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spk11: Your Director of Investor Relations, Corey Thomas.
spk03: Thank you, and welcome to our first quarter conference call. Joining me today are Mark Pitzer, our Chairman and Chief Executive Officer, Jim Peters, our Chief Financial Officer, and Joe Liatini, our Chief Operating Officer. Our remarks today track with a presentation available in the investor section of our website at warpoolcorp.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 peer ad reports. We also want to remind you that today's presentation includes non-GAAP measures. 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. Additionally, price increases or pricing actions referenced throughout this call reflect previously announced cost-based price increases. 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 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 ask no more than two questions. With that, I'll turn the call over to Mark.
spk10: Thanks, Corey. Good morning, everyone. It is my pleasure to discuss the results of our first quarter today and to provide... Turning to our business, over the quarter, we worked relentlessly to deliver strong results despite rising cost inflation, supply chain disruption, and higher levels of volatility.
spk09: In fact, this was among the top 10 strongest quarters in the history of... Very tough comparison period from record... ...growth seen last year.
spk10: Relative to our performance in 2020, however, we saw very robust growth.
spk09: Thanks to the relentless effort of our entire organization, the business remains stronger than where it stood pre-pandemic.
spk10: Our management team and I have also placed significant emphasis on improving and committed to sustaining these structurally higher profit levels for the future.
spk09: To emphasize, we're a structurally stronger world than just a few years ago. I'm very confident in the strong fundamentals of the underlying business.
spk10: Today's guidance change, as you see in our press release, is merely a function of a high volatility in the environment. We still expect a strong second half.
spk09: We're exiting the first quarter on strong footing, and our brands are performing very well.
spk10: That in mind, I'm pleased to announce that we're taking our growth efforts further and announcing two separate but highly interconnected initiatives. First, we're conducting an overall portfolio review that will help us transform the company into a high-growth and high-margin business. Reflected on that, we have also made the decision to embark on a strategic review The MEA segment has enjoyed solid recovery and turnaround over the past two years, despite significant COVID headwinds.
spk09: Given significant operational improvement in the region, it is the right time to conduct the strategic assessment in the MEA.
spk10: We expect to give you an update with a conclusion of this review by the end of Q3. You will be hearing more from us on this as we continue to grow both organically and internationally.
spk09: in select strategic areas of interest.
spk10: We are committed to continuing to improve Whirlpool, and I couldn't be more confident in the strength of our businesses and brands. To get into the quarter in more detail, we delivered a solid first quarter with ongoing EPS of $5.31, down by $1.89 versus the all-time record first quarter of last year. but up by 86% against 2020 and up 70% against 2019, which demonstrates that our business is fundamentally stronger than pre-pandemic levels. We remain confident in the strength of our business and believe that Wolfpool's deliberate actions over the last several years have made us a stronger company today. As our industry and most other industries face historical levels of cost inflation, which sold over $400 million in the fourth quarter, approximately a 10% increase on cost of goods sold. Despite this, we delivered over 16% EBIT margins in our North America business, again demonstrating the earning strength of the region and the actions we took, transforming margins over the years. We now expect higher levels of inflation to persist
spk09: four-year cost inflation expectations by $600 million to $1.8 billion. Price mixed contribution as a result of additional recently announced price increases.
spk10: We are positioned to deliver strong second half of 2022, exiting the year with actions fully offsetting cost inflation. In other words, there is currently a lag between inflation and pricing, but we expect a catch-up in the second half and remain confident in our actions. However, supply disruptions impacting shipments in the first half of 2022, alongside accelerated cost inflation, led us to revise our full-year ongoing EPS guidance from $27 to $29 previously, and now $24 to $26. Lastly, with the confidence we have in our business and the strength of our balance sheet, we continue to fund innovation and growth and return cash to shareholders. This includes a 30% year-over-year increase in expected capital investment and a 25% increase in our quarterly dividend. And we are on track to return approximately $1.5 billion in cash to shareholders in the year. Now we'll turn to our first quarter highlights in slide five. Again, we demonstrated solid performance during the first quarter, delivering ongoing EPS of $5.31 and ongoing EBIT margin of 9.4%. Our successful go-to-market actions in every region partially offset over $400 million of inflation in the quarter. Lastly, we returned a significant level of cash to shareholders with $533 million of buybacks and increased our dividend for the 10th consecutive year. Turning to slide six, we show the drivers of our first quarter EBIT margin.
spk09: As evident, a number of extraordinary and we still delivered strong margin. Price mix delivered 600 base points of margin expansion led by the success price mix.
spk10: Net by 250 basis points, largely driven by increased logistics and energy costs, which were intensified by the Russia-Ukraine conflict. Additionally, the raw material of the market was a significant year-over-year headwind, negatively impacting margins by 7%.
spk09: Lastly, our strong discipline was related to marketing and technology investments by 50 base points.
spk10: Overall, we're pleased to deliver solid operating margins in what remains a very challenging environment and remain confident in our ability to sustain and grow margins in the future. Now I'll turn it over to Joe to review our regional results.
spk12: Thanks, Mark, and good morning, everyone. Turning to slide 8, I'll review results for our North American cost-based price increases. First quarter industry shipments represent one of the strongest quarters on record, despite being in the supply chain.
spk09: Low inventory levels and production disruptions will ultimately continue to grow beyond these record levels, as the fundamental strength of consumer demand trends remains intact. During the quarter, we experienced increased
spk12: inflation and operational inefficiencies, in addition to the negative impact from temporary volume deleveraging. We delivered at a fundamentally higher level than when we entered the pandemic to stay at the fixed cost base of the region.
spk09: Lastly, our previously announced pricing actions that are coming online in Q2 are on track and position us to fully offset cost inflation and as we exit the year. At sustained strong levels. And all indicators point to multi-year growth beyond these levels.
spk12: Historical growth of approximately 2.5% alone indicate that the industry has yet to fully recover from the great financial crisis, with well over 5 million units needed to catch up. This is in large part due to the fact that housing remained well below historical and structurally needed levels for over a decade. This is still the case today, which we are seeing play out with housing demand that is constrained by supply. Next, add the expectation a period 10 years ago when the industry grew at approximately 4%. Then combine this with consumers' higher usage of appliances. which has remained elevated.
spk09: In summary, we were in multi-year demand expansion in North America.
spk12: The strength of our business and its strong brands that serve the needs of millions of consumers daily. Turning to slide 10, I'll review the results for our Europe, Middle East, and Africa region. The region's revenue decline is attributed to negative impact from currency. In reduced volume, the demand in the region was impacted by the war in Ukraine and the subsequent impact it had on consumer confidence. Excluding the impact of currency, the region's price mix actions almost entirely offset the negative impact of demand. For the quarter, the impact from our operations in Russia and Ukraine resulted in an approximate 16 million EBIT decline year over year. At this time, I want to pause and address the war in Ukraine. It is a time of great concern for us all, and it is devastating to see the impact that it is having on the lives of so many people. Our primary focus is the safety and well-being of our colleagues and their communities. and we remain hopeful for a peaceful resolution. We remain supportive of Ukraine and its people. We are proud of the support our teams have provided to refugees. We will continue to support our colleagues through this situation. In closing, for the overall region, EBIT margin contraction was the result of increased inflation, partially offset by cost-based price increases, including actions that came into effect during March. Turning to slide 11, I'll review results for our Latin America region. Net sales growth of 4%, driven by cost-based price increases, offsetting expected industry weakness. The region delivered strong EBIT margins of 7.1%, despite the current inflationary environment. Turning to slide 12, I'll review the results of our Asia region. The region's revenue declined, is largely attributed to the whirlpool China divestiture. Excluding this, the region declined by 5% year-over-year. The region delivered EBIT margins of 4.8%, driven by cost-based pricing actions, offset by lower revenue and inflation. Lastly, COVID-related disruptions and lockdowns in India began to ease as we exited the quarter. Now on slide 13, I'll turn it over to Jim to discuss our perspective on 2022.
spk02: Thanks, Joe, and good morning, everyone. Now turning to slide 14, I'll review our perspective on the external environment and what actions we have in place to exit the year with a strong second half. First, let us address market concerns and misconceptions about demand. Underlying consumer demand remains strong. even with the impact from continued supply constraints and disruptions alongside the spillover effects stemming from greater geopolitical events. We remain very confident that the fundamental strength of consumer demand trends will remain intact over multiple years. With the reorientation towards the home and hybrid work models, the underlying demand strength is here to stay. This is supported as, post reopening, we continue to see consumers using their appliances at sustained and much higher rates. Next, historic levels of inflation, notably in raw materials, energy, and logistics, will impact us throughout the year. However, our previously announced pricing actions are on track and position us to fully offset cost inflation as we exit the year. Disruptions continue to impact the supply chain and inventories remain at low levels. But again, we have taken action announcing over $200 million in refrigeration projects, built-in cooking investments driving automation, capacity, and innovation, increased capacity in dishwashers to support the strong demand for our products. In total, we expect to increase our capital investments by 30% year over year. We have the right actions in place and are confident in the underlying consumer demand strength. Now, on slide 15, I'll discuss our full-year 2022 guidance. We have revised our 2022 full-year guidance to reflect the increased inflation we expect to absorb alongside the industry disruptions that we experienced in the first quarter. We now expect 2% to 3% revenue growth and ongoing EBIT margins of approximately 9.5% for the year. Next, we expect free cash flow of $1.25 billion, or 5.5% of net sales. This represents a full-year EPS range of $24 to $26. Turning to slide 16, we show the drivers of our full-year ongoing EBIT margin guidance. We now expect to deliver 725 basis points of price mix, an increase of 125 basis points led by additional price increases that have already been announced. Next, we expect net cost takeout to negatively impact margin by 100 basis points, a 50 basis point increase, largely driven by increased logistic and energy costs, partially offset by our ongoing cost reduction initiatives. We now expect our business to be negatively impacted by 1.5%, or $725 basis points in raw material inflation. This is an increase of 225 basis points led by higher resin and component costs. On a full year basis, raw material inflation is fully offset by our price mix actions. Next, as we continue to invest in our business, we expect increased investments of 25 basis points in marketing and technology. and we no longer expect a negative impact from currency. We expect to deliver 55% to 60% of our earnings in the second half as we exit the year with our actions fully in place. We are confident in our ability to again navigate a supply-constrained and inflationary environment and deliver approximately 9.5% ongoing EBIT margin. Turning to slide 17, we show our regional guidance for the year. We have aligned our global growth expectations to reflect the current consumer sentiment in EMEA, along with supply constraints in North America. We expect the North America industry to be approximately flat on a full year basis as the industry recovers in the second half of the year. We remain very confident in the fundamentals of the demand environment for North America, supported by broader home nesting trends and undersupplied housing market and a strong replacement cycle. we remain equally confident in the strength of our business and its brands. In EMEA, we have reduced our growth expectations to negative 5% to negative 3% as a result of the broader impact from the war in Ukraine. This includes a significant demand reduction in Ukraine and Russia. Lastly, Latin America and Asia industry expectations remain unchanged from our previous guidance. Regarding our EBIT guidance, our expectation for North America to deliver very strong margins of approximately 16% remains unchanged. In EMEA, we expect margins to recover in the second half to low single digits, resulting in a full-year margin of approximately 0%. On a full-year basis, we expect our EMEA results to be impacted from our operations in Russia and Ukraine by approximately $300 million in revenue. In Latin America, we expect to deliver EBIT margins of approximately 7% as positive price mix is partially offset by inflation. Lastly, we expect to achieve EBIT margins of approximately 6% in Asia, driven by top-line growth partially offset by inflation. Turning to slide 18, we will discuss the drivers of our 2022 free cash flow. We have reduced our cash earnings expectation to approximately $2.2 billion due to previously mentioned factors. Our capital investment expectations remain unchanged at $700 million as we continue to invest in our products and fund organic growth. These investments include unlocking capacity constraints, launching innovative products, and furthering our digital transformation journey. We continue to plan for a moderate inventory build as we begin to recover our inventory position, particularly in the United States. We anticipate minimal cash outlays related to restructuring or post-integration activities as these have been largely completed. Overall, we expect to deliver free cash flow of $1.25 billion, or approximately 5.5% of sales. Our balance sheet remains very healthy, and we expect this to continue in the future. Now, let me recap what you've heard over the past few minutes. Our first quarter results demonstrate that we are a different whirlpool, delivering structurally improved EBIT margins no matter the operating environment. We have the right actions in place to deliver a solid 2022, including our previously announced cost-based price increases of 5% to 18%, addressing inflation across the globe. Next, the strength in consumer demand trends remains unchanged, The strength of our balance sheet and our strong cash generation expectations provide us with significant optionality. We will continue to invest in the business to support accelerated growth and innovation, while returning approximately $1.5 billion in cash to shareholders. These actions demonstrate the confidence we have in our business and our commitment to drive strong shareholder value. Now, on slide 19, I will turn it over to Mark to discuss our portfolio transformation, including the strategic review of our EMEA business.
spk10: Thanks, Tim. Now, on slide 20, I will begin with why we are discussing portfolio transformation. Not only during this past quarter, but over past years, we've done a profound assessment of rapid changes in the global macro environment and how our respective global businesses are positioned to win in the future. As we sit here today, we are operating in a very different world than we were just 10 years ago. In short, it is a less global world where we are experiencing a fundamental global decoupling, which obviously has far-reaching consequences for any global company. A world with rising geopolitical and trade tensions, along with global supply chain vulnerabilities and high inflation from freight and logistic costs. While 10 years ago, global scale benefits and the advantages of global asset utilization were significant, we're now experiencing a diminishing advantage of global scale. At the same time, the benefits of regional and local scale become even more compelling and emphasize the strategic importance of leading regional share positions. Put it differently, Businesses that are structurally in a weaker position will be more impacted by the unfavorable macro trend than businesses that are in a structurally stronger position. At the same time, we at Whirlpool have raised the bar for our long-term value creation, which we have announced in October of 21. We expect our businesses to support 5% to 6% growth, almost doubling our previous value creation growth targets. and growing profitably with 11% to 12% EBIT margins and high free cash flow conversion. It is with this value creation criteria that we critically assess all of our businesses. Now, moving to slide 21, I will discuss our overall portfolio transformation. We will accelerate our portfolio transformation towards higher margin and higher growth businesses. This will have far-reaching impact on capital allocation or restructuring funds or the absence of them, but also on M&A and potential divestitures. We will achieve success with three strong pillars. One, strengthen and refocus our major appliances business. We will leverage our number one position in North America and Latin America and regional strength across the Americas and prioritize our investments to win in the Americas. At the same time, we will drive our high-growth and profitable business in India as penetration rates accelerate growth. In the not-too-distant future, India will be among the three largest global markets, and we are well-positioned to win there. We will continue to develop and build upon our consumer direct business with leading innovation that transforms consumer experiences and increases. We will do this profitably at over 12% EBIT margin, led by the strength of our North America business. Two, we will grow our small domestic appliance business. This business is more global in nature with both distribution and outpace rate. With the KitchenAid brand, we own the most desired small domestic appliance brand to accelerate organic growth. At the same time, we're assessing inorganic growth options in pursuit of serving our consumers with our innovative presence and lead. position that dates back to the launch of 2019, we are positioned to do this by driving portfolio creative margins of over 15%. Third, grow our commercial appliance business. We have the smallest of these three pillars with a healthy commercial laundry business in North America. What makes this segment attractive is the inherent attractive margin profile of more than 15% EBIT, coupled with high as well as the somewhat counter cyclical and stable nature of the business. It also provides opportunities and natural synergies across technology that can be cascaded to our residential business. The significant progress of our company with four years in a row of all-time record earnings and cash flow has now put us in a position to embark on this portfolio transformation. The opportunity of this transformation would not have been available to us 10 years ago. We have a very disciplined approach to M&A and remain selective to pursue only value-creating acquisitions that make long-term strategic sense for our business. While I'm the first one to recognize that this is not a short-term transformation and will require hard work, I'm excited and, frankly, energized about what's happening in front of us. We have demonstrated that the whirlpool of today is a This will create an even stronger and more valuable company and positions ourselves for the future. Now I will turn to slide 22 to discuss the strategic review of our EMEA business. This business has undergone significant changes, and in the last two years we have taken it from a contracting and loss-making business in 2018 to a profitable and growing business in 21. That structural growth is based on share gains in key countries where we have leading positions in. with strong brands that consumers love, and higher margins are the result of successfully implemented cost actions and a focus on growth of highly profitable built-in products. As we look at this business, we do so with both the evolving external landscape, including the war in Ukraine, and our performance to date. While we continue to have confidence that this business can achieve attractive EBIT margins, we have to acknowledge that the timeline to achieve these margin levels may take longer than anticipated. Now, continuing to slide 23, I will explain the actions we may take. We are assessing the long-term value creation opportunity in the EMEA, including the option of continuing ownership as is today. Ultimately, we are reviewing what creates the most value for Volcker Corporation and what is required for future success in Europe. Again, to be clear, all options are being assessed. We expect to conclude this review by the end of the third quarter this year. I will now close my remarks with a few comments. Are we operating in a very dynamic world? Of course we are. We just delivered a number-strong first quarter, fundamentally stronger than pre-pandemic levels, with actions in place to deliver a strong second half. And we're well-positioned with strong, profitable, leading businesses, a balance sheet that provides us optionality and consumers who have never been so engaged with our appliances. We're well prepared to accelerate the focus of our portfolio in high growth and high margin businesses, positioning our company for a future as a different role pool operating in this very different world.
spk11: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Susan McClary from Goldman Sachs. Your line is open.
spk01: Thank you. Good morning, everyone.
spk09: Morning, Susan.
spk01: My first question is, despite all the moving parts and the unexpected events, I mean, obviously your North American margin was incredibly impressive and certainly well ahead of where we were. And I guess in the spirit of no good deed goes unpunished, despite the 16% this quarter, you left the guidance flat for the year for that region. So can you talk a little bit about how you're thinking of the cadence of that margin as we go through the next several quarters, how we should be thinking about that, and what would potentially drive any upside relative to the guide that you have out there?
spk12: Hi, Susan. This is Joe Leotini. In terms of the North American business, I mean, we feel strong about the consumer demand continues to remain healthy, which is really positive. We feel really good about our value trading go-to-market actions and how we've executed that over a long period of time, and that also is a positive. In terms of overall margin, you know, we had a lot of different factors playing in there. We did, again, announce price actions that it were January 1 that helped us mitigate a lot of the cost elements. We are still seeing quite a bit of inflated cost, and we are still seeing quite a bit of disruption in our supply base, kind of limiting our top-line growth. And so on balance, we feel that the approximate 16% EBIT for the year is still the appropriate target for the North American business at this time.
spk10: Susan, it's awesome, Mark. Maybe external question to pause this the way i look at it you know nar had a q1 march of 16 over here 16 guidance and the same as globally we have 9.4 and we're guiding towards 9.5 so the way i would look at it is right now we are already on the right run rate which obviously significantly de-risks our outlook for the year having said that imagine jules point we have further price action already announced they will help us on the upside But we all know there's still volatility out there with raw material price, et cetera. So I think it gives us the appropriate and necessary protection to really deliver the margins which we laid out.
spk01: Okay. Okay, that's helpful. I do have a follow-up question, but first, just on that, is there anything we should be thinking about in terms of the sequential cadence of the margins in North America as we update the models?
spk10: Susan, it's Mark again. I would, for your model, probably keep it pretty stable. There will always be some pluses and minuses, but it's pretty stable. And again, we feel good about where we had a Q4, Q1. It's pretty steady, despite all the moving parts that you laid out. So I think the team has done a really good job managing towards very stable and sustainable margins.
spk01: Okay. And then my follow-up is obviously you announced the strategic review of your EMEA operations, obviously noting that all options are kind of on the table for you. Can you just give us a bit more detail on how you're thinking about the potential set of opportunities out there and You know, I guess within that we have seen over the last year or so you do some interesting kind of transactions where, you know, you are able to keep the Whirlpool brand in certain regions and kind of financially benefit from that while, you know, sort of de-risking the business a bit. So can you talk about whether that's a potential within this or, you know, just what are the sort of opportunity sets out there?
spk10: Susan, obviously we announced today or yesterday a broader acceleration of our portfolio transformation. So there's many moving parts and we're looking at where we can grow organically and inorganically. And obviously we also announced the strategic review of our European business. Again, just to re-emphasize, in Europe we've done really good progress over the last two or three years, turning from loss-making to a profitable business now where we have been growing. But, of course, the question is, as I alluded to earlier, you know, how can Europe fit into our broad portfolio, in particular after we raise the bar for performance? And so such a question is out there, what really delivers the greatest value to Wopo Corporation, but also what is the best structural answer to improving our business in Europe? So in that context, and I mean literally all options on the table, I refer to retaining the business, We also refer to changing ownership, but there could be also hybrid solutions in between, similar to what you laid out. So we're going through a process and, again, expect an answer, maybe not completion, but an answer in terms of what we have in mind and how we would pursue it by the end of Q3.
spk11: Your next question comes from the line of David McGregor from Longbow Research. Your line is open.
spk13: Yes, good morning, everyone. Good morning, David.
spk11: Good morning.
spk13: Yeah, good morning. I just wanted to ask additionally on the portfolio transformation. As you transform the portfolio into higher margin businesses, how much additional capital do you feel you may need to deploy? And can you talk about your targeted ROICs?
spk10: So, David, I mean, first of all, the portfolio transformation can be ultimately driven by think about resource multiple levels. First of all, the ongoing capital where we put it as a company, and frankly, we already announced this year, we will invest more in the America's capacity of new products. Basically, every dimension is probably going forward, we want to invest less in restructuring rather than put the dollars behind growing business and high-margin business. So let's call it more the internal shift of resources. When we talk about external opportunities, obviously, there is not a point in it. It's premature to talk about which specific ones, but I would suggest in general terms refer to investments. The combination of a strong balance sheet and a much stronger underlying earning potential in our company, natural earnings, give us just a lot of optionality in terms of call it firepower out there, which is something which we didn't have available to us five or ten years ago. It gives us a lot of options in multiple levels. Having said that, we will stay consistent, mindful in terms of we're not going to overspend. We look very critical at all opportunities out there. But, again, between balance sheet and earnings power, our capacity is very significant.
spk02: Yeah, and I think, David, a way to think about it also, this is Jim, go forward, is we've always had a pretty consistent level of capital. We invest in our business based on the size and all that. And that will continue to be at that type of level. But as we invest in additional businesses, the amount of capital then could remain the same as we're going to invest in some of those. The other thing you asked on ROIC, our ROIC targets haven't changed at all. And if you look at some of the portfolio work we're doing, we're obviously looking at assessing, you know, the future of ones that perform below our target ROIC level. And then as we do, you know, acquisitions go forward and things, Obviously, initially, they may not, you know, be at that ROIC level, but then as you generate synergies and grow them, that's where we see these are businesses that will contribute to our longer-term, you know, increase in ROIC.
spk13: Yeah, that makes sense. All right. Thanks for that. And then just as a follow up, can you comment on the opportunities in commercial appliances? And I realize you have an existing commercial laundry business that is profitable, and maybe you could size that for us. But do you build a stronger presence in cooking and refrigeration categories? And are you thinking about being just in sort of a really strong niche player? Or do you see Ripple eventually holding a leadership position in commercial appliances?
spk10: David, let me again, first of all, repeat why we believe it's an attractive business segment, and again, that's also based on our own experience. It is inherently a very strong margin business. It's a very stable business where it's not only the initial sales, it's then the ongoing support for spare parts and kind of fleet sales, if you want to say so. Pretty high cash flow yields, and certain elements are a little bit counter-cyclical to our residential business. That's why we like this business. That's why we, a couple of years ago, started to acquire small business commercial laundry. But, frankly, it's not only commercial laundry. We have a commercial cooking and kitchen segment that you might know is even bigger than the commercial laundry segment. So that will be a business that we would have to grow for acquisitions. Now, in its nature, it's a little bit more regional, less global than some of the other businesses, but it's a very attractive one. But, again, it's super mature to talk about what we may target for or what not. But as kind of an area where we want to grow, it is actually very highly on our priority list.
spk11: Your next question comes from the line of Sam Darkash from Raymond James. Your line is open.
spk14: Good morning, Mark, Jim, Joe. I hope each of you are well. A couple questions getting back to the European Strategic Review. The first, and Mark, we've talked about this obviously a lot in the past. I think your prior reticence to potentially monetizing the business was that there was a fair amount of shared technology and R&D and data clearly managing control of the Whirlpool brand was an issue as well. Has any of that changed specific? I guess what I'm getting at is I know all options are on the table, but realistically, is a sale of the entire business a possibility, or is it more you're looking to potentially sell off a minority stake and retain some of those assets?
spk10: So, Sam, again, I can only repeat all options on the table, but what you raise are relevant points. A potential decoupling or partial decoupling of Europe is not a trivial matter. It's technology, the brand, where I can assure you we would put contracts in places to have either control or indirect control of a brand. So the limit to how much you really have a clear sale. I mean, there are certain elements which we want to still keep a certain element of control. Technology is a big one, but also here, as we've demonstrated in the past, there are solutions in the setup where you can ensure our long-term interest, also our global scale and getting some global synergies and not completely losing them. And these are some of the options which we look at.
spk14: And are there any parts of the EMEA business that are higher margin and separable, or is the business mostly a monolithic type of operation that it would be more of a holistic transaction?
spk10: I would argue the same. There's not a lot of pieces that you can easily just partially cut out or whatever. So it is more a one piece of a business. And as such, it's not like you can separate certain individual countries from the rest of Europe because there's a very strong connection with supply base and technology base. So I think you're talking about the overall EMEA region in a total.
spk11: Your next question comes from the line of Michael Reholt from J.P. Morgan. Your line is open.
spk04: Thanks. Good morning, everyone. Thanks for taking my questions. You know, first I just wanted to... switch back to the North America segment for a bit. Um, you know, obviously with, uh, volume industry volumes down 4%, um, yeah, you guys continue and your revenue down 8% despite, you know, solid positive price mix, you know, it appears that, or appears that this quarter, maybe the share losses accelerated a little bit and, you know, obviously you continue to have challenges with supply chain but there were probably four to six quarters into these supply chain challenges so you know i just wanted to get a sense number one if i was correct in terms of directionally thinking about the share losses this quarter and number two you know you alluded to some increased investment in the back half and capacity expansions but um how should we think about ultimately resolving this kind of ongoing supply chain, these supply chain challenges that, you know, appear to have been the bigger factor in this ongoing issue over the last several quarters?
spk10: So, Michael, it's Margaret. Let me just address it. First of all, on the demand side, and there's – it may sound like semantics, but I still want to clarify a couple of things. What we see in North America, you refer to the minus 4% demand, that is supply. Consumer demand is strong, in fact, very strong. you have a situation where it's very clear that demand outstrips supply by a wide margin. And that has been going for several quarters, and that will continue to some extent. So the underlying demand is very strong. I also really want to refer to this page 9, which we have in the presentation, which just shows you the long-term demand trends. They are strong. Of course, if you compare technically Q1 versus Q1 last year, it's slightly down. Most people who started still up 20% versus 2019 and 2020. So this demand is strong. We don't see going away. Replacement is strong and housing will also be strong. So our issue, and we talked about it, has been our supply was not capable of catching up or matching the demand side. And even today, we have a fairly sizable number of back orders. And that ultimately comes back to Throughout the pandemic, North American production was slightly disadvantaged than Asian production. That's as simple as it is. And we are, by a long shot, the biggest producer in North America. We're still 80% of what we sell in the US is produced in the US. And that has been, through the pandemic, a slight disadvantage because there have been less constraints on Asia production. It appears right now the tides start shifting. partly because of the COVID wave in Asia, but we are also seeing now an easing of our supply constraints in Q2. That is also in combination with we started investing more in capacity, not only in our own capacity, but also in our supplier capacity. So it will not go away magically overnight, but it appears the tide is shifting, so we're actually – reasonably confident where we can um ramp up our supply um but frankly it still will remain a volatile environment so it is just choppy out there but right now um at least what we've seen two two turns to the better yeah i'd say michael this is jim too just to point out as all those things that marcus mentioned despite that fact and despite the inefficiencies that cause it's caused us uh we're still generating 16 margins within north america and so
spk02: You know, we are dealing with all the issues and the supply chain constraints, but we're able to manage our business in a way that it's not impacting our margins right now.
spk04: I understand. Appreciate that. I guess just also a little bit of further clarity on the portfolio transformation and strategic review of Europe. You know, if you kind of take a step back and look at, you know, the various components of you know, what you're trying to achieve from a broader portfolio standpoint, you know, obviously you kind of talk about the fact that all options are being assessed for EMEA. But as you said before, you know, it's kind of hard to decouple the business or break apart the business in any substantive way. And so, you know, while obviously, again, you're kind of assessing all options, It does appear that more or less that an outright sale in most elements, maybe retaining some ownership of the Whirlpool brand, maybe some kind of smaller facets of a transaction. But when you talk about your three pillars and investing in the Americas and India and a higher margin business, it just appears that EMEA obviously is the peg that doesn't fit. And so, you know, just trying to make sure that I'm understanding that correctly, that, you know, in effect, it does appear that a large sale of most of the assets at least is, to us at least, what it sounds like you're saying. And number two, though, in terms of the reinvestment of the proceeds from such a transaction, How should we think about that? Should it be more share repurchase? Is there going to be an element of reinvestment? You highlighted inorganic growth opportunities. Just trying to think of the different redeployment of any proceeds.
spk10: Michael, first of all, with regards to Europe, I would not yet jump to any conclusion about what is more realistic or less realistic. So what I said earlier, the decoupling is not trivial, but it's doable. And, of course, it's easy if you have a trusted partner on the other side of a transaction, then it's a lot easier, but it's doable. So, yes, an outright sale is possible. It's one of the options to look at, and then we will go – from an objective assessment about all the pros and cons, which, again, also include retaining the business. That's, in a certain way, our baseline, and we've got to assess our own opportunities and how we drive a margin to required levels and need to compare that, how does it stack up to some other options.
spk09: But so at this point, I... Michael, on your question on the proceeds process, but I think this doesn't change our capital allocation strategy right now. And if you look at... We've been focused, obviously, on returning capital.
spk02: As Mark talked about earlier, and even we've talked about this recently with the strength of our balance sheet now, we are looking at inorganic growth opportunities. And so those two are going to be part of the capital allocation strategy and balance, but it doesn't change the priorities that we have. It just, over time, gives us more to invest in higher growth or potential high growth areas of our business.
spk11: Your next question comes from the line of Eric Fassard from Cleveland Research Company. Your line is open.
spk05: Thank you. Good morning. Good morning. A question and then a follow-up. First of all, relative to 90 days ago, just to separate consumer demand and shipments, trying to figure out what looks different, The industry shipment number you took down from up 2% or 3% to flat. And so trying to figure out what changed that caused you to revise that. And then secondly, it sounds like while that's changed, you haven't seen anything different with consumer demand. But I just wanted to understand that with greater clarity if that's indeed the case.
spk10: Eric, I can take it. I think the biggest change which we see, which has been reflected in forecasts, in Q1, the supply was shorter than we had in mind and probably than the entire industry had in mind. So that's why I would put the Q1 industry shipment number entirely down to supply chain constraints. We know our own numbers. I mean, obviously, we can read what the rest of the industry does. because we don't think the supply will catch up what we lost in q1 throughout the rest of the year um that's what you see reflected there but the other way to look at this zero percent for your guidance basically means yeah we're planning for roughly three percent growth industry growth for the rest of the year okay and then and then secondly in within the guidance you've lowered the the industry shipment numbers you've raised the raw material number
spk05: your performance versus the industry is a bit wider than it was, and yet the margin guidance is held. And so what is better within the business or within profitability to offset these two or three other things that are worse?
spk02: Yeah, I'd say, Eric, and this is Jim, if you take a look at it, we did reduce the margin guidance slightly to the 9.5%, but the biggest thing that offsets this significant increase in materials is the additional pricing that we announced within the first quarter, and that we'll now see running in throughout the second and the third quarter for our business. And so, you know, that's as we talked about earlier. As we've seen higher material costs, we continue to take cost-based price increases to offset that. And it's just a matter of the timing for the year, and it's why we reduced the margin down slightly in to reflect that our pricing is now catching up with some of the cost increases we've seen. And it's not just on materials, obviously. It's also been on things such as logistics costs and energy costs that were all significantly higher and have accelerated at a rate greater than we originally thought they would this year.
spk11: Your next question comes from the line of Liz Suzuki from Bank of America. Your line is open.
spk00: Great, thank you. So SG&A had been running above $500 million per quarter for the last six quarters and dropped pretty sharply in the first quarter. And as a percent of sales, it's the lowest it's been in decades. I mean, how much of that reduction in SG&A was the result of transitory factors like the temporary layoff of plant workers in Clyde? Or in other words, how much of that reduction is sustainable and how much cost is expected to come back in if supply constraints and production issues ease?
spk02: Yeah, Liz, this is Jim. And I think if you step back and take a look at it, you know, partially there is a benefit in there from currency translation, as we translate everything into dollars from around the globe that has helped us reduce that. Two, you know, in our walk we talk about marketing and technology investments, which we're We're lower year over year within this quarter, but then we expect to invest more in the back half of the year, so that's another big driver. Our third thing is we had a business in China last year that also had a significant amount of SG&A in it, and that's now structurally out of there because we don't consolidate that business anymore. We've got some ongoing cost reductions that continue to benefit us in there, and we've talked about that. those in the past, but we see the full run rate of those coming in this year. And then we have some smaller moving parts that can be things such as a small gain on a property sale, but then offset partially by increases in bad debt reserves in places like the Ukraine. So there's a lot of factors in there, but, you know, I think you have to look at that and say at least half of that plus is probably what I would say is a structural run rate reduction, and the other is just maybe timing of things, as I said, like marketing and technology investments.
spk00: Okay, that's really helpful. And then a follow-up question is just about if those 2022 price increases are able to catch up to inflation by the second half, could there be some favorable flow-through from pricing versus inflation in 2023 that we should be considering?
spk10: This is Mark. The current environment is so volatile, but to be honest, there's a lot of moving parts which will happen before now in 2023. But having said that, With all the actions which we have right now put in place, particularly on the pricing side, But also what we do on the supply side, you know, absent of further massive volatility shocks on the raw material side, I think we will have very strong exit run rates coming out of Q4, which by definition should spill over then in 2023. But again, the caution I have right now, you know, even entering the first quarter, we didn't have a war on our radar screen. And so this is a very dynamic, to put it mildly, environment, and we've just got to prepare for everything. But having said that, absent of major shocks, we will have very, very strong exit run rates.
spk11: Your next question comes from the line of Dan Offenheim from Credit Suisse. Your line is open.
spk15: Great. Thanks very much, and thanks for taking the call. I was wondering in terms of the supply difficulty that you've spoken about. Initially, there was a talk in terms of the 30% increase in capex over the course of the year. Later, you talked about some of these issues easing and shifting here in the second quarter. Just trying to get a better sense in terms of how meaningful that is in terms of what you're saying with the easing, or if we should think about that as more sort of being – but later in the year in terms of significant progress on that, and then sort of benefiting then as the CapEx comes through.
spk12: Yeah, Dan, this is Joe Liottini. So, you know, we did talk about how March performed a little better and we expect that kind of ramp continue into Q2. It's going to be slight improvements into Q2 and then a bit more meaningful improvements into Q3 and Q4. There's a lot of factors in here, but we've seen already indications that give us, you know, a bit of optimism. and then we've seen some actual performance that's slightly better. And so that combination kind of sets forth a Q2 that's going to have improvement, but really the bigger ramp happens in Q3 and Q4 with an exit rate in Q4 that shows us kind of the opportunity to get growth back and share back that we have been discussing.
spk15: Got it. Great. And then I was technically just wondering about – What are the comments about the pre-cash flow for the year? How to think about inventory levels over the course of this year and just what overall goes into that in terms of investment?
spk02: Yeah, Dan, and this is Jim. You know, I think it's As we pointed out that, you know, as we go throughout the year, we do expect to build inventories slightly as we begin to see, you know, in later in the year some recovery in certain areas of our supply chain. But it shouldn't be significant for the year. And, you know, what we're guiding to out there right now is about a $200 million increase year over year in working capital. And the biggest portion of that will be, as I mentioned, in inventories. We just try and get our level of stock within our own logistics network to a healthy level as we begin to fulfill some of the, you know, the backlog of orders so that the next step is for us to, you know, continue to increase the health of our own supply chain.
spk11: Your next question comes from the line of Mike Dahl from RBC Capital. Your line is open.
spk08: Hi, it's actually Chris Claw from Mike. Thanks for taking our questions. For my first question, I was hoping you could give us an update on the current state of your Russian operations today. Is maintaining a presence there going to complicate any potential EMEA divestitures in the future?
spk10: I can take this one. As we published, we have a local for local production in Russia, which historically satisfied about 80% or 90% of the volumes in Russia. We are not importing goods from other European sites into Russia, but we maintain a very low-level production, basically keeping the lights on in our Russia factory. Is it sustainable over time? It's probably not, but right now we keep it running to a certain volume, of course fully compliant with all sanctions and everything else. I want to point out that Russia is not the reason why we look at the strategic review in Europe. Russia has been a good and important market for Europe, but that's not the reason why we look at the strategic review in terms of landscape. Us, like many other companies, will of course carefully consider what strategically is possible or not possible in Russia going forward.
spk08: Understood. And just turning back to your demand outlook in North America, you're expecting to know leading housing indicators are starting to decelerate, and clearly there's more uncertainty around demand and confidence around making that decision.
spk09: Mark, in all honesty, I don't see any uncertainty with demand. I said earlier that demand clearly enhances
spk10: over the last two years outstripped supply by a wide margin. Replacement is as strong as ever and the COVID pandemic and now also the more and more hybrid work models with further accelerate replacement because you basically have a higher usage of appliance and we still see that confirmed even two years into the pandemic. Our outlook on the fundamental long-term consumer trends in North America are as bullish as they've ever been. So, honestly, I just don't see that slowing down. Also, on the housing side, I know there's talk about mortgages. If you look at the fundamental demographic trends, the age of the housing stock, the demand out there, I wouldn't bet against U.S.
spk09: housing. And we're certainly very optimistic about the long-term U.S. housing trends.
spk10: Okay. So with that, it looks like we're coming to the end of the Q&A session. So first of all, thank you all for... joining us today um as you've just seen and heard we um but Q1 we feel very good about very solid Q1 um obviously a lot of moving parts um as some of you pointed out in the court and the environment around us but I think we've demonstrated yet again um we can deal with a lot of challenges um I think we have put all the right actions in place to have a very very strong second half and As it comes to the portfolio transformation, we will keep you updated, in particular once we come to the earnings call after the third quarter. With that in mind, thanks again for joining us, and have a wonderful day.
spk11: Ladies and gentlemen, that concludes today's conference call. You may now disconnect.
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