Q3 2021 Whirlpool Corp Earnings Call
Good morning, and welcome to Whirlpool Corporation's third quarter 2021 earnings release.
Release call.
Today's call is being recorded.
For opening remarks, and introductions I would like to turn the call over to senior director of Investor Relations Corey Thomas.
Yeah.
Thank you and welcome to our third quarter 2020.
Conference call. Joining me today are Marc Bitzer, our chairman and Chief Executive Officer, Jim Peters, Our Chief Financial Officer, and Joe <unk>, Our Chief operating officer.
Our remarks today track with a presentation available on the investors section of our website at Whirlpool Corp Dot com.
Before we begin I want to remind you that as we.
One conference call, we'll be making forward looking statements to assist you in better understanding whirlpool corporation's future expectations are.
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.
Conduct believes these measures are important indicators of our operations as they exclude items that may not be indicative of results from our ongoing business operations.
We also think the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations.
<unk> are directed to the supplemental information package posted on the Investor Relations section.
For the reconciliation of non-GAAP items to the most directly comparable GAAP measures.
At this time all participants are in a listen only mode.
Following our prepared remarks, the call will be open for analyst questions. As a reminder, we'd ask that participants ask no more than two questions with that I'll turn the call over to Mark.
Thanks.
Our website and good morning, everyone. Today. In addition to our third quarter results I will be sharing our new long term value creation goals.
Despite operating in a supply constrained and inflationary environment. We continued with system. This demonstrates strong results at or above our previous long term targets.
We want to take.
Thanks, Karl and to share our insights and expectations for our business moving forward, but first I'll turn it over to Jim to review, our global third quarter results and 2021 guidance.
Thanks, Mark and good morning, everyone.
Now turning to our third quarter highlights on slide five.
We anticipate that in the third quarter.
The opposite faced both a constrained supply chain alongside elevated inflation.
The exceptional execution of the actions, we put in place and the sustained robust consumer demand delivered yet another quarter of very strong results we.
We delivered revenue growth of 4% year over year, which represents growth.
<unk> <unk> percent compared to 2019.
Next the decisive actions we took early this year delivered strong double digit margins of 11, 1%, which largely offset the expected cost inflation of 650 basis points. Additionally, we generated positive adjusted free cash flow.
Of a $1 3 billion.
A $1 1 billion increase compared to a year ago.
Cash generation was led by strong earnings and the successful completion of divestitures in the first half of the year.
Lastly, we opportunistically executed $441 million in share buybacks in the third quarter and.
Of to our previous investments in <unk>, India by acquiring a majority interest in the company.
Our ability to successfully deliver strong results in a difficult operating environment gives us the confidence to increase our guidance to approximately $26 25 per share.
Turning to slide six we.
Added to drivers of our third quarter EBIT margin.
Raw material inflation, particularly steel and resins resulted in an unfavorable impact of 650 basis points.
This was fully offset by our combined price mix and net cost actions.
Price and mix delivered 600 basis points of margin expansion.
We showed led by the execution of the previously announced cost based price increases. Additionally.
Additionally, ongoing cost productivity initiatives delivered 50 basis points of net cost margin improvement.
Our ongoing cost initiatives more than offset increased logistics labor and other supply chain premiums we.
And many companies are facing.
Lastly increased investments in marketing and technology and the continued impact from currency in Latin America impacted margins by a combined 75 basis points.
Overall, we are very pleased to be delivering above our previous long term EBIT margin commitments and are confident this positive momentum.
And then we'll continue to drive very strong results throughout 2021 and beyond.
Now turning to slide seven I will discuss our revised full year 2021 guidance.
We remain confident in both the actions we have put in place to protect margins and in the strong execution capabilities, we continue to demonstrate.
Moment that we expect to drive strong net sales growth of approximately 13% and EBIT margins of 10, 8%.
Additionally, we continue to expect to deliver $1 7 billion and adjusted free cash flow or seven 7% of net sales.
Finally, we are raising our ongoing EPS guidance.
Approximately $26 25.
A year over year increase of over 40%.
Turning to slide eight we show the drivers of our increased ongoing EBIT margin guidance. We continue to expect 600 basis points of margin expansion driven by price mix, we have increased our expect.
<unk> tuition for net cost takeout to 200 basis points as we realize further efficiencies and continue to focus on cost productivity.
Within our net cost results were fully offsetting the inefficiencies across the supply chain, notably in distribution and labor.
While our expectations remain unchanged.
Expect tenuously monitor cost inflation globally, largely in steel and resins and.
And still expect our business to be negatively impacted by about $1 billion.
With the peak increase already realized in the third quarter.
Inflation is fully offset by our price mix actions, we continue to expect increased <unk>.
We can Tim marketing and technology and unfavorable currency, primarily in Latin America to impact margins by 125 basis points.
Overall, we are confident in our ability to continue to navigate in this environment.
And deliver 10, 8% EBIT margin, representing our fourth consecutive year of margin.
<unk> session.
Turning to slide nine we provide an update on our capital allocation priorities for 2021.
Our commitment to fund innovation and growth remains unchanged as we expect to invest over $1 billion in capital expenditures and research and development.
Next with a clear focus.
<unk> experiencing significant levels of cash to shareholders, we expect to repurchase over $940 million of shares in 2021.
Which includes over $300 million in the fourth quarter.
Including dividends, we expect to return a total of over $1 $2 billion to shareholders. This year.
Now I'll turn.
On return <unk> to review our regional results.
Thanks, Jim and good morning, everyone turning to slide 11, I'll review, our third quarter regional results in North America, we delivered 5% revenue growth with sustained and robust consumer demand in the region.
<unk>, we delivered another quarter of strong EBIT margin driven by.
Turn it over to and execution of cost based price increases demand for our products remains high as we operate in a constrained environment, which we expect to persist into 2022.
Lastly, the region's outstanding results demonstrate the fundamental strength and agility of our business model.
Turning to slide 12.
Discipline will review, our third quarter results for our Europe, Middle East and Africa region. The region delivered stable revenue year over year, which represents growth.
Of over 15% compared to 2019.
Cost based price increases, partially offset the impact of inflation in the quarter, we remain confident in.
We have in place are long term turnaround plan for the region remains on track.
Turning to slide 13, I'll review, our third quarter results for our Latin America region.
Net sales increased by 17% led by cost based price increases and strong demand across Mexico.
The accident and delivered very strong EBIT margins of eight 7% despite supply constraints inflation and continued negative impact from currency.
Turning to slide 14, I'll review, our third quarter results for our Asia region. The.
The region's revenue decline was entirely driven by the Whirlpool China divestiture.
Excluding this the region grew by 3% year over year or 10% compared to 2019.
As expected the region continued to recover from Covid related shutdowns experienced in the first half of the year.
The region delivered very strong EBIT margins of eight 6% driven by cost.
<unk> actions and positive impact from our Whirlpool, China divestiture.
Lastly, our increased investments in elegant PV, India enhances our built in cooking product offering strengthens our distribution network and is expected to be margin accretive to the region.
Now on slide 16, I will turn it back over.
<unk> to discuss our new long term value creation goals.
Thanks, Joe before I look forward I will take a moment to look back we are a 110 year old company with a legacy of success and emission anchored on improving life at home.
Our introduction of our first electric wringer offer and firsthand mixed them in early 19 hundreds.
To Mark to our launch of our first French door built in refrigerator and our leadership in connected appliances today.
We are relentlessly reinvent ourselves with consumer at the heart of everything we do.
These new long term value creation goals build on our strong foundation, but reflect the fact that we are very different whirlpool vein 10 years ago.
Operating in a very different board.
Today, we are operating in a supply constrained and inflationary environment, which is negatively impacting most industries across the board.
We are on track while year of record performance.
In 2020 with World was impacted by the COVID-19, pandemic and before that numerous other unforeseen global.
We have faced many significantly challenging environment and yet we're on track for a fourth consecutive year of record results.
We have an agile and resilient business model, which enables us to succeed in any operating environment.
Our increased value creation growth demonstrate our confidence in our long term success.
The challenge and are supported by strong underlying drivers such as the positive outlook on housing strong replacement demand and evolving consumer habits.
Additionally, our demonstrated value, creating go to market approach lower cost base and compelling innovation pipeline position us for continued success.
Our.
Success long term value creation goals reflect our confidence in the different role and with different growth.
Now turning to slide 17, you will see that we have exceeded our existing targets.
We first introduced these targets in 2017 with a clear focus on value creation and a balanced approach to grow profitably.
We've been consistently.
Our new ads are above all of these targets.
We are pleased with our progress we're not done yet and turning to slide 18, I will review, our new long term value creation goals.
We now expect revenue to grow at a rate of 5% to 6% almost doubling our previous goal of approximately 3%.
Next we are.
Deliveries in our EBIT margin expectations from approximately 10% to a range of 11% to 12%.
This is the level of performance that our business is absolutely capable of achieving.
Additionally, we expect to continue to convert cash at a high level and have increased our adjusted free cash flow as a percentage of net sales from six.
Percent plus to a range of 7% to 8%.
Lastly, we expect to deliver a return on invested capital of 15% to 16% an increase from our previous target of 12% to 14%.
We are confident in our future success and achieving these goals will continue to drive significant shareholder return.
Now turning to slide 19, I will discuss why we expect revenue growth of 5% to 6%.
Demand in our industry segmented by three primary purchase drivers housing replacement and discretionary.
We are entering a period with strong growth catalysts across all three categories first let's begin with new housing construction.
Housing remained well below historical and structurally needed levels for over a decade, which.
This was compounded by pent up demand from millennials that were only now beginning to see.
Lastly, interest rates remain at historically low levels.
Second let me discuss replacement.
We're entering a period in which when.
So the replacement cycle will move from a headwind to a tailwind.
This is driven by elevated usage rates and a larger installed base of appliances, which will need to be replaced.
Also with our installed base of connected appliances, we have clear data on how consumers are using our products and they are using them more.
Matt for example, consumer are using our connected wall ovens and freestanding range, it's twice as often as before Covid.
Even more important with hybrid work models, becoming more widespread we do expect appliance usage levels to remain significantly higher than pre COVID-19 ulta.
Ultimately driving shorter replacement.
Third let's review discretionary purchases.
Covid has brought a fundamental reorientation of our consumer towards home, which will not just go away.
In addition, consumer remains healthy with increased disposable income and more equity in their home, which ultimately drives high investments in the home to recap with.
Cycles long positive demand trends across all three segments.
Next turning to slide 20, our discuss additional revenue catalysts. During this pandemic, we all witnessed a significant increase in all e-commerce activities, which we do not expect to revert back to pre COVID-19 levels.
Over the past years, we've built our own.
<unk> direct to consumer business Metro represents to date approximately $1 billion.
Our multi year investment in our strategic digital transformation has been and will continue to deliver growth rates of over 25%.
Lastly, we continue to enter and expand upon new ecosystems, which presents significant new revenue.
Our revenue opportunities.
This was demonstrated when we entered the consumable detergent segment business with the launch of our ultra concentrated swarf detergents were offering an end to end experience. They have a consumer can fill his or her detergent for bulk dispense in the unit.
Be alerted bin replenishment as needed in order for our.
Our app for convenient at home delivery.
This is one of many applications, where we have earned the right to win.
Moving to slide 21, I would like to address why we're positioned to capitalize on these opportunities and grow profitably.
As we exited the great recession of two 9% to 11, we took many difficult.
Sections, enabling below fixed cost position, we have today.
We removed over $1 billion cost, while reducing our fixed asset base by over 30% in just the last five years next.
Next we have a proven value, creating approach to promotions and our relentless focus on cost and complexity reduction.
All of these are.
<unk> <unk> continued demonstration of financial success, and we're not done yet for example to date, we are absorbing significant costs associated with operating in an inflationary environment.
Lastly, we will continue to prioritize investments to drive innovation and growth.
Now turning to slide 22, I will review, our adjusted free cash flow and.
Evidence of invested capital expectations.
Large acquisition related items are behind us.
Additionally, seasonally balanced approach and disciplined working capital management position us to drive higher cash conversion.
Next we will opportunistically seek bolt on acquisition targets that are EPS accretive sooner.
Soon after acquisition.
And with our significant reduced asset base, we're positioned to continue to deliver strong return on our investments now.
Now turning to slide 23, let me recap what you've heard over the past few months.
Q3, again impressively demonstrated our ability to operate in a very challenging environment.
<unk> delivered very strong operating results.
Sustained healthy market demand and strong operational execution gives us confidence to increase our ongoing earnings per share to approximately $26 25.
By delivering adjusted free cash flow of $1 7 billion.
Next we are unwavering on our.
Our commitment to drive strong shareholder value and expect to deliver record ongoing EPS and returned over $1 2 billion to shareholders in 2021.
As we look beyond 2021, we firmly believe we have demonstrated that our business is structurally different and well positioned to again build on our record results.
Lastly.
Lastly, our new long term value creation growth reflect the fact that we are different whirlpool operating a different world and in early 2022, we plan to hold an investor day at which time, we look forward to discussing our view of our business in greater depth.
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 one on your telephone keypad at any point you would like to remove yourself from the queue. Please press star one again.
Your first question comes from David Macgregor of Longbow.
Yes.
Good morning, everyone.
Good morning, David David.
And nice to see the long term.
Probably accretion goals being updated.
Obviously, an expression of confidence in your ability to continue growing the financial performance of the company. So thanks for that I wanted to talk about a more immediate conditions being cost inflation youre dealing with a fairly substantial level.
Now and inflation it looks like it will continue into 2022 can.
Can you just talk about your plans to mitigate the impact to profitability in <unk>.
Extent to which you feel further price increases are achievable to offset that pressure.
Good.
Good morning, David It's Marc.
So first of all in the cost inflation, you know as you know we ever since our Q1 earnings call.
We guided to a significant cost inflation, we put out 1 billion is it cost inflation.
In April and that's the same 1 billion, which we have today so.
Probably one of the few companies, who kind of it didn't change the guidance, we saw it coming and we're dealing with it in this Q3 also as we expected with probably solve this.
The highest.
Inflation increased ever year over year, I mean, six 5%, which is sitting in the Q3 P&L.
In 22 years, I've never had a single quarter with that kind of inflation, but we dealt with it and I would say Q3 is certainly a proof points a strong proof point that we can deal.
With exceptionally high inflation, so going forward.
No. We don't expect that inflation will quickly fall off and will be short short term there's by definition various carryover into next year.
But by definition you will also have pricing carryover into next year, So I would say.
As you know around this time of year.
We're giving guidance on inflation for next year, we'll do that in January.
But I I would rather point to Q3 as a proof point, even in extreme spike of inflation year over year like you had in Q3, we're dealing with it without.
Without even a blip on our margin so I'm pretty confident that we can deal with the carryover to which we will see to some.
We're not inflation.
Just on that point do you feel like you still have room to go on pricing before you reach any kind of demand elasticity issues with the consumer and then I have a follow up.
Yeah, David and as usual, we're not commenting a lot on the go forward pricing, but again, if you split in several pieces.
It's kind of I think.
Extend from anything which we've seen in the last 18.
18 months is basically the <unk>.
Consumer colleague.
Colleague the category price elasticity is very little.
Typically what you see in price list is more what you see promotional or cross price elasticity in the store, but the consumer.
There is very limited.
Price elasticity actually in fact over years, we've been running consumer research, where we ask consumers before they enter the store how much do you expect to pay versus what they actually paid and they consistently overestimate how much they have to pay so I think.
It is just the nature of an infrequent purchase that the consumer awareness of exact price point is somewhat limited.
On.
Let's not also forget the disposable income and household is right now probably at an all time high so I think from that perspective.
I'm less concerned well at one point promotional pressure in the market will get a little bit bigger, yes, but right now we're not seeing it in the current environment and as long as.
Top of our global supply chain constraints will exist I think you will see very little pressure from that perspective.
Okay. Thank you for that as a follow up question I guess, just with regard to you know.
Earnings power sort of at the lower end of the cycle or what the minimum level earnings power might look like I mean, given all that you've accomplished with regard to cost reductions and exiting underperforming businesses.
So there's a productivity investments can you just talk about downside risk to earnings what gives you confidence in whatever that level of support might be.
Yeah, David This is Jim and maybe I'll start off here and I think you know you can take the second quarter of 2020 is really a good benchmark out there when we saw a significant drop in volumes around the globe and significant disruption.
<unk>, our overall margins for that quarter only dropped to 5% and if you look at our North America business. It was actually 12% during that so you know I think that's one beginning a proof point there I think the second thing that we've always pointed to as you know when we came out of the the recessionary period in 2011 2012, a lot of the improvements.
We made really brought our overall margins up to that type of point and got our North American margins up to 8% at that time, and we've kept those fixed costs out and taken more out. So I think what you saw in a very extreme situation in 2020 proves that we can handle drops in volume as well as we can handle some of the shocks.
<unk> from with these type of.
Volatile environments.
Yeah.
Your next question comes from Sam Darkish Raymond James.
Good morning, Marc Jim Joe how are you good.
Good morning, Dan morning.
Two questions first.
Then with respect to market share recovery within your long term goals. Obviously, you talk about regaining market share in North America, and I'm sure you're talking about beyond just <unk>.
Working through your backlog.
At what point do you anticipate specific.
Defending your market share or is that going to be fiscal 'twenty, two and what are the methods by which you plan to do so is it more new product rollouts or is it is it defending on price.
So Sam.
Let me maybe first take it them in <unk>.
<unk> been kind of asset.
That's.
<unk> on the long term you've seen minutes beyond establishing a very healthy EBIT margin target in the long term of 11% to 12%, we kind of significant increase our revenue growth.
The 5% to 6% Matt.
And that is as you pointed out driven by both market demand and market share aspirations.
The demand.
So first let me just comment.
We're exceptionally positive in terms of the outlook going forward on the mid and long term and that's driven by as we pointed out earlier. The housing market is the strength will be a strength for the housing market has been under supply for a decade or.
Our position in the builder channel is a very strong one it's Bob.
As long as in 100 years. So we feel good about housing market replacement and Thats, what <unk> done.
Still many people get a little bit wrong. When we look at the market replacement has been and as we pointed out has been headwinds been asked couple of years because in a certain way you were cycling a comping again below sales period of financial.
During this crisis.
Now starts turning into a tailwind because you're now comping or are replacing against a stronger installed years or strong growth years of post financial crisis.
On top of that and I can't stress this enough.
With Covid has brought increased appliance usage. So if you want to say so you have a significantly higher wear and tear.
Financially, we further drive replacement cycles, and lastly, we're very bullish on discretionary spend.
I mentioned before was high disposable income consumer reorientation towards the home to put that altogether. I think we are rarely had at the nearby all free demand components point in the right direction Madison the fundamental background of why we feel very good about the.
Sure.
But beyond this one yes, we do believe we can further expand our share in that business.
Not just in North America around the globe.
It is now.
Let Joe comment on Midland kind of through existing tools, but everything which we also pointed out the urban presentation is very different revenue streams. If you are a DTC business.
Demand. It gives you a higher revenue per unit. If you have additional revenue sources like the detergent business forever kind of ecosystem revenues that is additional revenue. So it is going beyond calling the natural or the traditional market share on a unit perspective, Joe Yep. Thanks Mark.
Just a couple of points to add Samuel.
Business and product launches.
The World has been a volatile place in the last year and so really our dishwashers that we've launched our best in class have a lot of innovation and they really yet to be fully seeded in the market. We're very excited about how that product is doing already and we will continue to do in addition, our laundry products in top load we've launched.
On our new fantastic products here, just recently in the last quarter or so and those are just getting seeded now and we will have a growth trajectory into 2022 Super excited about those and then mark touched on it there is a <unk>.
And the new areas around detergents are yodlee probe that we just recently launched as well that are just now getting in the marketplace.
Some really essentially new areas of growth for us and we have not really participated in historically, so you put that altogether with the fundamentals behind demand, we're very optimistic about the overall demand profile.
My second question.
The guidance for the year.
<unk> that the fourth quarter margin stepped down pretty.
In our earnings release sequentially to 300 basis points versus the third quarter. Despite the fact that sales will be up sequentially.
That's unusual from a seasonal perspective, historically I'm trying to get a sense of what the drivers of that margin step down might be I know that price versus raw.
Pretty much getting a little bit worse, but it doesn't I don't think.
Explain the entirety of that margin step down in your guidance if you could help thanks.
Sam its Marc.
First of all I would like to point out we raised guidance.
For like before timeline Rosa, we feel very good about business and whenever you raise guidance it.
Is sign of confidence.
Honest and direct answer to your question don't read too much of me exact mathematics of 26, 25% and full year.
It says around and I would probably describe it today off with having a prospect for October.
I think it will probably mark, but lower end of where we ended up with so we probably have strength again.
It is a good 26 25 and there are some some smaller tactical investments, which we have to do in Q4 around capacity and procuring and getting supply, but these are purely tactical but I would see.
We may have we might have strength against with 26 25, and so maybe the one other thing I'd call out is you know you had talked about our historical seasonality.
Against that I think youre, starting to see that smooth out a little bit more especially when you look at whether it's our small appliance business or.
The previous history, we've had with large promotional periods being in the fourth quarter. This year was more demonstration both from a free cash flow and an earnings perspective, how our business is not as seasonal as it used.
And we do generate positive results in cash throughout the year consistently now.
Okay.
Your next question comes from Michael Rehaut of Jpmorgan.
Thanks, and good morning, everyone and.
To be in some of the results.
First question I, just wanted to maybe bear down on a on a couple of prior ones in and see if we could.
Visit and make sure we understanding things right.
On the market share question, obviously appreciate that.
Comp.
<unk> in the 5% to 6% organic growth.
And you know.
The new products are always a key.
Key component of that just wanted to understand and unpack a little bit three key results.
In North America, particularly if youre probably benefit.
Congrats from.
I don't know you tell me mid mid even high single digit price increases.
It would imply maybe a low single digit volume decline. So am I thinking about that right and you know that that would imply a little bit of continued lost market share.
If you might.
Fitting the drivers of that.
Yes.
Michael Let me try to explain in North America.
So we did not make progress on regaining market share in North America that is correct and let me give you a little bit perspective that has nothing to do with product on new products as Joe pointed out has nothing to do with pricing it's entirely to do with.
How much can we dial up production. Okay. Now also here to give you a little background. We finally produced in Q3 more than in Q3, 2020 and more of it in Q3 2019.
Now you Wonder why we didn't ship more last year Q3, we still were reducing inventory I, we're selling off the inventory.
Inventory and we know because we had to rebalance inventory, we started carefully build back up inventory carefully because we we just have to make the logistics flow work. So some better explains a little bit different but frankly, yes, we would have liked to dial up production even more we're facing.
Similar constraints as you hear for off the presses labor.
Which component shortage and transportation bottlenecks on again as you can read already from production volumes, it's slowly getting better in Q3, and we expect that to also continue to slowly getting better.
But it's not going to disappear overnight. So we will carry some of the constraints into next year right now.
It is still a fundamental constraint against.
Regaining certain market share levels.
Feel very confident that and hopefully you heard bedroom, Joe about our product range, which was from price perspective, well position. So it's just about how much we can further increase production.
Okay. So before I ask my second question just to clarify and I know this is a huge issue.
Sure, but to the extent that the backdrop remains stable.
Saying youre, starting to build up a little bit of inventory strategically.
If this.
Backdrop that you've had over the last couple of months were to persist would you expect to be able to start to regain share.
And then in the next quarter or two or.
And again.
But assuming that things stay kind of the same as they are today.
Yeah, So Michael it's and again, it's always a question of demand supply right now.
Start of a positive.
The reason why we haven't.
And order backlog is demand is so strong that we can't produce enough. That's a fundamental reason I could serve as a positive having said that we also expect to continue to increase production every quarter now, it's not going to dramatically increase and that's very simply driven by the shortage of constraints, which were all well aware of but we continue.
And even against a continuous increase of demand, which should be sequentially able to regain some market share, but it's not going to be a dramatic shift overnight because they simply can't produce enough.
Great No I appreciate that.
Second question just on.
Continued share repurchase.
Clear on.
In terms of guidance it appears that the <unk>.
The revised 2021 guidance does not include the 300 million plus.
In the fourth quarter.
Just want to make sure we're understanding that right and secondly, when you talked about the amount.
<unk> repurchased that you've done in 'twenty.
2021.
Is that kind of a new benchmark per se because certainly you're expecting continued solid free cash flow generation and I guess I would say obviously outside of opportunistic.
M&A.
Yeah and Mike.
Well this is Jim and maybe I'll start with if you take the $300 million that we've given for Q4, you know to be honest when you do the math on that that has a very minimal impact because you're buying those shares ratably throughout the quarter in the back half of the year. So I would say that that as Mark said earlier that we kind of the guidance we've given its more at the low end.
On a show, but we don't see that as a significant mover within there I'd say the second thing when you think about where we are from the perspective. This year. Obviously, if you look at our free cash flow has been very strong this year and with that we've increased the amount of cash we returned to shareholders, whether it be through share buyback or dividends. This year.
And so and we.
We have five different calc capital allocation priorities now as we look forward share buyback will continue to be one of those and especially in an environment right now where we don't have a different strategic purpose for the cash we would continue to do that.
But you know also some things that we've highlighted in there as we continue to invest or expect to <unk>.
And to invest higher levels in our business, especially coming out of this period right now where we haven't been able to implement.
Implement large product launches in some of our factories you should see our capex picking up along with we will continue to look at opportunistic M&A things that come along and I think the acquisition, we did of our remaining or additional stake.
Elicker within India as an example of how we balance all those priorities and Michael Let me maybe also maybe.
Maybe a broader comment.
As you've seen in our numbers, we are right now having a very strong balance sheet and we have a pretty significant cash balance on our balance sheet.
That is good because it gives you optionality.
Steak and it could be as options.
As you can imagine we have regular reviews with our board to discuss the capital allocation, which ultimately comes back to.
Where can we create the biggest return for our shareholder for each allocated dollar.
Particularly in the share buyback be ultimate decision about how attractive a share buyback, it's not a tactical decision what we basically.
As we look at it.
It is with discounted value of our long range plan versus market valuation right now for share prices and right now we.
We do see a fairly significant disconnect between these two numbers and Thats why we have in accordance with our board. We made the decision to buy back significant amount of shares.
And as Jim alluded to you should.
Basically look back but in Q4.
Okay.
Your next question comes from Stephen Maguire with Goldman Sachs.
Thank you good morning, everyone.
My first question is thinking about the mix shift you know in the end.
In the past you've talked about.
That has really kind of improved for you would you say that youre still seeing that improved mix shift, especially in the U S and how you're thinking about that in relation to these longer term goals that you've put out for us This morning.
Okay.
Sure.
This is Joe just in terms of mix.
We have seen continued improvement there part of that is as a consequence of our new product launches that we referred to earlier, which essentially hit more of the mass premium segment of the business. In addition, as we've had different constraints.
Cross labor and suppliers, we've also prioritized our business in a way.
Shift most advantageous and has helped continue to improve the mix and so we feel good about the tools. We employ we've done this successfully in the last few years here and we expect with the combination of our product launch and our go to market.
To be able to continue to do that in the future and so generally speaking.
Been a good baseline for us and something we've kind of built.
That was <unk>.
Okay and then.
Follow up.
<unk> you, obviously outlined for us how youre thinking about the business today, and where you expect it to operate.
As we think about it from the topline and margin perspective, you know cash generation all those factors can you talk about.
Founded when you think that Youll actually sort of arrive at these levels. When we think about 'twenty 'twenty. One obviously, you've been operating at a much higher level relative to some of these goals and some quarters. How do we think about all these different moving pieces and what they mean over time.
Yes, Susan.
You would see me you would see me smiling because I expect it.
That question now you also have if you step back a little bit we established the last time the value creation goes in 2017.
And as you may recall some of them call them very ambitious and can you ever achieve them we delivered so.
So we deliver them after four years I'm not saying these new ones will be delivered.
To sum it for years, but these are our goals and of course, we have our internal plans, where we have a certain timeline in mind, but we're kind of refraining from giving a.
Exactly year, when we're going to hit them, but I think as you pointed out are more more importantly.
Because a lot of a question came up about the last five quarters.
First off the margin can you keep them that should be the best indication we have all confidence that we can deliver on these margin levels.
The real Big change I think is as we pointed out is moving.
Moving by a revenue goal from 3% to 5% to 6% and that is really I think the biggest change in this value creation go which bear and that is simply coming from.
But in the longer term strong demand trends and.
Again trying to stay away from timelines, but I would see with the 5% to 6% growth numbers you should see earlier.
And because we do see that met demand strength, both on the short mid and long term.
Your next question comes from Ken <unk> of Keybanc.
Okay.
Good morning, everybody good.
Good morning, Ken.
Joe Congratulations.
And I'm wondering if you can take that.
Knowledge.
Comment on how supply chain.
As expected the North American landscape, specifically kind of the sales guidance.
Peter talked about changing perhaps obviously the impact on promotions.
And.
These supply chain issues might in your mind.
It's really changing the cadence of how retailers address.
How they get product to consumers I E.
Don't have as Big July for it maybe you don't have the black Friday events.
That's my first question.
Thanks, Ken.
Yes, so from a supply constraint standpoint, I mean, if we just.
Zoom out a little bit and go back to what we've experienced over the last 18 months I mean, we have had many different events throughout the last 18 months, we've shown a very good ability to deal with them, although not always perfectly, but I would say deal with them successfully and so certainly that world I think is still going to be a bit.
Challenge as we look forward.
All different factors labor.
It could be components supplier disruptions whenever it might be and so I think that is inherent in what we've experienced and what we will expect here in the short term looking forward to the point Jim made a little earlier in terms of our cash flow. There is as a consequence of these constraints.
Across all had been a little bit more even throughout the year and less seasonality around either holidays or promotions or even business segments. So I think that has been a consequence of us being even every month as opposed to.
Something else that we've experienced historically, how it impacts promotions with retailers and I really can't comment on that.
That's really kind of for them to decide but I would say generally speaking that is what we've experienced as a consequence of how we're managing our supply chain and how we're managing our production and mark touched on it as well we are seeing an increase in production quarter over quarter and year over year for us and Thats, a positive, but certainly that doesn't relieve everything.
Everything completely.
From the from the equation.
It can be only thing I want to answer this one.
No.
We spoke about this before is from a consumer perspective, I think the consumer will look at appliances, it very differently going forward than where Pat first of all in terms of how often they look at it.
Just want to repeat what I said to me.
In the earlier remarks is.
We know from our connected appliances, where we have a significant installed base of several hundred thousand units.
No actual usage data not research not reported.
Real usage data and on freestanding ranges and <unk>.
We see two X usage of pre Covid on washers, we see 27% higher increased users right. So and that doesn't go away quickly because with hybrid work people will spend more time at home. So first of all the consumers will see if a product more often and use it more often second of all because of always nesting.
In the United and investing in the home consumers care more about bulk buy invest them at home and what kind of products behave in there. So I would strongly argue about in general terms, you will see higher replacement cycles, and probably also a higher willingness to spend because people are investing in the home.
Yeah.
Trey I understood and I think.
That issue with some of my appliances.
As it relates to the.
Yeah.
Placement yesterday with new construction.
The discretionary is interesting because.
In the past we've talked about how much of that discretionary is actually <unk>.
Just walking now.
Replacing an appliance that's not broken because they weren't new features but also on that discretionary is large remodel projects someone's doing a kitchen can you update us on kind of.
How you consider your sweets right resell all those appliances, together, which looks to go into a kitchen remodel versus.
One off purchases could you give us any commentary that you feel comfortable disclosing on that thank you.
Yeah, Ken you know in terms of discretionary and remodel.
Essentially a lot of these favorable trends that mark alluded to the nurse team being at home using your appliances more it really resulted in consumers carrying more.
<unk> about that experience and that carrying more results and then wanting to invest in those spaces customize those space is really get exactly what they want to meet their family's needs and so we generally see that as a favorable trend in this space in terms of their remodels and likely even suites and ensuring that they have all the right features and functionality.
<unk>. So we don't have perfect data here, but I would say the general trend and the sentiment is one that improves that position for us. It makes consumers really want to invest more time and money to get exactly what they need for their family and so I think we're going to continue to experience that here in the midterm to marks point people are still going to remain in a hybrid environment here.
And so that's going to only bolster that position.
The only thing, which I probably would want to add is.
It's an interesting dynamic with you, but you highlight here.
As consumers are looking at buying new homes with simple realities versus.
Home market the new houses are still completely underserved.
<unk> have been honest about for 10 years and as a result of that despite strong demand you're at the very high price increases. So I think what you would see more and more consumers who are absolutely from.
Called the household balance sheet capable of buying a home just being frustrated about a home prices or the lack of availability who may shift some of these investments.
Supplied remodel the kitchen instead.
So I would not be surprised if you see more and more of that happening going forward and we've seen that in prior periods. So so I think this segment of hydrocarbon, but discretionary whole kitchen remodel I think will be an attractive segment going forward and I think before we have and with suites.
Particularly.
In traditional retail is and the home improvement centers.
We have some very attractive offerings there.
Okay.
Your next question comes from Mike Dahl of RBC capital markets.
Good morning, Thanks for taking my questions.
Good morning.
Mark I wanted to follow up on a comment you made in response to Mike Rehaut question.
And you mentioned that you're strategically built up a little inventory I guess I'm kind of wondering you've got such extended backlogs.
Could you give us a little more color on the decision to prioritize.
Hello inventory build versus kind of shipping out the door in servicing the backlog.
Yes, Michael I can maybe on a high level.
First of all when you look in particular and I think your question refers to the U S market. The U S market you have obviously, we have a large factor in distribution center.
<unk> regional distribution center, but you also need to have smaller distribution centers down the field for Mitch you serve particular builder channel the direct to consumer business, but also many of our home improvement centers. So.
<unk>.
As we reduced inventory last year. It basically came in particular have expense of a smaller distribution centers.
Which basically ultimate translate into consumer services. So we had to rebalance some of them inventory call. It downstream in order to better service consumer and reduce some of these wait times.
Now couple that with transportation from one coast to another is just getting slower these days and just what it is so you basically tie up a little.
A bit more inventory and transportation when you would do enormous circumstances and that's I think what you would have seen in Q3.
But of course rest assured we're trying to reduce the backlog of orders, which we have as quickly as possible. Yeah. I think Michael This is Jim the other thing to point out when you look at the inventory number there's a big component in there too that's cost raw material cost.
Costs have gone up and other things. So the portion that Mark is talking about that we've repositioned and that it's only a part of this the biggest driver of increased inventories is the increase in our input costs.
Okay, and I guess, just a quick clarification and then I had a second question. It seems like your implied fourth quarter guide.
Kind.
Flattish for total revs would still suggest.
A positive price environment that that volume dynamic.
Is likely to continue in <unk>. So could you just clarify that but then the second question is more around your confidence in the inflationary environment. This has been such a dynamic environment.
For for every company as you acknowledged there just you know what.
What are you seeing that's giving you the confidence or visibility.
In terms of this kind of being the peak and as you look out.
Yeah, and I'd say, you know, Mike if I start with the first question here and say.
When we look at Q4 and all of that is as Mark alluded to earlier you know, we believe that that right now our guidance for the full year as you know we do believe that that's on the low end of where it will be so you take that into Q4 and the assumptions that we have around our ability to produce and get product out out of the door continues to increase and so.
You know you can pretty much back into from the guidance, we've given on revenues, where we expect our sales to be but you know as we've said we expect to continue to see throughput within our factories increase and then when I look at just the dynamic of the market around US right now I'm in and say, okay with where we are today, obviously, we've done a very good.
<unk> of understanding what the cost environment was going to do and offsetting that with cost based price increases throughout the year and as we look forward and I think mark alluded to this earlier, we do see some carryover benefits that still will continue to come I think the other thing that I point to more historically, even within our business and our ability to handle.
Good job on these dynamics, if you look back to like the 2018 19 timeframe. We also had cost increases within that and many of them were driven by tariffs, which we were able to offset with cost based pricing back then so again the trends that we see right now we believe we're taking the right actions to offset it.
I mean, we expect to continue to do that and Michael D. B.
So additional comment I want to make almost inflation.
Yes inflation is very dynamic, but again I want to repeat what I said earlier.
We basically saw that coming we gave in April the inflation outlook, which probably many people perceive this oh, that's pessimistic, but it turned out to be true. So I think we were pretty accurate.
You are reading of a broader markets commodity markets and also have a short term market.
So.
And as such probably that's all sort of a prime reason why is Q3, which had a.
Pretty brutal year over year increase of inflation at six and a half points, but it didn't leave a dent in our button.
I would say, it's pretty remarkable so.
Accurate and being able to read me inflation outlook, a little bit early been averse helps you just deal with it earlier and then I think we've demonstrated that in Q3 as it comes through next year as I mentioned before of course that will be carryover.
While there will be also carryover from pricing and I would again use Q3 as a proof point.
We are able to operate in pretty challenging dynamic.
Environment, and we will continue to do so.
Your next question comes from Eric from Cleveland Research.
Thank you good morning.
Eric two things.
Two things in terms of the longer term guide first of all.
In terms of the margin guide if you could just give a bit of clarity.
Guiding for margin improvement in the coming years.
Does that assume progress across all markets and I guess the underlying question is does that assume that the margin in North America is sustained or enhanced from here.
Yeah.
And here's so here's what I would say is if you look at our long term goals. We just laid out what that assumes is it does assume in our businesses outside of North America, we continue to see margin improvement and especially within EMEA and we havent really changed our targets in terms of our goals in terms of the overall margin profitability. There when you look at our North America business.
What it indicates is that we believe that that business will stay at above a 15% EBIT margin type of range right now and so we feel very good about where we are remember our previous guidance was 13 plus for that so we do believe we have made a step change in the profitability within North America, but a big driver that you Shouldnt discount here is at the international.
Eric businesses outside the U S.
We will continue to expand margin.
Okay.
Okay. That's helpful and then and then secondly.
The increased revenue guide.
The goal of the last I guess five years was 3% and you achieve that goal.
Total, but it felt like there were a few years, where you didnt.
<unk> or 3%.
As you look at this five to six.
I guess, what I'm trying to understand is that in the last number of years.
When given an opportunity to focus on market share margin. It felt like you defaulted to margin and that May explain a few years you fall short of that goal.
As you move forward is the accelerated revenue.
Didn't growth, representing mostly confidence and faster market growth or does that imply a different performance focus commitment to market share.
Yes.
So Eric let me just take this one first of all.
I already answered the second part of your question I think primarily demonstrates.
Our confidence in the market outlook because of the market demand. We just view it as very strong as you were before having setbacks and stepping back a little bit.
Three years ago, when we were operating at six or 7% EBIT margin.
If you just look at the pure financials, how you create economic value for the company.
To grow we have a higher lever.
On the margin expansion compared to revenue growth. We are operating on different levels. If you take the North America business now operating at 17 or 18% by definition. If you just look at basic value creation, you can create even more value economic value if you drive for growth.
So it all depends.
You know you called the shift it just depends on where you are kind of in your margin progression and where you have going forward the highest level for economic value creation.
That picture of course is slightly different in Europe in Europe, We will continue to drive our margin expansion very hard because we are not yet done with our turnaround.
And again it depends on the respective region.
I Wonder we are in the business and that's where we kind of depending on where we are have a particular focus on margin expansion of revenue expansion, but again. The overriding theme is we're highly confident on a very strong market demand in the near and long term.
Okay.
So with that I think we're coming.
We're in the Q&A session.
First of all I appreciate everybody calling in dialing in.
There was a lot of material to absorb today, because it was more of a and B earnings call.
What's also about the long term value creation growth and I appreciate a lot of questions about this long term value creation goals.
And then I just wanted to reiterate what I said ultimate call business.
Two weeks after Q2 last year with five exceptionally strong quarters, but it's not just the five quarters is this is a year number four railroader of the year. After year, all time record performance and I think I think you would all agree it was not.
Particularly easy trading environment, no smooth sailing, but we delivered.
Certainly you can almost say well.
Just give us a rough environment, we performed well and I think metro competent you should also see going forward, we're not kind of planning or expecting but it's all going to be nice next year. It will be continue to be challenging but every quarter for me as a proof point, we have an agile organization, we have an agile business model and we can deal with what comes in we can perform.
Exceptionally well in these circumstances.
That in mind I. Thank you all for calling in and wish you all a nice Friday and a nice weekend.
Okay.
Ladies and gentlemen that concludes today's conference call you may now disconnect.
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<unk>.
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Okay.
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Yes.
Yeah.
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