Whirlpool Corporation (WHR) Earnings Call Transcript & Summary

All right. Good morning. I'm Sam Darkatsh, and on behalf of Raymond James, would like to welcome you to the Whirlpool Corporation presentation for today. With us today from the company is Jim Peters, Executive Vice President and Chief Financial Officer; as well as Lara Mordoh, Director of Investor Relations. I'm guessing most of you, if not all of you know who Whirlpool is, but Whirlpool is the world's leading kitchen and laundry appliance company, approximately $20 billion in annual sales. Markets under the brand names, including Whirlpool, KitchenAid, Maytag, Brastemp, Amana, Bauknecht, Jenn-Air and Indesit, sells product in nearly every country throughout the world. Jim, I think your prepared remarks are, what, about 15 minutes or so?

Yes, about 15 minutes. Yes.

So that should leave a little bit of time for Q&A, and then we'll follow this up with a breakout session downstairs. So with that, Jim, welcome.

Okay. Thank you, Sam. I appreciate it. Let me grab the clicker here. Thank you, today, for all of you being here. Appreciate it. And as Sam said, I'm going to really kind of give you a high-level overview of Whirlpool and many of the things going on in our overall strategy, and then we'll save some time for questions at the end here. If you look at our business globally, we're approximately $22 billion in sales. We sell in all major regions of the world right now, North America, which is really the U.S. and Canada being our largest region and as you'll see, our most profitable region for us. We also have approximately 70,000 employees and about 54 different manufacturing locations around the world, so just to give you a feel for the size and scale of our company. Most of our manufacturing we do is local for local. So in many cases, let's take the U.S. as an example, about 80% of what we sell in the U.S., we produce in the U.S. Very similar for EMEA, for Latin America. And Asia is also very similar due to our India business there. Leading position. And Sam alluded to this, but one, our size and our scale has given us the ability, one, to have, what I'll say are -- our economies of scale across the globe also allows us to leverage our design and engineering capabilities for all the parts of the world that we function within or that we sell product within. We have multiple brands within our portfolio. Some are used on a local basis, such as a Brastemp and Consul that are used in Brazil. Whirlpool and KitchenAid are more our global brands that you'll see and then some are very specific European brands. Again, we've been in this business for a long time. We've brought a lot of new innovation in the marketplace, and so you get a feel for some of those things up there. The picture there is the dishwasher we launched a couple of years ago, which is our -- actually has a usable third rack that we call in, where you can put plates, you can put glasses, et cetera, where the third rack typically was used for cutlery. And then cost position. I talked a little bit about that. It's just our size and scale allows us to have a best cost position within the industry. We also have a continuous focus on cost takeout within our business, which allows us to year-over-year offset some of the material cost headwinds or other headwinds we see through ongoing cost productivity. Track record of delivering results, and this is something that we really highlight right now. If you go back and look, right, pre-COVID, we were on a good progression of improving our earnings as we went forward and beginning to structurally improve our earnings. As we've gone through the last 2 years, we've been able to leverage a handful of things, is one, we've been able to leverage reduction in costs that we took at the beginning of 2020; two, in this environment where it has been unprecedented material cost increases, we have been able to offset those with price increases and even more than offset those with price increases; three, there is a benefit in there of a reduced promotional environment, but we've always been very disciplined when it comes to the promotional environment; and then four, we just see a continuing level of demand that's increased due to the consumer focusing on products within their home. See there our EBIT margins, but also our cash generation. And I think that's something that's important to highlight here, is on top of that, we've had 2, really, 3 strong years of cash generation, and we expect this to be another one this year as we look forward. So it's showing you that the results that we're generating really are falling to the bottom line and also it's coming with the right level of investment and not having to increase our working capital significantly. Long-term value creation goals, we would have released these recently. And this was something that we brought out late in 2021 to talk about ahead of -- as we look forward because we were ahead of our current guidelines at that time. And so if you really look at our business, we do believe over the long run, we always said we thought this would be a 10% plus margin business. I'd say today, we believe it's got the potential to be in the 11% to 12% on a mid- to long-term basis. We also believe over the next few years, in the next 4 to 5 years, there are significant growth opportunities that come due to strong underlying demand, that come due to some market share recovery in certain parts of the world, but also that come via expansion of ours into different geographic and product spaces. And then if you look at cash conversion, that's just a natural follow-on to the increased margins. So that's really where we get that, but we do believe this business can generate 7% to 8% free cash flow on an ongoing basis. Strong underlying demand. And this is a question we get very, very often, and I think this chart helps tell the story. And we actually -- we used to use this chart to explain the industry demand and how much it had fallen during the downturn in the U.S. economy right after the financial crisis. Now we use it more to show that the replacement cycle is significantly strong. And you think about appliances that are replaced about every 10 years, and you walk back 10 years, you see that, that was a time period of significant growth. So underlying replacement demand, which is 55% of our business should be strong. Then you take new construction on there. New construction continues to be strong. In fact, there's a backlog within there. So we do expect that to continue to be -- and within the U.S., especially, it's primarily us and GE in that segment of the market. And then discretionary. And discretionary has had a good benefit over recent years, but we do see that continuing also, especially as you look at the housing market out there and the shortage of houses, people are continuing to invest in their homes. So that segment also, which is about 1/3 of our business, we expect to continue to grow. Then we talk about our strategic imperatives. And nothing's really changed on these probably since the last time I talked to all of you, which just on a side note, I realized that the last time I talked to all of you here would have been the last one of these conferences I did because it was March of 2020. And so -- but nothing has really changed in terms of where we're focused, in terms of expanding into different areas around our products and consumables, in terms of our direct-to-consumer business and growing that significantly. And obviously, COVID was a period of time that helped our direct-to-consumer business grow, but then also the digital consumer journey. And we continue to invest in this space and we continue to utilize our recipe app, Yummly, like we did before. So when we step back, and I talked about some of these things earlier, why we feel good about our margins going forward. But the things we're doing to make sure we protect our margins, one, cost-based price increases are on track. We -- when we announced our earnings for last year in January, we talked about cost or price increases we were taking. Those are on track and implemented in the marketplace. I think more importantly, what you can look at is we've had a track record over multiple years. If you think about 2021 and 2022 raw material cost increases of taking pricing to offset these costs. So it's more than just what we've done to date, it shows that we -- that's become a core capability of ours. Navigating supply chain constraints. We're not out of the woods on this yet, and we're far from out of the woods. And you'll see many companies, especially automotive and other companies out there talking about these issues continuously. We face many of these issues. And I've been asked the question specifically, where is it? Is it chipset? It's a moving target. Chips, microchips were a big part of the issue for a period of time, still are, electronics. As we look around the world, many times, it comes just due to where we see COVID issues or other things that are impacting not just us but our competitors. And so from month-to-month, day-to-day, that's why I say I don't think it's going to change anytime in the short to midterm because I do think there's still continuing pockets of this that we see around the globe. Investing in growth. This year, we plan to increase our capital investment. We actually didn't hold it back over the last couple of years due to try to conserve cash or anything because we had very good cash generation. What happened is when you have your factories disrupted by COVID and other things, it's very hard to launch new products to change out equipment, to change out lines within those when they're just focusing on staying up and running. So we more pulled some things back just due to the fact that it was necessary to keep our factories moving along. And then innovation driving mix and margins. Again, that's where we say, is the opportunity, is as we begin to launch more and more products at the higher end, that's the area we focus on investing because those do deliver the greatest margin. Legacy of responsibility. Everybody talks about ESG these days and all the different things they're doing and the responsibility that goes with it. What I will say is, and I'm not going to go through this whole slide, but it shows you the history that we as a company since the late 1960s, which is -- that year is the year I was born, have been focused. So all my lifetime, we've been focusing on our responsibility around the environment and sustainability. And a lot of that comes -- many people think about us in this room as an American brand and all that. But our European operations have actually probably been the center of us thinking about that for a long period of time and where many of the innovations come from in this space because if you think about the focus there that's been on energy consumption, water consumption for a period of time, we've used a lot of those ideas and innovation there to help drive other things around the globe. Investment thesis. Why should you invest in Whirlpool? And there's a handful of things here, and I'm not going to read off every one. But as I alluded to before, we do believe there is a good opportunity for growth here. And we do believe our business will continue to grow. Margin expansion. We do believe we have the opportunity to continue to expand our margins. especially in certain countries around the world where they may be below average. Free cash flow conversion. I think the last 2 or 3 years and this year are demonstrating our ability to generate free cash flow. I talked about funding the business. But then the last point there really is returning cash to shareholders. If you look at last year, as we returned almost $1.5 billion to shareholders through buybacks and through dividends, this year, we're committed to the same. Doing at least the same or more. So right now, we are looking at in terms of our dividend where it is based on our trailing earnings we feel is appropriate. And obviously, it went up 25% year-over-year. So we are confident in our earnings capabilities. But then, two, we've continued to buy back shares in the marketplace as we said we would because we do feel our shares are undervalued today. And it is an opportunity for us from a capital allocation perspective. So you looked at last year, we committed to $1 billion plus of buyback again this year, and we believe we're on track to that. So with that, I think I've kind of moved through in about 12 minutes, all the key areas.

Perfect. Thank you, Jim. I'll start with a handful and then we'll open it up to the room. So you mentioned the share repo, at least $1 billion this year, although the Board recently authorized another -- a new $2 billion on top of what was already an existing $1.5 billion authorization. That implies you're at least prospectively looking to do an awful lot more than just $1 billion this year. Can you talk about what the potential or the prospective timing or cadence might be of that $3.5 billion?

Yes. Sam, here's what I would say is -- as we typically, when we've done this, we don't give a time frame. And in fact, historically, we didn't even talk about the amount we might do in a quarter or a year, but we started to be much more transparent on that. I would say the reason we put the $2 billion -- incremental $2 billion in place, was that we already knew we'd be over $1 billion this year, and we had $1.5 billion remaining. And we really want to send the signal and all that to everybody that we do believe that if our stock stays at a similar type of valuation, that is one of the best uses of our cash and that we don't intend to stop at the $1.5 billion that we would have already had authorized. So we don't necessarily have a time line on that. But what I will say is that we are committed this year to an increased level that is at or above last year's amount. And we do see that go forward as still an opportunity and a tool we want to have available. But if you think about the last $2 billion, we did it over about a 2-year period of time. It was approximately -- and that's about what the rate we're running, you would think on this one.

Talk about your direct Russian and Ukraine exposure, both from a sales and profitability standpoint, what you're seeing in the theater right now and what sorts of contingencies are available to you.

Yes. So I'd say -- the first thing I'd say on that is, obviously, our first area of focus has been our people there and making sure our people are safe and all that. The Ukraine for us is not a significant business. We do have a sales office there. We do have a logistics center there. That will have an immaterial impact on our business. So our thoughts are more with the people there. In terms of our business within Russia, we disclosed it's just short of about $500 million, and that's about where it's been over a longer-term period of time. And we've got about 2,500 employees there. We have a factory there. And as I mentioned, we manufacture locally. Now as you go through this process and you think about things that are going on, you've seen many companies talk about it. We've had to adjust our level of production to the demand there and to the availability of components. And so as you think about that, what's happening is with the situation going on, you've got demand that's dropping, you have sanctions that are now in place that will make it difficult to get components in. We don't know what the long and midterm looks like for that. So right now, we definitely think there will be some sort of financial impact and starting here in Q1, obviously. It's not overly significant because that's about 10% of our European business today. And to be transparent, that isn't the most profitable 10% of our business. But it all matters a lot on what the future looks like and the picture looks like there and how long this goes on, how long sanctions last. So at this point, we're kind of holding off to make any announcements or talk anything about that until we get to the end of the first quarter and maybe we see at least some sort of stability in terms of just what's going on, because if you take the ruble, it went from whatever, 90 to 150. I think -- I looked, it was like close to 120, 117 when I came down here. The cost of oil went up dramatically. As I mentioned, all the sanctions that are being put in place right now and trying to navigate and understand those, that's a lot to absorb. And I was thinking about the last time I was here, the question at that time was COVID, how is COVID going to impact your business? And as I said, back then, we really didn't know. Well, it wound up having a significant impact over a long period of time. And I think we're in the same stages with Russia right now. This is so early. It's just hard to tell exactly what it will be.

So I'm asking this question for a lot of the building products manufacturers here this week. So if I had -- if this microphone was a magic wand and I was able to immediately get rid of all your supply chain constraints and labor constraints and what have you, how much additional volume if you were running 3 full-time shifts could Whirlpool produce versus where you're at right now? And I'm saying this in light of the fact, I think GE just announced a $500 million capacity augmentation. I'm just trying to get a sense of where your slack capacity and the industry's slack capacity might be.

Yes. I would say the good thing for us, if you could wave that magic wand, we wouldn't need to necessarily invest significant amounts in additional capacity because we have it. And we have it -- and the -- we don't need to build any new factories. We can actually break through bottlenecks at a relatively lower cost. But I think if you just look back and say, okay, historically, at times during this period, we've talked about having 4 to 8 weeks of a backlog of orders sitting out there and supply. If all of a sudden, you could free that up and then put us at an accelerated run rate, now you're starting to look at something that, for lack of a better word of doing math, is it 5%, 10% higher, pretty quickly, that will start to build up, just thinking about all that that's backed up in the supply chain as well as then if you could keep up with where demand is currently. So I wish you did have a magic wand, and I wish we could. And that's why also we do believe there's some opportunity in there, especially for us, as we look at top line growth just on -- from a share perspective because we have been affected probably a little bit more disproportionately than some of our Asian competitors due to some of these supply chain challenges.

So your capacity utilization, even with 10% or so more volume would still be modest? Or where would you peg it?

Yes. I would say it's not concerning that, that would not be a point that's concerning to us. We don't need to add brick-and-mortar many of times in our business. What we do need to maybe add is some more tooling at suppliers and things like that, which has a relatively lower cost than building new factories. So for us today, the bigger concern in terms of capacity is not within our factories, it's within our suppliers and their ability to keep up. And Sam, to your point, if you could wave the wand and fix that, we could already handle a higher level of production within our facilities. And we have at times. If you look at -- for temporary periods of time when demand has been that high, we've been able to produce at much higher levels than we are now due to supply chain constraints.

When I'm doing my channel checks, it seems as though your lead times, at least near term, are improving a bit, certainly -- in certain categories like washers and dishwashers and fridges, at least that's what I'm saying. I don't know how representative that is. Can you talk about where all-in lead times are right now versus where you were at the end of the year?

Yes. Well, I'd say today compared to the end of the year, they're not significantly different if you go back to maybe last year. At points in time, as I said, we're probably have half the number of back orders and backlog that we did at that point in time. So it does show some recovery there that's coming, but still is a pretty significant portion. To your point, there are categories where we do feel better about, such as top load laundry and things like that, where we have the supply that we have and we're able to get allows us to manufacture what's required within the industry. But there are other categories, such as cooking and refrigeration that still maybe have a little bit more pressure on them from a supply chain limitation perspective. So it's improving. But as I mentioned earlier, I think throughout 2022, we will still continue to deal with many supply chain issues like our competitors, and as I said, like other durable goods manufacturers right now.

You're guiding for positive price cost or price minus raws of about 100 basis points this year. Presumably, that's all 2Q to 4Q since there's some timing with when pricing goes through in the first quarter. I think there's some concern as to the guide around positive price cost in the fourth quarter, presumably when, in the middle of the promotional environment, if -- assuming and if it resumes and maybe when lead times for the industry normalize, what gives you confidence that price cost for Whirlpool will be positive in the fourth quarter, given that type of scenario?

Yes. I think there's a couple of things there, Sam, is one, in some of our thoughts around the cost space, we did see the potential that by the fourth quarter, we could be past the peak. We've always talked about we saw the peak of material costs coming in the first half of the year. So you start to see a little bit of a reduction on top of that. Now if you take the pricing that we're implementing as it's going into effect, what you do see is that continuing to escalate to your point throughout the year and creating a bigger buffer there. I think, as I think about the promotional environment in the fourth quarter, if I think about today and where things are, as people begin to plan out, you don't make the decision in the fourth quarter, you make decisions in the second and third quarter around what that fourth quarter promotional period might look like. In the environment today, I would expect it actually to be a similar environment than what it's been in the past 2 years because you're in a period right now of limited capacity and supply, you're in a period of rising material costs. And so my expectation is probably we don't see a return to that type of promotional environment yet in 2022, not at that level. You did see in 2021 some activity, some increased activity. But I think the other thing for us, we've always been very good at managing and being disciplined around that type of environment. The last thing is here is, I'd say, today, what we don't know for certain what could happen to commodity costs now as you're seeing spikes in things like oil and other things today that weren't expected that are coming out of world events today. Does that drive us and other durable goods manufacturers to take additional pricing in the future because of further rising commodity costs? That's also a scenario that could occur. And it's just hard to say how much of that will be temporary versus more structural.

I think last year, you were largely hedged as it relates to base metals. I mean we were clearly seeing a significant spike in base metals of late, especially nickel. Is that an issue for '22 raw material inflation for you? Or is that more of a '23 thing when we have to start looking at that?

I would say it's probably more of a later in the year and more of a 2023 thing. We begin -- because many of our contracts we go through and all that, we begin to lock in some of the pricing. And we gave a range this year of $1 billion to $1.25 billion of overall raw material cost increases. So we've put some room in there to just -- for us to see how the market evolves and see how our different contractual arrangements play out. Now with that said, as I mentioned, there could be things that occur over the next 1, 2, 3 months that we just didn't anticipate, with things around the world that could drive to a different place. But if that would start to occur, as I mentioned before, one of our core capabilities is understanding how much of that should we be passing along to the consumer at that point in time. So I would say it's probably not top of mind, but it's something that's obviously on our mind in terms of monitoring.

In your prepared remarks, you were mentioning the difficulty or at least the repivoting away from new product development at the plant level and at the R&D level because of necessity. So talk about this year, next year, the cadence and timing of new product and platform rollouts that we can expect and that you're excited about.

Yes. Well, I think you'll see an accelerated cadence as we begin to go into this. And I think you have to think about once we really get started within a factory, the period of time from then to launch can be approximately a year or so. I mean the whole cycle is about 2 years from when you make a decision to invest. You go through the engineering, the design of the product, through the manufacturing and all that. So I do believe as we get later into this year and go into over the next 2 years, you're going to start to see more new products coming out. A lot of our focus and our investment has been more in the kitchen space, and I already talked about the dish product that we launched just before COVID hit, but we continue to expand that platform around the globe, and that's actually becoming a global platform for us that we use in multiple dishwasher factories. So we'll be seeing it rolled out around the world. Two, cooking appliances. We continue to invest, especially in ovens and ranges and other areas within there. Because, one, that's been a big growth area for us throughout this process; but two, as I mentioned, we see that as a continuing opportunity for growth there. And we do believe the consumer is going more and more to the premium appliances these days. So that's where we're investing our money. And then refrigeration, a lot of the investments and the launches will come in higher-capacity refrigerators, multi-door refrigerators, French door, counter-depth French door type of -- so we're really looking at not just what does the consumer want, but we're also looking at the segments we want to invest in. And as I mentioned, we're investing more and more to the high end. Additionally, we continue every year to launch new products in our KitchenAid countertop business, whether they be different configurations of the stand mixer or they tend -- espresso product that we launched recently. We also launched a whole line of new food processors within the last year. So those are other areas. So Sam, it's going to come across the board. But what you will see is an acceleration once you get to late this year, into next year of us bringing new products to the marketplace.

Questions from the room? Here, yes.

[indiscernible]

Yes. Yes. That's an interesting question. The question is around, how are we as management thinking about Russia, and what's going on and then decisions we make around our business and the impact that, that could have over a longer term. Now as I mentioned earlier, for us, we do have a factory there, and we have 2,500 employees working there. And so as things have begun to unfold, our first thing is just to, one, look at the business and say, where are we and how is it impacted? And one of the things I mentioned earlier is demand has dropped down and availability of components. So we are temporarily slowing our production or stopping it in order to align with those levels. I think that also what it does is it gives you time to take a look. We've always liked to say we don't make rash decisions. We really want to take a look at it, make the right decisions for the long term, understand the situation, understand the impact to our employees that are there, who have been employees of the company, many of them for a long period of time, and then make the right decision from that point go forward. And in a short period of time that's not -- most of the companies that have come out and said they're -- the first ones who came out don't have manufacturing there. It's very easy for them to stop or just stop shipping product in. The next group even who've looked at it and said, we do have a footprint there of some kind have said, well, at least temporarily, we're going to do it. We know right now there's temporary disruptions to the business anyway. And that's allowing us the time to continue to monitor the situation and make the right decision go forward. The impact to the brand as we think about what that could be, we definitely keep that top of mind and in consideration. But that's why I said, is we want to make sure whatever decision we make, it's right from a long-term perspective. And today, we're just -- we're not at that point that we can say what will change structurally long term there.

And with that, we're out of time. We're going to continue the Q&A in the breakout session. Jim, Lara, thank you very much.

Thanks.