Whirlpool Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 14 speakers on the call.

Operator

Good morning, and welcome to Whirlpool Corporation's Second 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, Corey Thomas.

Speaker 1

Thank you, and welcome to our Q2 2023 conference call. Joining me today are Mark 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 Our actual results could differ materially from these statements due to many factors discussed in our latest 10 ks, Thank you and other periodic reports. We also want to remind you that today's presentation includes the non GAAP measures outlined in further detail On slide 3 of the presentation, we believe these measures are important indicators of our operations as they exclude items that may not be indicative of results from our ongoing We also think the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations.

Speaker 1

Listeners are directed to the supplemental information package posted on the Investor Relations section of our website for the reconciliation of non GAAP items to the most As a reminder, we ask that participants ask no more than 2 questions. With that, I'll turn the call over to Mark.

Speaker 2

Thanks, Kari, and good morning, everyone. As you will have noted in our earnings release, we did post another quarter of solid sequential improvement. And it was a quarter which puts us firmly on track towards our full year guidance. If you look at the drivers of this improved performance, We did not get a lot of help from a macro environment. The global industry demand was down, but frankly, that is exactly what we expected.

Speaker 2

It was instead our consistent and disciplined execution of our operational priorities that drove this improvement. We were able to achieve meaningful cost reductions. We improved our supply chain, our product innovations drove strong consumer demand, and we gained market share. In short, we did what we told you we would do. As we are looking towards the second half of twenty twenty three, We are leaving our industry demand outlook unchanged.

Speaker 2

Even though we are starting to see early but clear signs of a strengthening U. S. Housing market, which will benefit us disproportionately, but broader consumer sentiment is still cautious and not yet pointing towards more discretionary purchases. We are also seeing the operating environment essential return to pre pandemic conditions with stabilized supply chains, improved inventories And a promotion environment which is similar to pre pandemic levels. Frankly, this is an environment we have demonstrated that we can Turning to Slide 6, I will provide an overview of our 2nd quarter results.

Speaker 2

The world we are operating in today is very different from first half of twenty twenty two, where supply chains were fragile, inventories were historically low, Promotions were largely absent and inflation was at historically unprecedented levels. In the second half of twenty twenty two, we saw a global demand shift With industry declines in key countries, we continue to experience this trend into the first half of twenty twenty three Global demand declines in the mid single digits. 2nd quarter year over year revenue declined 6% versus the prior year, in line with expectations. The promotional landscape is normalizing at pre pandemic levels, negatively impacting price and mix. Yet, we continue to gain momentum with year over year share gains in the Americas through improved supply chains and our strong product lineup.

Speaker 2

In Q2, we delivered a strong operating margin of 7.3%. This represents a 200 basis points expansion from the 1st quarter, driven by our strong cash takeout actions. These actions delivered $150,000,000 of year over year benefit and are on track to our full year target of $800,000,000 to $900,000,000 of cost takeout and delivered strong 2nd quarter ongoing earnings per share of $4.21 in line with expectations. Now turning to Slide 7, I will share more details on our The second quarter was unfavorably impacted by the normalization of promotions, which reemerged 50 basis points with a year over year impact of 3 50 basis points. Our strong cost takeout actions delivered 2 75 basis points, both sequentially and year over year.

Speaker 2

And as expected, marketing technology and foreign currency negatively impacted margins. Overall, we are pleased with our 2nd quarter performance, delivering ongoing EBIT margin of 7.3%. Turning to Slide 8, you can see we are on track to deliver $800,000,000 to $900,000,000 of year over year cost takeout benefits, Including $300,000,000 to $400,000,000 of reduced raw material costs and $500,000,000 of additional cost takeout actions driven by Enhance supply chain resiliency, reduced parts complexity with approximately 50% fewer parts since 2021 And improved transportation rates and reduced premium freight costs. Additionally, in aggregate, we have reduced our salaried workforce by 7% And remain disciplined with discretionary spending and other indirect costs. With the cost actions we took over past quarters, we are fully on track towards delivering our While the chart shows high year over year cost reduction in Q3 and Q4, it is important to note that this is highly driven by the baseline effects in the second half of twenty twenty two and will not require additional new cost takeout actions.

Speaker 2

Now I will turn it over to Jim to review our regional results.

Speaker 3

Thanks, Mark. Good morning, everyone. Turning to Slide 10, I'll review results for our North America region. Year over year share gains and the addition of In Syncorator was more than offset by industry decline 1% and increased promotions, resulting in 5% revenue decline. The region delivered sequential margin expansion with Solid double digit EBIT margins of 10.3 percent as our strong cost takeout actions continue to gain traction alongside the integration of In Syncorator.

Speaker 3

We expect the region to deliver 100 plus basis point margin expansion each quarter driven by Strong cost takeout actions. We are confident in the structural strength of our North America business and continue to expect our actions to deliver strong results, Exiting the year with 12% to 13% EBIT margins. Turning to slide 11, I'll provide additional color around the U. S. Housing market.

Speaker 3

During our earnings call in October of 2022, we presented our upbeat long term view on the U. S. Housing market. Nothing has changed and we are very optimistic about mid and long term housing driven demand trends currently representing 15% of the total industry demand. New housing construction has significantly lagged historical averages for more than a decade.

Speaker 3

For perspective, There was only 1 year in the 40 years prior to the Great Recession in which fewer than 1,200,000 new homes were built. Much of the period between 2,007 2017 was below this level, leading to the oldest U. S. Housing stock in the country's history. In total, we estimate 3,000,000 to 4,000,000 unit undersupply of housing.

Speaker 3

While we do not expect housing starts to reach a steady state of supply To fill this gap in the near term, we do believe housing starts will begin to increase to 1,700,000 units annually or higher due to the housing shortage. Turning to slide 12, you can see we are well positioned to capture this trend as the number one choice for homebuilders. The combination of 1, the best brand portfolio with multiple $1,000,000,000 brands including Whirlpool, Maytag and KitchenAid 2, an innovative product portfolio that targets 90% of the consumers and 3, our strong final mile delivery capabilities across the region Strongly positions Whirlpool to drive value creation as the housing market rebounds, with every new home having a full suite of typically 5 new appliances. It is not surprising that we have become the number one choice for U. S.

Speaker 3

Homebuilders, serving 8 of the top 10 national builders. Turning to Slide 13, I'll review our results for our Europe, Middle East and Africa region. Organic second quarter revenue was down approximately 12% driven by continued industry demand weakness across key countries. EMEA margin expansion was driven by strong cost takeout actions Alongside held for sale accounting benefits due to reduced depreciation that will continue each quarter until the transaction closes, which is Turning to Slide 14, I'll review the results for our Latin America region. The region saw demand improvement in Mexico and year over year share gains resulting in a 4% revenue increase.

Speaker 3

Inflationary pressures were partially offset by higher volumes resulting in solid EBIT margins of 6.5%. Turning to Slide 15, I'll review results for our Asia region. Excluding the impact of currency, revenue declined approximately 8% Driven by consumer demand weakness. Sequential share gains drove a 15% revenue increase compared to the Q1. The region delivered EBIT margins of 3.7 percent with our strong cost takeout actions offset by negative price mix.

Speaker 3

Turning to Slide 16, I will discuss our full year guidance. We are reaffirming our ongoing EPS range of $16 to $18 And free cash flow guidance of approximately $800,000,000 We continue to expect to deliver approximately 60% of our full year earnings in the second half of the year, driven by our cost structure reset. We now expect to deliver EBIT margins of 7 point to 5% as promotional spend has slightly increased and demand weakness in EMEA has been greater than anticipated. Our guidance also includes updated expectations for our adjusted effective tax rate now 10% to 15% for the year. As the Europe transaction progresses, we will continue to assess the adjusted tax rate, which has the potential to be at the low end of our range.

Speaker 3

We continue to expect to deliver $800,000,000 of free cash flow. Turning to Slide 17, We show the drivers of our updated full year ongoing EBIT margin guidance. We have updated our expectation of price mix by 25 basis points to a negative 250 basis point impact, reflecting a global promotional environment at pre pandemic levels. All other margin drivers remain unchanged. We now expect to deliver solid margins of 7.25% for the year.

Speaker 3

Turning to Slide 18, we show our regional guidance. We see no change to our full year regional industry expectations. While Q2 North America industry shipments were slightly favorable versus our prior expectation, this was largely driven by retailer restocking and The consumer sellout was relatively stable with a low single digit decline. And while there might be some uptick in consumer demand driven by the housing rebound, consumer sentiment in the region continues to be impacted by macro uncertainty. Therefore, our market assumptions are unchanged.

Speaker 3

Overall, we expect continued EBIT margin expansion 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 11.5% With the region's strong cost takeout actions partially offsetting a promotional environment that is at normal pre pandemic levels. We expect to partially offset the impact of the promotional environment with positive mix driven by a strong lineup of new product introductions Delivering year over year share gains. We now expect EMEA to deliver approximately 1.5% margins as the region continues to be impacted by soft consumer sentiment. Lastly, EBIT margin expectations for Latin America And Asia remain unchanged.

Speaker 3

Now I will turn the call over to Mark.

Speaker 2

Thanks, Jim. Turning to Slide 20, Let me provide an update on our portfolio transformation. Whirlpool today is very different from Whirlpool of the past. In the last 5 years, we've taken several significant steps to transform a company into a higher growth, higher margin business based on 3 structural pillars: Small Appliances, Major Appliances and Commercial Appliances. The steps in changing our company portfolio lay the foundation for As we look forward, we are reassessing our operating segment structure in anticipation of a potential change after the completion of the Europe transaction.

Speaker 2

During one of our future earnings calls, we expect to share more information about our assessment And potential resegmentation, specifically about our strong value creating small domestic appliance business. Turning to Slide 21, I will provide an update on in Synchro radar and how it is strengthening our portfolio. Our integration efforts are well underway and nearing completion after acquiring InSinghErator in Q4 2022. Insyncorator's rich history and strong product legacy have us very excited about the brand's largest launch, NextGen, which we presented during our last earnings call. We continue to be pleased with the sustained EBIT margins of approximately 20%, Contributing approximately 50 basis points to our consolidated EBIT margins.

Speaker 2

Turning to Slide 22, I In January, we agreed to contribute our European major domestic appliance business into a newly formed entity with Arschlich. The Europe transaction and the regulatory processes are ongoing and progressing as expected, Including executing agreement to sell our Middle East and Africa business. We continue to expect to close the Europe transaction in the Q4 of 2023. Until then, we will continue to focus on EMEA delivering the best products in consumer preferred brands. Let me also remind you of the benefits of this transaction.

Speaker 2

We will own approximately 25% of a new company, Which will be well positioned to deliver value to consumers through attractive brands, sustainable manufacturing, product innovation and best in class consumer services, and is expected to have over €6,000,000,000 of annual sales with over €200,000,000 of cost synergies. We have a potential to unlock long term value creation for our ability to monetize our minority interest. Coupled with a 40 year Whirlpool brand licensing agreement, We expect $750,000,000 net present value of future cash flows. Additionally, Post closing, we expect the transaction to improve our value creation metrics by $250,000,000 of incremental free cash flows And 150 basis points improvement in ongoing EBIT margin. Turning to Slide 23, I will discuss our capital allocation priorities, which remain unchanged.

Speaker 2

We remain committed to funding innovation and growth and expect to invest over $1,000,000,000 in capital expenditures And research and development this year. Additionally, we are confident in our ability to generate strong free cash flows. This, coupled with our balance sheet strength, provides us with flexibility to support our commitment to returning cash to shareholders. In the first half of twenty twenty three, we returned $193,000,000 in cash to shareholders, representing nearly 70 consecutive years of dividends. Turning to Slide 24, let me further discuss our commitment to maintaining our strong investment grade credit rating.

Speaker 2

We are confident that we are well on our way to delivering debt leverage to below historical norms and towards our target of 2 times or below With $1,300,000,000 cash on hand and strong free cash flow, which as mentioned earlier, we expect to be $250,000,000 Higher after the close of a Europe transaction. We continue to prioritize debt repayment with approximately $500,000,000 Acquisition related term loan pay down expected by the end of the year. Turning to Slide 25, I will review our healthy debt letter and how it gives us Flexibility and de risks our balance sheet. We have an attractive weighted average interest rate of approximately 4.25 percent With 70% of our debt held at a fixed rate of just over 3%. Additionally, over $2,000,000,000 of our debt is due after 2030.

Speaker 2

This gives us a balance sheet flexibility to deliver strong shareholder returns and maintain our solid investment grade rating. Turning to Slide 26, let me close with a few remarks. Despite a dynamic external environment, we delivered another Solid quarter with sustained margin expansion. Through strong execution of operational priorities, we delivered results in line with our expectations and remain on track to deliver $16 to $18 of ongoing earnings per share and approximately $800,000,000 of free cash flow. More importantly, the strength of our brands and products is resonating with consumers with a point of year over year share gains.

Speaker 2

With our strong position as the U. S. Builder's number one choice and serving 8 of the top 10 national builders, Wopro is well positioned to benefit from a housing driven demand recovery, and we continue to unlock value with our ongoing portfolio transformation.

Speaker 4

And your first question comes from the line of Mike Rehaut from JPMorgan. Your line is open.

Speaker 5

Great. Thanks so much. Good morning and thanks for all the detail. First question, I wanted to hit on the promotional environment, if I could. You kind of mentioned it's now reverted back to pre pandemic levels, which I guess is maybe Little higher than perhaps you were expecting at the beginning of the year and it appears the driver of the reduced North American Margin outlook.

Speaker 5

I was hoping to get a sense from you in terms of how this affects How this might affect price cost in the back half and into 2024? And Also from a margin perspective in North America, I believe last quarter you were expecting to end the year at roughly 14%. Just want to get a sense of how that changes and how we should think about the new baseline for the business Outside of additional price mix gains in 2024?

Speaker 6

First of all, Michael, good morning. It's Mark. Let me try to answer that fairly wide question. On the promotion environment first, you asked a question about where we expect is it higher than we expected? I would rather call it The promotion normality came earlier than expected.

Speaker 6

And what I mean with that, we always assumed that at one point, The normal promotional environment will return back to pre pandemic levels. Honestly, we probably would have expected more close to Q3, Q4 and then now basically came in Q2. So that's, as such, not a surprise. It just happened 1 or 2 quarters earlier. That's the only change.

Speaker 6

The level of promotional depth is frankly not surprising relative to what we've seen pre pandemic. So I wouldn't See that as an overly concern. But in that context, what I really want to remind everybody on the call is And refer back to Page 7 of our presentation because I think that tells the full story and I think it's very helpful in that context. Because you see both a year over year comparison on a margin walk and the sequential. If you first start with year over year comparison, You see and Jim alluded to this one earlier, yes, there is a big price mix decline year over year.

Speaker 6

But I really want to remind everybody, Q1 and Q2 last year were pretty much the last quarter basically absent of any promotion. It was basically kind of a dark period from a promotion perspective. These promotions started to kind of resume in the marketplace in Q3 and Q4. So you saw a slow ramp up. So as such, Yes, but year over year comparisons look big, but that's not surprising given that we all knew promotions are coming back into the market.

Speaker 6

The more relevant perspective, and we point towards this already in the last earnings call is right now the sequential look. Sequentially over Q1, we lost 0.5 point of market share. Keep in mind, Q2 in the marketplace has Memorial Day in July 4th in there. So by Definition, it's a little bit more promotional heavy than a Q1 is. The 0.5 price decline, I wouldn't call that out of a norm.

Speaker 6

Even more relevant is when you look at relative to cost takeout. Sequentially, we took 2.75 points of cost out. Put it differently, basically, we reinvested the marketplace 20% of our cost takeout. I would call that a very measured and reasonable approach to approaching promotions. And frankly, it worked for us because we picked up market share and we expanded our overall margin So put that all in context, I would consider the promotion environment, yes, we're back to pre pandemic levels.

Speaker 6

We know how to operate in that environment very successfully as we have evidenced over many years, and I think as we have evidenced in Q2. Now more specifically to the North American margin, we expect North American margin by year end to be around 12% to 13%. And also coming back to this pre pandemic margin run rate, that was pretty much the margin run rate we had Coming into the pandemic, about around 12% or 12% plus in North America. And yes, we fully expect that to be back on that level, and then we can see where we can expand it from there on.

Speaker 5

Great. No, no, I appreciate that, Mark. Thank you very much. Secondly, I wanted to hit On InSinkErator for a little bit, wanted to get a little color or more granularity on How the product launch is unfolding and what that's contributing to the business? And also just In context to that or maybe in addition to that, I think more broadly, I think you did notch down the full year revenue contribution outlook.

Speaker 5

So wanted to understand the drivers of that as well.

Speaker 6

Yes. And Michael, again, let me give you context at Integrator. First of all, we are very pleased with that business. The margins hold up very strongly, 12% 20% plus. It's a very EBIT accretive business.

Speaker 6

We like the team, we like the product lineup, we like the product production efficiency. It is a very, very strong business. There's obviously 2 factors. 1 is the broader revenue. I would say, Insinkerator is even more exposed to the U.

Speaker 6

S. Housing market Our normal appliance business, and as such, as we always expected, the first half of the first three Quarters of this year will be somewhat soft from housing before the housing fully rebound. So that is one element, but hasn't changed In terms of where we are from a market share perspective on in Syncurator. The second part, in particular, on the new product introduction of NextGen. First of all, you need to know the NeXgen carries margins which are stronger than rest of the line.

Speaker 6

So inherently, it's a margin accretive product. And right now, you're going through what we call the phase in and phase out. So we started the first shipment actually in July. So that is now underway. But in the short term, given that we have product placement costs and in the phase in, phase out costs, which we do not Capitalized, we take it into our ongoing cost.

Speaker 6

It's actually even a slight burden in both Q2 and Q3. But the inherent margin of NextGen is very attractive and we're now fully in the process of ramping up the production and we would expect the full sales element of a new product to be fully visible in Q4.

Speaker 4

Your next question comes from the line of David MacGregor from Longbow Research. Your line is open. Yes. Good morning, everyone.

Speaker 7

Good morning, David. Good morning, Mark.

Speaker 8

Yes, good morning, guys. I wonder if you could just talk a little bit about volume demand or market demand right now. I mean, we had the Core 6 number out That you indicated in your prepared remarks included some restock. I wonder if there's any way of just giving us a sense of what you're seeing right now in terms of replacement demand versus The builder channel, which you've highlighted is growing importance to you versus maybe discretionary demand is obviously down. But just try and unbundle that

Speaker 6

David, it's a very good question. So First of all, it's a little bit similar to what we already qualitatively alluded from Q1. The discretionary side of the demand continues to remain And we see that in the major appliances and I think as one of your colleagues point out, we see it almost more domestic appliances. That's The nature of discretionary demand, which is right now still impacted by uncertainty in consumer sentiment, which is still not in a positive territory. What is holding up strong is replacement type as we always expected because with that pandemic there comes increased usage of appliance which drives replacement demand And that is holding up very strong.

Speaker 6

To put it on in the numbers, as you've seen the kind of industry, and I'm more referring to U. S. Industry, Shipments were minus 1. In all transparency, the consumer sellout, we Expected to be slightly weaker, and we think it was around the minus 3, minus 4, pretty much in line with what we initially guided the industry shipments to. The difference is, retails were restocking what were pretty low inventory levels.

Speaker 6

So there's a restocking element in there, and that explains the difference. Now going forward, as you know, we left the industry assumption unchanged, Frankly, because there's still uncertainty out there. Now, but there are clear, Matt, probably to your point, clear Signs and data points about the housing recovery. And what I'm referring to, I mean, this morning, Number of nationally recognized big builder came out with numbers. The order intake of a builder is very strong across the board.

Speaker 6

You do the math to begin order translates into an appliance shipment anywhere 6 to 10 months after the order comes. That's just the time it takes to build the house. Andy, as you know, appliance always come in last when the house is being completed. So we do know there's a significant momentum building on the builder side. The only question is how much of that will fall into the calendar year of 'twenty three versus 'twenty four, but it will come because these orders are real and bad.

Speaker 6

I think we've seen now 6 or 7 builders with really impressive order intake. So that potentially could translate into some upside on the industry But right now, we've been reluctant to already update that because again, there's still uncertainty on the discretionary side. We know and we see it, the housing momentum is starting to build and that's very, very positive news for us.

Speaker 8

Thank you for that. And then just as a follow-up, talk about the cost takeout program and You've got some very well defined goals for 2023 and you mentioned most of that's just coming from the year ago comp. What What does that imply in terms of the 2024 carryover benefit at this point?

Speaker 9

Yes. David, this is Jim. And what I'd start with is, first off, we are extremely happy with, as you said, that we're on track to deliver the $800,000,000 to 900,000,000 And we're seeing what we expected in raw materials. I think as we look forward and we haven't and we won't Give guidance yet at least on next year, but as we look forward, there are some of these actions, obviously, as we've had headcount reduction via attrition throughout The year, but also different projects we've implemented that have reduced costs within our products that will carry over into next year. I mean, if you look on a typical basis and as we've always said that we typically in any year target to do at least a half To a point of cost reduction, typically, give or take 25% to 35%, 40% of that is carryover.

Speaker 9

So right now at this point in time, we don't have a specific number, but we do expect to come into next year with some strong tailwinds from a cost perspective.

Speaker 4

Your next question comes from the line of Susan Maklari from Goldman Sachs. Your line is open.

Speaker 10

Thank you. Good morning, everyone. My first question is around the mix. Are you saying that that has been changing either positively or negatively for you? Either positively or negatively for you and what role is that having within that price mix shift that we're seeing?

Speaker 6

Susan, it's Mark. So I think overall, we don't see the big mix down effect, which some people have referred to, And in particular, North America actually, if you would look in the detail, our N Air business, our KitchenAid business are performing very well. So we feel pretty good about it. Coupled with that, we have a couple product introduction, like the Maytag pad, the dishwasher, which really are just by lifting the mix. So and of course, mix also going forward will be a major lever to offset any promotion pressure.

Speaker 6

So I would say in general terms For North America, but it's also pretty true for most of the other regions. There's a slight positive mix, and that is Right now offset by the promotion pressure out there. But again, mix, in particular, product innovation so far has been a good guide for us.

Speaker 10

Okay. That's helpful. And then, you're targeting the $300,000,000 to $400,000,000 in terms The raw materials for the year, can you talk about any changes to where you expect to fall within that range, especially as perhaps some of the raws have Moved over the last few months and what that can apply for the back half of the year?

Speaker 9

Yes, Susan, this is Jim. And what I would say is If you remember in Q1, as we kind of at the end of Q1, we talked about we thought we were at the lower end of that range as we were looking at where the commodity prices were. Now as we look at Where we are today and what happened within the Q2, commodity prices have improved some, but we're still within the range and whether we're at the midpoint or slightly better than the midpoint, We're probably at that point. So it won't have a significant impact for us in the back half of the year against what we guided before, what we're guiding now because it's still within that range that we So I don't think it's going to be a big impact for us. And then as I mentioned earlier, we won't be guiding for next year until later Until in January of 2024.

Speaker 4

Your next question comes from the line of Sam Darkatsh from Raymond James. Your line is open.

Speaker 11

Good morning, Mark. Good morning, Jim. How are you?

Speaker 9

Good, Sam. Good morning.

Speaker 11

A couple of questions. First off, Going back to North America margins specific second half versus first half, it looks like you're guiding, I don't know, somewhere around 13% or so in the back half versus the 10% in the first half. I think we can back into The sequential benefits of RMI and cost takeout and we can guess at pricing, the one thing we really can't see as your volume production plans sequentially, there's a lot of moving pieces obviously with Market share and moving expectations around volumes, but can you be specific as to what you're Expecting for volume production specifically in the second half versus the first half?

Speaker 6

Sam, it's Mark. First of all, yes, first half in our margins were now 10.15% over 10.2% in the back half. And we said earlier, we expect to exit with 12% to 13%, which again essentially is spot on to pre pandemic level in North America margin. First of all, structural, as you know, there is a little bit of seasonal element in the back half of the first half. 1 is volume related because you tend to ship More in the second half and first half and second part is, our more seasonal business, particularly KitchenAid stand mixer, which as you know is margin accretive, It tends to be a little bit higher in the back half.

Speaker 6

So these are the structural elements. Now specifically to the question about production levels, inventory, I think you're rightfully pointing out to last year we had to take down production significantly in Q3 and Q4, which frankly is a fairly And costly manner to do it. I would say right now coming into Q3, I think we're much better balanced. We feel very good about right now inventory levels. Our supply chain is basically, except for some very small residual items, is running very smoothly.

Speaker 6

So I don't see this kind of the need for this draconian action, Which we had to undertake in Q3 and Q4. So as such, we expect a pretty level production volume similar to Q1 and Q2.

Speaker 11

And then my second question, the corporate overhead line bounces around a lot and it's hard for us to model and it looks like It was considerably below at least where we were thinking. I was imagining it was going to be maybe a $70,000,000 quarterly run rate excluding items and it came in around, Call it around $20,000,000 or so. What was that due to I'm guessing it was Confluence of items, but what were the primary drivers of that? How should we model that corporate overhead number going forward, Jim?

Speaker 9

Yes, Sam, and here's what I think you should do is if you kind of look back historically over the last, let's just say, 3 years or even longer than that, Typically, on an average, we run between $50,000,000 $60,000,000 per quarter in that line. And if you actually take where we are year to date, I think we're at like 47, 48. So, I think you should continue to model at that type of number, especially maybe a little bit closer to the lower end of that range because some of our cost takeout actions we're doing We're obviously falling into there, so you'd be slightly lower than historical averages. Now specific items that drive Changes within there, I'm not going to get into a lot of them, but obviously, you have certain accruals that can be related to employee related And so Those just caused some fluctuations between quarters, but we for a full year, we do not expect to be outside of our normal range of $50,000,000 to $60,000,000 average per quarter. So Sam, maybe just

Speaker 6

adding to what Jim was alluding to. Again, the corporate expense base has 2 structural items. 1 is the ongoing corporate, Call it infrastructure cost, MEO 1 are kind of always on one timers, either legal costs or other actions. So of course, the latter one is always a little bit difficult to model, because that's the nature of the ins and outs. But it's important to look also As we allude to in our remarks our prepared remarks, our overall salaried workforce is down 7% year over year.

Speaker 6

That is a very, very significant number, and that is also visible in our corporate expenses. Keep in mind, we are starting to reposition our corporate Headquarter basics to a potential post Europe environment. So we took proactive measures and as such our ongoing corporate expenses They are lower than they were several years ago. There is also this element, which is just structurally and structurally lower than it was a couple of years before.

Speaker 4

Your next question comes from the line of Eric Bessard from Cleveland Research. Your line is open.

Speaker 7

Thank you. Good morning.

Speaker 6

Good morning, Eric.

Speaker 7

Good morning. Two questions if I could. I guess first for Jim, Just a housekeeping question. The comment was made that mix was stable. I'm curious, can you just help us understand the The North American organic revenue, Exane Syncarator looks like it's down than 7%, 8%, 9%, And it sounds like your units are up better than the industry.

Speaker 7

What is is that all price? Can you just help us understand the mechanics between the gap between your dollar decline and your Apparent unit volume growth.

Speaker 9

Yes. So as you said that year over year, we did pick up And so that would obviously be a positive. Still within the quarter, as we said, the industry was down slightly, so that would be a negative. And As Mark talked about earlier with the promotional environment, that's your incremental piece that you just have to take off of the top there to say. And again, when you're looking year over year, as he highlighted earlier, last year in the first half of the year, it was There were not many promotions at that point in time.

Speaker 9

So that's having a significant impact year over year. But then as we get to the back half of the year, it will have much less of an impact And that's why you see the full year average for price mix being below where this quarter is when you walk it year over year. Eric,

Speaker 6

it's Mark. The additional comment I want to make is, but you keep in mind when we show the North America business, there is the U. S. Core business, Then you have other elements like in SyncErator, KitchenAid Small Domestic Appliance and you have Canada in there. The pure U.

Speaker 6

S. Core business Was better than the number which we show for North America. What hurt us in Q2 was Canada was fairly weak. Canada had the last couple of years very strong years and this year is And the Small Domestic Appliance business was also softer than prior year. So These were to offsetting items, but the U.

Speaker 6

S. Core business was slightly better than the number you see here.

Speaker 7

Okay. And then secondly, a strategic question, I guess, for you, Mark, which is from a promotional standpoint, I'm curious how what your thoughts are? I guess, first of all, is the promotional environment now stable or more intense in the back half than the first half? And then within this, Are you planning to focus on participating and maintaining or improving market share or is your focus more on margin And less on promotion and share. Just curious how we should think about that relative to your guidance?

Speaker 6

Yes, Eric. So first of all, I would describe the promotional environment, it's back to normal, okay? I know that sounds boring, but that's pretty much it. And we know how to operate in that environment fairly effectively and efficiently, which also means we've always said we will participate in promotions as long as we're value Great. Also from an overall margin margin expansion, of course, we are kind of there will always be an element where some of the cost savings you have to reinvest in the marketplace.

Speaker 6

We've done that in Q2 and the map overall worked for us very well, but we expanded market share and expanded margin. And that is also going to be our The balancing act going forward, we want to continue to win market share, but we certainly will expand all of our margins. So that's the balancing act. So Again, overall, the promotional environment, it just came a little bit earlier, but it's right now not two levels which kind of which we would know how to operate in. We know and feel very confident about the cost takeout and some of that will be reinvested in marketplace, but not all of it.

Speaker 4

Your next question comes from the line of Mike Dahl from RBC Capital Markets. Your line is open. Good

Speaker 12

morning. Thanks for taking my questions. Mark, just a follow-up on that. Presumably, Some of your competitors have some cost tailwinds as well, maybe not to the same extent as you do given some of your Company specific items and not just the RMI tailwinds, but in an environment where gross prices have still risen substantially the past Few years sellout is a little soft and costs are down across the industry. What how do you handicap the risk of just the Other competitors leaning more into promotion and reinvesting more of some of the overall cost tailwinds into promotion here in the back half?

Speaker 6

Yes. Michael, I can only repeat what I said before. First of all, the raw material, yes, it's probably fair to assume it More or less most people kind of benefit from the same tailwinds. Now with different color, keep in mind that North American raw materials were particularly bad the last couple of years worse than some of the Asian raw materials. So I would say right now you come to a period where the North America production Slightly gets more raw material benefit than an Asian production.

Speaker 6

So that is already one differentiating element. I would say on the company specific cost takeout actions, and you've seen that before, I mean, our own numbers, more than half of our cost takeout is Discreet to us, that's what we are doing, okay? I would pride ourselves. We took actions early and fairly decisive. So I would see we see some of these cost elements Reductions probably earlier and more than most other competitors.

Speaker 6

Now, obviously, we got to see. So As such, we feel confident about our cost takeout. We know how to operate in a promotion environment as we've evidenced and demonstrated in Q2. From that perspective, I don't expect a change in the back half relative to what we've seen right now around July 4.

Speaker 12

Got it. Okay. And then just as a follow-up, with respect to inventory in The channel, I mean, inventory was running fairly lean. You called out some restock. How would you characterize Inventory at retail now, is it back to normal?

Speaker 12

Is it still climbing back toward normal Off of levels that are still you characterize to lean or are there any pockets where you think there is now relative to the sellout environment Essentially, a little too much.

Speaker 6

Yes, Michael. First of all, we got to recognize And remind us that the last 3 years, we've seen extreme swings on manufacturer and retail inventory levels. I mean, this was Bull wave effect up and down, and that's what we've seen in the last couple of years. I think we're now back to a normal environment on many fronts, Including trade inventories, which I would consider back to normal trade inventory levels. And basically, the retailers over last half year took, basically took a particular advantage of restocking to required levels, and that's how we would look at this one.

Speaker 6

But right now from what we've seen, we don't see excessive inventories out there. You also know there is one Trade customer who doesn't carry inventory, so it's not they're not excessive inventories out there. Again, I would just describe them as normal retail inventory levels,

Speaker 4

Your next question comes from the line of Liz Suzuki from Bank of America. Your line is open.

Speaker 13

Great. Thank you. So just as we think about the ongoing tax rate in 2024 and beyond, I mean, what do you think is kind of a normalized It's obviously quite suppressed this year, but just as we think going forward and I mean I know you're not giving 2024 guidance, but in just any normal year, what do you think a tax

Speaker 9

Yes. So, Liz, this is Jim. And historically, we have said that We thought the tax rate on an ongoing basis and on a cash basis would be closer to the 2025 rate over extended period of time. Now what I would say is, As we go through our divestiture of EMEA, we have a significant amount of tax assets there that have resulted from losses that we've incurred And as we go through this process, we're really looking at our ability to utilize many of those, Because like I said, these are losses that we did incur. And what we're finding is that we're finding more and more opportunity to continue to utilize those.

Speaker 9

And so that's By this year, we think similar to last year, we're going to be in the 10% to 15% range. I think over a midterm, we could see a rate that's below that Historical thing that I was quoting of 20 to 25 and maybe even closer to the 15 to 20 at least for a period of time or closer to the 15. But until we get to the end of this year, We get through all of this transaction. We look at the global footprint that we have and the remainder, and then we look at the assets that we have. It's hard for us to give a longer term guidance, but I do believe it will be better than we've said historically.

Speaker 9

And in addition to that, I do believe we'll be able to Realize significant amount of just cash benefits over the period of years as we utilize some of those losses that we've already incurred.

Speaker 13

All right. That makes sense. And just to follow-up on the price mix guidance, which for the year is estimated to be below what the first half Tracking at, I mean, is most of that improvement in the back half of the year easier comparisons? Or do you think it's is it more going to be concentrated The homebuilder side of the business versus retail, I'm just curious, how you think about pricing by channel as we get into the back half?

Speaker 6

This is Marc. I can take it. I basically fully come back to the earlier comments. By definition, you have baseline effects of last year. Keep in mind, first half last year basically had no promotions and they were building the second half.

Speaker 6

So That's the element of where the comparisons getting a lot easier in the back half because again every quarter the promotions have been building. So as such, I mean, with 2.5 on a full year basis of just a quarter difference versus what we had in mind, but just Yes, we saw the normal promotional environment kind of 1 quarter earlier when we originally expected, but not fundamentally different from baseline and where we So I think with that, we that was pretty much the last question which we had, and I Want to take the opportunity to thank you all for joining us today. Hopefully, as you heard before, and we feel very good about the Q2. I mean, this was a quarter with 200 basis point of margin expansion, which is a significant step up. It's a step up fully back to pre pandemic margin run rates.

Speaker 6

You also see or heard that we kind of we start seeing positive signals on the market demand environment more towards the end of the year, But they're undeniable, and they will at one point provide tailwinds for us for our industry, and we feel good about it. So With that, we feel good about where we are. Q2 puts us on track towards reaffirming our full year guidance and I'm looking forward to talk to you again at the Q3 earnings call. Thanks a lot for joining us.

Speaker 4

Ladies and gentlemen, that concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Whirlpool Q2 2023
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