Good morning, welcome to Whirlpool Corporation's Q2 2021 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, Korey Thomas.
Thank you, and welcome to our Q2 2021 conference call. Joining me today are Marc Bitzer, our Chairman and 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 whirlpoolcorp.com. Before we begin, I want to remind you that as we conduct this call, we'll be making forward-looking statements to assist you in better understanding Whirlpool 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. 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 two questions. With that, I'll turn the call over to Marc.
Thanks, Korey, and good morning, everyone. Before we discuss our Q2 results, I'd like to acknowledge that we're comparing to a period in which the world was experiencing the greatest depth of disruption from COVID-19. While lessened, disruptions from the pandemic do in fact remain along with volatile industry dynamics and numerous global supply chain constraints. Having said that, our impressive results throughout this entire period, and again in Q2, demonstrate the strong execution of our global teams and the resiliency of our business model. Now, turning to our Q2 highlights on slide four. We delivered very strong revenue growth of 32% year-over-year, which also represents growth above 2019 levels, driven by robust and sustained consumer demand and the execution of our pricing actions.
Next, our decisive response plan to address volatile industry dynamics and broad supply constraints delivered ongoing EPS of $6.64, a $4.57 improvement year-over-year. Ongoing EBIT margin of 11.4%, a year-over-year improvement of 640 basis points, overcoming 400 basis points of cost inflation. Additionally, we generated positive free cash flow of $769 million, led by strong earnings and the successful completion of a partial tender offer of our Whirlpool China business and the divestiture of our Turkey subsidiary. These global results were driven by substantial EBIT growth and margin expansion across every region. The execution of these actions and the sustained consumer demand delivered very strong Q2 results and give us the confidence to significantly raise our guidance to approximately $26 per share. Turning to slide five, we show the drivers of our Q2 EBIT margin.
Price and mix delivered 600 basis points of margin expansion, driven by reduced promotions and the further implementation of our previously announced cost-based pricing actions. Additionally, structural cost takeout actions, higher volumes, and ongoing cost productivity initiatives delivered 550 basis points of net cost margin improvement. These margin benefits were partially offset by raw material inflation, particularly steel and resins, which resulted in an unfavorable impact of 400 basis points. Lastly, increased investment in marketing and technology and the continued impact from currency in Latin America impacted margin by a combined 100 basis points. Overall, we're very pleased to be delivering even above our long-term EBIT margin commitment and are confident this positive momentum will continue to drive outstanding results throughout 2021 and beyond. Now I turn it over to Jim to review our regional results.
Thanks, Marc. Good morning, everyone. Turning to slide seven, I'll review our Q2 regional results. In North America, we delivered 22% revenue growth, driven by sustained strong consumer demand in the region. Additionally, we delivered another quarter of very strong EBIT margin, driven by volume growth and the disciplined execution of our go-to-market actions, and the previously announced cost-based price increases that were fully in place as we exited the quarter. Demand for our products remains high as we continue to produce in a constrained environment that we now expect to persist throughout 2021. Lastly, the region's outstanding results demonstrate the fundamental strength and agility of our business model. Turning to slide eight, I'll review our Q2 results for our Europe, Middle East, and Africa region. Double-digit growth in all key countries drove a fourth consecutive quarter of revenue growth above 10% in the region.
Additionally, the region delivered year-over-year EBIT improvement of $97 million, led by increased revenue and strong cost takeout, overcoming inflationary pressures. These results demonstrate the progress we are making towards our long-term goals. Turning to slide nine, I'll review our Q2 results for our Latin America region. Net sales increased 76%, led by strong demand across Brazil and Mexico and the continued growth of our direct-to-consumer business. The region delivered very strong EBIT margins of 9.7%, with continued robust demand and the execution of cost-based price actions offsetting inflation and currency devaluation. Turning to slide 10, I'll review our Q2 results for our Asia region. In Asia, revenue decline of 1% reflects the successful partial tender offer for our Whirlpool China business, which was completed in May. Additionally, as COVID cases surged in India, we were yet again faced with shutdowns significantly impacting the industry.
However, in June, as we exited the quarter, we began to see demand recover. Despite this disruption, the region delivered year-over-year EBIT growth of $23 million, led by pricing and cost productivity actions. Turning to slide 12, Marc and I will discuss our revised full year 2021 guidance. I will now turn it over to Marc to begin.
Thanks, Jim. While the macroeconomic environment remains uncertain and volatile, we are confident that sustained strong consumer demand and our previously announced cost-based pricing actions will offset the impact of global supply constraints and rising input costs. We are raising our guidance, now expecting to drive net sales growth of approximately 16% and EBIT margins of 10.5+%. Additionally, we now expect to deliver $1.7 billion in free cash flow or 7.5% of net sales, driven by higher earnings and the completed divestitures. Excluding the impact of divestitures, we expect to deliver on our long-term goal of free cash flow at 6% of net sales. Finally, we're significantly raising our EPS guidance to approximately $26, a year-over-year increase of over 40%. Turning to slide 13, we show the drivers of our revised EBIT margin guidance.
We continue to expect 600 basis points of margin expansion driven by price and mix, as we demonstrate the disciplined execution of our go-to-market strategy and capture the benefits of our previously announced cost-based pricing action. We have increased our expectation for net cost to 175 basis points as we realize further efficiencies from higher revenues and strong cost takeout initiatives. As we closely monitor cost inflation globally, particularly in steel and resins, we continue to expect our business to be negatively impacted by about $1 billion, with the peak increases to materialize in the Q3. Increased investments in marketing and technology and unfavorable currency, primarily in Latin America, are expected to impact margins by 125 basis points.
Overall, based on our track record, we are confident in our ability to continue to navigate this uncertain environment and deliver 10.5+% EBIT margin, representing our fourth consecutive year of margin expansion. I'll turn it over to Jim to highlight our regional industry and EBIT margin expectations.
Thanks, Marc. Turning to slide 14, we show our updated industry and regional EBIT guidance for the year. We have increased our North America industry expectation to 10+% to reflect the continued demand strength. We continue to expect to see demand strength driven from broader home nesting trends and an undersupplied housing market. Additionally, we have updated the EBIT guidance of our North America region to reflect the benefits of increased cost efficiencies, which are more than offsetting increased costs from logistics, labor, and operational inefficiencies of producing in a heavily constrained environment. This brings our EBIT guidance for North America to approximately 17%. Lastly, we continue to expect to deliver strong growth and significant EBIT expansion across our international regions, with each region contributing to our global EBIT margin of 10.5+%. Turning to slide 15, we will discuss the drivers of our updated 2021 free cash flow.
We now expect to drive free cash flow of approximately $1.7 billion, an increase of $450 million. Driven by expectations for stronger top-line growth and improved EBIT margins, we increased our cash earnings guidance by $250 million. We have reflected the benefit from the divestitures completed in the quarter. This represents free cash flow generation of 7.5% of sales, delivering above our long-term goal of 6%. Turning to slide 16, we provide an update on our capital allocation priorities for 2021. We continue to expect to invest over $1 billion in capital expenditures and research and development, highlighting our commitment to driving innovation and growth in the future.
This includes industry-leading, externally recognized innovation, such as our newly launched 2 in 1 Removable Agitator in our top-load laundry machine in North America, and the launch of new products in EMEA, such as our new built-in refrigerator, which is recognized as the quietest built-in fridge in the marketplace. Next, with a clear focus on returning strong levels of cash to shareholders and a signal of our confidence in the business, we expect to increase our rate of share repurchases in the H2 of 2021 to at or above $300 million. Lastly, we repaid a $300 million maturing bond and issued our inaugural sustainability bond focusing on actions to drive positive environmental and social impacts.
This milestone further advances our global sustainability strategy and reflects our core philosophy that sound corporate citizenship and environmental performance are good for business. Underscores our leadership position in our industry as we continue our constant pursuit of improving life at home. Now on slide 17, I'll turn it back over to Marc to summarize our key messages.
Thanks, Jim. Let me just recap what you heard over the past few minutes. Q2, again, impressively demonstrated our ability to operate in a very volatile environment and deliver very strong operating results. Sustained healthy market demand and strong operational execution give us the confidence to increase our guidance for revenue, EBIT, earnings per share, and free cash flow. Next, we remain unwavering in our commitment to drive strong shareholder value and return cash to shareholders. Lastly, as we look beyond 2021, we firmly believe we have demonstrated that our business is structurally improved and well-positioned to again build on our record results. Now we will end our formal remarks and open it up for questions.
As a reminder, to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. Your first question comes from the line of Susan Maklari with Goldman Sachs.
Thank you. Good morning, everyone, and congrats on a good quarter, guys. My first question is around the volumes in North America. It seems like you trailed the industry a bit overall during the quarter. Can you talk to what drove that and how you're thinking about the back half of the year and the potential to maybe kind of get back to that outperformance we saw in the Q1 and regain some of that market share?
Marc. I think what you basically state here is, on a sequential base, we were not able to further improve our market share in Q2 in North America, which ultimately comes entirely back to supply chain constraints, which we've discussed and which we talked about. You will probably also ask who was the beneficiary. It's still largely similar to what we've seen in Q1. Chinese-based production is a little bit less constrained than, call it, the Americas, and to some extent Europe, and that's still the beneficiary. As you know, we largely produce in the U.S. what we sell in the U.S. Having said that, going forward, sequentially, we do expect to gradually increase our shares. I'm saying gradually because the supply chain constraints will not immediately disappear. They gradually get better, but we will be fundamentally faced with a supply constraint for some quarters to come.
Now, again, with every quarter becoming slightly better.
Okay, that's helpful. My next question is, in the revised margin guide for this year, you did increase the benefit that you can see in terms of some of the cost reductions and the carryover from last year. Can you just talk to what is driving that? Are there any incremental projects that you're taking on, and what is the potential going forward to continue to see some of that benefit coming through?
Yeah. Susan, this is Jim, like we said at the beginning of the year, you highlighted, we had approximately $100 million of just carryover from the prior year, which is about 50 basis points. With additional actions that we've taken, which were more in our normal cost management programs, where we look across the board at different areas of spending for opportunities to reduce. Think about typically on an annual basis, we target between 50-150 basis points of incremental cost reduction. What we're seeing right now as we improved our guidance for the year is, one, we see some of the programs that we implemented last year as well as early this year are delivering more than we expected.
The second thing that we're seeing on that is we did identify some, but there's no one large opportunity. It's just multiple opportunities that have delivered more than we expected. The third thing is we expect to see some of the restructuring benefits increase within the back half of the year.
Your next question comes from the line of Eric Bosshard with Cleveland Research Company.
Good morning.
Good morning, Eric.
Two questions. First of all, in terms of the market share performance, and this is maybe more of a strategic question. As you look out over the next year or two in an environment where promotions at some point will increase a bit, how important is market share performance for you relative to profitability? How are you thinking about managing sort of those two vectors, if you will?
Eric, it's Marc. First of all, again, on a global level, I want to put that in context, outside the U.S., we feel pretty good about also market share performance in Q2. We picked up slightly market share in Europe. We're very solid in South America and in India. We also have a really strong market share position. It is predominantly the U.S. production constraints which kind of didn't allow us to further expand our market share in Q2. In the long term, we got to do both. We got to deliver strong financial performance while expanding our market share, and we're confident we can do that. Having said that, I think what you particular need to hold us accountable is the revenue growth.
Revenue growth is not always unit market share, because with our business model and how we explore, there are multiple opportunities to get additional revenues beyond the pure unit growth. That's particularly what you need to focus on, and that's why I also feel very good about what we guided this year with $22.5 billion, which is a very, very strong organic growth no matter where you come from. I would also expect, and I would hope for similar growth rates also going forward. Not to the same magnitude as this year, because you have a baseline effect, but we will go for strong organic growth also going forward.
Great. Secondly, you've raised guidance now I think twice pretty meaningfully. As you take a step back and look at 2021, what has been so notably different than what you thought coming into the year? Obviously, there was, I guess, some degree of uncertainty, but what's been most different in 2021? Is it your execution? Is it how the market has behaved? Can you just talk a bit about that?
Yeah. Eric, first of all, every quarter is kind of different, and I think we got a little bit used to that over the last 1.5 years that you wake up and there's some new news. I think fundamentally, it still comes back to, on the external side, the massive raw material cost inflation, which frankly, was stronger than we expected. On the other hand, I think we got the reading right already in Q1. You see that because we didn't have to further change it. I would say we saw that it's still bad news, but we recognized that earlier probably than most. Two, the recognition that this whole, what I call this upside-down world with constraints everywhere, will last a lot longer than probably everybody was hoping for.
I think the best thing is we recognized that earlier. We adjusted our actions. We took strong actions. I think this Q2 and the prior quarters demonstrate we can operate very successfully in this upside-down environment. I think that's also why you may see a very different financial performance from us compared to some other players.
I think the other thing, Eric, and this is Jim Peters, if you just look at Marc Bitzer hit the highlights there, as I mentioned earlier. We are seeing more benefits on at least some of the cost takeout areas that we've been able to realize. Additionally, the pricing that we previously announced and took at the end of the Q1 and into the Q2 has been successful in covering off those higher material costs. To Marc Bitzer's point, we did expect materials to be a significant headwind this year. They were larger, we've really been able to offset it with the go-to-market actions we've taken.
Your next question comes from the line of Michael Rehaut with J.P. Morgan.
Hi. Good morning, everyone.
Good morning.
Morning.
First, a quick clarification, if I'm able to, before I ask my couple of questions here. On the share loss, don't want to beat it with the dead horse, previously, you've noted that you haven't lost any shelf space in North America. When I say share loss, I mean obviously just the slight sequential miss. From a shelf space standpoint, did things remain stable as you've highlighted previously?
Short answer is absolutely yes. To be a little bit more calm, Michael, we did not lose floor space, period, which also, I think, is a reflection. We feel really good about our product portfolio, about the products which we brought to market with several innovative features. That just helped us to absolutely protect our floor space, which is a crucial element, because obviously, it is a little bit a different challenge if you would have lost floor space and trying to regain market share, but we have a floor space. Kind of "dialing up" once you get the production is considerably easier than in another situation. We feel very good about the floor space. Yes, we got to work through resupply constraints.
Great. No, that's helpful, and I think it's an important distinction. Just going into the two key questions here. First, you mentioned that you expect raw material inflation to peak in the Q3. You were positive price cost in the Q2, noting that your previous price increases, cost-based price increases, in effect going into full force mid-year. Can we expect with a higher raw material headwind in the Q3 that price cost might still be positive as your prior price increases also gain momentum? Or would it flip negative in the Q3?
Yeah. Michael, it won't flip negative, but I think you'll begin to see that it will be reduced because remember last year in the back half of the year, as we talk about price mix included in there is allowances. You began to see the promotional spend come down significantly in the back half of last year. As that tapers off the impact of that now by middle of this year, the price increases begin to fill that area. We expect to still be price mix positive through the back half of the year.
Your next question comes from the line of Sam Darkatsh with Raymond James.
Good morning. This is Josh filling in for Sam. Thanks for taking our questions this morning. Congrats on the quarter.
Morning, Josh.
Morning. Inventories were up fairly sharply at 2Q versus 1Q despite fairly flat sequential sales and supply chain issues. Could you explain what caused that change in inventory? Was it raws or finished goods?
Yeah. This is Jim. I'd say it's a combination of things, but you have to realize also that we were starting off a very low base of inventory in terms of where we were. As we've said, around the globe, we're in different states with our supply chain. Some of our supply chains are actually able to keep up with some of the market demand. We're able to build back some of the inventory, the normal buffers that we have. I would say it's no one particular area, but it's just the beginning of us in certain countries around the world beginning to get our inventories back to healthy levels, which we had expected to do.
As Marc would have talked about earlier, from a supply chain perspective in the U.S., we're still trying to catch up, and we would expect to continue to build small amounts of inventory go forward.
Got it. Your Latin America industry unit guidance of 2%-4% seems to suggest a substantial drop in H2 sales and margin. Do we have our math right on that? If so, how long might that softness occur, and given that much of demand may have been stimulus-driven?
Josh, I can take it. I think your observation is correct. I would say Latin America has surprised us through positive over the last several quarters relative to what everybody was expecting. At this point, we certainly can't exclude that they will beat that number easily, and to be very transparent. And again, as you know, these markets are a little bit more volatile than some of the North American or European markets. Right now, we have strong momentum. There is a little bit more caution going forward because you're also comping some pretty big numbers in all transparency. Right now, so far we've seen strength out of both Brazil and Mexico with some plus or minus. Long story short, there could be an upside revision on that volume guidance for Latin America.
Your next question comes from the line of David MacGregor from Longbow Research.
Yes, good morning.
Good morning, David.
Sounds like this is on a good call. Yeah. Let me just start off by just looking at your free cash flow, which is obviously very strong, and you've got some asset sales in there as well, but still really strong underlying cash generation. I wanted to ask you about inorganic growth and just where M&A may stand right now in terms of a priority for the capital allocation strategy and your competitor on their call this quarter was calling it the fact that there just isn't a lot to buy out there right now, that it's kind of quiet. I just wanted to just take your temperature on how does your funnel look? I know you run a gated process there, but where do things stand on development and just where M&A may stand as a priority right now?
Yeah. David, it's Marc, and maybe also Jim should chime in later on. First, let me zoom out before we talk about M&A capital allocation. Our capital allocation policy and guidance is unchanged, and that's why we include it in all clarity on every earnings call in the presentation. The first priority is always fund the business. We are investing capital slightly more than the prior two years. Part of that is capacity expansion, part of that is new products. That takes a little bit. We also know, as you know, in April, we increased dividends for the ninth consecutive year, and that should be also a capital allocation priority going forward, and will be. We refinanced that. We didn't pay down massive debts. Right now, we have a pretty healthy cash balance.
Which then obviously leads to the question, what do you do with the additional capacity which we have? One, and Jim alluded to this one early in his prepared remarks, is the H2 will be higher on the share buybacks than the H1. Jim mentioned the number of $300 million plus, and we can debate about how big the plus will be, but that's why now we just consider our company both on past performance, the performance which we guide to, and what we consider our long-range plan. Our company is a good investment, and that's why we're dialing up the share buybacks. M&A is, we always said, it's certainly by definition, opportunistic. We have certain targets on our list, but these targets need to be available, and they also need to be available at a justifiable price, which is not always a given.
Obviously, this is the wrong forum to talk about some immediate M&A, and there's nothing imminent, to be clear. I would just say a strong balance sheet gives you optionality, and that's a good thing, and that's the situation which we're in. This optionality will not make us unnecessarily trigger-happy. We'll be very prudent in how we take certain capital allocation decisions.
David, this is Jim, just to echo what Marc has said is the criteria that we use to evaluate potential acquisitions have not changed. What we have done is we've positioned ourselves as a company, both from our balance sheet strength perspective and from now having the integration of previous acquisitions behind us and those businesses on the right trajectory in terms of performance. We've positioned ourselves to be ready and able if the right opportunity would come along at some point in time.
Good. Thanks for that answer. As a follow-up question, I guess I want to talk a little bit about Europe and maybe specifically if we could talk a little bit about the pricing environment over there. Again, your competitor called it the fact that pricing had been rather slight in the H1, slightly positive, and that they expected a much more pronounced pricing benefit in the H2. Just wondering if you'd concur with that view. As well, just thinking about 2022 in Europe, if demand was flat, would you still be more profitable than you were in 2021, just based off all the other initiatives that you've implemented?
David, it's Marc again. Let me try to split it in two pieces. One, pricing, and more the long-term margin development in Europe. I can't speak for our competitors. I can speak for ourselves. As I mentioned before, we did recognize the significant inflationary pressures coming at us probably earlier than other ones. Okay. As a consequence, we had to make the decisions which we ultimately communicated. If you have this cost coming at you can't mitigate it. You have to raise prices. That's a decision which we've taken already early in the year, and we communicated, and consequently, we basically raised prices in most parts of the world, but also obviously in Europe, not only once, but in some cases even twice. The good thing is what we communicated, we implemented, and we start seeing the benefits.
To be clear, not yet all of that, because some of that will fully materialize in Q3. What we communicated, we implemented. Again, if you would look at whatever reliable market data you have, either in Europe or in other parts of the world, you probably would come to the conclusion that we're a little bit ahead of our competition, just facing that reality. Now, with regard to the long-term margin development, I would say Europe is exactly where we wanted to have it from a turnaround plan. We said this year will be around 2.5% operating margin. We also indicate next year you should probably expect around 4%, and that's just consistent with our trajectory, which we forecast for Europe. I'm pleased that we're delivering despite all the ins and outs which we have on inflation and everything else.
I feel very good about where we are from a long-term turnaround and the long-term value creation scenario for Europe. I mean, it's right on consistent with what we communicated to you a couple of quarters ago.
Yeah. I think, David, just to add to that, I think some of the continuing cost benefits that we'll see within EMEA as we continue to drive our cost savings programs there, we'll see more benefits in the back half of the year into next year. Additionally, you said, even without volume gain, we still expect to improve the mix there. That's another thing that we've talked about, is a lot of our product investments there have been to ensure that we improve our mix and grow our share of the built-in market there.
Our next question comes from the line of Ken Zener with KeyBanc.
Good morning, everybody.
Morning, Ken.
Morning.
What a year. A couple questions about, first the raw material. It's a two-fold question. I think people were surprised that with steel moving up, you had anticipated that generally. The assumption given your guidance. Were there any different tools that you deployed to understand that? What gave you that confidence to assume steel prices? What are your insights, I guess, is what led to your proper thinking early and the implication of that into FY 2022? If you said a raw material pricing is not going to peak till the Q3, as I look out into our FY 2022 estimates, it seems logical to assume that you'll have quite a bit of this pricing still in or how should we think about that, those two components of raw material and the price you pursued to get it?
Ken, maybe let me try to take a stab at your question. First of all, in raw material and steel specifically, I mean, all transparency, compared to what we thought last year in November we would be, we were somewhat surprised by the magnitude of raw material increase. Frankly, as you know from last earnings call, we saw that picture pretty much in February, and it's since stabilized, which again, was a little bit earlier probably than most thought. You're also right, I mean, steel is just a big part of our cost base, and that's where we saw a significant portion of the raw material, not everything, because we also saw it in resin and logistic cost, but significant portion. To answer your question about how did you know, I mean, it basically comes back to data and experience, okay?
It's not that we started buying steel this year. We've done that for about 109 or 110 years. We know steel, basically experience, but we also have a lot of data. We know the cost model by steel mill everywhere. We know what our contracts are. We know how they're running. Having said that, the steel market is always, there's a spot element to it, there's a structural element, so you still got to take several factors into account, and it will, despite our abilities, will still always include some surprises. Right now, I think where the steel market right now is pretty much where we "unfortunately" forecasted it will be.
Yeah. Then maybe to the second part of your question about as you look towards next year. Yes, with it peaking in the Q3, obviously there could be some incremental materials, but a lot of the pricing we've taken, we've implemented throughout Q2 here, so there also will be continuing pricing benefits as we go into next year to offset those continuing material headwinds.
Good. Yeah, it just seems like you guys all get too little credit for your raw material management. I guess with just stepping back, obviously sales went up in North America. Supply constraints are more persistent. If you could kind of address why you think that the supply constraints have remained. Is it just a function of higher demand? As that relates to your margin, which I think historically you guys have talked about 15% incrementals on revenue. It's obviously higher, which I assume is a direct connection of higher demand, tight supply, i.e., low promotional activity, because you guys were looking more for 14% margins in the back half, which are now higher. Could you talk to your view, if that's the proper logic, that margins are up because of lower promotions and demand?
If you see that normalizing really into next year, just so we have a little better sense of that thinking right now as it relates to promotional activity and that supply constraint. Thank you very much.
Ken, let me also split in two pieces in my answer. One is what you call the normal. The first one is more why we think the supply constraints will last and what the source of that is. The supply constraints are fundamentally driven by similar elements as we've seen in prior quarters, with now a slightly different emphasis on one item particular. Fundamentally, you talk about three issues, labor shortages, broader component shortages because other suppliers also have labor shortages, other issues in the factory. Thirdly, very specifically, weather, resins because of the Texas storm, and semiconductors. These were the fundamental sources. Now, in the Q1, it was predominantly broader components, labor shortage, and resins. The Q2, we saw more and more of a semiconductor, while some of the other sources kind of got less and less.
Having said that, all of that will be around us for some time. I think the labor shortages are increasingly manageable. I think the other component shortage get less, but the semiconductor challenges will not go away anytime soon. I think you may see that well into 2022. Again, it's difficult to forecast, but that's not going to go away short-term. Now, which leads me then to the broader comment. Many of you have commented or asked about the new normal or normalized or whatever you want to call it. I think the two messages which I really want to pass on is, one is, whatever the new normal is, it will happen a lot later than most people assume. I understand, but everybody hopes for a new normal to be next quarter. It's not going to be.
This environment in which we are right now successfully operating will be around us for a lot longer than most people assume. Two, in our specific case, I hope you have seen this one, our new normal will look very different from a previous normal. We've taken structural fixed cost actions, consumer preference have shifted, certain business models around e-commerce have changed. Our new normal will be not comparable to the pre-COVID normal. I know that was a broader comment, I think it's important to make that point here.
Our next question comes from the line of Curtis Nagle with Bank of America.
Great. Thanks very much. Most of my questions have been asked, but maybe I'll just a follow-up. Just sticking on the margin question, Marc. I think the math is 19% in the H1. It's about 15% applied in the H2, given the 17% or so for the full year. I guess, why would it be materially lower? Like, you've kind of gone through a lot of this. Demand expectations are pretty good. The promotions probably aren't coming back certainly in a material way. You've got pricing, also the inflation. I guess, what am I missing? I'm not saying you're going to put up like a 19% margin, of course, but it is a big difference, I guess. What am I missing?
Yeah. Curt, this is Jim. I'd say as you kind of step back from it, to begin with, we're extremely happy with our North America margins. We did say that as you look at it as material costs, with there, we've benefited from a lower promotional environment for a period of time, and now we're getting the benefits from pricing. We did talk about that materials would eventually hit a peak within Q3.
Yeah
That's the big difference as you look at the Q1, Q2, and Q3. That's where it begins to really hit, that the two go into equilibrium. I don't think you're necessarily missing anything. It's just the timing of as material cost increases.
Right
begin to come in and that's what we expect for the full year. Obviously, this is with, as we talked about with the demand and the supply chain constraints there too, is it's really critical for us is just trying to increase our capacity within there, because that's also what will help our margin structurally go forward in the back half of the year.
Okay. I think.
Curtis, maybe just one comment in addition to Jim.
Please. Yeah.
Again, zooming out from a pure margin question, again, just look at the EPS and the guidance which we've given, which basically implies the back half, we're basically guiding towards $6 a quarter. That is, I mean, we didn't have a lot of $6 quarters in our history. Actually, they all happened pretty much in the last one or two years. There is no deterioration. This is a very, very strong absolute EPS performance in the back half. There is no slowdown, and we feel very good about where the business is right now running on all fronts.
Yep. Fair enough. Maybe just a kind of a clarification, just going back on the raw mats question. Yeah, totally understand and appreciate you guys are quite good at managing and I guess, anticipating cost increases. Just looking at steel, I suppose, right? I think they're 28% higher, at least for hot rolled steel. I know that's not exactly what you use in terms of your production, 20% higher from April. Did you just anticipate that and that's why you're not increasing from $1 billion? Is it limited by the collars? How should I think about that?
Curtis, again, we anticipated structural pricing trends on the steel. The week by week spot prices, that's driven by a lot of other factors. Sometimes there's short-term availability, et cetera. I'm not reading too much into these published CRU spot price because they're not, in our view, not necessarily indicative of a long-term pricing trend. Having said that, there's still long-term trends point upwards. I know you guys already probably want to know what's for 2022. We don't know, and we don't communicate fully until we have the earnings call. I would say if current trends persist, there will be a carryover of inflation to next year. I mean, maybe at the appropriate point, we will quantify how much of a carryover will be there.
Your next question comes from the line of Mike Dahl with RBC Capital Markets.
Hi. This is actually Chris Kalata for Mike. Thanks for taking my questions. My first question, I just wanted to follow up on the net cost benefit you're expecting, particularly in the back half of the year. Even with the increase to the full year, it seems like given the strength to date, that would inflect or imply an inflection to a headwind in the back half of the year. Is that just conservatism? What's driving that?
I'd say the big thing you got to look at in the H1 of the year, especially in the Q2, you got a benefit from production being increased across the globe. Think about the Q2 of last year, we had factories that were either shut down or slowed down due to COVID-19 restrictions in many parts of the world. When you get into the back half of this year, the factories were up and running at full speed during that time period. You're not getting necessarily the volume leverage benefits year-over-year that you would've seen before.
Additionally, within there, as we look at some of the other costs that have increased while we've increased some of our cost-saving initiatives, when you look year-over-year in the back half of the year, you do have other things such as labor costs and transportation costs that still do provide a little bit of a headwind from that perspective. The biggest driver is just the volume leverage as you look at it comparing 2020 to 2021.
Got it. That makes sense. Just for my follow-up, just going back to the supply constraints, in addition to the unit drag from component shortages, has there been any mix headwind to associate with these challenges? I think a competitor called out that the semiconductor shortage was particularly impactful for their higher-priced appliances. Is that something you guys are seeing or incorporating in your forward outlook?
Yeah. Without getting into the details about where exactly the semiconductors end up. Of course, it's not like, and that's a misperception out there, it's not like one semiconductor fits every SKU. It would be nice if they're all universally applicable. You can move them just from left to right. Of course, you're sometimes hit by specific ones. Where we had the shortages, either because of a factory fire in Japan or prior in Texas, they sometimes hit your product groups which you didn't want to hit, et cetera. That's just in the nature of these extreme supply chain constraints. It's not like you can move very easily semiconductors from 1 place to another, because sometimes very highly specified according to the specific application of that product.
Let me maybe just wrap up here, given that we're kind of coming to the end of the questions. First of all, appreciate you all joining. Good questions, and obviously, we're available for follow-up. I just want to recap this. As you've seen, we had truly outstanding results in Q2, as we had truly outstanding results in the prior quarters, and we're guiding towards outstanding results in the back half of the year. We feel very good about where we are from financial performance. As evidenced by your questions, we're living in what I call an upside-down world, and I think that will be around us for some time to come. I think we absolutely have demonstrated we are able and capable to perform very successfully in these upside-down environments, which ultimately is a testimony of our agility, but also the resilience of our business model.
We feel very good where we are. We feel very good about our future, and looking forward to talk to you at our next earnings call or in between. Thanks a lot.
Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.