InSinkErator, Inc. (WHR) Earnings Call Transcript & Summary

Good morning, and welcome to Whirlpool Corporation's conference 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.

Good morning. 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 Investors 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 better 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, 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. Listeners are directed to the appendix slides within today's presentation posted on the Investor Relations section of our website for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. [Operator Instructions] With that, I'll turn the call over to Mark.

Thanks, Korey. Good morning, everyone. Now turning to Slide 3. In April of this year, we shared with you our plans for major portfolio transformation of Whirlpool Corporation with focus on investing in high-margin and high-growth businesses. And today, we made a major step towards accelerating this portfolio transformation. We've signed a definite agreement to acquire InSinkErator from Emerson Electric Company for $3 billion in an all-cash transaction. As you do know, our space is the kitchen and laundry room, and this is a truly unique asset in the kitchen space. InSinkErator is the world's largest manufacturer of food waste disposals and the instant hot water dispensers is more than 70% of the U.S. industry. With its predominantly U.S.-based business and strong manufacturing base in the U.S., the acquisition of InSinkErator demonstrates our commitment to winning in the Americas and also our belief in the long-term growth potential of the U.S. housing industry. Our strong balance sheet position has provided flexibility for this unique value-creating opportunity, and we expect to close this transaction fairly swiftly. Turning to Slide 4, I will share an overview of InSinkErator. InSinkErator is a structurally attractive and truly unique business. It has been demonstrating strong margin delivery, a free cash flow profile that has fueled reinvestment in the business and a track record of accelerated growth. If advanced technology offerings alongside well-established relationships with trade customers, I'm really excited to add this business to our already strong portfolio of brands. As a highly respected brand, InSinkErator has earned a reputation for quality and performance with over 80 years of experience in the industry. InSinkErator has established trusted relationships with consumers and build an installed base approximately 5x larger than the rest of the industry, driving recurring and predictable sales growth of approximately 4% over the last 20 years. A approximately 75% of InSinkErator's demand is replacement-driven with an average 8-year replacement cycle. Following the close of the transaction, InSinkErator's expected to operate as a separate business as part of Whirlpool's North America region, maintaining the headquarters in Mount Pleasant, Wisconsin. I'm looking forward to working with impressive and dedicated teams behind InSinkErator product leadership, who consistently demonstrate their commitment to providing high-quality solutions to consumers. Now turning to Slide 5. I will provide an overview of InSinkErator's industry-leading product portfolio. With offerings across both residential and commercial segments, InSinkErator is an innovation leader portfolio of 350 active patents. Residential disposals represent approximately 80% of sales, providing a trusted option across the value chain that has a strong end-user tendency for like-for-like replacement. Residential water products and disposal accessories make up approximately 15% of sales and provides an opportunity to expand the penetration rate by growing the installed base. Commercial products represent approximately 5% of sales, supporting restaurant, health care, education, government and hospitality sectors. We are excited to add this industry-leading products to our brand portfolio, providing our customers with a necessary product to continue improving life at home. Now turning to Slide 6. Jim will discuss our value creation expectations associated with this acquisition.

Thanks, Marc, and good morning, everyone. The addition of InSinkErator is immediately accretive to Whirlpool Corporation in our North America region. On a full year basis, we expect incremental revenues of approximately $650 million, supported by one, a strong replacement cycle; two, the housing market remains structurally undersupplied, and we believe in the long-term U.S. housing growth opportunity; three, the potential for significant expansion in the Americas and globally as adoption rates significantly lag the U.S.; and four, the further expansion of the best brand portfolio in the industry. Additionally, we expect our consolidated full year EBITDA to increase by over $170 million and our consolidated EBIT margin to benefit by approximately 50 basis points, as we leverage our leading scale and best cost position to drive synergies through sustained productivity, our already established procurement relationships and significant purchasing capabilities and our continued commitment to product design and innovation. As a result, we expect incremental free cash flow of approximately $100 million. This acquisition creates value for our business, our consumers and our shareholders. Again, we are excited about this unique opportunity to acquire an industry-leading brand and expect InSinkErator will add approximately $1.25 of EPS accretion in 2023, and $2 to $3 of EPS accretion post debt paydown. The amount of benefit recognized in 2022 is dependent on the timing of the closing the transaction, but will be fairly limited. Now turning to Slide 7. I will discuss the acquisition details. The purchase price of $3 billion represents a 14x EBITDA multiple, net of synergies and $300 million of future tax benefits. The purchase will be initially funded from available liquidity through existing credit facilities. We will put new debt into place at a later date and expect to maintain a strong investment-grade rating. After buybacks of approximately $900 million year-to-date, we are pausing share repurchases for the remainder of the year. The strength of our balance sheet and strong free cash flow delivery has allowed us to return over $5 billion in cash to shareholders in the last 5 years through share repurchases and dividends. Our history of shareholder returns is a clear demonstration of the confidence we have in our ability to generate free cash flows and maintain financial flexibility to continue to deliver on our capital allocation priorities, including this value-creating acquisition. We expect this deal will close in the fourth quarter of 2022, subject to regulatory approvals. In closing, we are extremely excited about this unique value-creating acquisition and look forward to capitalizing on the significant growth opportunities ahead. Now we will end our formal remarks and open it up for questions.

[Operator Instructions] And your first question comes from the line of Sam Darkish from Raymond James.

Can you hear me okay?

We can.

Congratulations. Terrific business, obviously, that you're acquiring. I've got a couple of questions, if I might. The first, it looks like, at least based on what Emerson is saying for trailing 12 months and what you're saying for the year, that the growth profile of the InSinkErator business is fairly substantial this year. Can you help in terms of what you're expecting for their sales and EBITDA next year in '23 to get to your $1.25 accretion? And then also on top of that, the $20 million to $25 million in synergies, what's the timing that you're assuming that you'll be able to achieve that?

Sam, it's Marc. Maybe I Emerson announcement, keep in mind, they refer to the published numbers as of end of March, in June or even July, and the overall revenue trend is actually very solid one. And I would expect that momentum to carry well also well also into '23. Now obviously, we all know there's -- what do we consider a temporary slowdown in the U.S. housing, but as we also indicated earlier, that business is highly replacement driven also more so or even a new housing. So I would expect a continued sustained healthy revenue growth trends. Jim, do you want to comment on the EPS?

Yes. And then Sam, from an overall EPS perspective, and as I pointed out, as we expect the $1.25 this year and then once we pay down the debt, which we expect to do in a relatively short period of time, it will expand to $2 to $3. I think on the cost synergy timing, obviously, that will take a short period of time, but we don't see a significant period of time that it will take to begin to earn that because as we mentioned, a lot of that is driven more on the purchasing side and also our ability to just reduce the minimal amount of SG&A.

And then my follow-up question to that would be -- I'm not sure how to phrase this one, but would the $3 billion price tag is obviously considerable? Are the -- is what you're seeing in the EMEA sale process emboldening you that this type of transaction is something that is easily digestible?

Sam, first of all, just the broad acquisition. I would again refer to what we said earlier, this is a unique asset, and these kind of opportunities don't come across every day. I mean you -- again, keep in mind, our space is attrition, and this is a wonderful business in the kitchen thing where we're kind of "next door" neighbors with dishwasher. So we see plenty of opportunities also when it comes to product innovation, revenue growth over time. So -- and again, these kind of unique opportunities don't come across every day. It was a competitive bidding process. I still believe the valuation is fair given precedent in that space, and certainly you could probably argue a couple of months ago, you probably would have had to pay more. But anyhow, it's -- we do feel it is a truly unique asset and as such, will create significant value. It's obviously too early to speculate about the outcome of your strategic review. But even absent this one, as you all know, our balance sheet metrics are very, very strong ones from a debt leverage, from our overall cash position. And therefore, the financing of this one does not create any headache or it's not -- certainly not contingent on the outcome of European with you.

Yes. And Sam, just to add to what Marc said on top of the balance sheet being strong, if you look at our free cash flow generation over the last few years, it puts us in a very good position, as I mentioned to, and will be able to be able to pay down any debt related to this within a medium-term period of time so...

Your next question comes from the line of Susan Maklari from Goldman Sachs.

My first question is, can you talk a little bit more about the synergies in terms of procurement, inputs to the product relative to your core appliance business. And then also in terms of the distribution side, can you talk about the go-to-market strategy here? And is that the same or different from the current business?

Susan, it's Marc. So I mean, again, there's 2 fundamental different type of synergies. One is the cost side, the other one is more of a revenue go-to-market side. On the cost side, we do see opportunities on procurement. There's components in the product, which we know very well, but I think we have a good procurement scale globally. This business also, because of the growth in the past, runs into capacity constraints and I think we have opportunities on the manufacturing side in terms of cost efficiency going forward also. On the go-to-market side, first of all, there's long-term growth potential, then again, comes back to product innovation. It's not just the InSink and [indiscernible] the entire system under the thing where we see a lot of opportunities and you may remember, we have been working on like computing solutions and other solutions. There's a lot of product innovation ideas which we can think about in that space. Two, there is a brand leverage. We do believe that with the strong brands in our company, we can add and expand the offering of InSink, which gives consumer more choice and we create more choices. On the go-to-market side, yes, these are relationship of trade, which we know very well. Having said that, and that comes back to the script earlier, we would initially treat that as an independent business. So you should expect different sales force going to well-known trade customers out there than from a Whirlpool appliance business.

Okay. That's helpful. Follow-up is can you talk a little bit more about the financing side of the business. How year-on-year expect to proceed with the debt offering. And then you mentioned that you're going to pause buyback for the balance of this year, but can you give us any more color in terms of the down schedule you're anticipating? And how to think about the return of those buybacks looking to '23 or further out?

Yes. So this is Jim. And I think first off, what you start with is our existing liquidity, cash on our balance sheet and credit facilities give us the capabilities to do this as an all-cash transaction. Once we get a little bit further down the road and obviously, by the end of the third quarter, we'll talk more about the specific financing that we have put in place, which we're already beginning to work on now. And then as you look forward, what I would say is that for the remainder of the year, as we said, we'll stop share buybacks. As we look forward to future years, we've always talked about we buy back our dilution. But I would say until we make a significant paydown on this, which we do expect in the next 2 to 3 years, you should expect us to at least moderate our share repurchases in light of this. And additionally, as we've said before, what we plan to do is continue to look at other areas we want to invest in from a capital allocation perspective. I think the other thing, just to remind everybody is that over the last 5 years, we've returned $5 billion to shareholders. And over the last 2 years, it's going to pretty close to $2.5 billion. So we have made significant returns in another area of our capital allocation priorities.