Whirlpool Corporation (WHR) Earnings Call Transcript & Summary

Good morning. I'm Sam Darkatsh. On behalf of Raymond James, we'd like to welcome you to the Whirlpool Corporation presentation for this morning. With us today from Whirlpool is Jim Peters, Executive Vice President and Chief Financial Officer; as well as Korey Thomas, Head of Investor Relations. Jim, I think you mentioned that your prepared remarks might be -- might take the whole 30 minutes, which is fine. We do have a breakout session that will immediately follow. So with that, Jim, welcome back.

Thank you, Sam, and welcome, everybody. And for those of you who might have caught our Investor Day last week, I don't mean to disappoint you, but I'm going to probably cover some similar areas and some similar topics in many of -- and most of the slides will look very familiar from that. But we did just have our Investor Day Tuesday of last week, where we really rolled out what I'll call it our midterm targets looking out to 2026. So real quick, let me just get to -- so you look at, for those of you who aren't familiar with Whirlpool, which I see many familiar faces within the room, but you can see, right now, in terms of this year, our sales as reported are approximately -- or as of last year, about $19 billion. As we divested our EMEA business, our sales will be closer to $17 billion on a go-forward basis. Globally, we have about 59,000 employees, and we have 55 manufacturing and technology centers. We manufacture close to where we sell appliances in all parts of the world. And that's what you'll hear me talk about, too, as we made a decision around transforming our portfolio, we really looked at what parts of our business really truly were global and what parts are more regionally or locally operated, and that led us down the road of making certain decisions in that transformation process. Additionally, you can just see by categories that we sell appliances within dishwashing, cooking, laundry and refrigeration, all relatively similar. The reason that laundry and refrigeration are larger is that there are many countries outside the U.S. where those are the big products you sell. And cooking is not as big of a business in those. But if you really break it down within the U.S. or more mature markets, then it is a very similar split of percentage across all product categories. Also then I just go through real quick here some of the strong reasons why Whirlpool is a good company. We've got a #1 share position in the U.S., in Canada, in Brazil. We're #2 in Mexico. We're #3 in India. All strong markets for us. We have a strong track record of launching innovative products. And if you look at the brand portfolio that we have, we have significant brands that are used both globally and locally in many countries. So you can see that we have certain brands that are large in, say, Brazil as a Brastemp or a Consul, which give us #1 market share position there. We have Whirlpool, which is a global brand. We have KitchenAid, which is a global countertop brand. Also we do major domestic appliances globally with that, but most of that is within the U.S. And then from a best cost position, you'll hear me as I talk about the future. We intend to continue to improve our cost position. So if you really look at the -- where do we say the value sits here and what's the value creation thesis go forward? Big part of this is about unlocking value through our portfolio transformation, and I'm going to walk you through here. Biggest thing that we thought about when we did that is we really want to invest more in our high-margin and high-growth businesses. That's what led us down the road of deciding that we would divest of the EMEA business. As we looked at it and we looked at that market, we didn't see the growth, and the margins have always been under pressure. So one, we're refocusing on 3 pillars, and I'll talk about those in a second. Two, the MDA business in the Americas and the SDA business, as you'll see me walk through, are really positioned well at this point in time. Three, our India and commercial businesses, we see as strong growth opportunities go forward. And as I said, we really want to focus on these parts of the portfolio. So now as I talked about earlier, the 3 pillars for us of what we see as our business go forward. The first pillar there that you see is small appliances, and I'm going to talk a little bit more about that in a second, but that's our KitchenAid countertop or small domestic appliance business. We operate it on a global basis. Two strongest markets for it are North America and EMEA, but it is in Latin America and Asia. EBIT margins above 15%. And you'll see, we see it as something that can grow at a 10% rate, as we begin to expand the product portfolio in there. Major appliances, that's our core business. As you can see from there, we really want to strengthen and focus that business. We're going to focus it very much on the Americas, but we do intend to continue to drive our business within Asia and especially within India because we do see that as a very positive growth area for us in the future. Commercial appliances is probably the smallest part of our business today. We're in the commercial laundry space. We do see that as an opportunity to continue to grow in some higher-margin areas we could participate. But I'd say of the three, that's probably the one that's furthest out. If you look at then the additions and the subtractions, and you can see the moves we've made over recent years, you can see we added InSinkErator. We added Elica, which is a hood and cooktop business. We added the Elica India business. And so Elica operates as a separate company within Europe, but that India business has been a significant benefit for us within India. You can see the things then that we've divested over or exited out of. And now we're exiting out of all of EMEA. But before that, it was Russia, Turkey, South Africa. We sold our compressor business in Brazil, which is in Braco. And then China also, as we've looked at where do we want to focus. As I mentioned earlier, we're focusing in the Americas and certain parts of Asia. So now you kind of get to hear, and as I mentioned and you look at the different big markets around the world, North America, I already talked about #1 share position, over $11 billion in sales last year. Latin America, #1 sales position over -- or almost $3.5 billion in sales. And India, which is just below $1 billion and #3 share position there. All significant markets for us, all good growth opportunities in the future, but it gives you just an idea of the size and scale of these. So now what we talk about here is we have gone through this portfolio transformation. We've also had to look at the segments and how we report our business. And historically, we reported our business in 4 segments, and there were 4 geographic segments. And included within those segments was both the major domestic appliance business for that location, but the small domestic appliance business for that location. Now as I talked about earlier, when we stepped back and looked at our business and said, "Boy, how do we really run this business? Is it truly global? Is it regional? Where does it sit?" We realized that the small domestic appliance business is a truly global business. It operates that way. The products are very similar, if not identical, across the globe. The stand mixer is made in 1 location, in Greenville, Ohio in the U.S. and sold in all other countries around the world that we sell it in. So we identify that as a truly global business. We looked at our major domestic appliance businesses and said, "Boy, those operate on a much more regional basis." While they get a benefit of a global engineering organization and they have some common architectures, most of the time, the product is produced very close to where it is sold. We've always talked about in the U.S., 80% of what we sell in the U.S., we manufacture in the U.S. I would say today that it's probably closer to at least 80% is made within North America because there's always a balance between Mexico and the U.S. in terms of production. If you looked at our Latin America business, almost the entire amount is made either in Brazil or Mexico that is -- for that business. And if we look at our India business, almost the entire amount of sales within India are produced within India. So as we started to look at the new segments, we said, "You know what? We'll break this into 3 different major domestic appliance businesses by geographies, North America, Asia and Latin America. And then we will have a separate global SDA business that we'll report out on." That's the way we run the business. That's the way we invest in it, and we do think that helps provide the transparency to see how well this business performs and how well it's historically performed. So now I'm going to talk a little bit about the major domestic appliance business in North America. Obviously, this is one of our most profitable businesses. It's the one that generates a significant amount of free cash flow for us. And it's the one that many of you as investors tend to focus on a lot when you bring questions to us. So I want to spend a little bit of time here just to help you understand further. So if we really look at North America right now and if you take 2023, we were just under $11 billion in sales, about a 9%, 9.5% EBIT margin. As we have talked about for 2024, we expect sales to be relatively flat, very close here. We expect margins to be approximately 9%. And this is as we look at the market right now, and we look at the appliance industry right now. What we would see is the biggest drivers right now that are affecting us. Obviously, as many of you are aware, with higher mortgage rates, we're seeing existing home sales lower, which drive our discretionary demand lower, which is about 1/3 of our business in the U.S. Replacement is much stronger than it's been historically and doing very well. And we did think the replacement industry would do well based on just looking at periods of time that we comped against and looking back 10 years because the average appliance has a life of about 10 years. That's giving us a window that says, "Boy, we should see some growth in the replacement demand." So we looked at that and then we look out to 2026. And we say, "Okay. In 2026, and I'll walk through a little bit more of this in a second, but in 2026, we do see sales should grow at about 2% to 3%." If you just look at the GDP, if you look at some of our expectations, you look at where we think we can gain a couple of points of share. And then we do believe that our margins can get back to the 11% to 12% range. Now you're going to see, as I talk about that, it's really driven by cost, and that's the biggest driver in terms of margin expansion right now as we look at it because, as we all know, we're not banking on mortgage rates changing anytime soon. We're not banking on the housing industry shifting significantly anytime soon. So that's not what's factored in. This is more about just the cost opportunities we see within our business today. So you really take the North America journey, and I've lived through this over the years and all that. But prior to COVID, we were in a period, from 2017 to '19, where our margins were improving, where we're seeing a very stable business. We were seeing housing was in a very stable state, and you saw some ups and downs, but we continue to really invest in our products and drive a lot of innovation. You then saw in -- during COVID in 2020 through about 2022, 2021, what you saw is disruption to the supply chains. Everybody experienced this globally. You couldn't get components. You couldn't get parts. Your factories were impacted. It shifted the -- and demand rose, so it shifted the industry significantly. And what happened, though, to us at that time, because we were disproportionately affected based on our footprint and where we were located, our market share did drop to about 26% in the U.S. But you know what we did? We took a lot of pricing to offset some of the inflation we saw then. Now you get into a post-COVID period. This -- we are seeing more inflation now than we've seen probably in any period of time within our company. Multiple years of raw material inflation, curbing then down a little bit in 2023, a promotional environment that's come back to what we saw pre-COVID. But we were able to gain back some share within this environment. And so if you look at the things that overall impact that North America margin, these are some of the big drivers. Now as we look 2024 to 2026, and I'll talk a little bit more about, we do feel we're well positioned for the future here. We do feel good about where the housing market could head. We do feel that we've got the right amount of product innovation. And as I talked about already, we do believe we can expand margins by reducing our cost, and there are a lot of opportunities, especially we get in a more stabilized supply chain environment that we're in today. This will really help us from an overall manufacturing and supply chain cost perspective. So we talked about this just briefly before. But if you take the U.S. appliance industry, there's 3 drivers of demand we always talk about: replacement; discretionary; and new construction. And as you can see here, historically at one point in time, it was closer to 1/3, 1/3, 1/3. Then as you got into the period coming out of, what I would say is, when you had the housing crunch and the financial crisis and the industry began to grow back, we saw a significant amount of increase in replacement, with discretionary and new housing stabilizing around 30% for discretionary and 15% for new housing. In this market today, where existing home sales are on a multi-decade low, that's the driver of discretionary purchases. So you really see, that space has contracted down to about 25% of the business. What happens? When people buy an existing home, one of the first things they think about upgrading and changing is the appliances, and that's why that's such a big driver for us. And it's not just that they do that. They typically look at the entire kitchen suite. So it's a very profitable segment for us. That's been under pressure as mortgage rates would start to come down or as existing home sales would pick up at some point, that's the driver that benefits us. New construction, we do see that as a positive, and I'll talk a little bit more here. But if you were to look at our Investor Day presentation, we talked about we're over 50% of the largest homebuilders in the U.S. today, and we're targeting getting to 60% of that business, which also is a significant benefit for us because, again, we're selling kitchen suites through that channel. So now talk a little bit about the innovation. And as I said, these are many of the same slides we would have used in our Investor Day presentation. But you can really see just examples of some of the innovation we've been launching in recent years. I start with the Maytag Pet washer and dryer. And again, even Lowe's highlighted this in one of their earnings call at one point. Think about the pandemic, COVID. Think about what a lot of the population did. They went and got pets. People all of a sudden brought pets into their home. We saw this as an opportunity that now they were having pet hair, let's launch a product, which has been very successful, limited amount of engineering resources because it's a filter effectively, but works very, very well. The flexible 3rd Rack dishwasher. That's one of the best-selling products for us out there. What does that do? It's actually a third rack that you can use to put more than just silverware or cutlery on. You can put glasses, you can put bowls, something that the consumer really values. Microwave hood, again, this is about aesthetics, about how it fits in the kitchen. And SlimTech refrigeration is something we talked about recently here and launched. SlimTech refrigeration is using vacuum-sealed panels on a refrigerator rather than foam-filled panels. That allows you to actually make the panels, the outside much thinner. And this is something that nobody has really brought significantly to the market. So it increases capacity. It helps with energy usage. So these are the kind of things that we're really looking to launch right now into the marketplace and drive innovation. So I did say we've got something in here about the builder business also, and you can kind of see here that of -- we've got 8 of the top 10 builders. We've got strong delivery capabilities. But you can see, as I've said, we're over 50% of that business. And right now, we expect to get that closer to 60% over time. So again, and you kind of go through, but what makes us so good in that space? It's our logistics capabilities. It's the product portfolio that we have, and it's the brand portfolio that we have. We have brands that you can use in homes at every price point, from things that are starter homes,through step-up homes, through luxury homes, et cetera. We have products and brands that will work, and that's why builders like to work with us. The other thing then, real quick, just kind of closing on North America is in 2022, we acquired InSinkErator from Emerson. This is a food waste disposal business, sits under your counter, attaches many a times to the dishwasher via the hose and how the water flows, but it is the neighbor of the dishwasher. We saw it as a very good fit for our product portfolio, a very good fit with our placement in the builder industry, very good fit as many of the retailers that sell our appliances sell InSinkErator product also. And again, as I said, it's the next-door neighbor of the dishwasher. Strong market share, strong installed base, strong replacement base. And as housing begins to recover and grow at some point, we see this as something that will take off well with that, too. Very, very strong margins. Margins -- EBIT margins over 20%. Along with that, generates very solid free cash flow. So that's why we're very excited about this business. So real quick. As I said, I'm running through what we kind of covered in Investor Day in a matter of about 30 minutes, and I'll talk briefly about our global small domestic appliance business, our KitchenAid business. So if you really look at, and you would have heard Ludo Beaufils, who's running this for us globally when he talked about this the other day, he talked about the strength of this brand and the history of this brand. And just so you know, the stand mixer is an iconic brand -- or the stand mixer is an iconic product. But the brand is one of the most widely recognized brands throughout the world. And as he talked about, according to Prophet, it's the second brand behind Apple, which just gives you a feel for how well this is recognized, but how many consumers have these within their home. The biggest problem with the product we talk about is it lasts forever. And so people don't -- it doesn't have a big replacement industry. The good thing is people continuously get married and have other types of events that you celebrate, and it's one of the #1 items on a wedding registry. So this has got maybe some slightly different drivers than some of the other businesses do, but still has a very strong performance over a period of time. What we've talked about here is now it's about expanding that brand to other products that we can bring to the marketplace. If you really just look at it today, and we've talked about this, is about a billion-dollar brand for us -- or a billion-dollar business for us, margins at over 15%, talked about the strong presence we have globally, also does very well in a direct-to-consumer type of space. And the ratings in terms of the product are some the highest that we see on any of our products. As I said, the quality on this is so good that the one thing you never see is a consumer complaining, "Hey, my stand mixer doesn't really work anymore. I've had a problem." So just to give you some perspective on where that business is. Now as we look out, we don't think the industry will grow at 10%. The driver for us is new product introductions. And you can see the different categories that I've just really tried to lay out here for you to understand why do we think we can grow this business at an above-average rate. The stand mixer today is a space where we do very, very well, and we're a leading producer in the world. Food processors, we do food processors today, but we see that as an opportunity to grow. If you actually take one -- and go look at one of our food processors, we've simplified the way that you actually interact with it in the way that it opens and closes to make it much easier than many of the competition out there. Traditional blending, we actually have some very good blending products, but this is [ matter ] now growing that segment for us. Espresso machine, we are launching in the near future, the fully automatic KitchenAid Espresso Maker, which will compete with the likes of a JURA, some of the products that De'Longhi has and other folks out there. So we're very excited about that. It's something that will be in price points that are at or above $2,000. It's something that you're seeing the market grow around the world, but especially within the U.S. And then you've got countertop cooking, and that can include everything from countertop ovens to toasters, et cetera, another space that we participate in, but see as very, very good growth potential in the future. So with that, just kind of get to what I said or talking more about what are our midterm targets here and what do we see by 2026 for this business, and this is what we would have rolled out the other day. We really believe that in terms of where the business will be is, right now, just below in the $16-plus billion, as you can see, around $16.2 billion, just above $17 billion in 2026, assuming about a 3% to 4% growth rate when you blend all these businesses together. Ongoing overall EBIT of 9%, and I'm going to walk you through the building blocks of that in a second. Free cash flow, that's really driven by that increase in margins, but also by divesting of our EMEA business, which gives us about a $200 million to $300 million per year free cash flow benefit. That business consumed, whether it's through restructuring, through operating costs or whatever, about $200 million to $300 million of cash per year for us. And then obviously, that will improve our return on invested capital. Our guidance for the year is that, you see on the bottom line there, and that just gives you the perspective is we do believe we'll be around 7% for this year, and those are the numbers I'll kind of start to walk to and from here. And that free cash flow this year, as I said, is still impacted by EMEA as we will divest to that and complete that transaction at the beginning of the second quarter. So real quick, what are the drivers on our margin? As I said the other day, this is focused on things we can control. This is a very -- this margin improvement plan is focused very much on cost. We already took out approximately $800 million of cost last year, as we've been faced with significant amounts of inflation. We've identified opportunities within this year to drive another $300 million to $400 million of cost out of our business through things such as just simplifying our structure as we divest of EMEA, through actions we already implemented in 2023, through improvements within our factory and simplification of many of our processes there, uses of automation, making changes to our logistics network. So numerous opportunities that we feel very good about. Then as when we look go forward, we do believe that there's a further $300 million to $400 million opportunity over the coming years. Some of that will be a carryforward from the things we're putting in place today. Every time we do something like this, there's always a benefit that starts to accumulate in the next year. Additionally, we do see some opportunities to take further complexity out of our business as we simplify, as we have fewer product architectures. You would have heard Marc talk in our Investor Day about reducing the number of SKUs we produce. That's a big thing for us. It takes multiple years to do it. We've been very successful in driving it so far. We do believe there are continued benefits that will come from it. So then what does this mean from a free cash flow perspective? If you look at that, what you see here, as I already told you about building off of the 2023 numbers, $200 million to $300 million of just free cash flow benefits that come from exiting EMEA, another $300 million that would come further from just margin expansion. You just take 2 points or 200 basis points of margin expansion and really do the math, it gets you there. We do believe that we've got working capital opportunities of at least $100 million in inventories. We ended 2023 with higher inventories than we probably would have wanted to see. We see that as something we'll take out in 2024 and beyond. We'll continue to focus on lowering -- especially as you simplify your product structure, that does drive a benefit there. And then interest and tax, the $100 million to $200 million we talk about, as we bring our debt levels down, obviously, interest will be less of a factor for us. But also we've talked about, you've seen all the tax benefits we've had over the last few years. That will now flow through our cash tax rate over a period of multiple years. And we will see cash benefits of that. They don't all come in 1 year because it's applied against income that we will make in the U.S., these benefits that we've been able to set up, so that as we divest of EMEA, we can realize the losses that we incurred in EMEA that were funded by the U.S., they will now flow through, and that's where we'll see the cash benefits. So again, we see things that really drive cash flow to a much better place in over $1 billion. And I think we got about 5 minutes left here, so I'm going to jump. Capital allocation, and this is also something that, as we discussed with many of you, has been a topic and always is. And I think I would say, and you would have heard me say in Investor Day, we're very consistent here. We look at it. One, we want to fund our business and our organic growth. And we continue to invest in our products, showed you by those new product launches, but also in products that will be coming down the line, both capital and engineering costs. Fund our dividend, we continue -- we've talked about 69 straight years of paying a dividend. We've always either kept it constant or raised it. We fully intend. And looking at it on a multiyear period, we're comfortable with the guideline that we've established. Debt service, also talked about that. We really want to bring our net leverage down to about 2x EBITDA. And then share buyback and value-creating M&A. M&A will not be a focus in 2024 for us because we're still digesting InSinkErator. But we do see go forward, we'll continue to look at opportunities. But we are beginning with the $2.5 billion of share repurchase authorization that we have, beginning to at least buy back dilution that's created by some of our comp programs and starting there to reengage on buying back shares. So that really brings us to the last slide here that brings it home and why do we think this is an attractive investment. If you look go forward, the opportunity for profitable growth, I really walked you through here. The margin expansion, as I said, our margin expansion plans are focused on things we control, are focused on costs we control. It does not assume material costs get better. It does not assume inflation gets better. It assumes we take cost out of our business at significant levels that we've done in the past, but even probably more significant, especially as we simplify in a post-EMEA world. Our ability to convert that to free cash. Now that we don't have EMEA consuming cash every year, it will increase our ability to convert our earnings to free cash flow. I already talked about how we'll continue to fund our business, especially through engineering and through capital expenditures. And then right now, also talked about returning cash to shareholders, whether it be via a dividend or via share repurchases. So with that, I think I'll kind of bring it to closure here and probably got like 2 minutes left.

Probably got time for perhaps one question, one question with us. Anyone in the room? Jim, you've indicated that you're looking to take at least 1 point of your growth or 1 point of your share from the builder side and then also another point from the retail side. Talk about the cadence because it would imply that, that new product introduction is pretty critical to the achieving of that goal. You've talked about the SlimTech, the new dishwasher lines and what-have-you. But going forward, what's the timing and cadence of platforms to be introduced in '24 and '25 that we can track?

Yes. So I'd say, Sam, I mean, really, if you look, we launch hundreds of new products every year. And as you really look forward, some of the areas that we're investing significantly right now is in some of our refrigeration platforms at the higher end because we do see the opportunity there where we do think we can bring some new product to the market that will be extremely competitive and representative of the strong brands we have. Laundry will be an area where we always continue to invest in things like the Maytag Pet, as I highlighted. Those are the types of innovations you can drive within a shorter period of time and bring to the marketplace. Something like a SlimTech is something that actually runs in over a period of years as you expand it to more and more products. I think if you look at that -- the dishwasher and what we talked about with the 3rd Rack, that's about now bringing that to all the price points that we possibly can, and that's the other opportunity that we have. You start anything like that at a certain price point, on certain products and certain -- and then we -- to push it more to the mass because it's something that every consumer really wants to have and wants to have access to. So I think there's an exciting cadence of continuous product launches that we'll do. I think that if you look at -- to your point, half of our share gain will just come as the builder industry and new homes begin to come back, but the other half comes through new product launches or leveraging existing products that we have in the market today. So I think with that, we're probably good.

Sounds good.