Whirlpool Corporation (WHR) Earnings Call Transcript & Summary

We'll continue the program. Again, thanks for everyone for being here. We're in the middle of our first day of our morning session, and we have Whirlpool Corporation. CFO, Jim Peters, is to my left. Again, my name is Mike Rehaut. I cover the Homebuilding and Building Product Space for JPMorgan for more years than I'll admit but I've seen a cycle or 2, I guess, you could say.

You have.

So as with prior presentations, this will be a fireside chat. I have a bunch of questions that but there will be time at the end for Q&A. And so with that, again, Jim, thanks for being here. Nice to see you in person after 3 years virtual. It's nice to be back. I appreciate your time today.

Yes. Well, thanks, Mike. I appreciate the opportunity to be here. And maybe just before we kick it off real quick. I'll just say a few things because I think you guys are having an opportunity to hear from a lot of industries that are either related to ours or industries that are -- as homebuilders that use our product. And what we would say right now is where we are as a company, we're in a space where the demand has been suppressed for a period of time. And many of us know why that especially the increase in mortgage rates is driven down, especially the discretionary demand in our industry. But we are optimistic on the future, and we are optimistic on the housing market in the future, and we do think there's still pent-up demand for housing. We still think there's an undersupply of housing. And so we think we've positioned ourselves well for when that begins to come back, especially with our share in the new home construction space but also with the products that we have available as consumers do begin to upgrade on existing home sales pick up. So just kind of wanted to open with that, that kind of ties into what everybody else does here and then hand it off to Mike to raise the questions.

Great. Thanks, Jim. Appreciate that. And my first question kind of is around demand-oriented question. So kind of working off of those comments, the shipment guidance that you have for North America, you kind of alluded on your last call that you did have a little bit of a -- the phrasing was slower-than-expected start in North America during the first quarter as the promotional environment despite being similar to the back half of '23, maybe didn't produce the volumes you'd expect. So what drives Whirlpool's confidence that volume will improve in the second quarter and the second half to hit the full year guidance?

Yes. I think the first thing is part of what we saw in the first quarter is that because the promotional environment didn't drive the consumer sell-through late -- in late 2023, retailers started off with higher inventories. And so part of that in the first quarter was retailers beginning to correct their inventories in line with where demand was. I'd say the second thing, as we said, we did expect it to begin to pick up at some point here. Now we did expect to begin to see some rate cuts that would hopefully impact mortgage rates overall and begin to put more consumers in the marketplace, and we haven't seen that quite yet, but what we are seeing is at least a stabilization within the industry here. Now in terms of what the promotions have done and the incremental demand that they've driven, as we said in the first quarter and the reason why we announced what we'll call promotional program price increase of 5% is that we aren't seeing the uplift from that. That means, listen, the consumer that's in the market right now is either most likely a replacement consumer which we see is close to about 60% of the business today and typically is more 50% to 55%. And they're more impacted by that they need to replace. It's a [ dress ] purchase. Additionally, that we see the new housing market is still a stable part for us, and that's not really affected by the promotional environment. So the segment, that discretionary segment that's impacted the most is the segment that's down the most right now. And so that's why as we step back, we said, listen, we only invest in promotions that create value and create uplift. And what we saw throughout late last year is we weren't -- they weren't creating the value or the lift we thought. So obviously, that's not what's driving the consumer and the elasticity is not what everybody thinks right now.

So looking to the back half, I think when you think about your volumes were down in the first quarter. I think you kind of said roughly in line with the outlook for industry shipments. I believe your full year is flat up 2% for North America. So that would imply shifting to a little bit of growth in the back half of the year. Maybe just walk us through how that progresses? Is it just more of a function of comps? Or are there any kind of demand green shoots that you might see emerging in the first half of this year?

Yes. I would say as we look towards the back half of the year, to begin with, like I said, I think the industry came in with some higher inventories across the retailers and all that. So that's part of in the first half of the year or the first quarter just normalizing back to that, so you don't have to deal with that in the back half of the year. I think the second thing, as we look at, as we said, is discretionary demand is probably on a bottom point here. And so at some point, any type of little bits of green shoots or movement from an economic perspective should begin to help our industry. We don't expect significant improvement in the back half of the year, and I'd probably say of that flat to 2%. We're probably closer to the flat as we look at where the industry is and where things are right now. But incrementally, we also have certain new product launches that we have had in the first half of the year here. We do expect those to help us at least from a comp perspective. And I think, Mike, as you mentioned, I do think as you look back on last year, it was a year where demand was suppressed also. So that's why we think at least we've hit the bottom. Now it's a matter of when it just begins to start to come back up. And we were hoping that, as I said, you would start to see some less pressure on interest rates and mortgage rates may be trending in the right direction. But I'd say right now, we're a lot more cautious on that, but that could be something at some point that could help us, but we're being really cautious about that.

Okay. Thank you. So margin guidance also kind of coming out of the first quarter. North American margins being 100 to 150 bps below expectations for some of the reasons already mentioned. You implemented the promotional program price increase. So maybe just kind of give us a sense of -- again, you kind of alluded to this before in terms of replacement versus discretionary demand in the marketplace. But the confidence in realizing this. And if demand does remain more depressed kind of said your -- you have this cautious outlook, maybe you're closer to flat versus up to for the full year. What prevents the competition from getting a little more competitive as well or aggressive in that backdrop?

Yes. I think if you kind of step back there and you look at first off, as we said, is we really decided to take the price increase because one margins are under pressure, but two, the promotions aren't driving the incremental demand that everybody had hoped or was really pushing for. And so as we looked at that, we said, okay, we've done this numerous times before. And honestly, we said it just doesn't make sense in this environment to be as aggressive as we were being when it's not driving incremental demand. And so that being one of the biggest levers to impact our margins. We said, you know what, we've got to take that step. It's the right thing to do. To be honest, the inflation, as we've talked about is still sticky out there. So our costs are still higher than we anticipated. Now I think we'll know more as we go through the next couple of months because 2 big promotional periods in our industry are Memorial Day and 4th of July. And that's where we'll begin to see the real impact to this. We'll begin to see what the competitive reaction is in the marketplace and we'll start to understand better. But I think if you just think about the marketplace today, even with the retailers, many of them, as they talk about their earnings and some of their sales recently are just saying that, listen, they're in an environment where they're not seeing the sales growth that they may be looking for either. And some of that is coming due to the fact that the discounting has been so high in some of these major categories. So again, I think that we'll see and we'll know more. We do believe the price increase -- increasing the promotional prices will be successful. Obviously, we fine-tuned something like this as we go through the process, but we do believe it's going to drive the margin lift that we expected. When you do a 5% increase, it's only on a -- think about in our business, we've got a portion that's done by with builders that's under contract, so it doesn't affect that. You've got a portion that's outside of a promotional period. So you can say, does this affect 75% of your business or so? That's probably the right answer. And I would say that even if it has a little impact on our market share, what we would know is that still we do believe it creates more value than the risk is of doing that. But we won't know really the competitive reaction until the next couple of months, and we see what happens in the marketplace.

Fair enough. You hit on market share, but so let me ask a bigger picture question on that. I think it was at your Investor Day earlier this year, you threw out some numbers where today, you're currently around 28% versus low 30s, 33% pre-pandemic. So maybe if you could just kind of review the competitive landscape, what drove that move down and perhaps comment on other participants maybe who took that share and then kind of looking forward as well, you kind of mentioned a goal of 30% by 2026. So the components to get there, if not get back to pre-pandemic share.

Yes. So maybe if you start at the 33% before the pandemic, the biggest impact for us was our supply chain and disruptions to our supply chain. And a lot of that came through suppliers that we had that were unable to get us in components or other things during that time period. And so that really took us from 33% down closer to 25% throughout the pandemic. Now we were in a marketplace at that time, though, where also the promotional environment was almost nonexistent. And so you weren't dealing with some of those things that we are right now and we haven't seen the rapid inflation of materials. And so we were making significant margins at that time. Now as you roll the clock forward, everybody's supply chains being a lot more healthy than they were back then. We've recovered the market share back close to 27.5%, 28%. And with where we are today, what we've been able to do is really work back into some of those areas that I'll call are more profitable or value creating for us. As we look to go to 30% from the 28% to 30%, that's where we really look to now push is to grow our business more in the premium appliances to grow our business more in the mass premium segment to grow with launches that we've done in the dishwasher space with launches in laundry such as the Maytag Pet's line. These are all products that sell at higher price points, and that's really where we're focusing to try and gain our market share back. As Mike talked about, we said at Investor Day that over the next couple of years, we intend to grow approximately another 2 points. Biggest part of that is going to be new product launches for us. And whether it's new product launches in refrigeration and front-load laundry, it's leveraging the ones we've done in Dish, that's where you should really expect to see us going after the market share to go back to 33%, I would probably say that we would have to venture into some areas that we don't see to be as value creating. And so that's why we're a little bit more cautious and say, listen, we're really targeting to get that 30% and make sure that, that growth comes in very profitable and margin accretive areas. And then if there are possibilities beyond that, that's good, but what we don't want to do is just try and get very aggressive at the bottom end of the market to try and pick up another few points of share because that part of the market is not extremely value creating in our industry. And so that's why we want to hold ourselves to that 30%. And then if we see the opportunity, we definitely go back. But we think the sweet spot is closer to 30% these days.

Okay. On new product development, you're kind of leading me into my next question now for a few questions here. So maybe you could just kind of review the pace of new product development, has it increased or decreased over the last few years. What does Whirlpool spend in R&D? And has this changed? For example, we recently saw an increase in advertising for all-in-one washer dryers, I talked about this a little bit with Scott earlier, and he said it's been out there for a while, but at the same time, it looks pretty new and shiny. So I was just curious around that. But to the extent that I think -- you look at some other industries at points, new product development can become a lot more intense. It can be more capital-intensive, resource-intensive, margin dilutive potentially. So just any thoughts around that? And again, from a cost standpoint, from an investment standpoint, how are things trending?

Yes. So we traditionally and going forward, invest 3% in R&D or engineering within our business and another 3% of our sales in capital. And that's -- so that 6% overall product investment or at least investment in products and our factories, et cetera. It has been where we are traditionally, and we do see to continue at that pace. We probably are seeing an increase in the amount of product investment in the marketplace, but also we're increasing our own level of investment. And we're not increasing the absolute dollar amount, but we're increasing our productivity within that space. And that's been a big part of some of the initiatives we've had for a while to simplify and reduce complexity in our space. We also looked at our global engineering organization and really wanted to focus more on having more engineers that are doing the work and less from an oversight and a management perspective, within it. So we really tried to increase the productivity, and we have. And we intend to keep trying to go that direction. Now what has that led to? I think as you've seen recently, we've launched the dishwasher, we launched a couple of years ago, which was the first one to market with a truly usable third rack has been a extreme success for us in the marketplace. The Maytag Pet line actually has done very -- been very successful for us with filters that will take the pet hair out of your laundry. As I mentioned, we're really focusing now on some things in refrigeration and front-load laundry to either refresh product that we have, bring the new SlimTech refrigeration product to the marketplace, which is actually using vacuum sealed panels. And that will allow us to make the walls thinner on refrigeration, and we're starting by launching that, using doors -- using it for doors within certain Jenn-Air models, which will be coming out here in the near future. So that's really where we want to focus is more of that innovation in launching products at what I'll call the mass premium, the premium to super premium space. Mike, on your question on the combo, washer and dryer is to Scott's point, it has been around for a while and especially over within Europe. It is seeing some recognition in the marketplace today, but it is still a relatively small part of the overall market. The technology that you need to use to do it is heat pump technology to be able to put a dryer and a washer together. They have to be a self-contained unit. We actually had a heat pump dryer that we launched into the marketplace around 2013, 2014. And it's very common technology used in Europe for dryers. The issue that we found is that the consumer really didn't like it very much because it's very energy efficient, but the drying time was much longer and the clothes come out and they're not completely perfectly dry, and that's what the consumer here is not used to wear European consumer that's normal. That's how the dryers work over there. So it will be interesting to see how much uptake among the consumer there is because at some point in time, we've also talked about this with energy standards in that. You may see the U.S. have to go to heat pump type of dryers to meet certain energy standards, and that will be a shift in terms of what consumer expectations are today versus how those perform in terms of drying cycles and how dry they get to close. So we do actually understand the technology very well. We've invested in it historically. We've looked at it, but we're also looking at what is the true demand that the consumers want more in a mass type of, but it is a space that we continue to look at. But right now, I'd say that's something that we're more observing and probably investing more, as I said, in refrigeration, in refreshing the aesthetics of our front-load laundry products and dishwashers and things that maybe have a little bit larger segment to the market. But also outside the U.S., the combo washer is one -- the combo washer dryer is one that we do see some pickup. So that's why we continue to look at, at least on a global basis, would there be a platform someday that we might be able to use across all our different locations.

So it's interesting you kind of alluded to new product intensity may be increasing and you're trying to get more productivity out of your own resources on that front. What does that mean from a product vitality index, if you have any in terms of -- do you have any type of goals around percent of sales from products introduced over the last 3 or 5 years? And where has that trended?