared remarks, whenever you're faced with a significant raw material inflation, you look always at a multiple set of options, cost-based price increases, cost reduction programs, supplier negotiations as one of them, and we intend to do so.
Yeah. Second question, if I could, was just on Europe. You talked about it's a sort of a consolidation of a lot of different markets. It strikes me that maybe U.K. was a disproportionately negative contributor to the results there and the problems that you're facing. Can you just sort of deconstruct the European aggregate for a moment and just talk about which countries are a particular problem and how you plan to remedy that?
Yeah. I mean, David, again, without breaking down in velocity, but more in a, call it 2 years perspective as opposed to just the quarter. Historically, our European business, particularly in this side of a business, used to make a lot of profit in Russia and U.K. Both markets have, as you know, significant currency and also demand volatility to a downward, that is still structurally a burden, because obviously with all products being imported in U.K., you just don't realize the same margins. On top of that, the demand is very slow in U.K. To some extent, the same is true for Russia, where we had a significant currency exposure over 2 years. I would say U.K. in the second quarter was not necessarily the decisive factor. Russia impacted us because the currency got a lot weaker, but we also had some challenges in other markets.
I would say the encouraging thing, is I think our historical core markets like France, to some extent like Italy and Germany, they have started to stabilize, we see some positive signs there.
We'll take our next question from Sam Darkatsh of Raymond James.
Good morning, Marc, Jim, how are you?
Good, Sam.
Sam, morning.
A few questions I wanted to make sure I'm clear with. What you're saying, Marc, is that subsequent pricing from here is not in the guidance, if you were to take pricing from here, it would be incremental to guidance. Is that how to understand your commentary?
Well, again, Sam, obviously, we cannot communicate for a number of reasons on future price increases. Apart from the law, there's also competitive reality, which I don't want to put all our cards on the table. Having said that, our margins as our guidance assumption right now include the current raw material assumption of $350, and of course, includes the continued discipline on the cost-based price increases. As you've seen, we upped what we assume on a full year price benefit from 1.25% to 2.0%. We have included in the guidance also, technically, we included already the Canada and the Latin America price increase because we have announced them, but not anything beyond.
Okay. My question here, my real question would be two-fold. First off, when do you expect laundry margins, specifically washing machine margins, to approach or approximate fleet average for North America? Secondly, for raw materials, I know you said that you're insulated this year, based on contracts and hedging and forward purchasing, but if you were to mark-to-market what you're seeing right now, what would 2019 inflation look like at present?
Sam, these are two questions, so let me first talk about the raw material. Obviously, we're not giving 2019 guidance on raw materials at this point. Because I think it's important to be clear on my earlier remarks. On steel, we have annual contracts. They protect us to some extent, but given that there is some element of indexing, they don't completely insulate us. There is still some steel elements. Second of all, not all parts of the world you have annual steel contracts, so then some of them you buy short. Thirdly, there are certain steel parts, not necessarily the cold rolled steel, but specialty steels like stainless steel, where we don't have annual contracts. We are impacted by steel prices on a current base. The other big ticket item are resins.
We are not on annual contracts and resins because you simply can't get annual resin contracts. We are fully exposed to the quarterly inflation, what we see in these markets. On all the other base metals, which as Jim mentioned earlier, where we have also an inflation, we have hedges in place. Of course, at one point, you run out of hedges and you're not 100% hedged at any given time. There are certain exposure, and we got to see also how the future price trends evolve. Having said that, we're also convinced that certain Spot prices, which we see right now, in particular on steel, we do not believe are sustainable in the external market because they're simply disconnected from the input cost, and they're also disconnected from the rest of the world.
Coming back to the washer margins, again, as you know, we don't reveal margins by region or by product platform. Having said that, the washer business as such in Q2 was impacted by very slow market demand in Q2, which you probably can relate back to strong demand in Q1. Probably our first half was more balanced, with Q2 demand on washers was very soft. We have a benefit from a cost-based price increases. I would say our EBIT margins on laundry have improved, but they have not yet reached fleet average.
Our next question is from Susan Maklari of Credit Suisse.
Good morning.
Morning.
Morning, Susan.
I guess first I wanted to get a little bit more color on North America. You said that you expect things to recover. Coming out of the quarter, have you started to see volumes improve for either your business or for the industry broadly? How do you think about that coming together in the back half of the year?
Yes, Susan, this is Jim. I think, as we mentioned before, the first way we look at it is that in Q1 was significantly strong, and some of that, we believe, was due to some load in, especially of laundry products during that quarter, which balanced itself back out in the second quarter. As we look at the third quarter, we're very early in the quarter at this point in time. As we look at what we believe the underlying drivers of demand are and sell through and other things, what we've really reflected and said is we've taken our industry guidance from 2%-3%, down to 1%-2%, is we do believe a little of that softness within Q2 will not be made up in the back of the year.
We expect at least U.S. demand to normalize back closer to the levels where we had expected for the full year, just realizing that the first half of the year was flat, and we probably won't make that up.
Susan, it's Marc. Let me maybe also add some additional color. As Jim indicated, Q1 industry was very solid. Q2, it was down -5%. In the first half, it was approximately flat. Frankly, we did expect some rebalancing of the inventory, which was also related to a price increase in the pre-buy. We expected some rebalancing in April, May. I think the, if you want to say, the surprising element was the June demand was slow, which is an indication of July 4th as an overall period was softer than usual years. I think that's impacting the first half. Having said that, of course, we look at housing data and everything else. We still believe the fundamentals of a healthy U.S. market are in place, of course, we're observing all parameters.
With that first half softness, if you want to say, in particular June 1, we took our full-year guidance, despite the confidence in the structural health of the market, down to 1%-2%.
In thinking about the pricing, have you seen a mix shift as a result of that? Do you see consumers sort of moving down in terms of price? Is that changing any of the broader market share positions out there?
Susan, it's Marc, it's of course different region by region. If I stay focused on North America, typically, when you go up with these cost-based price increases, you sometimes have a mix element. I use risk, which you sometimes have that you mix down. Having said that, on this one, because it's so heavily cost-based, we have driven price increase for our entire product range. We didn't see a massive mix shift, if you want to say so. What it did impact, we lost some volume from the low end, in particular around the promotion periods, because these are typically the most advertised promotion active product in mass retail. It's not necessarily from an ongoing base, we lost mix. Yes, for our promotion periods on the low end, we lost some volume.
Our next question is from Ken Zener of KeyBanc Capital Markets.
Good morning, gentlemen.
Good morning.
I wonder if I could just take a step back. I really want to try to put this quarter and your outlook in the right context. If I think back to 2011, going into 2012, when you pursued pricing then, your margins, focusing on North America, your margins were 3% going to ultimately 8% in 2012, which was good. Now you're looking to get price to attain your 12% margin target. In 2012, AM fell about 2% that year. Can you talk to the implied elasticity in appliance demand? Obviously you're talking about a, quote, "normalizing second half." I'm just trying to discern the perhaps elasticity around pricing. You talked about July 4th, promotional weakness, as opposed to a cyclical softening. I just want to kind of clarify your macro thoughts there, first of all. Thank you.
Ken, before Marc kind of goes into some of the elasticity, let me just take it to that with 2011 and 2012 that you talked about. The margin expansion there, yes, there was significant pricing, and there were multiple cost-based price increases during that time, but also there was a significant amount of fixed cost takeout. You can't compare the pricing results necessarily of 3% to 8% to what we have now. You are correct on the margin expansion there, but there were multiple drivers.
Okay.
Ken, let me maybe also add a couple of comments. First of all, before we can get into the price elasticity, also, if you take it in broad historical context, of course, these Q2 numbers were not in line with our expectation or your expectation. At the end of the day, we also got to recognize that despite an extremely challenging cost environment, we have expanded our ongoing margin. I'm really encouraged by the actions which we've taken October and the first quarter around the fixed cost reduction price increase, because it just showed, even extreme environment, we can lever and we can expand the margin, and these actions will also give us quite a bit of momentum and backup.
As much as we're kind of disappointed about the short term, we're encouraged by how the total business was able to expand the margin in this environment. Specifically on the price elasticity, again, a lot has been written, and there's a lot of moving parts. Obviously, this is very different by category. The fundamental thing which we need to keep separate is what is called a category price elasticity, i.e. industry as such, versus cross price elasticity, i.e. versus our competitor at a given price point. Of course, you have a substantial cross price elasticity, in particular, when you come to laundry, low-end price points, not necessarily the high-end price points. That's just given as a reality of a competitive environment. The category price elasticity, repeatedly said that in the past, I don't think is very high.
I.e., of course, in the short term, you may see some moving pieces, but in a developed mature market like U.S., there's so much, particularly on the laundry side. It's not necessarily all housing related. It's replacement related, innovation related. You typically don't see on a full year base the massive or the big price elasticity on the entire category. Kind of month-to-month you might see it, but not on a full year base.
Yeah. I think, Ken, the one other thing to point out too, if you look back historically, the price increases that you had referred to earlier, we had taken more at the tail end of the commodity inflation period. Right now, as Marc pointed out, we've taken cost-based pricing in the middle of the commodity inflation period that's continued. It's allowed us to expand our margins this quarter year-over-year, despite the fact that we're dealing with significant raw material headwinds. I think that's a positive to point out here, that we've taken these cost-based price increases much earlier in the process.
Thank you. My second question is regarding Europe, considering the 4% margin in 2020. If we think back to the Indesit acquisition, could you isolate some of that shortfall just to the U.K. and competitive situations there? Is there something, I heard you say the 8% long-term margin as well, but it seems like it's getting farther away. Is there something structural that changed within the different countries? Obviously, you lost floor space, so your relationship to the retailers was weakened within country, which I think is very important. Could you talk about why that 8% seems so far away now, if it was a structural change or if it was the U.K. or really the IT transition that led to the market share that's not as quickly recoverable? Thank you.
Ken, let me try to address it, even though obviously that it's probably at one point either an analyst conference we got to give you the full story. The short one is, first of all, when we talk about the 4%, let's also not lose sight of we had the Indesit business already at 4% post Indesit acquisition action. In 2014, 2015, we had a 4%, 4.5%. It's not a new number. We had it. You also look at our competitive set, you would easily conclude 6%-7% margins in this environment are achievable. Now to your question about the sources of the losses. I'm not trying to blame it all on U.K. and Russia. I would say that is approximately half of the losses which we have, and that's just the currency which we don't think will recover in the short term.
The other half is also what I would call broader internal execution issues, which are related to supply chain and some other elements. Now to your question, why does it take us longer to get to 8%? A, yeah, because we don't expect the U.K. and Russia to recover in a one or two year period. I think ultimately it will come back, but it will take a little bit longer. The other element, this is just reflection of a long integration with some, call it internal focus as opposed to external focus. We lost a little bit of side of our profitable kitchen business. That is structurally the most profitable business in Europe. That takes longer to regain because these are typically annual contracts, and it's more than just a floor spot.
These are annual contracts which you have to regain, and that will take us a little bit longer. That's the key element to get this business to 8%.
Our next question is from Michael Dahl of RBC Capital Markets.
Good morning. Thanks for taking my questions.
Welcome.
Marc, first question, I want to follow up on the EMEA discussion. You talked about some of the rebalancing and around the kitchen, it sounded like there's some retrenchment and reallocation of resources there as well. Could you give us a little more detail around whether there's an underlying cost plan and whether we should expect some pullback in some of the non-kitchen related businesses as you shift your focus back here?
Mike, let me just try to address it. First of all, there's a short-term rebalancing of a volume, which is more related to specific trade actions and floor spaces where we can get it, which is typically more of a freestanding. The kitchen takes, as I mentioned before, a little bit longer. I think what you refer to is, in my prepared remarks, in terms of called focus portfolio optimization. Basically comes back to the European business is very different market by market, asset by asset. Of course, we are looking at certain very specific assets in terms of do they generate the kind of value which we expect? Is there no alternative way to get some value out of this one, or should we do alternative paths for some of these assets? That is not across Europe, but very specific either countries or product categories.
We just structurally need to step back and say, "Does it make sense from a shareholder perspective?" That's part of the effort which we're looking at. Coupled with further cost reductions. Europe has had actually, and unfortunately, it's a little bit lost in results, but its cost takeout was on track, in line with what we had in mind for the integration acquisition. Obviously, given the volume trends over the last 18 months, you have to dig deeper, and that's the effort which we are undertaking right now.
Got it. Okay. On a broader note around the cost takeouts, I think you guys have mentioned that there's some offsets around your ability to obtain the gross cost takeout targets originally envisioned, just given the lower volumes. I think if I look across our coverage and what companies are typically doing in the face of these rising raw materials, rising freight costs, it is digging deeper across the portfolio to, if anything, lean into cost actions. Whereas now we're seeing the cost takeout figure come down against a rising inflation environment. Can you just help us bridge that a little bit more? Are there other, outside of what we just talked about in EMEA, what are some other actions you can take to recapture some of this?
Yeah. Michael, this is Jim, let me start, Marc can fill in here. To begin with, late last year, we announced a $150 million fixed cost takeout program for this year, which we are on track to achieve. Halfway through the year, we've got about half of the benefits we expect to see in there. The second thing is on our ongoing cost productivity, we've talked about this earlier. While we are seeing progress, we're seeing some of that offset with the increased freight and warehousing and oil costs that we see, and we don't put that in our raw material bucket. Right now that is an offset.
The third thing is, especially within the second quarter here, I talked about this some with the free cash flow outlook, is we are bringing our inventories in line and reducing some of our working capital levels, that's primarily by bringing our inventory levels in line with where sales have been and demand has been in the first half of the year. That's caused us to incur a conversion, to take a hit within our conversion costs within our factories. Additionally, as we look at within the first half of the year with the Brazilian truck strike, most of the cost to that, as we were unable to produce and deliver goods, is sitting within that. We do expect the second half of the year to see a more positive type of picture from an ongoing cost productivity.
Michael, again, only echo what Jim was saying. First of all, what is really important for you from an analyst perspective to look at it, when companies talk about inflation, you got to keep in mind inflation hits us across a number of parts of our business. What we put in raw material is literally only steel, direct resins, and some base metals, by and large. All our inflationary elements sit technically in how we show it on the ongoing cost productivity. If we have higher freight costs because of shortages, or if you have labor inflation, all these aspects, they reduce the ongoing cost productivity. Of course, that impacts us. The second part is what Jim was alluding to is really important. We exited the year with elevated inventory levels, we decided to take down inventory levels in a very aggressive manner.
As you've seen, our inventories are flat or even down versus last year at the end of Q2. What it also basically means, beyond the volume decline in Q2, we took additional actions to reduce our production, of course, as such, had a deleveraging in our conversion costs. That was material and significant, and that was reducing the ongoing cost productivity. On a go-forward basis, that gets back to your question, of course, we're doubling down on all cost initiatives, we're shifting some resources into what further cost reductions we can do, either on variable costs or on fixed costs.
We'll take our next question from Alvaro Lacayo of Gabelli & Company.
Good morning. I just wanted to touch on Latin America. The full-year guidance seems to incorporate a rebound in the second half. Maybe if you could just go over the dynamics that impacted the second quarter and maybe make some comment around what gives you the confidence that you'll be able to improve from Q2, given that consumer confidence seems to be declining over the last few months in Brazil particularly.
Alvaro, it's Marc. First of all, structurally, the Q2 results were impacted by Brazil. What we call LAR North, i.e., from Mexico down, was actually in a very healthy state, and we had a good business there, and we also expect that going forward. We do consider, and we said that in the remarks before, despite all the ins and outs, the Brazil truck strike was a temporary one. To be more specific, in May, it cost us almost 30% of the sales in Brazil. That was substantial. The industry and us, I'm talking about the broad industry, not just appliance, was slow to recover from that one because it took quite a while to get the trucker availability back, et cetera.
That loss in Q2 was just there, but at the same time, we consider it temporary because now what we see from the June and July trends is back to normal trends. Having said all that, probably until the elections in Brazil are over, I think you should not expect a big boost from consumer confidence. We still expect the Brazil industry to be about flat on a full year base. No major momentum probably until the elections. Again, I want to echo, we do consider the Q2 impact temporary. You got to keep in mind, Brazil had solid Q1. If you take out the trucker strike, it would have been a solid Q2, and that's what we expect on a full year base.
Got it. Thank you. With regards to EMEA and all the additional actions that are being taken, maybe if you can discuss when you'll begin to see, in a meaningful manner, the benefits from the additional actions being taken, and how you see that. You reset 4% to 5% by 2020, maybe if you can give a little bit more color in terms of timing of how you see these benefits flowing through the business and when you'll begin to show improvements as time goes on.
Alvaro, first of all, I want to come back to 2018. In our guidance, we adjusted the European margin guidance to -1%. That's what we have right now based on the numbers, and that's what you see there. You put that on top of the first half, it basically tells you the second half we expect to be above breakeven. That is based on our current actions and the short-term levers which we can pull in the second half. Again, the second half, we expect to be above breakeven. We also guided towards 2020, 4% to 5%. I would expect that 2019, even though it's too early to give specific region numbers, to be somewhat midpoint in between.
Our next question is from Michael Rehaut of J.P. Morgan.
Thanks. Good morning, everyone.
Good morning.
First question, I just wanted to kind of better understand a couple of the comments around Europe. Marc, you just mentioned that you're expecting maybe closer to breakeven in the back half as opposed to down 2%-3% in the first half. At the same time, you commented that it'll be hard to regain some of the floor space in the meantime, I guess, particularly around the kitchen business. You have leadership changes going on. I was just trying to understand, what are the specific actions that give you confidence in getting to breakeven in the back half? You mentioned a little bit of cost, maybe a little bit of other businesses getting some floor space back. Also, how does this interact with the leadership changes? Because it seems like you're already putting into motions different elements of a strategy.
Do you have new leadership in place already, or is it internal movement and you're already pushing some strategy forward and you're just putting in the personnel to implement that?
Michael, let me just address it. Like in any business, there are certain things you can do in the short term, and there are certain things which take a little bit longer. In the short term, again, we're guiding to breakeven and above, and that's implied in the entire full-year margin for Europe. There are certain floor spaces and trade business which you can regain in the short term, particularly around the freestanding business. There's also certain markets where just certain things are moving faster than other markets. What takes longer is to regain the structural profitable kitchen business. Again, as I said before, that is typically tied to either annual contracts or what is also very typical in kitchen that the floor spaces are negotiated on an annual basis. It's not something to regain shorter.
Again, the freestanding business, I would say in particular in some of the Eastern European markets, but also to some extent Italy, we can regain floor spaces a little bit faster. Other parts take a little bit longer. The reset and strategy, that is not something which we're counting on completing the back half of 2018, there's operational measures which we can take in the back half of 2018. What is encouraging is that at least our volume loss got a little bit less every month in the quarter, and that's what we pretty much see also now for Q3. Things are slowly getting in place. The other element is we have taken additional cost action towards the end of the quarter in Europe, got some benefit out of this one, that will carry also into Q3 and Q4.
We have added some further cost action for the back half, which will help us to regain that breakeven.
In terms of the leadership changes, can you give us any color there? How much is in place, how much will be in place over the next few months? I had a follow-up on, second question just on inventory levels. You had mentioned a reduction in trying to get that in line. Does that further impact margins in 3Q versus 2Q as you have some inventory rationalization and that kind of reduces factory optimization, or can we expect across the board more of a stable narrative there?
I think, Michael, this is Jim. I'll take the inventory one first here and just say that, as we mentioned, we believe we took most of the actions within Q2 to bring our inventories in line with us. At the end of Q1, they were higher than the prior year. Once we got to the end of Q2, they were even to the prior year or better. We've worked that higher inventory level out. Throughout the back half of the year, we expect to continue to reduce inventories, but it'll be on what we expect to be a slightly higher level of demand than we saw in certain markets within the first half of the year. We don't expect significant impacts within the back half of the year due to reducing inventories.
Michael, the short answer to your leadership changes, we announced that internally last week we have a change of presidency in Europe, and until we name a successor, I will at interim run it. I've run Europe before, so I know the market very well. Of course, that's not a permanent and long-term solution, but expect us to announce a formal successor in the next one or two quarters.
This does conclude our question and answer session. I'd be happy to return the call to our host for any closing comments.
As we wrap up here the call, let me also try to summarize some of the key messages on this call, which is also on page 20. First of all, we delivered solid global margin expansion despite the significant macro challenges. We will continue to take action to mitigate those headwinds and are pleased with strong sequential improvements to global price mix. We've also delivered strong margins in North America despite cost inflation and what we believe is a temporary soft U.S. industry. This performance highlights the fundamental strength of our business, and we are taking finally strong actions to restore profitability in Europe region. We remain confident that our global business is well-positioned to deliver improved ongoing margin expansion and all-time record ongoing EPS in 2018.
Thank you for joining us today, and we look forward to speaking with you again on our third quarter earnings call on October 25th.
Thank you. This does conclude our conference call. You may now disconnect your lines, and everyone, have a great day.