Whirlpool Corp /De/ Q2 FY2020 Earnings Call

Good morning, and welcome to Whirlpool Corporation’s Second Quarter 2020 Earnings Release Call. Today’s call is being recorded. For opening remarks and introductions, I’d like to turn the call over to Senior Director of Investor Relations, Roxanne Warner.

Thank you, and welcome to our second quarter 2020 conference call. Joining me today are Marc Bitzer, our Chairman and Chief Executive Officer; and Jim Peters, our Chief Financial Officer. Our remarks today track with a presentation available on the Investors section of our website at whirlpoolcorp.com. Before we begin, I remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Whirlpool Corporation’s future expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10-Q and other periodic reports. We also want to remind you that today’s presentation includes non-GAAP measures. We believe these measures are important indicators of our operations as they exclude items that may not be indicative of results from our ongoing business operations. We also think the adjusted measures will provide you 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. Also, as we highlight on Slide 2, there is significant uncertainty about the duration and potential impact of the COVID-19 pandemic. Therefore, our discussion of the potential impact of COVID-19 on the company’s business results reflects our best estimate based on what we know today. At this time, all participants are in a listen-only mode. Following our prepared remarks, the call will be open for analyst’s questions. As a reminder, we ask that participants ask no more than two questions. With that, I’ll turn the call over to Marc.

Thanks, Roxanne, and good morning, everyone. I hope you and your families are staying healthy and safe during these times. Before I begin, I want to acknowledge the hard work of all our employees throughout this year. I’m extremely proud of their unwavering dedication and commitment to Whirlpool and our customers through these difficult times. Now turning to Slide 4, we discuss our second quarter 2020 highlights. We delivered resilient results globally with ongoing earnings per diluted share of $2.15, and an ongoing EBIT margin of 5.2%, despite significant and continued COVID-19-related challenges. In North America, we delivered a very strong performance of 12.6% EBIT margins, an expansion of 20 basis points and a clear indication of a region's strength and agility. Across the globe, we took decisive and meaningful actions, driving strong levels of cost takeout. Lastly, we delivered year-over-year free cash flow improvement of $124 million due to strong working capital management, particularly in accounts receivable and inventory. Turning to Slide 5, we show the drivers of our second quarter EBIT margins. Price mix negatively impacted margins by 75 basis points as unfavorable product mix shifts due to COVID-19-related consumer purchases were partially offset by effective promotion management in North America. Our cost takeout actions delivered approximately 150 basis points of margin expansion, partially offsetting a 300 basis point headwind from lower fixed cost absorption, driven by COVID-19 production disruptions and inventory reduction. Additionally, continued favorable raw material trends positively benefited margins by approximately 100 basis points. Lastly, strong cost discipline related to marketing and technology investments partially offset the unfavorable impact of currency primarily in our Latin America region. Overall, we’re very pleased to deliver solid operating margins in what was undoubtedly the most difficult quarter of a global pandemic. This impressively demonstrates the strong execution of our global teams and resiliency of our business model. And now I’ll turn it over to Jim to review our regional results.

Thanks, Marc, and good morning, everyone. Turning to Slide 7, I’ll review our second quarter regional results. In North America, COVID-related demand and operational disruptions resulted in double-digit revenue decline with solid recovery in June as restrictions eased across most states. This year-over-year revenue decline of approximately 13% is comparably better than other regions due to home improvement channels remaining open. Despite lower demand, we delivered EBIT margins of 12.6% in the quarter due to strong cost discipline and reduced marketing investments. From an operational standpoint, we continue to experience supply disruptions due to reduced production yield in U.S. factories and component shortages out of Mexico. Overall, we are pleased with the continued strength of our North America business and the region’s ability to maintain strong margins in a challenging environment. Turning to Slide 8, I’ll review our second quarter results for the Europe, Middle East and Africa region. Shutdowns across Europe in April and May and significant demand weakness across the region drove our negative second quarter results. However, in June, year-over-year volume growth in all countries, except Russia, driven by strong demand recovery and share gains in key countries resulted in year-over-year net sales growth and positive EBIT in the month. Looking forward, a strong order pipeline extending into Q3 combined with our ongoing improvement efforts provides us confidence the region will return to profitability in the back half of the year. Turning to Slide 9, I’ll review our second quarter results for our Latin America region. Demand declined strongly throughout the quarter in Mexico and through May in Brazil, with June showing strong signs of recovery. Organic net sales declined approximately 4% as share gains across the region and strong direct-to-consumer sales partially offset demand declines. The region delivered positive EBIT margin, strong cost takeout mitigated COVID-related disruptions and continued currency devaluation. Finally, as a reminder, our second quarter 2019 results include the impact of the Embraco compressor business in Latin America’s results. This will be the final quarter in which comparison periods will contain Embraco results. Turning to Slide 10, I’ll review our second quarter results for the Asia region. While net sales were significantly impacted by the India shutdowns in April and May, demand rebounded across Asia in June. EBIT declined as cost takeout was offset by significant COVID-related demand challenges. In China, the macroeconomic environment has become increasingly stable, though a level of uncertainty remains as we move through the second half of the year. Operationally, we are pleased to have delivered Whirlpool branded share growth in the quarter. In India, results strongly improved sequentially within the quarter as economic restrictions eased. Overall, we are pleased with our ongoing EBIT margin results of 5.2%, given the approximately 300 basis point impact from COVID-19. These results in our operational strategy demonstrate the resiliency of our global business. Turning to Slide 12, Marc and I will discuss our updated perspective on 2020. I will now turn it over to Marc to begin.

Thanks Jim. As expected, the second quarter was the most difficult one in terms of the impact of the pandemic on our business. While we are encouraged by the demand trends seen in June and extending into Q3, we are very mindful of the significant uncertainties which remain for the rest of the year. Because of this, we’re not reinstating full-year guidance, but again want to provide our current perspective based on the information available at this time. In line with our discussions during the last earnings call, I want to give you an update on the three fundamental questions for our business in 2020. One, what’s the shape of recovery? Based on our current sell-through trends in key countries, we continue to expect a U-shaped recovery throughout 2020. However, there is a risk for a W-shaped demand curve in particular, as we look into Q4. Overall, we anticipate a fully organic net sales decline of 7% to 12%, an improvement from our previous full-year perspective of 10% to 15%, due to stronger expected second quarter net sales. Second, can we sustain our operating margins? Here, I will highlight the clear structural improvement in our margin profile compared to our business results during the 2008 financial crisis, which provides us confidence in our ability to sustain healthy operating margins going forward. Additionally, we can confirm we are firmly on track to deliver cost savings of $500 million or more in 2020. Third, what’s our liquidity position? Finally, Jim will discuss our strong cash position supported by a clear focus on disciplined working capital management and our enhanced liquidity position, which enables us to withstand the current economic uncertainty we face across the globe. Turning to Slide 13, I’ll highlight the updated data that continues to support our perspective of the U-shaped recovery throughout 2020. However, please note that we do not intend to share this data beyond this quarter; however, we felt given the uncertainty of the current situation, this data would provide valuable proof points as we all assess the impacts of COVID-19. As we continue to monitor the development of COVID-19 cases and its related impact on appliance demand across key countries, we continue to see similar U-shaped demand patterns emerge on different timelines. In China, COVID-19 cases have significantly reduced even as the broad economy reopens, leading to a pickup in demand with a notable shift from offline to online. In Italy and the UK, we’re seeing clear signs of recovery in June as COVID-19 cases reduce and economies begin to reopen. We believe this is pent-up demand from the previous lockdowns and it remains to be seen if it’s yet a structured recovery. In the U.S., we have not seen the level of demand declines as we have experienced in other countries. This is a result of key retailers remaining open throughout the pandemic and the impact of government cash transfers to consumers. Based on the consistent demand trends we are seeing across many of our key countries, each at different phases of the crisis, we continue to expect a U-shaped recovery resulting in a full year 2020 organic net sales decline of 7% to 12%. Turning to Slide 14, I’ll discuss our structurally improved margin position. During our last earnings call, we highlighted our margin profile during the last financial crisis. In 2008, we saw EBIT margins drop sharply to around 3.5% before bottoming out at a negative 1%. In contrast, we delivered ongoing EBIT margins above 5% in what is the trough period of the current COVID-related crisis. These results provide a meaningful proof point indicating where we can sustain healthy margins throughout the crisis and demonstrate the effectiveness of the strong and decisive actions we’ve taken. Turning to Slide 15, I’ll discuss the actions put in place to sustain our margins over the near-term in more detail. Overall, we’re well on track towards delivering cost takeout of $500 million or more as part of our COVID-19 response plan. Year-to-date we’ve delivered cost takeout of approximately $180 million; these actions are in place to realize the remainder of the savings in the second half of the year. First, we continue to focus on ensuring we capitalize on the deflationary raw material market. Second, we continue to significantly reduce both structural and discretionary spending. During the quarter, we took the initial steps to implement a large majority of the actions we outlined on our Q1 call. As of today, these actions are 80% completed; therefore, we expect to see cost savings resulting from these measures accelerate throughout the second half of the year. Third, we’ve maintained our strict focus on working capital management ensuring we have the proper risk mitigation plans in place and are appropriately managing our inventory levels across the globe. Finally, we recently announced a workforce reduction plan in the U.S. as part of our continued cost reduction efforts. Inclusive of our U.S. actions, Naples’ restructuring charges, and anticipated additional actions, we now expect total restructuring charges of $260 million to $280 million for 2020, above our original guidance of $100 million. Moving to Slide 16, I’ll now turn it over to Jim to highlight our overall financial position and ability to navigate and ultimately lead out of this crisis.

Thanks, Marc. As a result of continued efforts to support our overall liquidity needs, our financial position remains strong with ample liquidity and flexibility to withstand the current economic uncertainty. First, we have a very strong liquidity position, as evidenced by our current cash position of $2.5 billion with approximately $2.5 billion available and remaining committed credit facilities. Within the quarter, we executed a $500 million 364-day revolving credit facility and issued a $500 million 30-year bond, adding $1 billion of additional liquidity. Subsequently, we used the proceeds from the bond and new credit facility to pay down $1 billion of short-term borrowings under our long-term committed credit facility, maintaining our leverage position compared to the first quarter. Second, we continue to maintain an ample buffer to withstand increased debt or a reduction in earnings without negatively impacting our covenants. From a covenant perspective, our debt-to-capitalization limit is 0.65, and we are currently at approximately 0.5, while our interest coverage ratio requires a minimum of three times, and we are currently above 10 times. Third, I’d like to remind everyone that we have no additional bond maturities until the second quarter of 2021, which is only approximately $300 million. It is through our strong financial position and our continued actions that we strive to maintain our strong investment-grade credit rating. Lastly, I’d like to mention that our revised capital allocation plan remains unchanged at this time. Until our future liquidity needs become clear, our temporary suspension of share repurchases will remain in effect. Overall, we are confident that we have the liquidity needed to support our operations during this crisis and remain focused on progressing towards our long-term gross debt-to-EBITDA goal of two times. Now on slide 17, I’ll turn it back over to Marc to summarize our key messages.

Thanks, Jim. Our second quarter performance demonstrated the resiliency of our business model and highlighted the strong execution of our global teams as we delivered healthy operating margins in what we believe is undoubtedly the trough period of a COVID crisis. The decisive actions we took mitigated significant volume loss across the globe and helped ensure we continue to sustain strong margins in the future. Additionally, we continue to maintain a very strong liquidity position and remain firmly committed to driving our business towards our leverage goal of 2x over the long term. As we continue to invest in operational priorities and our digital transformation journey, we are positioning ourselves to win in the eventual economic recovery. These continued investments and resilient year-to-date performance give us confidence in our ability to drive long-term value for our shareholders. And now we will end our formal remarks and open it up for questions.

Certainly. [Operator Instructions] Susan Maklari with Goldman Sachs. Your line is open.

Thank you. Good morning, and well done for the quarter, guys.

Thanks, Susan.

Thank you.

My first question is just, Marc, you mentioned that you are 80% done with the cost actions that you plan to take. Can you maybe give us a bit more color on how much of that is structural versus discretionary? And maybe how we should be thinking about it rolling through as we think about the margin trajectory, especially maybe going into 2021?

Yes, Susan. And I would particularly like to refer to what is Page 26 in the slide presentation because that breaks down exactly what you asked for. So first of all, we are very confident on our $500 million total cost takeout for 2020. And as we said in the prepared remarks, $500 million or more, of which $150 million is roughly raw material. I wouldn’t call that structural. And of a remaining $350 million, there’s about $100 million, which are non-structural, like furloughs or travel expense reduction. But there’s $250 million structural actions, which we largely implemented in the second quarter, that’s what the 80% refers to, which of course will have an impact, had some impact already in Q2, but the large impact is in the second half. There will be, by definition, just that for the fact of a calendar year. Yes, there’s a carryover impact of structural actions into 2021, but keep in mind that also next year we’re running a comparison of a non-structural action, so you mitigate some of that. So, yes, there’s a carryover impact of structural actions, which is probably in the ballpark of $50 million to $100 million carried over into 2021.

Okay. That’s helpful. Thank you. And then, given some of the movements we saw this quarter, especially as it relates to COVID, it seems like maybe there was some shift in market share that happened. Can you just talk a little bit to that? And kind of give us some sense of how you expect that to trend as we’ve now kind of emerged from the key parts of COVID and are getting to perhaps a more stable operating environment?

Susan, are you referring to North America or globally?

Yes. I’m sorry, North America. Yes.

Yes. So, in North America, and as we also highlighted in our remarks, we saw in particular, first of all, throughout the entire quarter, the demand impact was less pronounced than any other market around the world. And that’s just the result of key challenges remaining open, and frankly also with consumers benefiting from a government stimulus program with having cash available. So, the combination of relatively solid demand and stores remaining open led to probably less of a severe impact in the second quarter than other markets. With that in mind, even though we kept our factories running through the entire second quarter, the COVID impact on the supply chain is relevant. It comes back to social distancing in the factories, how you prepare factories for it, you could have had temporary shutdowns of factories because of flare-ups, and we also had component challenges coming out of Mexico. With that in mind, and particularly the last six weeks of the quarter, we were supply constrained and that led to a market share loss over the last six weeks in North America. We are in our way of working through that and out of it, but I also want to be mindful of as long as COVID is around us there is a certain risk to the supply chain. We work on the existing challenges, and we’re confident we will get them behind us, but the risk will remain throughout the rest of the year as long as COVID is around us.

Curtis Nagle with Bank of America. Your line is open.

Good morning. Thanks very much for taking my questions. So, maybe Jim, a question for you. If we could break out the $118 million in cost taken out related to restructuring, how much of it was that attributable to COVID-19 and how much would you bucket to North America? And maybe just could you give a little bit more detail in terms of what exactly these costs were attributable to, and in your words, fixing and reducing the cost structure? And why are they being stripped out for things that are either onetime in the quarter or at least kind of the front half of the year?

Yes. So, Curt, I believe what you’re talking about the incremental restructuring costs that we added on, and obviously this is significantly related to the downturn in volume that we had, which is a onetime type of event in terms of a pandemic and the need to reduce our cost structure at a higher level than we had originally anticipated. I mean, if you want to think about that, it kind of happens pretty ratably across the globe, as you look at it, because this is the portion. The initial $100 million was the restructuring we were doing mainly within EMEA around the closure of the Naples factory and a few other things. These incremental actions are being implemented across the globe, almost in an equal amount about where our revenues are. Most of these are, the majority of these are people costs and that’s just the reduction that you see. We did a couple of different things. Here is one, we ran a discretionary early retirement program within the U.S., and additionally, we had some involuntary layoffs that we also did throughout the process. So using both of those tools, those are what add up to most of those costs there. And as I said, you just got to think about it. It’s pretty even across the globe because we’ve taken actions everywhere to bring our business in line with the volume that we see for this year and the potential risks we see going forward.

Okay. Understood. I think maybe just a quick one, kind of shifting back to the U.S. and the promotional environment. As I understand it, it was pretty subdued. I think kind of similar to what you saw in Q1 for obvious reasons in terms of the lower volume demand. Did you think there were any risks kind of going forward as the operational and kind of demand environment normalizes, you could see a pickup in promotional intensity or competition from some of your competitors?

Curt, it’s Marc. So, as you know, we’re not making forward-looking statements on the promotional environment, and I don’t know what competitors will be doing. I would say that the Q2 promotional environment was rather unusual because, at least for our case, we decided there’s no point in promoting products which you don’t have available to some extent. And that’s why Q2 was subdued. Plus, in addition, you had a very peculiar demand situation. There’s a drive towards freezers, fridges, et cetera. So, nothing in Q2 was normal in that respect. For Q3, keep in mind, there will be supply constraints also throughout Q3. So I’m not quite sure I would take a broader promotional environment, Q3 as representative of a normalized market environment.

Eric Bosshard with Cleveland Research. Your line is open.

Good morning. Thank you.

Good morning.

Good morning, Eric.

On the revenue side, it sounds like the adjustment to the full year, you attributed exclusively to the Q2 better than expectations. Am I saying that right that you haven’t had a different view on the second half revenue outlook from what you’d said previously? And I guess the follow-up within that is, why not?

Eric, fundamentally, yes, the numbers are similar to what we laid out before, and Q2 came in stronger. The color I want to provide in addition, and we alluded to this one in my prepared remarks, we feel very good about July and August. So July and August remains as strong as June. But we are cautious about what happens September to December. There’s just too much uncertainty in the form of what happens once the government’s stimulus tapers off. We don’t know how people will react to COVID and consumer demand. We don’t know how unemployment will be dealt with and how it impacts consumer demand. So in a certain way, yes, we factored in that caution in our second half outlook. If it doesn’t materialize, yes, then it will be better. The good news is July and August are looking pretty good.

Yes. And maybe, Eric, I’d add to that. And just say that as each week goes by, we see improvements in our ability and our suppliers’ ability to meet the demand. But to Marc’s point, there also is just a backlog of orders that we work through throughout the upcoming quarters. And we know many of our competitors are in the same situation. So it is improving, but we are still catching up to where the demand has been.