Whirlpool : To Participate In The 17th Annual J.P. Morgan Homebuilding & Building Products Conference (Transcript)

Whirlpool Corporation

Whirlpool Corporation presentation delivered at the 2024 Homebuilding and Building Products

Conference on Tuesday, May 14, 2024 at 10:45 AM

Mike Rehaut: We'll continue the program. Again, thanks, everyone, for being here. We're in the middle of our first day of our morning session, and we have Whirlpool Corporation. CFO, Jim Peters, is to my left.

Again, my name is Mike Rehaut. I cover the Homebuilding & Building Products space for JP Morgan for more years than I'll admit but I've seen a cycle or two, I guess you could say.

Jim Peters: You have.

Mike: As with prior presentations, this will be a fireside chat. I have a bunch of questions set, but there will be time at the end for Q&A. With that, Jim, thanks for being here. Good to see you in person after three years virtual. It's nice to be back. Appreciate your time today.

Jim: Thanks, Mike. I appreciate the opportunity to be here. Before we kick it off, real quick, I'll say a few things because you guys are having an opportunity to hear from a lot of industries that are either related to ours or industries that are as home builders that use our product.

What we would say right now is where we are as a company, we're in a space where the demand has been suppressed for a period of time. Many of us know why, that especially the increase in mortgage rates has driven down, especially the discretionary demand in our industry. We are optimistic on the future, and we are optimistic on the housing market in the future.

We do think there's still a pent-up demand for housing. We still think there's an undersupply of housing. We think we positioned ourselves well for when that begins to come back, especially with our share in the new home construction space, but also with the products that we have available as consumers do begin to upgrade when existing home sales pick up.

Just wanted to open with that. That ties into what everybody else does here, and then hand it off to Mike to ask the questions.

Mike: Great. Thanks, Jim. I appreciate that. My first question is around demand-oriented questions.

Working off of those comments, the shipment guidance that you have for North America, you alluded on your last call, the phrasing was slower than expected start in North America during the first quarter as the promotional environment, despite being similar to the back half of '23, maybe didn't produce the volumes you'd expect.

What drives Whirlpool's confidence that volume will improve in the second quarter, in the second half, to hit the full-year guidance?

Jim: The first thing is part of what we saw in the first quarter is that because the promotion environment didn't drive the consumer sell through late in late 2023, retailers started off with higher inventories.

Part of that in the first quarter was, retailers beginning to correct their inventories in line with where demand was, I'd say. The second thing is, we said we did expect it to begin to pick up at some point here.

Now, we did expect to begin to see some rate cuts that would hopefully impact mortgage rates overall and begin to put more consumers in the marketplace. We haven't seen that quite yet. What we are seeing is at least a stabilization within the industry here.

Now in terms of what the promotions have done and the incremental demand that they've driven, as we said in the first quarter, and the reason why we announced a, what we'll call, promotional program price increase of five percent, is that we aren't seeing the uplift from that.

That means, listen, the consumer that's in the market right now is either most likely a replacement consumer. Which we see is close to about 60 percent of the business today and typically is more 50 to 55 and they're more impacted by that they need to replace. It's a duress purchase.

Additionally, that we see the new housing market is still a stable part for us. That's not really affected by the promotional environment. The segment, that discretionary segment that's impacted the most, is the segment that's down the most right now.

That's why, as we step back, we said, "Listen, we only invest in promotions that create value and create uplift." What we saw throughout late last year is they weren't creating the value or the lift we thought. Obviously that's not what's driving the consumer and the elasticity is not what everybody thinks right now.

Mike: Looking to the back half, I think when you think about your volumes were down in the first quarter. I think you said roughly in line with the outlook for industry shipments, believe your full year is flat to up two percent for North America.

That would imply, shifting to a little bit of growth in the back half of the year. Maybe just walk us through how that progresses. Is it just more of a function of comps? Are there any demand green shoots that you might see emerging in the first half of this year.

Jim: Yeah, I would say is we look towards the back half of the year, to begin with, like I said, I think the industry came in with some higher inventories across the retailers and all that.

That's part of, in the first half of the year or the first quarter, just normalizing back to that. You don't have to deal with that in the back half of the year.

I think the second thing, as we look at, as we said, is discretionary demand is probably on a bottom point here. At some point, any type of little bits of green shoots or movement from an economic perspective should begin to help our industry.

We don't expect significant improvement in the back half of the year. I'd probably say, of that flat to two percent, we're probably closer to the flat as we look at where the industry is and where things are right now.

Incrementally, we also have certain new product launches that we have had in the first half of the year here. We do expect those to help us, at least from a comp perspective.

Mike, as you mentioned, I do think, as you look back on last year, it was a year where demand was suppressed also. That's why we think at least we've hit the bottom.

Now it's a matter of when it just begins to start to come back up. We were hoping that, as I said, you would start to see some less pressure on interest rates and mortgage rates maybe trending in the right direction.

I'd say, right now, we're a lot more cautious on that. That could be something, at some point, that could help us, but we're being really cautious about that.

Mike: Thank you. Margin guidance also coming out of the first quarter, North American margins being 100 to 150 bps below expectations for some of the reasons already mentioned. You implemented the promotional program price increase.

Maybe just give a sense of -- again, you alluded to this before, in terms of replacement versus discretionary demand in the marketplace -- the confidence in realizing this.

If demand does remain more depressed, you said you have this cautious outlook. Maybe you're closer to flat versus up two for the full year. What prevents the competition from getting a little more competitive as well or aggressive in that backdrop?

Jim: I think if you step back there and you look at, first off, as we said, we really decided to take the price increase because, one, margins are under pressure. Two, the promotions aren't driving the incremental demand that everybody had hoped or was really pushing for.

As we looked at that, we said, "OK." We've done this numerous times before. Honestly, we said, "It just doesn't make sense in this environment to be as aggressive as we were being, when it's not driving incremental demand."

That being one of the biggest levers to impact our margins, we said, "You know what? We've got to take that step. It's the right thing to do." To be honest, the inflation, as we've talked about, is still sticky out there. Our costs are still higher than we anticipated.

Now, I think we'll know more as we go through the next couple of months because two big promotional periods in our industry are Memorial Day and Fourth of July. That's where we'll begin to see the real impact of this. We'll begin to see what the competitive reaction is in the marketplace. We'll start to understand better.

I think if you just think about the marketplace today, even with the retailers, many of them, as they talk about their earnings and some of their sales recently are just saying that, listen, they're in an environment where they're not seeing the sales growth that they may be looking for either.

Some of that is coming due to the fact that the discounting has been so high in some of these major categories. Again, I think that we'll see. We'll know more. We do believe the price increasing the promotional prices will be successful.

Obviously, we fine-tune something like this as we go through the process, but we do believe it's going to drive the margin lift that we expected. When you do a five percent increase, it's only on a...Think about, in our business, we've got a portion that's done with builders that's under contract. It doesn't affect that. You've got a portion that's outside of a promotional period.

You can say, "Does this affect 75 percent of your business or so?" That's probably the right answer. I would say that, even if it has a little impact on our market share, what we would know is that still we do believe it creates more value than the risk is of doing that. We won't know, really, the competitive reaction until the next couple of months and we see what happens in the marketplace.

Mike: Fair enough. You hit on market share. Let me ask a bigger-picture question on that. I think it was your investor day earlier this year. You threw out some numbers where, today, you're currently around 28 percent versus low 30s, 33 percent, pre-pandemic.

Maybe, if you could, just review the competitive landscape, what drove that move down, and perhaps comment on other participants maybe who took that share.

Then, looking forward as well, you mentioned a goal of 30 percent by 2026. So the components to get there, if not get back to pre-pandemic share.

Jim: Maybe if you start at the 33 percent before the pandemic, the biggest impact for us was our supply chain and disruptions to our supply chain. A lot of that came through suppliers that we had that were unable to get us some components or other things during that time period. That really took us from 33 down closer to 25 throughout the pandemic.

Now, we were in a marketplace at that time though, where also the promotional environment was almost non-existent. You weren't dealing with some of those things that we are right now. We hadn't seen the rapid inflation of materials. We were making significant margins at that time.

Now, as you roll the clock forward, to everybody's supply chains being a lot more healthy than they were back then, we've recovered the market share back close to 27.5, 28 percent. With

where we are today, what we've been able to do is really work back into some of those areas that I'll call our more profitable or value-creating for us.

As we look to go to 30, from the 28 to 30, that's where we really look to now push, is to grow our business more in the premium appliances. To grow our business more in the mass premium segment. To grow with launches that we've done in the dishwasher space, with launches in laundry such as the Maytag Pets line.

These are all products that sell at higher price points. That's really where we're focusing to try and gain our market share back.

As Mike talked about, we said in investor day that, over the next couple of years, we intend to grow approximately another two points. Biggest part of that is going to be new product launches for us.

Whether it's new product launches in refrigeration and front-load laundry, it's leveraging the ones we've done in dish, that's where you should really expect to see us going after the market share.

To go back to 33 would probably say that we would have to venture into some areas that we don't see to be as value-creating. That's why we're a little bit more cautious and say, "Listen, we're really targeting to get that 30 percent and make sure that that growth comes in very profitable and margin-accretive areas."

If there are possibilities beyond that, that's good. What we don't want to do is just try and get very aggressive at the bottom end of the market to try and pick up another few points of share, because that part of the market is not extremely value-creating in our industry.

That's why we want to hold ourselves to that 30. Then if we see the opportunity, we definitely go back up, but we think the sweet spot is closer to 30 these days.

Mike: On new product development, you're leading me into my next question now for a few questions here. Maybe you could just review the pace of new product development. Has it increased or decreased over the last few years? What does Whirlpool spend on R&D? Has this changed?

For example, we recently saw an increase in advertising for all-in-onewasher-dryers. I talked

about this a little bit with Scott earlier. He said it's been out there for a while. At the same time, it looks pretty new and shiny. I was just curious around that.

To the extent that you look at some other industries at points, new product development can become a lot more intense. It can be more capital-intensive,resource-intensive,margin-dilutive potentially. Just any thoughts around that? Again, from a cost standpoint, from an investment standpoint, how are things trending?

Jim: We, traditionally and going forward, invest three percent in R&D or engineering within our business and another three percent of our sales in capital. That's six percent overall product investment, or at least investment in products and our factories, etc., has been where we are traditionally. We do see to continue at that pace.

We probably are seeing an increase in the amount of product investment in the marketplace, but also we're increasing our own level of investment. We're not increasing the absolute dollar amount, but we're increasing our productivity within that space. That's been a big part of some of the initiatives we've had for a while to simplify and reduce complexity in our space.

Because we also looked at our global engineering organization and really wanted to focus more on having more engineers that are doing the work and less from an oversight and a management perspective within it. We really tried to increase the productivity, and we have. We intend to keep trying to go that direction.

Now, what has that led to? As you've seen recently, we've launched the dishwasher we launched a couple years ago, which was the first one to market with a truly usable third rack. Has been an extreme success for us in the marketplace. The Maytag Pet line actually has been very successful for us, with filters that'll take the pet hair out of your laundry.

As I mentioned, we're really focusing now on some things in refrigeration and front-load laundry to either refresh a product that we have, bring the new SlimTech refrigeration product to the marketplace, which is actually using vacuum-sealed panels.

That'll allow us to make the walls thinner on refrigeration. We're starting by launching that, using it for doors within certain JennAir models which will be coming out here in the near future. That's really where we want to focus, is more of that innovation in launching products at what I'll call the mass premium to premium to super-premium space.

Mike, on your question on the combo washer and dryer, to Scott's point, it has been around for a while and especially over within Europe. It is seeing some recognition in the marketplace today, but it is still a relatively small part of the overall market.

The technology that you need to use to do it is heat pump technology, to be able to put a dryer and a washer together. They have to be a self-contained unit. We actually had a heat pump dryer that we launched into the marketplace around 2013, 2014. It's very common technology used in Europe for dryers.

The issue that we found is that the consumer really didn't like it very much because it's very energy-efficient, but the drying time was much longer. The clothes come out, and they're not completely, perfectly dry. That's what the consumer here is not used to. Where a European consumer, that's normal. That's how the dryers work over there.

It'll be interesting to see how much uptake among the consumer there is. At some point in time -- we've also talked about this with energy standards and that -- you may see the US have to go to heat pump type of dryers to meet certain energy standards.

That will be a shift in terms of what consumer expectations are today versus how those perform in terms of drying cycles and how dry they get the clothes.

We do actually understand the technology very well. We've invested in it, historically. We've looked at it, but we're also looking at what is the true demand that the consumers want more in a mass type of...It is a space that we continue to look at.

Right now, I'd say that's something that we're more observing and probably investing more, as I said, in refrigeration and refreshing, the aesthetics of our front load laundry products and dishwashers, and things that maybe have a little bit larger segment to the market.

Also outside the US, the combo washer dryer is one that we do see some pickup. That's why we continue to look at, at least on a global basis, would there be a platform someday that we might be able to use across all our different locations?

Mike: It's interesting, you alluded to new product intensity maybe increasing and you're trying to get more productivity out of your own resources on that front. What does that mean from a

product vitality index? If you have any in terms of, do you have any type of goals around percent of sales from products introduced over the last three or five years, and where is that trended?

Jim: Yeah. We do typically look at that and it's a metric we used to track. I'd say now what we really look at is we look at more growth within...What we do is we go through a process. We look at the different products that we have and we define how we want to have product leadership. We define what are those key battlegrounds.

The key countries and product platforms in those countries that we need to win in. Then we monitor ourselves against comparing our product to consumer or to competitors. Comparing, looking at ratings we get on our product and looking at other metrics. Looking at our cost versus a competitor's on similar products.

That's how we evaluate if we're launching successful products into the marketplace. How do they match up against the competition and do they give us leadership? Then as a result of that, we would expect to see revenue growth and to see share improvement.

That's really where we're looking at is to say, "OK, are we seeing the lift in terms of the revenue? Are we seeing the increase in share in that specific platform that we would necessarily see?" Sometimes when we used to look at it, Mike, in the way you were describing and all that, it got a little bit cloudy at times in terms of defining how much truly came.

Sometimes you have to define, is it just an aesthetic refresh, or is it a true platform? Are you adding new features or not? What we found is the best way for us is to look at, are we growing revenue? Are we increasing share? Based on our criteria, do we have product leadership in the marketplace?

We've actually continued to make our criteria tougher and tougher to meet year-over-year as we try and hold our standard tire to try. That's what we truly believe is true product leadership will win in the marketplace.

Mike: Maybe just shifting to, again, some of the margin goals 2026, again, at your analyst day, talking about getting North America back to 11 to 12 percent by 2026 from roughly nine percent guidance this year, so obviously that's at least 100 basis points a year in '25/'26. Maybe just walk us through the drivers of that and your level of confidence.

Jim: First thing I'd say is there's two drivers, and the drivers within this year we've talked about is the promotional program price increase we took, but then, also cost reduction. We have said last year, we did significant cost reduction, and we had carryover coming into this year on a global basis that gave us about 100 million.

If you just want to take that and apply it across what North America used to be about 50 percent of our business or so, and now it's closer to the 70 or whatever, or about two-thirds, you've got about a comparable portion that goes into North America.

Then, the new cost actions that we've taken this year will also improve the margins, and it'll probably be rateable to our North America business just based on that what percentage it is of our global business. We've implemented another 100 million of actions that will benefit us within this year.

You would have seen announcements we made recently about headcount changes we were making on a global basis. A big part of that was driven more by the simplification of our business that we're able to do because we're not in EMEA anymore. It does allow us to reduce a lot of our existing cost base now that we don't have that business anymore.

The next piece that drives it from a cost perspective is the continuing ongoing productivity. We try and drive within our factories, within our logistics networks.

Today, what I would say is a lot of that is still taking some of the inefficiencies out of our factories that we've had just from the industry going up and down and our need to adjust our production levels on a regular basis.

We're looking at more structural ways, not closing any factories or anything, but just always looking at more structural ways within the factory and how we manage headcount and workload to try and make sure we address that. Looking at the routes and the carriers we use in our logistics space and looking to optimize all of that.

Then as you go forward beyond this year, there's still going to be opportunity to take inefficiency out of our factories and reduce complexity within our product portfolio.

We will continue to drive that, and we see that adding more cost-benefit as we go forward. You'll have a carryover into next year from many of the cost actions we're taking this year because