Whirlpool Corporation (WHR) Earnings Call Transcript & Summary

Good afternoon. Welcome to the afternoon session of day 1 of our 16th Annual Homebuilding and Building Products Conference. My name is Mike Rehaut, senior analyst at JPMorgan covering the homebuilding and building products space. We're excited to kick off the afternoon session with Whirlpool Corporation and CFO, Jim Peters. Jim, welcome.

Thank you.

We're going to conduct, as usual, a fireside chat, but we do have the ability to ask questions from the audience. [Operator Instructions]

Jim, like I said, welcome, thanks for participating and joining here. I guess we'll kick it off with just maybe some of the questions that are perhaps front and center as we talk to investors, and I believe it's similar to your own experience. Maybe just starting with some comments around the current demand backdrop and how it relates to your overall 2023 outlook.

Yes. Yes. And so to begin with. Thanks, Mike, and I appreciate it. I appreciate being here. I would say from a demand environment perspective, the first thing I'd cover here is it's in line with what we expected for the year already. And in Q1, we guided to the U.S. being down 4% to 6% for the full year. And in Q1, it was pretty much in line with that. I think in April, as you see the numbers coming out here, it's in line with that, still. And even I'd say well within the lower side of the range, but within the range there. So we feel good about what we forecasted. Today, you would have heard some news around Home Depot talking about a little bit lower level of demand and purchases that they were seeing. But that's not outside of what we expected and it's not outside of what we guided to for the year. So we really did suspect or anticipate that the consumer would be a little bit moderate in terms of their buying habits in the first half of the year. We expect the back half of the year to be similar. But when you're looking year-over-year, it's going to have a better comp because the first half of 2022 was just stronger. And we think you're going to start to comp in the back half, the back half of 2022, and it will be closer to flat. Beyond that, though, I would say is even some of the comments you heard this morning, is that people still believe in the long-term demand out there, and it's not just us and the industry. As we look at housing is undersupplied, there are factors right now in terms of just a lack of inventory available, whether it's new housing or existing home sales, mortgage rates have gone up. But some of those factors are probably temporarily limiting housing and which is having an effect on us. But we do expect the longer-term demand characteristics to still be positive, and we expect it to start to see some growth coming out of this year.

Great. And I think along with demand, we always get questions, and as I believe you do as well, around the pricing and promotional backdrop. I believe as of your last call, you talked about reiterating an outlook that promotions in '23 should be similar to back half of '22, but filled better than pre-pandemic. So I'm just trying to get a sense for what drives the view that pricing and promotions will continue to kind of hit your outlook, if there's any potholes or potential downside drivers that might play out as the year -- as we get into the back half of the year? And perhaps more broadly, how to think about pricing and promotional discipline in the industry?

Yes. So I'd say probably the first thing is -- and you kind of highlighted it, Mike, that when we looked at it, we did see the back half of last year, promotions pick up. And kind of as expected as some of the supply chain issues within the industry began to free up. We still had some of our own within Q4. But then as we came into Q1, what you would have seen sequentially is the impact of pricing and promotions on our margins. Sequentially, we had a 100 basis point improvement from Q4 to Q1, which is kind of the seasonality we expect in a normal environment, that it is heavier in Q4, lightens up in Q1. But when we looked at Q1 year-over-year back to Q1 of 2022, it was a negative 275 basis points, which also tells us that, like I said, we saw it begin to build in the back half of the year of 2022, it seems to be on a normal seasonality curve. And what we see so far would lead us to expect that what we saw in 2022 is about the level that it's at least settling in right now, which is below 2019. So we continue to believe that, that's probably going to be the course for the year. We're not seeing anything out there that's telling us anything differently. If you look at, commodity costs did come down, but then they've leveled off some. So it's not like there's a significant amount of cost benefits out in the market that other competitors could be investing in or that we could be investing in the marketplace. So I think that also will probably at least lead most of us to probably keep our promotions at a similar level as we saw in the back half of last year. And beyond that, if you look at where demand is, right now, the things suppressing demand -- incremental promotional investment is not going to drive higher overall demand, and I think that the industry kind of understands that. And so I don't see that a significant amount of incremental investment making sense to drive higher levels of demand out there. That's -- it's probably not going to happen because the factors that are affecting demand right now are not as much price-driven as they are some of the other macroeconomic factors I talked about around housing. And I think as those begin to free up, then the demand begins to come back anyway.

Right. Right. So maybe just shifting a moment to -- you talked about, maybe in some instances, promotion is not driving necessarily a higher level of volume. There are a lot of other factors, obviously, that come into play as well. But I was hoping to go to shift gears in terms of volume towards volume, but also market share. You talked about a little bit of share gains in the first quarter. I was hoping to get a little bit of a bigger picture. Stepping back, talk about the amount of share that you lost over the last couple of years as it relates to the various supply chain challenges that you had perhaps relative to the market. And how we should think about Whirlpool ostensibly gaining this share back over time. And if so, how long would you expect that to take?

Yes. So -- and to your first point there, you did highlight, yes, we gained share both sequentially from Q4 to Q1 and year-over-year. And the biggest driver year-over-year was more, our product placement and all that and our products we launched. But the Q4 to Q1 was really driven because we did have some supply chain issues in Q4 that we were able to overcome in Q1. Now our share historically prior to COVID had been, let's just say, in the low 30s. And as we went through various supply chain difficulties that impacted us a little bit more than some of our competitors, we probably dropped down into the mid-20s. We've gone from the mid-20s and back up probably into the high 20s now. And as we've talked about, our goal is really to progress about 0.5 point of share every quarter, at a pace like that. And so we continue to look to try and bring ourselves back up over a, let's just say, about a 1.5-, 2-year period of time, if you take that run rate, we've talked about before, back up closer to that 30% level. Which when we look at it and say, what's about the sweet spot or the operational space we want to be in that allows us to play pretty broad within all the different price segments, but also keeps us out of some of the value-destroying areas of the business. We've always said that somewhere around the low 30s, 30% to low 30s is the right market share to have. And we are seeing a progression back towards that. But if you want to do it in the right sort of a way without destroying value along the way, you've really got to do it by product launches, by product placement, by investing in the right types of promotions and avoiding the ones that don't make sense. So that's why I'd say we're not going to just rapidly go back because it wouldn't make sense from a margin perspective to get that aggressive.

Okay. Okay. Great. No, that makes sense, and I appreciate the detail there. Maybe just sticking on you kind of mentioned pricing and mix and other drivers of volume and share. How should we think about price/mix going forward for Whirlpool in terms of annual contributions, either through one or the other or a combination? Particularly if we remain in somewhat of a more tepid economic backdrop.

Yes. So here's what I would probably say is, if you just take pricing and promotions out, we typically shoot to try and drive 25 to 50 basis points in mix within -- year-over-year. And that comes via new product launches, comes via us looking to get a different mix among possibly our brand portfolio, our retailer portfolio and optimizing where our margins are better. So that's the goal and the target and what we typically try and drive within. The remainder of that is more the pricing and promotional concept. Does have a significant amount of -- it's driven significantly by the cost of commodities and input costs. And if you looked at over the last 3 years before this, '20, '21, '22, you had significant price increases we were able to drive as commodity costs went up. On the backside, on the way down, we typically are able to bring those down a lot slower and retain some of that benefit for a period of time. But that tends to be one of the bigger drivers in the marketplace beyond your ability to improve mix, is just the underlying input costs. Now as I mentioned before earlier, the other big factor is we continue to look to just be very disciplined in our promotional spend. And that's where you can really have a significant impact one way or another on that pricing and mix within a year, is if you get too carried away on your promotional spend. And I'd say, if anything, in the time period leading up to COVID, the few years before, and throughout it, we've demonstrated an ability to be very disciplined in our process and only invest in things that we think will give us the lift in our volumes that justify doing that type of spend. So absent of any big swings in commodity or input costs, I would expect pricing to be relatively stable in the near to midterm, and then to see a slight appreciation just coming through mix improvement over that time.

Great. Thank you for that. Maybe we can shift to margins, another kind of hand-in-hand key topic of interest, key area of interest among investors. How should we think about the North American margins longer term? Is the 15% floor that you kind of have alluded to over the past, particularly coming out of -- or the initial stages of COVID, is that still the goal? And with the exit rate this year being targeted at 14%, how do you think about getting back to that 15% number over time?

Yes. Yes, I don't think our long-term perspective on North America has changed really much at all. To your point, we really -- we expect -- we moved it quickly from where it had fallen in Q4 to 10% in Q1. We expect to exit the year at 14% and have a full year average of about 12%. If you look pre-COVID, in a more stable environment, we're already north of 13% with that business and had the ability to deliver margins above that. So to say that we can get to those longer-term goals of 14%, 15%, I think, are still very valid out there. I think where some of that comes from, further margin improvement in North America, is a couple of things. It's -- as we continue to stabilize the environment and our supply chain environment, we will get cost benefits that come along with that, that still aren't reflected in there. As we continue to grow back some of that share, we'll get further volume leverage which will also help our business. As we continue to invest in certain higher growth, higher-margin areas, such as InSinkErator and growing that, will help our margins over time there. And then as we launch new products, again, and continue to try and drive improved mix within that business, I'd say that's an opportunity there. And then on top of that, there's some more longer-term things, such as complexity reduction that will help our entire global business, but I think will also help our North America business. So our perspective on the long term hasn't changed. Like I said, I think some of the dynamics such as demand that could be healthy over the coming years will be a positive. And additionally, some of the inefficiencies in the system that are still there from the past few years that we're continuing to get out of for further cost savings opportunities. So I believe there's going to be opportunity to expand the North America margins for a multiyear period of time.

Great. That's great. That's very helpful. I also want to hit on cash flow generation. The goal -- the long-term goal is at 7% to 8% of sales. I believe this year, you're closer to 4% or per your guidance. Can you kind of bridge us from the 4% to the 7% to 8%? What needs to happen kind of similarly either from a balance sheet standpoint and/or a margin standpoint?

Yes. I think you got to think about it this way. About half of it should come from margin improvement and earnings improvement, and that's just as we continue to expand margins over a period of years. And especially as you grow the North America margins, back to above the levels where they were pre-COVID and then closer to our long-term goals, what you'll see there is that is a cash-generating machine. And so you'll see a lot of those earnings fall to the bottom line in terms of cash. But the second piece is as we divest of our EMEA business, that business has always had a higher level of working capital requirements than many of our other business. It also has had a higher degree of seasonality within it due to working capital. And it's also had a large amount of restructuring costs involved with it that impacted our free cash flow. And so when you take those 2 things into account, in addition to the fact that we added the InSinkErator business, and we'll now get that up to its full run rate. Those are the 3 big variables. But about half of it truly is just operational margin improvement, and the other half really is -- the big driver is just the disposition of the EMEA business. And I think those alone will -- as we've said, just the disposition of the EMEA business is over $200 million of free cash flow benefit that comes to us when we look at it on an ongoing rate.