Q4 2020 Whirlpool Corp Earnings Call
Yeah.
[music].
Good morning, and welcome to the General Dynamics' fourth quarter and full year 'twenty 'twenty earnings Conference call.
All participants will be in a listen only mode.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question you will need to press star one on your telephone keypads.
Please note this event is being recorded.
I would now like to turn the conference over to Roxanne Warner. Please go ahead.
Thank you and welcome to our fourth quarter 'twenty 'twenty Conference call Joe.
Joining me today on 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 Whirlpool Corp, <unk> com.
Before we begin I'll 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-K 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 presentation appendix on 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 opened for analysts' 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, Glenn and good morning, everyone and.
In difficult times like the ones we're living through today. It is important that we remain true to our guiding principles.
Whirlpool with 110 year history is rooted in our value driven commitment to our shareholders employees consumers and communities in which we operate.
In 2020, we face unprecedented challenges due to the ongoing COVID-19 pandemic.
Yet we remain firm in our commitment to all of our stakeholders.
The health and wellbeing of our employees was and it remains our top priority.
We increased safety measures at all manufacturing plants, and providing additional resources to care for families and those who failure.
We established business continuity plans to ensure our consumers received our products to improve life at home with their families.
And we continue to support our global communities by procuring medical supplies, making donations and engineering critical equipment for frontline workers.
In parallel we made significant advancements to our boards, our sustainability targets, resulting in ratings improvements and external recognition most.
Most notably we received a low risk rating from sustained lytic per year over year improvement driven by our outstanding energy and water efficiency programs and our strong global product safety systems.
And we were named to the Dow Jones Sustainability, North America index in recognition.
<unk> of our long standing sustainable business practices.
2020 marked our 14th time on the list from the last 15 years.
I'm very proud of the way our employees have managed from a pandemic.
It is ultimately the agility of our organization and the resilience of our employees that allowed us to deliver record results in 2020.
Now turning to our fourth quarter 2020 highlights on slide four we delivered strong organic net sales growth of over 10% driven by solid industry demand across the globe.
Additionally, we delivered ongoing EBIT margin of over 11% a.
Our second consecutive quarter of double digit margins in a year over year expansion of 410 basis points.
Lastly, we successfully executed our go to market initiatives and drove strong cost takeout across the globe, leading to positive EBIT and EBIT margin expansion in all regions.
Now turning to slide five we will discuss our full year highlights.
We took immediate and decisive action as we announced and executed a 500 million plus cost takeout program.
Forever, we realigned our go to market strategy to effectively operate within the supply constrained environment.
And structural and sustained positive demand trends and the exceptional execution of our COVID-19 response strategy resulted in.
Record ongoing earnings per share of $18 55.
A 16% improvement compared to the prior year above our previous guidance.
Record ongoing EBIT margin from nine 1% at 220 basis point improvement and a 25% increase in total EBIT compared to the prior year.
And record free cash flow of approximately $125 billion with.
With positive free cash flow in North America, Latin America and Europe.
Despite significant macroeconomic uncertainty, we strengthened our balance sheet and drove significant shareholder value will reduce our gross debt leverage to two three times, making progress towards our long term target of two times.
We delivered a return on invested capital of approximately 11% representing the fourth consecutive year of improvement as we realize the benefits of continued EBIT margin expansion at an optimized asset base in our Europe region.
Lastly, we returned strong levels of cash to shareholders through share repurchases and increased our dividends for eighth consecutive year.
Overall results were delivered in 2020 reflect the structural improvements we have made not just in 2020, but also from lowes made during the year before.
We are a fundamentally different company with an improved margin and cash flow profile two.
<unk> 2020, it could have been a setback for us instead, we were able to significantly accelerate our progress towards our long term financial goals.
Turning to slide six we share with drivers of our fourth quarter and full year EBIT margin.
In the fourth quarter price mix delivered 375 basis points of margin expansion driven by reduced promotion investments and mixed benefits as consumers invest in their homes. Additionally.
Additionally, we delivered on our cost takeout program positively impacting margins by 175 basis points.
Server reduced steel and resin costs resulted in a favorable impact of 125 basis points.
These margin benefits were partially offset by continued marketing and technology investments and the unfavorable impact of currency.
From a full year very strong margin expansion from price mix and our cost takeout programs were partially offset by increased brand investments and currency.
Overall, we're very pleased to be delivering on our long term EBIT margin commitment and are confident this positive momentum will continue to drive very strong results from 'twenty one.
Now I will turn it over to Jim to review our regional results.
Thanks, Marc and good morning, everyone turning to slide eight I'll review, our fourth quarter regional results.
In North America, we delivered 4% revenue growth driven by continued strong demand in the region.
Additionally, we delivered record EBIT driven by the flawless execution of our cost takeout and go to market actions.
Lastly, we continue to optimize our supply chain operations driving weekly improvements in our production yield delivering.
Delivering topline growth and a record EBIT performance the regions outstanding results again demonstrate the fundamental strength of our business model.
Turning to slide nine I'll review, our fourth quarter results for our Europe, Middle East and Africa region.
Share growth in Italy, and the U K, along with strong demand in the region drove another quarter of double digit revenue growth. Additionally, the region delivered year over year EBIT improvement of $29 million led by increased demand and strong cost takeout, we overcame the challenges presented by COVID-19, and restore profitability to the <unk>.
<unk> in line with our commitment at the start of the year.
Our 2020 results demonstrate the effectiveness of our strategic actions and the progress we have made to date.
Turning to slide 10, I'll review, our fourth quarter results for our Latin America region.
Net sales increased 5% with organic net sales growth of 28% led by strong demand in Brazil. The region delivered very strong EBIT margins of 12% with continued strong demand and disciplined execution of go to market actions offsetting significant currency devaluation.
Overall the regions 2020 performance serves as a proof point of the viability of our long term financial goals, highlighting our ability to deliver double digit margins and a strong demand environment.
Turning to slide 11, I'll review, our fourth quarter results for our Asia region, and India, We delivered strong year over year net sales growth driven by demand recovery.
In China, we delivered whirlpool branded share growth. In addition to EBIT improvement led by cost productivity actions. Overall, we are pleased to see a rebound in Asia and look forward to building on this momentum in 2021.
Turning to slide 13, Marc and I will discuss our full year 2021 guidance I will now turn it over to Marc to begin.
Thanks, Tim.
Well needless to say some uncertainty remains as we continue to operate in a COVID-19 environment. However, we do believe increased disposable income investments in the home and a favorable housing shifts are here to stay and will drive strong demand.
Based on our internal model for industry and broad economy, we expect global industry growth of 4%.
As we have demonstrated in 2020, we are uniquely positioned to capture a restructure shift and further advance our strategic priorities.
It is this confidence that we provide our 'twenty one guidance, which reflects our fourth consecutive year of record earnings per share and significant top line growth.
We expect to drive net sales growth of approximately 6% as we capitalized on strong demand and share gains in all regions.
Additionally, we expect to deliver above 9% on.
<unk> EBIT margin.
And deliver free cash flow of $1 billion or more.
Turning to slide 14, we show the drivers of our 9% plus ongoing EBIT margin guidance.
We expect price mix to deliver approximately 100 basis points of margin expansion through three key initiatives one disciplined execution of our go to market actions to recently announced cost based price increase in Brazil, Russia, and India and three new product launches just to give you a few examples of our legacy of innovation.
<unk> in 2020, we rolled out our new global Dishwasher architecture, featuring the largest capacity third rack dishwasher in Europe, We launched a Red Dot award winning built an induction cooktop.
On the United States, we ended the consumer both detergent business the launch of our ultra concentrated swash detergents.
Next we expect net cost to positively impact on margin by 150 basis points.
On an ongoing cost productivity efforts, coupled with a carryover benefit from our 2020 cost takeout program more than offset elevated freight and labor costs.
We expect raw material inflation to negatively impact margins by 150 basis points led by higher steel and resin cost.
Further as we continue to invest in the future, we expect increased marketing and technology investments to drive a negative margin impact of 50 basis points.
While unfavorable currency, primarily Latin America expected to impact margin by approximately 50 basis points.
In total we expect these actions to deliver 9% plus ongoing EBIT margin and EBIT improvement of over $100 million compared to the prior year.
Now I'll turn it over to Jim to highlight a few remaining guidance items.
Thanks, Marc turning to slide 15, we show our regional guidance for the year Star.
Starting with industry demand, we expect a robust demand environment for North America supported by continued strength from consumer nesting trends and increased discretionary spending.
Additionally, the impact from positive U S housing starts which began to strengthen in late 2019 and strong existing home sales will translate to higher appliance demand in.
In EMEA, we expect a continued recovery in the first half of the year to support strong growth while in Latin America, we expect modest growth of 2% to 4% as the benefits from government stimulus in Brazil or lessened.
Asia industry is expected to accelerate by 6% to 8% as the region rebounds from prolonged shutdowns in 2020.
Regarding our EBIT guidance, we expect very strong margins of 15% or more in North America.
We expect the impact of favorable go to market initiatives and disciplined cost actions to offset cost inflation.
In EMEA, we expect the strategic actions laid out during our 2019 Investor day to drive EBIT margin expansion of over 250 basis points and a full year EBIT margin of over two 5%.
In Latin America, we expect to deliver EBIT margins of 7% or higher as steady demand improvements and positive price mix are offset by continued currency devaluation in Argentina and Brazil.
Lastly, we expect to achieve EBIT margins of 2% or higher in Asia, driven by demand recovery.
Turning to slide 16, we will discuss the drivers of our 2021 free cash flow.
We expect another year of very strong cash earnings of approximately $2 billion driven by sustained EBIT margins, we plan to increase capital investments to historical levels to support the launch of innovative products around the globe. Additionally, we will continue to invest in world class manufacturing and our digital transformation journey.
Further as we ended 2020 with record low inventory levels, we are planning for a moderate inventory built.
We anticipate restructuring cash outlays of approximately $225 million, primarily due to the impact of COVID-19 related restructuring actions executed in 2020, and the exit of our Naples, Italy operations overall, we expect to drive free cash flow of $1 billion on more as we focus on continuing to deliver.
<unk> record EBIT margin levels and prioritizing our capital investments.
Turning to slide 17, we provide an update on our capital allocation priorities for 2021.
We remain fully committed to funding the business driving innovation and growth, while continuing to strengthen our balance sheet and return cash to shareholders.
We expect to invest over $1 billion in capital expenditures and research and development highlighting our commitment to driving innovation and growth in the future. We have reinstated our share repurchase program that had been temporarily suspended during the height of the pandemic with a clear focus on returning increased levels of cash to shareholders, we expect to reap.
Purchase shares at moderate levels.
Lastly, we have a clear line of sight to delivering on our long term goal of gross debt to EBITDA of two times.
Now on slide 18, I'll turn it back over to Marc to summarize our key messages.
Thanks, Jim and let me just recap what you've heard over the past few minutes.
We are extremely pleased to see that despite the enormous challenges of operating in a global pandemic. Our teams were able to deliver on our long term value creation targets.
In North America, we delivered nearly 16% EBIT margins for the full year significantly above our long term margin goal with overreach on 13% plus.
We restored our Europe region to profitability.
In Latin America, we capitalized on strong industry demand demonstrating the long term margin potential in the region.
And finally, we delivered record free cash flow of $1 5 billion or six 4% of sales.
Above our long term goal of 6% of sales.
Forever with demonstrated an unwavering commitment to our environmental social and governance priorities.
Resulting in significant advancements to our targets.
Building on the momentum of our 2020 performance and the operations excellence of our global team. We are confident that we are well positioned to deliver another record year in 'twenty one now.
Now we will end, our formal remarks and open it up for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment.
Your first question comes from the line of David Macgregor from Longbow Research.
Yes, good morning, everyone and congratulations on the strong quarter and the good guide.
Marc I guess I wanted to just ask about North America on the 4% revenue growth and indicated price mix was up close to 4%, implying flat volumes versus core six it was up.
20%. So you noted that you'd be back to normal in terms of the manufacturing efficiencies by the end of the second quarter, but.
What does the recovery path between here and there look like and what are the implications for first quarter net I've got a follow up question as well.
First of all David Good morning, and thanks a lot.
First of all stepping back on North America Q4, not Q4.
Needless to say exceptionally pleased with the overall financial performance in North America, and the margins, which we achieved.
In light of a pandemic, which is there.
Pretty severe non specific tuba volumes and supply chain.
I would say our overall volume directionally on the line in the scope of what you talked about which also means we'd kind of on a sequential basis Q3 versus Q4 with direction kept market share, but year over year were down.
Came down, which we had also Q3 and Q4.
Which is ultimately related to supply chain constraints, which we have.
Now with supply chain constraints, and we talked about it from a prior earnings call.
Our fundamentally pandemic driven I E. You have absenteeism in the factories you have labor shortage, you have component shortages, which have been significant and we have transportation bottlenecks.
So yes of course, we are improving month by month, but it's also against the demand which is rising months by months. So we're kind of we're still having a fairly significant back order situation.
Slightly better than at the end of Q3, but only slightly.
And from everything, which we see right now and that's why in our prepared remarks that probably by the end of Q2, a little bit depending on the progress with pandemic we.
We should be out of the constraints, but it will be around us pretty much as long as COVID-19 is around us.
It also also be crystal clear it impacts pretty much everyone producing in.
In the Americas, producing in Europe. It is less almost no impact if you produce in China or Asia.
So as the recovery path through the first half to do we see.
First quarter kind of look more like the fourth quarter and then we see the inflection in <unk> or just how should we think about first half no. David it's not going to be an inflection point it will be gradual improvement month by month and actually frankly already in January slightly getting better February will be slightly better, but we will.
On the back order situation will not be resolved in the short term is just too big from a back order overall perspective.
Our production yield has increased a lot.
We are also adding capacity so every month.
You will see improvement and frankly, we already seen in January so.
But it will take us still take us time to work through it.
Okay, well good luck with that on my second question was just with regard to your ongoing.
EIT margin guidance, we indicated that the net cost would be 150 basis points against that Rmi raw material inflation on a negative 150 basis points I guess, just trying to get some sense from you of your confidence on that 150 basis points on net cost I guess, a third of that is the carryover, but just could you talk a little bit about your ability to just cars on the costs further on 'twenty one.
On to offset that raw material inflation.
Yes, David why don't I start here and then Marc you can kind of follow up but I would say David as you highlighted.
That one and a half.
Percent I'd say <unk> got 50 to 100 million net is our carryover from last year and again, we continue to implement and drive actions related to that so we will also have some some additional actions that rolled out in Q4 that we'll continue to get a benefit for this year. The second thing is.
If you look across our broader production base and as we get more efficient and understanding how to deal with some of the COVID-19 inefficiencies that have come around that will be a help for us.
Incrementally, we expect volume to be as we've talked about volume to be higher this year. So that will help to drive additional cost savings and then on top of that within any given year. We typically look to drive a certain amount of reduction in what we call infrastructure and SG&A spend and so that's probably another big portion of what comes out there.
But where we start the year in terms of the cost takeout programs, we've already initiated.
What we've got on the pipeline, we feel very good about that number. Additionally, as we've talked about from a manufacturing footprint.
We ceased production in our Naples facility in Italy during Q4, and so we'll start to see the benefits of that also rolling in this year from a cost perspective.
David.
The comment I would want to add is first of all also coming back last year as you know in last year, we significantly dialed up our cost take out we started the year with a certain assumption, which we also gave you on my earnings call and then we wont book dynamic hit US we massively ramped it up to 500 million net cost take out and we did.
So I would say we have a.
And I know you said, we have a track record of being able to deal with cost now of course, we do no raw material as it had been this year.
We showed earlier $250 million to $300 million.
But I think we have other tools to overcome some of these headwinds and barry's carryover versus additional measures which were taken.
Yes.
You also know it is not the first raw material headwind, we're dealing with and we have dealt with very successfully in the past we everything also enrollment here on.
Because I see some writing north and Youre, writing out there people are always referring to spot price et cetera keep in mind, we are either having long term contracts or are hedged on certain positions.
So I would say, where we're less exposed to book volatility, we see in spot markets than most of our players and that's a good thing and I think that also gives us probably a higher level of confidence that's pretty much of a range, which we're talking about.
Your next question comes from the line of Eric Bosarge from Cleveland Research.
Okay.
Good morning, good morning on Eric.
Eric.
Thanks, Tom.
<unk> through <unk>.
And then secondly, I think you've commented about gaining share in the U S. In 2021.
When during the year do you think the supply chain your supply chain will be.
Our position that's effective to allow you to start to accomplish that.
And so Eric let me maybe first talk about the demand trends and then maybe Jim you want to cover the supply chain piece again so.
So Eric on the demand trends.
First of all we got a recognized in 2020, yes, you've all seen the North America industry volume BARDA positive I think what most people lose sight of is the quality of the demand has changed.
In a positive way we saw in particular in Q2 and beginning of Q3, you saw a lot of duress.
Covid related stress purchases in the freezers microwaves et cetera.
But that has gradually shifted more and more on two of our more higher mix I E. Remodel kitchen upgrades are rebuilding our entire on home construction. So.
Beyond the numbers of our volume, we're really pleased with the mix, which comes with the increased volume.
But it also means we do not see the demand as well. This is a COVID-19 spike yesterday, both liberty Covid Spike based on structurally and sustained healthy demand.
Chris Yes, coming to extremely strong housing trends, but it's more of on the housing its entire home improvement and we do not see that fundamentally train changing anytime soon.
Probably on of all the global regions.
I would say North America, maybe by region, where we're most bullish about from a structural demand trends, it's very healthy and we just do not see that slowing down.
So I know the number which we guided to but it could even be betterment it might be even stronger.
So we are very confident about the structural sustained demand trends I think we are.
Two guys, we get our supply chain constraints resolved I think we're confident we can capitalize on these demand trends.
And.
That's on the demands on Jim you want to cover on supply chain.
I would say Eric from a supply chain perspective, as we talked about earlier is one we've seen our supply chain now being able to at least keep up with the existing levels of demand. We're beginning as Marc talked about earlier starting to see improvements here early in the year.
In terms of our ability to start to catch up on some of that backlog as we've talked about.
By the middle of the year is when we expect to begin to have to work through that assuming that nothing in the environment changes around us because most of these as we've said supply chain issues are COVID-19, driven so that would put us in a place where we really caught up only not only on the demand, but on the need for higher retail inventory levels and then as you get into the back half of the.
Year Youll begin to see us build our inventory levels slightly as we return to what would be a normalized environment. We talked about during 2020, how are inventory levels came down during this time period. So I think thats kind of the path, we see throughout the year, but by about mid year normalizing from a trade inventory level and then on the third to fourth quarter.
Normalizing our inventories.
Your next question comes from the line of Sam Dark cash from Raymond James.
Good morning, Marc Good morning, Jim I Hope you both are well good.
Morning, Sam and good morning.
Couple of questions if I might.
First off with respect to the expectations for share gains and all of the regions embedded within your fiscal 'twenty one guidance.
Trying to get a sense of.
What gives you the.
A degree of confidence to categorically state that I know youre going to have some Asia.
On market share comparisons.
And you've noted the new product Rollouts, but.
I'm, mostly interested if the industry promotional activity.
Resumes like a normalized promotional activity resumes as lead times normalized as the discretionary replacement demand continues to improve.
If that were to reoccur.
What gives you confidence that you would still gained share in that sort of backdrop.
Let me take this one.
First of all as you rightly highlighted I mean.
I'll start with our new product innovations.
On the dishwasher, which we launched the new top loaders, I mean, the product pipeline, which we put in place is very strong and we know from a trade flooring on trade reaction. The perception is very well on a first of all built on innovation second of all.
Just do the math I mean, our as I mentioned before our back order level is still a significant I don't need to promote back orders and deliver them. So there is no promotion of pressure on the back on resolving that band on its own is a fairly sizable portion now on the promotions going forward.
We're not commenting on our go forward pricing strategy and the only thing that job on them into an end repeat is on.
Our promotion strategy has not changed no matter, what we participate in them, we can create value for us the trade customer or a consumer.
Rob will make.
A case by case decision, but it's.
In General terms, North America raw material pressure on.
Knowing that particular, China transportation costs are rising rapidly.
Im not quite sure of a promotional pressure will increase their rapidly as some people assume.
I think Sam the other thing maybe to add to that as you kind of talked about on a global basis and I'd say, if you look at EMEA right now the share gains we've had there, especially within some of the key countries that we do business and we expect to continue into next year as well as our supply chain while affected there is not as deeply affected as we see within the U S.
And then even within other large markets, such as Mexico and India.
Anticipate all continued to gain share there in Brazil as we've highlighted has also been a very healthy market for us so.
On the globe, we really do see multiple opportunities. This year in terms of just the trends and where they are right now.
And then my second question, Jim if Youre positioned.
Had this in your prepared remarks, I missed it I apologize normal seasonality from an earnings delivery standpoint, it's roughly about 40% in the first half 60% in the second half but.
Im guessing youre cost takeout rollover hits in Europe in your first half your volume loading it's going to be early on in the first half. So should we expect the normal seasonal earnings delivery to flipped this year I'm guessing. The answer is yes, I'm just trying to get a sense to what degree yes Sam.
I think youre thinking about it the right way in terms of the variables you are putting in there and we do expect it to flip now not to the extreme.
Many of the more recent years, maybe we've been closer to $45 55, but we do expect actually higher earnings in the first half of the year due to the things you highlighted is that one as we catch up on our supply chain on the production as well as they are just the carryover of cost.
And so I would just expect it to be slightly higher in the first half than it is in the second half of the year right now.
Your next question comes from the line of Michael Rehaut from Jpmorgan.
Thanks, Good morning, everyone. Good morning, Michael.
First question I had was just kind of circling back.
Price mix, particularly in the U S and.
Obviously been a big area of focus.
By investors.
Following Tom following two.
<unk>, and particularly <unk> and now on <unk> and changing day.
<unk> dramatically reduced promotional backdrop, helping pricing ex.
So you saw that come through on the.
<unk> results.
How should we think about price mix as you know.
'twenty, one progresses, particularly in the U S.
Marc you talked about obviously not having to promote your backlog and by all accounts. It appears that the demand trends that have allowed for that reduced promotional backdrop seems like will continue into the first half.
And.
If that's correct I mean should we be thinking about more of a flat to down.
Rice mix dynamic in the back half.
Related to this is I heard that if I heard right you talked about price increases in.
Russia, Brazil, India, but not the U S.
Despite obviously, having significant raw material inflation and I was just wondering if.
In lieu of those normally what we would expect would be some price increases to offset raw materials.
Youre getting those because of the reduced promotional backdrop at least on the first half.
And Marc Michael It's Marc So let me try to answer this one first of all on as you know, we're not giving quarterly guidance on on price and mix. We gave a full year number which is a positive so and we're confident this one.
As you point out there are several elements, which come into play one is you have carryover.
Versus certain carryover element, which will give us quite a good momentum too.
We have innovation, which I alluded to free and that's a really important part.
Coming back to the demand trends the mix on the current demand is rich. Okay. So we have mixed opportunities and then for free yes, we had already some price increase.
Certain markets as we move to Russia, India, Brazil.
We're not commenting on any planned future price increases the only thing I want to repeat again in the past we've demonstrated our ability to pass on necessary pricing cost based price increases the market, okay, but that doesn't mean, we have any precise plans on what we announced any precise plans.
Yes, I think the other thing to think about and you kind of alluded to this is Q1 is our least promotional quarter. So when you look year over year on even the first half of the year tends to be less promotional while as Marc said Theres carryover the amount of impact is less than it than it would have been in the back half of the year, what we saw this year.
Okay Alright.
Helpful. I appreciate it and then certainly obviously mix.
I appreciate you highlighting that because I think it's important and maybe underappreciated to a degree.
Secondly, maybe it's a focus a little bit on the EMEA region with the margins there the margin trajectory.
Down a little bit sequentially in the fourth quarter versus the third quarter and the <unk>.
Guidance being for two 5% plus in 2021.
I was hoping maybe you could comment.
On.
On.
Hi.
The margin improvement trajectory is unfolding and.
What are the kind of markers that we should expect over the next two or three years in order to.
Drive that margin.
Closer to what you would expect to be more of a normalized level.
Okay, why don't I start with it Michael net I can have Marc kind of add some comments to it and to begin with as we look at we're very happy with the performance that we saw on the back half of the year within EMEA on the margin improvement that we made now we have to remember that EMEA.
It typically does have their first quarter is the lowest quarter of the year. So we do expect to continue to be profitable, but obviously when you look at it quarter over sequential quarter over quarter, we wouldn't expect to see continued margin growth within Q1 for the full year, we do expect the margin growth to obviously to materialize to two 5%.
Big part of what drives that is one you've got cost takeout actions that took place in many of those were not implemented until the back half of the year within EMEA too as I've talked about with the share gains that we've seen in the continued improvement in volumes there and demand there we do feel very positive on that so both of those set us up coming out of 2021 on what.
I would say is a good trajectory that we feel will put us on on track to our longer term margin goals. There now the bigger drivers of that will continue to be cost takeout. In addition to with the market share gains that we're seeing right now on some of the new product introductions. We're doing we do expect to grow volumes, there and we've talked about that over the next few years.
That's one of the key drivers to get those margins to a healthier longer term level.
Michael just wondering what I want to add on Europe.
Echoing Jim's pointed.
We are actually very pleased with the 2020 fully results in Europe.
As a reminder, the pandemic from a consumer sell out hit Europe part of Latin America on North America. So Q2 as you all remember was pretty devastating from demand in automotive and so I am very pleased that that huge stand in Q2, we were able to achieve on a full year based on profit in Europe, which.
Media was a very difficult target to even think about but we achieved a full year profit now we all know achieving a profit does not heroic achievement, but it's an important milestone and what it basically tells me with the second half performance is we're back on track with a trajectory, which we laid out in front of you, which says we want to get Europe very quickly two 2% to 4%.
And then why we work from a long term strategic leavers get it on track versus seven or 8% operating margin target, which we talk about and today I would say the second half performance I'm not reading too much between Q3 and Q4, the second half performance gives us all the confidence we're back on the trajectory.
Your next question comes from the line of Curtis Nagle from Bank of America.
Good morning, Thank you very much for taking my question.
Forgive me if you guys have already addressed this but just a quick one.
On the backlog so <unk> I think you said it was <unk>.
<unk>, we ex that compares to a one to two weeks normally Tom.
Where does that stand.
Or where did that standard.
For Q1.
Roughly I know there'll be improvements.
Coming through.
To share at the end of Q2, but how should that kind of phase through the first half of the year in terms of that time.
Yes, Kurt this is Jim and what I would say, it's less and it continues to be as we've said previously on the call. It continues to be at that similar seven to eight week level.
But right now that our production is caught up with the current levels of demand and we haven't given a forecast or an outlook of how thats going to go but throughout the upcoming two quarters, but what we do see in terms of production improvements. We do believe we will have it resolved and have worked through it by the middle of the year. So you could think about that that would obviously.
It would be relatively ratable throughout the first two quarters.
Okay.
I guess, just a quick follow up.
In terms of.
Cancellation.
No no issues there is that still the case and then.
Just kind of.
A modeling question here in terms of about demand flow.
At the Analyst Day, 2019, I think 55% was replacement 15 day, sorry, 15, new housing 30 discretionary presumably that map has changed a little bit could you could you give an update in terms of awareness percentages standard.
Yeah, Curtis, it's Marc without getting into details on what percentages I think let me maybe more make the qualitative comments, which also adds to why we're confident in particular North America on the long term demand trends.
As you know on the replacement side.
Were running against the trough of the industry in 2008 to 210.
We're now pretty much coming out of this trough.
Keep in mind.
When people typically take this reference to eight to 10 years appliance based when you replace.
Last year was a year of extreme intense use at home, which probably accelerated the replacement of the need for replacement. So I would say on a fundamental replacement.
We're now coming I think soon with trough will be behind us so that will give strength on top of that.
We saw last year.
For years, I talked about significantly high discretionary demand.
Coming from ratable duress and stress to really structure improvement.
And I think on top of that.
The housing side will come stronger and stronger and stronger.
Housing side, the only thing by you probably don't see extreme numbers in short term, it's housing supply constraint. Okay, but you saw housing starts of $1 7 million or $1 67.
That is a promising sign.
And it's been the highest in a long time still far away from where we believe the true piece will be around 2 million housing starts. So that is not yet fully in the numbers, but again, that's because of all the data points, which give us the high degree of confidence from a structural demand improvements.
Your next question comes from the line of Mike Dahl from RBC capital markets.
Alright, Thanks for taking my questions and I appreciate the color so far Marc.
Sure the overall enthusiasm around home improvement spend and on what.
What that can do for long term appliance demand I guess I'm trying to think more about kind of cadence on to the point of some of the replacement cycle potentially got accelerated.
For all the comments around potential for kind of structural shifts and stay at home. There's also points out there.
This is kind of yes.
Roaring twenties post vaccine distribution and kind of.
Essentially some shift in pent up demand towards.
Restaurant dining and dining away from home in general.
What extent do you.
Again, appreciating that favorable overall construct to what extent does that play into your view on on cadence for demand for for this year.
Especially later in 'twenty one.
Michael first of all you hit already all the points, which I would have asked.
Tom.
But it's Ed again.
It comes back from a fundamental confidence in consumer demand now first of all I think macro theme of course, there's uncertainty there is uncertainty every year around what happens on raw material current et cetera, but I think this year and that's different from an off three years, we have a high degree of confidence of structural demand trends and Thats just real okay.
The housing side, it's the home improvement side.
But one thing, which I really want to emphasize.
Sometimes outside observers get wrong is.
Everybody thinks about post Covid average.
I think we'll go back to where it used to be it won't first of all COVID-19 will be around is longer than we wanted to be second of all consumer who has been more than one year essentially at home will not change behavior overnight. It's not consumer mind is not a flash memory that you just day rates that behavioral trend is not going to go away.
And also in the context of how people talk about future work you should assume that going forward. The average consumer spend more time at home than before it's just going to be that way, but it leads to is a fundamental reorientation of consumer towards the house. The purpose of the house, how I live in the house and how much money on invest in the house.
And frankly <unk>.
Some people refer to wireless local housing play I wouldn't even say, it's the housing where home play.
Don't care, while I do care about it.
If you improve your home it will benefit us if you upgrade vacation it will benefit us if you build a new house it benefits us. So there is multiple trends, which are all ultimately coming from consumer re orientation to the home, which will really play in our favor.
Got it and just a quick kind of.
Follow up to that and I think that it plays into an earlier question around seasonality of earnings. So based on that answer we shouldnt expect that within your guidance. There is necessarily a huge spread in your growth expectations for first half versus second half I E.
Not some.
Up.
High single digits in certain parts of the first half of the year and then flat to down in second half of the year.
No. Michael This is Jim you Shouldnt assume that that there is some high first half now what you should assume within there is think about when youre looking year over year Youre going to see the first half a day or just being stronger because around the globe you had numerous closures of various within various countries that would've impacted obviously.
Our shipments in our sales so we will show stronger year over year growth, but when you think about it starting from Q3 of this year and on through Q4 of next year quarter over quarter growth won't be anywhere near as dramatic as it was this year.
And.
Michael just to add to based on its Jim highlight an important point.
This will be a year, where the baseline comparisons are just a little bit misleading. Because you had these are I mean, we all know April may and you had so just the year over year comparisons.
We'll not make a whole lot of sense I think you should particularly look at the sequential run rates.
And I think that's where you need to be looking at and with that in mind I would see you see a lot less seasonal swings. This year, we will have a very balanced year. We yes, we have a very strong first half, but frankly also second half will be strong. So I would say you see much more balance dispersion of earnings.
Throughout the year and Thats a good thing, it's just but based on comparisons.
Elizabeth misleading.
Your next question comes from the line of Susan Carey from Goldman Sachs.
Thank you good morning.
Hey, good morning, Tom.
My first question is focusing on capital allocation I know you mentioned that.
Our modestly resuming our share buyback activity this year I believe on that past.
That's kind of when you were.
We use that language it kind of refers to a 200 to maybe $300 million range is that how we should be thinking about it this year and any thoughts in terms of the cadence there and kind of your appetite to be buying the stock back.
Susan This is Jim and obviously in the past, we havent given specific guidance on the amount or the cadence that will do it within the year, but what we always have said is one we at least intend to buy back any dilution that comes through any of our executive compensation programs or other things. So that's kind of.
The minimum that we look at again, when we say a moderate amount. We're also going to keep an eye on what the situation is around us and globally and we feel very confident as we've talked about our balance sheet is in a very strong position.
But also we want to be cautious throughout the year, just with any of the unknowns that could come. So I think you should think about it being as I said at a minimum on that lower level that at least eliminates the any dilution that could occur.
Okay, Alright, that's helpful and my second question is turning to Latin America, you had another quarter with a really nice margin in that.
Net region can you, maybe just talk to kind of the sustainability of what of that a little bit of what's going on on the ground. There I know you mentioned that you're putting some price increases through in Brazil, just any color on on that part of the world.
Yes, Susan I would read right now the.
Our second half performance in Latin America, it's not only Brazil, we also have Mexico very strong business in the upper part.
On was very impressive the way I read it as this is a demonstration of what Mr. Recent can deliver now there are of course crazy swings coming from currency in Europe have seen what the Brazilian real.
Mexican peso has now strengthened recently a little bit.
I'd say that performance is even more impressive from knowing how much currency losses, we had in particular in Brazil, the way I would look at it going forward.
That region is absolutely reached from structural perspective, which is able to deliver 8% to 10% and right now we guided 7% plus and we're pretty confident and I would also emphasize we're confident on plus.
You know our.
Latin America business, a very well run business operating very strong with exception of strong brands, but demand trends in <unk>, probably has been really positive surprise held up pretty strong Latin America, and I would even argue last year was the least impacted from demand trends of operations, which is largely a result of the COVID-19 stimulus in respective countries, so but we see.
We're continuing demand holds up strong of course, we are observing currency fluctuations we are observing the raw material increases, which were particularly impactful in Latin America.
But again five coming from a second half on Aussie I'm very encouraged by what our Latin America business can deliver.
Your next question comes from the line of Adam Baumgarten from Credit Suisse.
Hey, good morning, Thanks for taking my questions.
It outlines the industry growth for North America is about 4% to 6% yet you still will have some capacity constraints in the first half. So maybe if you could walk us through <unk> ability to grow with the market next year, given some of the constraints in the first half.
Yes, Adam this is Jim.
As we kind of talked about here is one.
We believe and we know that our supply chain is kind of caught up where that with where the demand levels are so right. Now it's just working through a backlog and if you think about last year that backlog is what we built and as Marc talked about earlier that was due to disruptions in our supply chain that were a result of COVID-19 and whether it was impacts at our suppliers our own factory.
So we're confident right now that we're able to keep up pace with the with the industry and where it is and so again for US we see it as more of a positive as we begin to work that backlog down throughout the year.
Okay got it thanks, and then in the presentation you noted the potential for opportunistic M&A, maybe you could kind of give us a sense for what that may entail is it would it be geographic base could it be new product categories, maybe just a little bit more color.
Yes, Adam this is Jim again.
As we've talked about at our various investor days over recent years as we look on all of those areas and the first thing we really look to do is see is it value, creating as it's something that we think can be earnings accretive and do we have the management capacity to do it and we don't limit it to any specific thing. So again, we're continuously looking at product expansion within the <unk>.
Portfolio, we have are on top of the portfolio, we have as well as geographic expansion and one of the things that we had talked about in recent years is that we believe that the first thing we needed to do was focus on some of the existing acquisitions that we did over the prior year's whether they be in Asia are they'd be in EMEA.
And we feel very good with where those are right. Now. So we will continue to look and we always are looking but theres nothing specific that we would highlight outside of what we've talked about in our investor day.
Your next question comes from the line of Ken Zenner.
Good morning, everybody.
Okay.
Quite a year.
Very well done.
Obviously with a lot of this.
You would focus on and mix, perhaps structural changes due to accelerated cycle uses.
Could you just expand on your North America margin guidance of 15%.
In the context of lower seasonality.
And sequential <unk> year over year, I guess, what im looking at it.
Just to the average margin spring in North America in 18, and 19 quarters versus the average and it was only about 50 basis points, which kind of surprised me, but not really considering how you guys are executing better is that a reasonable way to think about margin.
Volatility in.
In 'twenty, one is that it's going to kind of.
The average by maybe that much each quarter, given your comments around seasonality lacking.
Yes.
Ken This is Jim and I think the.
The best way to think about it is that our North America margins will be relatively similar to our overall seasonality of the business that we've talked about because just think of the percentage that they are of our overall business on our overall profits. So that's obviously one of the bigger drivers there too is.
We've talked about as we look towards the year, we do believe in terms of volume.
And demand the front half of the year being strong as we worked through some of the backlog that will help.
Normalize our our business on a full year basis, and especially within North America.
Additionally, as we've said we had more of the cost savings there within probably starting in the second quarter through the fourth quarter. So the dispersion of additional cost savings is in its big in North America. So it might be on the rest of the globe. So I think youre thinking about that way is probably correct.
Okay, because just the kind of surprise value Chad.
Such slow EBIT volatility in 18, and 19 pre COVID-19.
Just switching across the continent.
I was really surprised.
I think when you guys did the end of FY 'twenty. One was when you were supposed to around $21 is my memory. So.
Do not $1 at the high end is off but it's been quite a ride and <unk>.
EMEA, if youre looking at two 5% margin it really seems like you're a market share has improved.
You guys have been really focused on delivering positive EBIT, but with.
There.
It seems like you must have gained a lot of share so perhaps because it's a country by country event and you guys really lost a lot of floor space.
And usually it took a while to get back in and I know you had success at Ikea, but what really happened I mean did you guys just have better throughput. So people accepted your product perhaps ahead of your expectations in terms of share gains because it seems like you might have actually leapfrog leapfrog that where you were pre COVID-19 in terms of your expectations in Europe.
So Ken its Marc.
First of all it is true that towards the back half of last year, we started structurally gaining share back okay.
As you also know there is no European market Theres, a lot of countries and I'm, particularly pleased that in several of our key countries such as UK, Italy, but all from the now lately Russia.
We expanded our share position, which I think ultimately as a result of where strong product strong placement and very good execution. So I think it's a combination of all of that.
But I also wanted to be very clear, we're not yet back to the level of I would expect us to be from a share perspective, I think we're still.
Quite a bit of room to grow you also know strategically our particular focus is on the kitchen business, where naturally it takes a little bit longer to gain back per share and that remains our focus though I would say.
I would read the share gains, yes, we're proud promising sign.
But we're not done.
So with that in mind and also given that we're coming almost back to the top of the hour service. Both last question. So before you all checkout and hang up and get a new keyboard. Let me just pass on one important last message to.
To stay with me number one or two minutes.
When I reflect on your questions a lot of them are what happens next quarter two quarters down the road supply chain seasonality.
So the very short term.
And maybe rightfully and Thats what you also obviously talk about.
But it would also strongly encourage you zoom out.
I mean, we've had look at the long term look at the fundamentals.
Last year has been the third year in a row, where we delivered all time record EPS, we just guided towards a full fee in a row.
Four years in a row doesn't make it a onetime wonder when other COVID-19 play versus a structural improvement in a different company.
Can you just highlighted whirlpool promised several years ago, we are delivering towards our long term shareholders targets and I am very pleased.
A long way you guys had some questions we are delivering.
We are guiding 9% to $20. So if you beyond of course per short term challenges I think you should also give us some credits that we demonstrated sustained ability to deal with whatever is thrown at us. This is a three years in a row now four years in a row.
<unk> is an exceptionally strong long term fundamental trend and I think it is fair to say, but we'll put the day is a very different company than it was 10 years ago, So with that in mind, thanks for listening to us.
And have a wonderful day.
Ladies and gentlemen, this does conclude today's conference. We thank you again for your participation you may now all disconnect.
Yeah.
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