Whirlpool Corporation (NYSE:WHR) Q4 2022 Earnings Call Transcript

Whirlpool Corporation (NYSE:WHR) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Good morning and welcome to Whirlpool Corporation’s Third Quarter 2022 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 fourth quarter and full year 2022 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 on the Investors section of our website at wolffilcorp.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 non-GAAP measures.

We believe these measures are important indicators of our operations as they exclude items that may not be indicative of 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 presentation and supplemental information package posted on 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 open for analyst questions. As a reminder, we ask that participants to ask no more than two questions. With that, I’ll turn the call over to Mark.

Marc Bitzer: Thanks, Korey and good morning, everyone. Turning to our agenda on Slide 4. I will preview what we will discuss today. Two weeks ago, we announced the conclusion of a strategic review of EMEA alongside preliminary 2022 results and a preview of our ’23 expectations. This morning, we will provide additional context on each, starting with our ’22 results. And during the second half of 2022, we were in the midst of an unfavorable macro cycle. A short-term consumer sentiment and demand continued to reflect recessionary concerns. At the same time, inflationary pressures remained stubbornly high. While the combination of demand down, cost up is historically rather unusual for it best temporary it did impact our results negatively during Q4.

In addition, our supply chain execution was not where we expected it to be in the fourth quarter. This was due to a one-off supply issue that has since been resolved but negatively impacted a number of our North American factories. Jim will provide more information on 2022 later in the call. Looking ahead into 2023, we do expect the tail end of this negative macro cycle to be felt during the first few months of the year. We foresee macro headwinds to slowly turn into tailwinds as the year progresses. Needless to say that it is difficult to predict the exact timing of the shift in the macro cycle but we would expect this to happen towards late Q2 or early Q3. Given this volatility, we remain relentlessly focused on the business levers which we can control.

And we are fully confident that the medium-term demand drivers of our business remain intact. Our operational priorities in 2023 will be flawless execution of our supply chain and the delivery of very significant cost targets. After 2 years of inflationary cost increases, we will deliver $800 million to $900 million of total cost takeout. We have a high degree of confidence in delivering this target. Looking back on our history, Whirlpool has a strong record of successfully managing for challenging cycles and delivering substantial cost reductions. In 2007, we expected $400 million of raw material inflation as we entered the year. We responded to this high level of cost inflation with early and decisive actions delivering record results. In 2011 and 2012, we reduced our fixed cost in North America by more than $400 million.

More importantly, we’re not just starting this new cost initiative in January 2023. As mentioned in our prior earnings calls, we have initiated this during the second half of 2022. As a result, the maturity of the underlying actions has advanced significantly, thus giving us a high degree of confidence in the delivery of cost targets. Now turning to Slide 5. I will provide an update on our strategic review of EMEA and our portfolio transformation. I am very happy with the EMEA transaction its value creation and how it fits into the broader context of Whirlpool’s portfolio transformation that we have been discussing. In April of 2022, we outlined how we would continue our multiyear journey of transforming Wolford into a high-growth, high-margin business.

Let me first remind you why we are transforming our portfolio. As we sit here today, we are operating in a very different world than we were just 10 or 20 years ago. It is a less global world. Global scale was significant in the past but we’re now experiencing diminishing advantages of that. The benefits from regional and local scale have become even more apparent and compelling. At the same time, Whirlpool has raised the bar for long-term value creation. It is with this mindset that we critically assess ourselves and we are focused on transforming our portfolio into a high-margin, high-growth business. Recent actions include adding to our already strong brand portfolio and agreeing to contribute our European major domestic appliance business into a newly formed entity with Arcelik.

As you can see, the portfolio transformation is ongoing and we have made significant progress. I’m confident these actions have us well positioned to delivering growing shareholder value over time. As a reminder, as a result of our transactions we executed in 2022, we will see an increase in free cash flow of approximately $350 million in 2024. Now turning to Slide 6, I will share more about the strategic review of our EMEA business. We assessed a range of options with a goal of maximizing value for our shareholders, employees and consumers. We are pleased with the outcome of an agreement to contribute our European major domestic appliance business to a newly formed European appliance entity with Arcelik. Arcelik is a company where we know well, having executed a number of transactions with them.

Our consumers will benefit from broad product and service offerings as we bring together the best of the best innovation, attractive brands and sustainable manufacturing. We will own approximately 25% of a new company and we expect the transaction to close during the second half of 2023, subject to regulatory approvals. The new company is expected to have over €6 billion of annual sales with over €200 million of cost, synergies. It is important to note that we are retaining our ownership of our EMEA KitchenAid business. Our global KitchenAid Small Appliance business is 1 of the 3 strong pillars of our value-creating business model with a structurally attractive margin profile. Turning to Slide 7, I will discuss our value creation expectations from the actions we have taken in the EMEA region.

We expect to participate in the significant efficiency the new company will generate, including sustained productivity building upon already established purchasing capabilities and continued commitment to product design, innovation and sustainability. We have a potential to unlock long-term value creation for our ability to monetize our minority interest at an estimated net present value of $500 million. Even though we envision a long-term profitable relationship with Arcelik, a shareholder agreement includes a number of exit options at predetermined parameters after 5 years. Our 40-year Whirlpool brand licensing agreement will generate predictable cash flows of more than $20 million per year. Overall, we expect $750 million net present value of future cash flows.

Separately, through the previously executed divestiture of our Russia business, we continue to expect up to $260 million of deferred payments. Now, I’ll turn it over to Jim to review our fourth quarter results.

Jim Peters: Thanks, Mark and good morning, everyone. Turning to Slide 9. Our fourth quarter performance was impacted by a one-off supply chain disruption in North America and elevated cost inflation. Despite this, I want to highlight that our previously initiated cost actions remain on track. Additionally, raw material costs remain elevated but we are beginning to see improvement. In the fourth quarter, we delivered ongoing EPS of $3.89 and ongoing margins of 3.5% as results benefited from a full year adjusted effective tax rate of 4%. Turning to Slide 10. I’ll review results for our North America region. As expected, the inflationary environment and increasing interest rates continue to weigh on demand and cost-based pricing actions partially offset elevated cost inflation.

Our production volumes were impacted by approximately 5% due to a one-off supply chain disruption as mentioned before. This disruption involves one critical supplier providing a common platform of parts for multiple manufacturing locations and products and was resolved in mid-January. This disruption also negatively impacted price mix as we had previously committed investments in anticipation of value-creating holiday promotions. Given the confidential nature of the ongoing discussions with the supplier we will not share any additional information about this situation. Even with the supply challenges faced in the quarter, we successfully maintained our recent sequential quarterly share gains. We are confident that the actions we put in place have us positioned to win and we remain confident in the structural strength of our North America business.

Turning to Slide 11. I’ll review our results for our Europe, Middle East and Africa region. Excluding the impact of foreign currency and the divested Whirlpool Russia business, fourth quarter revenue was down approximately 9%. The region delivered breakeven EBIT margins during the quarter as cost-based pricing actions offset lower volumes and cost inflation. And as Marc mentioned, we completed our strategic review of EMEA. Until the close of the transaction, EMEA’s performance will continue to be included in our ongoing results. Turning to Slide 12. I’ll review results for our Latin America region. The region saw demand declines that were moderate compared to the steep declines experienced during the third quarter. The region’s cost-based pricing and strong cost actions resulted in flat revenue and solid EBIT margins for the quarter.

Turning to Slide 13. I’ll review results for our Asia region. On a full year basis, excluding the China business and the impact of foreign currency, revenue grew by approximately 5%. Cost-based pricing actions were more than offset by weaker demand and continued cost inflation resulting in an EBIT margin of 2.7%. Now, I’ll turn it over to Marc to discuss our perspective on 2023.

Marc Bitzer: Thanks, Jim. Turning to Slide 15. I will share how we expect the current operating environment marked by softer demand and still elevated but easing costs to impact 2023. As we enter the new year, we continue to expect consumer sentiment to negatively impact demand. This is expected to be more pronounced at the beginning of the year, the first half demand to be down by 5% to 10%. And we expect demand will improve each quarter and to exit 2023 with flat industry volumes. We strongly believe in the favorable mid- and long-term demand tailwinds in particular in North America. The undersupplied aging housing stock is the oldest it has ever been and we expect this will drive new construction demand in the mid- to long term.

In the short term, the sharp increase in mortgage rates has suppressed existing home sales but consumer equity remains very strong. As a result, we do expect a sustained high level of remodeling activities in the home and the kitchen in particular. Putting it differently, in the short term, consumers may be reluctant to buy a new house but they will use the strong balance sheet to remodel their home. From a go-to-market perspective, we expect 2023 promotional activity to be at similar levels as the second half of 2022. Also looking to the second half of 2023, we continue to expect the promotional environment to remain below pre-pandemic levels. From a raw materials perspective, we see raw material costs easing throughout the year. Steel spot rates have come down significantly and we have started seeing the benefits of this in our annual contracts.

We also see improvements in resins and ocean freight. At the same time, there are still a number of commodities such as nickel and strategic components where we are faced with persistent high cost levels. Turning to Slide 16. Our 2023 operational priorities are clear. First, we aim for flawless execution of our supply chain. And let me start out by stating a flawless execution is easier said than done. Our supply chain model has served us very well over many decades but it is a cost efficiency driven supply chain model characterized by long transportation lanes from low-cost countries, a high degree of parts complexity and high percentage of single sourcing. This historic supply chain model is cost efficient but has not been resilient enough to cope with the unprecedented COVID-related volatility and disruptions.

Over the past 2 years, we have reduced our parts complexity from well over 110,000 active parts to slightly more than 70,000 active parts. In the midterm, we do see a path to drive this number to well below 50,000 parts. At the same time, we significantly expanded our dual sourcing from single sourcing. We put our priority on high-value strategic parts and components and have come a long way in derisking this part of our supply chain but we still have a tail end of lower-value parts that are single source. This will be our focus in the coming months and years. As mentioned before, our second operational priority is a cost reduction of $800 million to $900 million. We expect to deliver $500 million in net cost takeout actions by removing over $250 million of premium costs and inefficiencies from our supply chain operations and continuing to be disciplined in our discretionary spending and headcount management.

Compared to the summer of 2022, our current global salaried workforce is already down by 4% and we will remain very disciplined throughout 2023. In addition to these net cost takeout actions, we do expect $300 million to $400 million in raw material cost reductions adding up to $800 million to $900 million total cost target. As you look at the seasonality of this cost reduction, you will note that it is more skewed towards the second half of 2023. There are 3 factors explaining the seasonality which specifically impacts Q1. First, it’s important to remember where we have higher cost inventory as we enter 2023, creating a lagging effect of easing raw materials. Putting it differently, even though costs are coming down because of inventory, it normally takes about 2 months to see this fully reflected in our P&L.

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Second, we’re lapping periods of lower year-over-year inflation as cost increases peaked in the third quarter of 2022. Third, as you may recall, we have a variety of material contract lanes with quarterly and annual durations which creates somewhat of a lack. Now with many of our annual contract negotiations now complete, we have line of sight to deliver $300 million to $400 million of raw material cost benefit in 2023. Now, I’ll turn it over to Jim to discuss our full year 2023 guidance on Slide 17.

Jim Peters: Thanks, Marc. I’ll review our full year 2023 guidance. In 2023, we expect a revenue decline of 1% to 2%, given softer consumer demand and sentiment, most notably in North America and EMEA, especially as the first half of 2023 continues to reflect the current macro cycles. As we reset our cost structure, we expect to expand ongoing EBIT margins to approximately 7.5% and deliver approximately $800 million in free cash flow. Our free cash flow delivery could be significantly impacted by the timing of the close of the EMEA transaction alongside the seasonality of cash generation from the region. We expect our ongoing tax rate to be 14% to 16% and our interest cost to be approximately $325 million which reflects the incremental debt from the Insyncrator acquisition.

This represents a full year ongoing EPS range of $16 to $18. Turning to Slide 18. We show the drivers of our full year ongoing EBIT margin guidance. We expect price/mix to be negatively impacted by 225 basis points. As our availability improves, we expect to participate in value-creating promotions partially offset by positive mix driven by a strong lineup of new product introductions. Next, as we execute $500 million of strong cost takeout actions throughout the year, alongside raw material benefits, we expect a positive 425 basis point impact to margins. Continued investments in marketing and technology alongside currency headwinds are expected to negatively impact margins by 125 basis points. As we navigate temporary demand declines, an easing inflationary environment and execute our decisive cost takeout actions, we expect to deliver approximately 35% to 40% of our earnings in the first half of the year.

We are confident that we have the right actions in place to navigate this macro environment and deliver approximately 7.5% EBIT margins. Turning to Slide 19, we show our regional guidance for the year. Starting with industry demand, we expect most of our regions to continue to be impacted by a subdued demand environment, particularly during the first part of the year as consumer sentiment is still impacted by the macro environment. In North America and EMEA, we expect a contraction of 4% to 6%. And in Latin America, we expect a contraction of 1% to 3%. In Asia, we expect industry to accelerate by 2% to 4%. Despite the expected declines, we expect industry volumes, particularly in North America, to be approximately 6% above 2019 levels. We expect EBIT margin expansion across all regions, driven by our strong cost takeout actions as well as raw material inflation tailwinds.

In North America, we expect to deliver full year margins of approximately 12%, with the region exiting the year with margins of approximately 14%. We expect EMEA to deliver approximately 2.5% margins. In Latin America, we expect to deliver EBIT margins of approximately 7% as cost takeout actions are partially offset by continued macroeconomic and geopolitical volatility impacting demand. Lastly, we expect EBIT margins of approximately 5.5% in Asia, driven by top line growth and strong cost takeout actions. Now turning to Slide 20. I’ll discuss our capital allocation priorities which remain unchanged. We have invested over $5 billion in capital expenditures and research and development over the last 5 years, reflecting our commitment to deliver a high-growth, high-margin business.

During that same time period, we have returned over $5 billion cash to shareholders, including $900 million of buybacks in 2022 and a 25% increase in our quarterly dividend, representing the tenth straight year of dividend increases and nearly the 70th consecutive year of paying dividends. The continued strength of our balance sheet with $2 billion of cash at the end of the year, has given us the flexibility and optionality to pursue value-creating opportunities like the acquisition of InSinkErator in 2022. In 2023, we are prioritizing debt repayment driving an optimal capital structure and maintaining our strong investment-grade credit rating. Now, I’ll turn the call over to Marc.

Marc Bitzer: Thanks, Jim. Turning to Slide 21. Let me close with a few remarks. In our 111-year history, we have built a proven track record of successfully operating through challenging macro cycles and we’re confident in our ability to deliver margin expansion in 2023. We will flawlessly execute on our supply chain initiatives, while our reset cost structure is expected to deliver $800 million to $900 million of benefit. In addition to these actions, the ongoing portfolio transformation will unlock value and enhance our financial profile. With the addition of incinerator and the MEA divestiture, we expect to deliver approximately $350 million of incremental free cash flow in 2024. The MEA transaction alone is expected to deliver a 200 basis point improvement to return on invested capital.

along at a 150 basis point improvement in ongoing EBIT margin. These improvements, coupled with a healthy balance sheet of a foundation of our firm commitment to returning cash to shareholders. Let me remind you 2022 represents our tenth consecutive year of dividend increases with a 25% increase to our quarterly dividend. Additionally, we repurchased $900 million in shares, returning a total of $1.3 billion in cash to our shareholders. Also, in the future, we will continue to maintain a solid balance sheet while providing attractive returns to our shareholders. We are well positioned competitively, seeing favorable market share trends and will continue to benefit from long-term demand tailwinds to our industry. Now, we will end our formal remarks and open it up for questions.

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Q&A Session

Operator: Your first question comes from the line of David MacGregor from Longbow Research.

David MacGregor: I guess sort of a 2-part question. On Slide 21, you talk about setting yourself after 2024. I’m just wondering, are you kind of providing kind of a high-level view that by 2024, you think you can get to 11% to 12% ongoing EBIT margins? And — or is that just you feel like you can make progress towards that goal? Second part, really I just want you to comment on what happened in the fourth quarter promotionally. There are a lot of programs there. You’ve said in the past, you don’t expect promotional activity to revert to pre-pandemic levels. You still feel this to be true? And if so, what are you seeing that gives you confidence in that view in your second half price/mix expectations?

Marc Bitzer: So David, let me first address the first question. Obviously, we’re just giving guidance for ’23. So it’s a little bit too early to give a guidance for ’24. Having said that, I think you’re correct in the read that there’s a lot of positive elements which will come through in ’24. First of all, as you heard from my prepared remarks, there’s a lot of reason to believe that consumer demand and particularly U.S. housing as it exits will head into much stronger years because, as you know, there’s fundamentally structurally undersupplied housing market in North America but not only in North America which is at 1 point will materialize. So that’s on the demand side. Also on the cost side, with a heavy lifting which we’re doing now on the cost reduction, we will reset our cost base which will set us up very well for ’24.

In addition, we have other elements. You have the full contribution of integrator on the margins and cash flow. And assuming that we can close the European transaction, that on its own will give an additional lift on cash flow and by definition, on margins as you look at the total company. So with all of that in mind, yes, in ’24, I would say, we’re much more confident where we’re heading towards these long-term shareholder value creation targets which we set out. So — and I think ’24 from that perspective will be a critical proof point and at this point, we’re pretty confident towards that. And your second question related to promotion, I would say, David, as we absorbed the entire back half of ’22, it was by and large pretty much as we anticipated, i.e., we expected and we always expected a higher level of promotion to essentially a previous period where which was completely absent promotion.

But it’s still important to note that even what we saw in the back half of ’22, it was quite a bit less than pre-COVID. So I would call it right now, we were faced with a moderate promotional environment. And from what you heard from my prepared remarks, we expect a similar environment also as we look in ’23.

Operator: Your next question comes from the line of Sam Darkatsh from Raymond James.

Sam Darkatsh: Two, I guess, themes to my questions. First would be around EMEA. I think normally, EMEA is much more profitable seasonally in the second half than it is the first half. I’m assuming that’s going to occur in ’23 also. And I think it looks like you’re including EMEA throughout the entirety of the year. So what’s the likelihood or what’s the general quantification if the transaction does close as you expect for incremental dilution to EPS guidance from the absence of a profitable EMEA in the back half? And then Mark, if you could also talk about the terms of the options that Arcelik has after 5 years. I didn’t see it in the filings. Just trying to get a sense to ascertain the likelihood of an $800 million transaction or a $500 million PV?

Marc Bitzer: Let me first address the first one on what is in the guidance and how the guidance might be impacted by the closure of the transaction. First of all, on a high level to keep it simple. The timing of the transaction will probably impact the EPS to a much less extent on the cash flow. There is more moving parts and that’s just driven by more historically, we never show regional cash flows but European cash flow too this year is much more volatility than the other regions, i.e., pretty big cash drain and then cash build towards the back half. So depending on when we close it, that has more of an impact on cash flow and a much less impact on EPS. On the principal profit seasonality also keep here in mind, yes, Europe is a little bit more skewed towards Q3 and Q4.

And but that is largely driven by the very profitable KitchenAid small domestic appliance business which similar to North America has a heavy share of Q3 and Q4 sales. So if a transaction closes, keep in mind that part of the business stays with us, that should not impact the EPS that much. So — and that’s probably also by depending on where you potentially close it Q3 or whatever, I don’t expect a major impact on EPS from everything which we see today. To your second question as it relates to the terms of the transaction, particular shareholder agreement, I think you will understand what we will not reveal all the details of the transaction but let me assure you, as we discussed after 5 years, where multiple exit opportunities defined in the shareholder agreement, the terms, including a potential EBITDA multiple are defined.

So it’s pretty clear in terms of what the valuation could be. At the same time and that’s why what you see behind this 500-millimeter by way is a discounted value up the 5-year. But I also want to underline what I said in the earnings or in my prepared remarks is — we have a long-term potential profitable relationship in mines. But of course, as you would expect us, there are various terms of a potential exit predefined and predetermined. So there is no negotiation down the road.

Sam Darkatsh: If I could sneak another question as it relates to the rows, the $300 million to $400 million tailwind that you’ve identified. Typically, the biggest variable intra-year is oil and resins and I’m sure that’s another variable this year. But are there other variables such as steel that could play a role into the $300 million to $400 million being above or below that, i.e., are you having more of your steel off contract and on contract plus something along those lines?

Marc Bitzer: Sam successfully sneaked in a third question. But anyhow, let me try to address it. At this point of view, you always have a certain amount of uncertainty or volatility in your forecast. Having said that and you know that very well. Our biggest procured item is steel. Steel are on big regions on annual contracts. And today, as we’re sitting here January 31, we pretty much have closed all contracts. Now there’s 1 contract which technically expires in Q1 which has a little bit of a lag effect. So for contractual terms which, as you know, this is not a hedging contract but they are 1-year contract, well defined and that gives us a very high confidence that on the steel side, we shouldn’t see major surprises. You always have a little bit a lagging item and the spot rates move.

But again, that’s a very smooth element in terms of a smooth impact on our overall P&L. Resins, as you rightly point out, is our typical quarterly contracts, annual contracts which ultimately is, I would say, loosely correlated with the oil price. So there’s a little bit more moving parts on the resin side. But frankly, already, we saw largely some benefits. We see it also in Q1, some benefits that right now looks pretty stable. Having said that, there’s — as you also know, there is a number of commodities out there which still are subject to wide variation. I mean, right now, it’s trying to buy glass. Glass is impacted by lithium, et cetera which has a higher spot price a couple of smaller items which impact us in total, not that much but they’re still moving elements and that always drives a certain amount of uncertainty.

If you completely zoom out, Sam and you’ve observed us for many years, of a total $800 million to $900 million, given where we are in the year, I would say we have right now a 70% to 80% fill rate of our actions which is actually pretty high compared to other years. So we feel, as we sit here today, with a high degree of confidence we will hit this $800 million to $900 million.