Whirlpool Corporation (NYSE:WHR) Q3 2023 Earnings Call Transcript

Whirlpool Corporation (NYSE:WHR) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Good morning, and welcome to Whirlpool Corporation’s Third Quarter 2023 Earnings Release Call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to Senior Director of Investor Relations, Korey Thomas.

Korey Thomas: Thank you, and welcome to our earnings conference call. Joining me today are Marc Bitzer, our Chairman and Chief Executive Officer; and Jim Peters, our Chief Financial Officer. Our remarks today track with a presentation available in the Investors section of our website at whirlpoolcorp.com. Before we begin, I want to remind you that as we conduct this call, we’ll be making forward-looking statements to assist you in better understanding Whirlpool Corporation’s future expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K, 10-Q, and other periodic reports. We also want to remind you that today’s presentation includes the non-GAAP measures outlined in further detail at the beginning of our earnings presentation.

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We believe these measures are important indicators of our operations as they exclude items they may not be indicative of a results from our ongoing business operations. We also think the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations. Listeners are directed to the supplemental information package posted in the Investor Relations section of our website for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. At this time, all participants are in a listen-only mode. Following our prepared remarks, the call will be opened for analyst questions. As a reminder, we ask that participants ask no more than two questions. With that, I’ll turn the call over to Marc.

Marc Bitzer: Thanks, Korey, and good morning, everyone. Before we discuss our Q3 results in more detail, I want to acknowledge the great news that we received earlier this week. On Tuesday, the European Commission announced their unconditional approval of our European transaction with Arcelik. The fifth decision in earlier clearances from Austria, Germany and China, we passed a major regulatory hurdle and are now fully focused in obtaining phase two approval from the UK’s CMA. By a transaction closure within this year is unlikely, we’re confident that we can close by April next year. The transaction closure will unlock significant value for us, largely coming from an improved free cash flow of $250 million per year. Later during this call, we will give you more detail about the expected regulatory process and the value creation of this transaction.

Looking more short-term at our Q3 results, we are pleased with our operational progress and our top-line growth and what is still a very challenging environment. The bottom-line showed solid progress over last year, but is essentially flat from prior quarters. Our operational progress during the entire year has been sustained and even accelerated during Q3. e improved our supply chain execution. We accelerated our cost takeout actions and are fully on track towards our full year cost targets, and we launched several innovative products across multiple categories. As a result, we were able to gain market share in almost all of our major businesses. As I mentioned earlier, the market environment is still challenging. Market demand in the Americas has been solid, but this is entirely driven by a very strong replacement demand related to increased appliance usage at home, a trend which we expected and which we expect to continue.

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Q&A Session

The other side of demand discretionary purchases have been even softer than anticipated as a result of increased mortgage rates and low consumer confidence. The low discretionary demand sparked a more intensive promotion environment, in particular North America. Essentially, we’re back to a pre-COVID promotional environment. Being back to a pre-COVID promotion environment is not surprising; however, we expected this to occur one or two quarters later. Looking into the fourth quarter, we do not anticipate this environment to fundamentally change and we do expect our business to perform on a similar level as Q3. As a result, we’re updating our full year guidance. We now expect full year EBIT margins of 6.25% to 6.5%. At the same time, we’re able to achieve additional tax benefits.

Putting both together allows us to remain at the lower end of our original guidance of approximately $16, but with a lower free cash flow of $500 million. Turning to Slide 6, I will provide an overview of our solid third quarter. We delivered 3% of top line growth, both year-over-year and sequentially. Promotions, which were normalizing sooner than expected, we’re more than offset by over point of share gains in North America, strong and growing replacement demand, our builder channel benefiting from a shortage of existing homes and InSinkErator acquisition. We realized $300 million of cost takeout benefit in the quarter and are fully on track to deliver over $800 million of cost takeout in 2023. Our actions drove 100 basis point margin expansion year-over-year with solid EBIT margin at 6.5% and ongoing earnings per share of $5.45.

Now turning to Slide 7, I will share more details on our 100 basis points margin expansion. Sequentially, price mix negatively impacted margins by 150 basis points and 375 basis points year-over-year. Driven from a normalization of a promotion switch was largely absent in recent years and reemerged in the third quarter of 2022. The promotional environment is now reflecting a return to historical levels, faster than previously expected and normal seasonal patterns, which are weighted more towards the second half of each year. In addition, mix was negatively impacted in the quarter due to over indexed share gains in laundry, as our laundry share was disproportionately impacted by supply chain disruptions during the pandemic. Our strong cost actions delivered both sequential and year-over-year benefit of 100 and 625 basis points, respectively.

Both year-over-year and sequentially, we invested more in marketing and technology. Ultimately, we delivered ongoing EBIT margin of 6.5%. Turning to Slide 8, you will see our operational priorities are fully on track. Our resilient and adaptive supply chain has delivered share gains throughout the Americas. We have addressed recent supply challenges, significantly reducing the risk of supplier driven disruptions by expanding dual sourcing and reducing parts complexity by more than 50% since 2021. We’re fully on track to deliver over $800 million of cost reductions in 2023 even with some raw material cost benefits coming slightly later than originally expected. And while we’re not providing guidance for 2024, we’re increasingly confident about sustained cost progress well into 2024 due to a number of factors.

A significant cost takeout during the second half of 2023 will obviously create sizable carryover benefits. The recent trends in raw materials, in particular steel and trade rates, which have been favorable throughout the year, are likely to continue to create tailwinds. Now, I will turn it over to Jim to review our regional results.

Jim Peters: Thanks, Marc. Good morning, everyone. Turning to Slide 10, I’ll review results for our North America business. The region saw mid-single-digit revenue growth, both sequentially and year-over-year with improved supply chain execution and new product introductions delivering over a point of year-over-year share gains, coupled with resilient replacement and builder demand, the addition of InSinkErator and strong cost actions, partially offset by normalized promotions negatively impacting price mix. Overall, the region delivered double-digit margins of 10%. Turning to Slide 11, I will discuss how North America is well positioned to grow and expand margins. We continue to invest in product innovation with a 25% increase in new product introductions this year compared to 2022, leading to premium product share gains.

Our strong portfolio of brands targets over 90% of consumers, with three of those brands delivering well over $1 billion of North America sales annually, we are the number one choice for U.S. National homebuilders, and our strong direct-to-consumer business has been growing at 20% annual compounded growth rate in the U.S. since 2018. Additionally, we have a relentless focus on delivering the best cost position and reducing complexity. With an industry demand of over 56 million annual units between the United States and Canada, and approximately 75,000 the 100,000 replacement units are purchased every day, and an undersupply of houses continues to exist in the U.S. Our brand and product leadership, coupled with our operational priorities, has North America business well positioned to deliver margin expansion in 2024 and beyond.

Turning to Slide 12, you can see a few recent examples of our product leadership. From our top load laundry innovation for pet lovers and the industry’s only two-in-one agitator washing machine to our latest premium KitchenAid French door refrigerator with superior craftsmanship and purposeful innovation like the industry’s largest third rack dishwasher or the first in the industry flush mount microwave hood combo. These innovative new products demonstrate our commitment to being the best kitchen and laundry company improving life at home for our consumers and strengthen our leading position in North America. As we look forward to 2024, we have an even stronger lineup of new product introductions that we expect will positively impact price mix and market share.

Turning to Slide 13, I’ll review results for our Europe, Middle East, and Africa region. The region saw continued demand weakness as the inflationary environment and geopolitical tensions continued to weigh on consumer sentiment. Revenue was down 2% year-over-year excluding the Russia business, which was divested in Q3 of last year. The region delivered margin expansion year-over-year from cost takeout actions and held for sale accounting benefits due to reduced depreciation. Later in the call, Marc will provide additional insights on the Europe transaction as it continues to progress through the regulatory process. Turning to Slide 14, I’ll review the results for our Latin America region. The region saw strong share gains and industry recovery in both Mexico and Brazil, with a double-digit net sales increase year-over-year of 14% and sequential growth of 5%.

Strong cost takeout actions and higher volumes drove 100 basis points expansion in EBIT margins year-over-year. Turning to Slide 15, I’ll review results for our Asia region. Excluding the impact of currency, revenue declined approximately 8%, driven by continued consumer demand weakness. The region delivered EBIT margins of 2.2% with our cost takeout actions more than offset by negative price mix. Turning to Slide 16, I will discuss our full year 2023 guidance. Our net sales guidance of $19.4 billion is unchanged. We are revising our full year ongoing earnings per share to approximately $16, and free cash flow guidance to approximately $500 million. As previously discussed, we continue to expect to deliver over $800 million of cost takeout.

However, as promotions have normalized to historical levels sooner than expected and the macro environment weighs on discretionary demand, which continues to be depressed. We now expect to deliver EBIT margins of 6.25% to 6.5% with fourth quarter operational results expected to be in line with our Q3 performance. Our guidance also includes updated expectations for our adjusted effective tax rate. Now between 0% to negative 5% for 2023, reflecting European legal entity restructuring benefits. I would like to remind you as the European transaction progresses, the close timing may have a material impact on our guidance. We also expect our 2024 adjusted effective tax rate and cash tax rate to be impacted by the closing of the Europe transactions and to be below historical norms.