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spk00: 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.
spk02: Thank you, and welcome to our second quarter 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 investor section of our website at whirlpoolcorp.com. Before we begin, I want to remind you that as we conduct this call, we'll be making forward-looking statements to assist you in better understanding Whirlpool Corporation's future expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K, 10-Q, and other periodic reports. We also want to remind you that today's presentation includes the non-GAAP measures outlined in further detail 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 business operations. We also think the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations. Listeners are directed to the supplemental information package posted 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.
spk01: Thanks, Corey, 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. Our global industry demand was down, but frankly, that is exactly what we expected. 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 2023, we are leaving our industry demand outlook unchanged. Even though we are starting to see early but clear signs of a strengthening US housing market, which will benefit us disproportionately, the broader consumer sentiment is still cautious and not yet pointing towards more discretionary purchases. We are also seeing the operating environment essentially 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 successfully operate and create value in. Turning to slide six, I will provide an overview of our second quarter results. The world we are operating in today is very different from the first half of 2022, 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 2022, we saw a global demand shift with industry declines in key countries. We continue to experience this trend into the first half of 2023 with global demand declines in the mid-single digits. Second 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. In Q2, we delivered a strong operating margin of 7.3%. This represents a 200 basis points expansion from the first quarter driven by our strong cost takeout actions. These actions delivered $150 million of year-over-year benefit and are on track to our full-year target of $800 to $900 million of cost takeout, and delivered strong second quarter ongoing earnings per share of $4.21, in line with expectations. Now, turning to slide 7, I will share more details on our second quarter EBIT margin. The second quarter was unfavorably impacted by the normalization of promotions, which reemerged in the second half of 2022, and are now following historical seasonal trends. Sequentially, price mixed negatively impacted margins by 50 base points with a year-over-year impact of 350 basis points. Our strong cost takeout actions delivered 275 basis points, both sequentially and year-over-year. And as expected, marketing technology and foreign currency negatively impacted margins. Overall, we are pleased with our second quarter performance, delivering ongoing EBIT margin of 7.3%. Turning to slide eight, you can see we are on track to deliver $800 to $900 million of the year-over-year cost takeout benefits, including $300 to $400 million of reduced raw material costs and $500 million of additional cost takeout actions driven by enhanced 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 cost takeout targets. While the chart shows high year-over-year cost reduction in Q3 and Q4, it is important to note that this is entirely driven by the baseline effects in the second half of 2022 and will not require additional new cost takeout actions. Now I will turn it over to Jim to review our regional results. Thanks, Mark.
spk03: 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 Insincurator was more than offset by industry decline of 1% and increased promotions, resulting in 5% revenue decline. The region delivered sequential margin expansion with solid double-digit EBIT margins of 10.3%, as our strong cost takeout actions continue to gain traction alongside the integration of Insincurator. 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 US housing market. 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. For perspective, there was only one year in the 40 years prior to the Great Recession in which fewer than 1.2 million new homes were built. Much of the period between 2007 and 2017 was below this level, leading to the oldest U.S. housing stock in the country's history. In total, we estimate 3 to 4 million units under supply of housing. 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 1.7 million 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 home builders. The combination of, one, the best brand portfolio with multiple $1 billion brands, including Whirlpool, Maytag, and KitchenAid, two, an innovative product portfolio that targets 90% of the consumers, and three, 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 five new appliances. It is not surprising that we have become the number one choice for U.S. home builders, serving eight 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 help-for-sale accounting benefits due to reduced depreciation that will continue each quarter until the transaction closes, which is expected in Q4 of this year. 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. 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 first quarter. The region delivered EBIT margins of 3.7% with our strong cost takeout actions offset by negative price mix. 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 million. 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 7.25% 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. We continue to expect to deliver $800 million 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. Turning to slide 18, we show our regional guidance. We see no change to our full-year regional industry expectations. While second quarter North America industry shipments were slightly favorable versus our prior expectation, This was largely driven by retailer restocking and slightly higher retailer inventory levels. 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. 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. Now I will turn the call over to Mark.
spk01: 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 five years, we've taken several significant steps to transform a company into a higher growth, higher margin business based on three structural pillars. Small appliances, major appliances, and commercial appliances. These steps in changing our company portfolio lay the foundation for a company with a double-digit EBIT margin profile, which is very different from our historic mid to high single-digit profile. As we look forward, we are reassessing our operating segment structure in anticipation of a potential change after the completion of a Europe transaction. During one of our future earning 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 Insincurator and how it is strengthening our portfolio. Our integration efforts are well underway and nearing completion after acquiring Insincurator in Q4 2022. Insincurator's rich history and strong product legacy I was very excited about the brand's largest launch, NextGen, which we presented during our last earnings call. We continue to be pleased with a sustained EBIT margins of approximately 20%, contributing approximately 50 basis points to our consolidated EBIT margins. Turning to slide 22, I will provide an update on our EMEA transactions. In January, we agreed to contribute our European major domestic appliance business into a newly formed entity with Arshlick. The Europe transaction and the regulatory processes are ongoing and progressing as expected, including executing an agreement to sell our Middle East and Africa business. We continue to expect to close the Europe transaction in the fourth quarter of 2023. Until then, we will continue to focus on EMEA delivering the best products and consumer-preferred brands. Let me also remind you of the benefits of this transaction. 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 billion of annual sales with over €200 million 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 million net present value of future cash flows. Additionally, post-closing, we expect the transaction to improve our value creation metrics by $250 million 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. We remain committed to funding innovation and growth and expect to invest over $1 billion 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 2023, we returned $193 million 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. We are confident that we are well on our way to delivering debt leverage to below historical norms and towards our target of two times or below with $1.3 billion cash on hand and strong free cash flow, which as mentioned earlier, we expect to be $250 million higher after the close of a Europe transaction. We continue to prioritize debt repayment with approximately $500 million of acquisition-related term loan paydown expected by the end of the year. Turning to slide 25, I will review our healthy debt ladder and how it gives us flexibility and de-risks our balance sheet. We have an attractive weighted average interest rate of approximately 4.25%, with 70% of our debt held at a fixed rate of just over 3%. Additionally, over $2 billion of our debt is due after 2030. 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 million 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. With our strong position as the U.S. builder's number one choice and serving eight of the top 10 national builders, Wopo is well-positioned to benefit from a housing-driven demand recovery. and we continue to unlock value with our ongoing portfolio transformation. Now we will end our formal remarks and open it up for questions.
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