Earnings Call Transcript - WHR Q4 2021

Operator, Operator

Good morning, and welcome to Whirlpool Corporation's Fourth Quarter and Full Year 2021 Earnings Release Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Senior Director of Investor Relations, Korey Thomas.

Korey Thomas, Senior Director of Investor Relations

Thank you, and welcome to our fourth quarter and full year 2021 conference call. Joining me today are Marc Bitzer, our Chairman and Chief Executive Officer; Jim Peters, our Chief Financial Officer; and Joe Liotine, our Chief Operating Officer. Our remarks today track with a presentation available on the Investors section of our website at whirlpoolcorp.com. Before we begin, I want to remind you that as we conduct this call, we'll be making forward-looking statements to assist you in better understanding Whirlpool Corporation's future expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K, 10-Q and other periodic reports. We also want to remind you that today's presentation includes non-GAAP measures. We believe these measures are important indicators of our operations as they exclude items that may not be indicative of results from our ongoing business operations. We also think the adjusted measures 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. Following our prepared remarks, the call will be open for analyst questions.

Marc Bitzer, Chairman and Chief Executive Officer

Thanks, Korey, and good morning, everyone. I'm very proud to say that 2021 was another record-setting year for us, now the fourth record-setting year in a row. And as you all know, 2021 was certainly not an easy year given all the COVID-related disruptions and rapidly accelerating inflation. As we turn to 2022, we expect to deliver yet another year of record results. While we, on one hand, strongly believe that consumer demand trends will remain strong, the ongoing pandemic, on the other hand, will continue to translate into supply constraints and cost inflation. As we have successfully demonstrated in 2021, we do know how to execute in a challenging environment. Also, with the strength of our balance sheet and significant cash generation, we are well positioned to fund innovation and growth while returning cash to shareholders. Throughout 2021, we demonstrated the agility of our business and the ability to operate in any challenging environment. Faced with supply chain constraints and significant inflationary pressures, we responded with early and decisive actions to protect margins. We executed cost-based price increases in every region, fully offsetting $1 billion in raw material inflation. Ultimately, we drove record results for the fourth consecutive year. We delivered double-digit revenue growth of 13%. We delivered this accelerated growth with a record margin of 10.8% and record ongoing earnings per share of $26.59, a 44% year-over-year improvement. And we generated record adjusted free cash flow of $2 billion, led by strong earnings. As a result, we strengthened our balance sheet and drove significant shareholder returns. We returned $1.4 billion to shareholders with $1 billion of buybacks and increased our dividend for the ninth consecutive year. We reduced our gross debt leverage to 1.8 times, delivering below our long-term target of two times. Overall, our 2021 performance again reflects the structural improvement in our business, and we're a different Whirlpool than we were 10 years ago, operating in a very different world. Our Q4 results were fully in-line with our expectations. We delivered record revenue in the quarter and an 8% growth compared to 2019. Additionally, we delivered ongoing EBIT margin of 8.6%, largely offsetting over $500 million of inflation from raw material and logistic cost increases. This quarter demonstrates our deeper understanding of the environment we are operating in and the strong execution capabilities of our teams. Now I'll turn it over to Joe to review our regional results.

Joe Liotine, Chief Operating Officer

Thanks, Marc, and good morning, everyone. Turning to Slide 8, I'll review results for our North American region. In North America, we delivered record revenue, with 11% full year revenue growth, driven by strong consumer demand and the execution of cost-based price increases. Additionally, we delivered record full year EBIT margins, driven by our disciplined execution of cost-based price increases and sustained positive mix. Demand for our products remains high as we operate in a constrained environment, which we expect to persist throughout 2022. Lastly, the region's outstanding results demonstrate the fundamental strength and agility of our business model. Turning to Slide 9, I'll review results for our Europe, Middle East and Africa region. The region delivered strong full year revenue, a 16% improvement compared to the prior year. And despite the negative impact of inflation, the region drove margin expansion of 190 basis points, delivering 2% margins for the year. We are confident in the actions we have in place, and our long-term turnaround plan for the region is on track. Turning to Slide 10, I will review results for our Latin America region. Full year net sales growth of 22%, driven by cost-based price increases, the region delivered very strong EBIT margins of 8.4% for the year, despite supply constraints, inflation, and continued negative impact from currency. Turning to Slide 11, I will review results for our Asia region. We streamlined our portfolio with the successful completion of the sale of our majority interest in Whirlpool China. The region's revenue decline is fully attributable to the Whirlpool China divestiture. Excluding this, the region grew by 16% year-over-year. We restored profitability to the region and delivered EBIT margins of 5.4%, driven by cost-based pricing actions and the positive impact from our divestiture. Lastly, COVID-related disruptions continue as cases have surged in India, with shutdowns impacting demand as we enter the New Year. Now on Slide 12, I'll turn it over to Jim to discuss our full year 2022 guidance.

Jim Peters, Chief Financial Officer

Thanks, Joe, and good morning, everyone. Now turning to our full year 2022 guidance on Slide 13, 2022 will be another year where we will face a difficult operating environment, including COVID and supply chain disruptions that we now face in the first quarter. However, consumer demand remains robust, driven by nesting trends and a strong replacement cycle. We are uniquely positioned to capture these structural drivers of demand and can operate in any environment. It is with confidence that we provide our 2022 guidance which reflects significant top line growth and a fifth consecutive year of record earnings per share. In line with our long-term value-creation goals, we expect to drive net sales growth of 5% to 6%. Additionally, we expect to deliver EBIT margins of approximately 10.5% and $1.5 billion in free cash flow. This represents a full year EPS range of $27 to $29. We expect price/mix to expand margins by 600 basis points from the following three drivers: one, carryover pricing actions from 2021; two, recently announced cost-based price increases in the U.S., Europe, and India, which will be fully in place in the second quarter; three, the continued positive trends in mix we have seen as consumers nest at home and the impact of new product launches. Next, we expect net cost takeout to negatively impact margins by only 50 basis points, with increased logistics and labor costs, partially offset by ongoing cost productivity measures. We expect our business to be negatively impacted by $1 billion to $1.25 billion in raw material inflation, led by higher steel and resin costs. As we already began to realize a significant cost increase in the latter portion of 2021, the largest year-over-year impact is expected during the first half of the year, particularly in Q1. On a full-year basis, inflation is fully offset by our price mix actions. Next, as we continue to invest in our business, we expect increased investments of 50 basis points in marketing and technology. Unfavorable currency, primarily in Latin America, is expected to impact margins by 25 basis points. We expect to deliver 40% to 45% of our earnings in the first half of the year. We are confident that we have the right actions in place to again navigate a supply-constrained and inflationary environment and deliver approximately 10.5% EBIT margin.

Marc Bitzer, Chairman and Chief Executive Officer

Thank you, Jim. We've demonstrated we can generate significant levels of cash, and we're unwavering in our commitment to drive shareholder value. We have structurally improved our cash generation through our accelerated growth and expanded margins. Next, with our multiyear footprint optimization actions largely behind us, with reduced unique cash outlays. Additionally, we will continue to invest in innovation, capacity and strategic initiatives, further demonstrating our confidence in the business. Lastly, with our strong balance sheet and significant cash generation, we expect to return approximately $1.5 billion to shareholders in 2022. Let me begin by reiterating our significant cash generation expectations and the strength of our balance sheet. We have achieved our gross debt leverage target of below 2.0. And additionally, we expect to deliver free cash flow of $1.5 billion in 2022 or approximately 6.5% of sales. Lastly, we have reduced our unique cash use significantly, in line with our long-term expectations.

Sue Maklari, Analyst

Thank you. Good morning, everyone. My first question is thinking about – I know you mentioned that you expect the greatest impact in terms of inflation in the first quarter and the first half of the year. Can you just give us a bit more color on how you're thinking about the sequential shifts and a lot of those input costs? I see in the bridge you sort of had a 6.5% hit to the margin in the fourth quarter. You're implying a 5% impact for the full year. Just talk to us about how we should be thinking about the cadence of those costs and what that could imply for the margins across the business?

Marc Bitzer, Chairman and Chief Executive Officer

Susan, it's Marc. So let me try to provide a little bit broader context. And first of all, as you know, we don't give quarterly guidance. But I think it's very important to understand we see a seasonality in our guidance. And what you see underlying, there's basically two fundamental factors in the seasonality which are not exactly in the same cycle. So first, you have cost increases, which we do expect to peak in Q1 and Q2 and then moderate in the back half of 2022. The offsetting incremental pricing actions which we have already announced, they will start seeing the incremental additional benefit towards the end of Q1 and particularly Q2. So while the negative side is more heavily balanced towards Q1 and Q2, the pricing benefits will be more significant in Q2, Q3 and Q4. So you overlay these two factors, that led to kind of the first half indication, which Jim provided in his remarks, that we expect 40% to 45% of our full year EPS to be delivered in the first half.

Sue Maklari, Analyst

Okay. That's very helpful. And then following up, can you talk about the supply chain, the sort of headwinds that you're seeing as you come into this year, anything that's really changed? And how you're expecting that to come through the year? And how we should be thinking about your volumes relative to the industry in North America and the U.S. specifically?

Joe Liotine, Chief Operating Officer

Susan, this is Joe Liotine. Yes, in terms of our inventory, if we just take a step back, we'd still see very strong consumer demand, and we see a lot of reasons for that across housing, nesting and just usage of our products. And so as we talk about inventory, it's a function of kind of the outside demand as well. And so we did experience good consumer pull. But at the same time, we continue to be hampered by operational disruptions. We've kind of chipped that down to six weeks and then ultimately to four weeks. So we've not yet made the full progress that we would have liked on inventory as a consequence of those two functions. We expect the disruptions really to continue into the Q1 first half period.

Marc Bitzer, Chairman and Chief Executive Officer

Yes. Susan, maybe just adding to this one. Basically, we do expect the supply chain constraints to persist throughout 2022. If you look back at what drove supply chain shortages in 2021, it's largely labor shortage in our own factories, component issues, chip issues and transportation delays, both across the ocean and even domestically. Ultimately, all these factors are somewhat related to the respective COVID waves. And as we all experienced and all we can see every day, COVID is not yet completely over, even though there may be some light at the end of the tunnel, but there's always rippling effects coming out of the respective COVID waves as we work ourselves to supply chain, and also in particular, as you think about Omicron and what it might mean for Asia and Asia component suppliers.

Eric Bosshard, Analyst

Thank you. Good morning.

Marc Bitzer, Chairman and Chief Executive Officer

Good morning, Eric.

Eric Bosshard, Analyst

I just wanted to talk about the 2022 guidance on EPS of $27 to $29. Could you just talk a little bit about the assumptions behind the low end of that range versus some of the assumptions underlying the upper end of that range?

Jim Peters, Chief Financial Officer

Yes, David. And this is Jim. As we go into the year, and if you think about even historically, as we've given ranges in the past, it's typically been about a 10% range around our earnings. If you look at what we're saying today and the low end versus the high end, as we come into the year, we're starting off with an estimate on a range of material cost increases between $1 billion and $1.25 billion. So obviously, there's still some moving parts within there, and we feel very good about the range that we've given.

David MacGregor, Analyst

Marc Bitzer, Chairman and Chief Executive Officer

David, it's Marc, and maybe Joe should chime in as well. So first of all, also to be very transparent and clear, Q4, we gained sequential market share in the U.S. compared to Q3. Year-over-year, we were still slightly down. So if you want to – another way to look at it, probably our weakest U.S. market share was pretty much around the summer period. And ever since, we slightly managed back.

Joe Liotine, Chief Operating Officer

Yes. Maybe, Marc just to build on that point. Our product launch is related to top load 2-in-1 agitator that we launched, has been very successful. Our dishwasher launch in the last, let's say, 12 or 18 months continues to gain steam there. Very successful. So we do see a lot of assets in market that are ready to – in a position to help us grow.

Sam Darkatsh, Analyst

Good morning, Marc, Jim, Joe. How are you.

Marc Bitzer, Chairman and Chief Executive Officer

Good morning, Sam.

Jim Peters, Chief Financial Officer

Yes, Sam. And this is Jim, and Marc can kind of add in a little if he'd like or Joe. But what I would say is when we look at the contracts we have in place and our expectations, that range incorporates what we think the variability could be. As you know, historically, we really don't give specifics on various commodities in terms of what they are. But when we look at them in total, we believe the range of $1 billion to $1.25 billion incorporates the different movements we could see within there, and based on what we know today and the contracts we have in place.

Michael Rehaut, Analyst

Thanks good morning everyone.

Marc Bitzer, Chairman and Chief Executive Officer

Good morning Mike.

Mike Dahl, Analyst

Hi, thanks for taking my question. Just another follow-up on cadence through the year, but maybe ask from the volume standpoint. When you think about your global – the global guide seems to suggest volume kind of flat for the year. Would you expect volume down in the first half of the year and then up in the second? Is that effectively what the guide is implying to get to the full year?

Jim Peters, Chief Financial Officer

Yes, Ken. As Marc kind of mentioned earlier in that, is we do expect that the pattern for this year than in the first half of the year, we'll see 40% to 45% of our earnings come and then, obviously, 55% to 60% in the back half of the year. So that one does imply that volumes and revenues will ramp throughout the year, as I mentioned earlier. The second thing that drives that and you mentioned it, but as we implement the new price increases that we've just announced, those will obviously have an impact on the top line too.

Liz Suzuki, Analyst

Thanks for taking my question. I guess first one is, if raw material costs moderate more quickly than you anticipate, would you expect to hold on to some of these higher prices, and therefore, lead to some margin upside? Or would the intention be to pretty quickly react to a lower cost environment with some more attractive pricing to the consumer and potentially some bigger market share gains?

Marc Bitzer, Chairman and Chief Executive Officer

Yes. Liz, it's Marc. Again, to reiterate, we expect inflation to peak in Q1 and Q2 and to start moderating in the back half. Moderating doesn't mean it's going down to zero. So we will still experience some inflation in the back half. Let me maybe just also give, we came to the last question, just wrap it up here. First of all, thank you all for joining. Ultimately, 2021 was an all-time record year, all-time record revenue, all-time record margins, all-time record cash flow and we have a strong balance sheet. This is now the fourth year in a row, and we're guiding towards a fifth all-time record. So we feel very good about business. Of course, we have some challenges and some unknowns to deal with, particularly in Q1 and Q2. But I would argue, the last four years, we think we've demonstrated pretty well that we can deal with unknowns and challenges and deliver strong results.

Operator, Operator

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