Q1 2022 Whirlpool Corp Earnings Call
Good morning, and welcome to Whirlpool Corporation's first quarter 2022 earnings release call. Today's call is being recorded for opening remarks, and introductions I would like to turn the call over to senior director of Investor Relations Corey Thomas.
Thank you and welcome to our first quarter 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 conduct this call we'll be making forward looking statements to assist you in better understanding whirlpool corporation's future expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K 10-Q and other periodic reports.
We also want to remind you that today's presentation includes non-GAAP measures.
We believe these measures are important indicators of our operations as they exclude items that may not be indicative of results from our ongoing business operations.
We also think the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations.
Additionally, price increases or pricing actions reference throughout this call reflect previously announced cost based price increases.
Listeners are directed to the supplemental information package posted on the Investor Relations section of our website for the reconciliation of non-GAAP items to the most directly comparable GAAP measures.
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 ask that participants ask no more than two questions with that I'll turn the call over to Mark.
Thanks Corey good.
Good morning, everyone. It is my pleasure to discuss our results while first quarter today and to provide some perspective for how we intend to continue to transform our business for the better.
Turning to our business over the quarter, we worked relentlessly to deliver strong results, despite rising cost inflation supply chain disruption and higher levels of volatility.
In fact this was among the top 10 strongest quarters in the history of our company. Despite the many external factors that we had to grapple with.
We also obviously faced a very tough comparison period from record growth last year.
Relative to our performance in 2020, however, we saw very robust growth. Thanks.
Thanks to the relentless effort of our entire organization for business remained stronger than where it stood pre pandemic.
Our management team and I are also place significant emphasis on improving operating margins over the last few years.
We will remain committed to sustaining the structurally higher profit levels for the future.
The emphasize we're structurally strong award just a few years ago and this quarter is another reflection of our ability to perform well.
In a tough macroeconomic environment.
I'm very confident in the strong fundamentals of the underlying business and my belief in the go forward growth remains undimmed.
Today's guidance change as you've seen our press release.
Merely a function of a high volatility environment, we still expect a strong second half and continued robust performance will remainder of this year.
We're exiting the first quarter on strong footing and our brands are performing very well.
With that in mind I'm pleased to announce that we're taking on growth efforts fervor and announcing two separate but highly interconnected initiatives.
First we are conducting an overall portfolio review, but will help us transform our company into a high growth and high margin business.
Collective of that we have also made the decision to embark on a strategic review of the EMEA business.
Our EMEA segment has enjoyed solid recovery in turnaround over the past two years, despite significant COVID-19 headwinds.
Given significant operational improvement in the region, we have decided but now it's the right time to conduct the strategic assessment of our long term value creation and EMEA.
We expect to give you an update with the conclusion of this review by the end of Q3.
You will be hearing more from us on this as we continue to grow both organically and evaluate inorganic opportunities in select strategic areas of interest.
We are committed to continuing to improve whirlpool and I couldnt be more confident in the strength of our businesses and brands.
To get into the quarter in more detail, we delivered a solid first quarter with ongoing EPS of $5 41.
Down by $1 89, there's the all time record first quarter of last year, but up by 86% against 2020 and up 70% against 2019.
This demonstrates that our business is fundamentally stronger than pre pandemic levels.
We remain confident in the strength of our business and believe that both pools deliberate actions over now several years have made us a stronger company today.
As our industry and most of our industry has faced historic levels of cost inflation, we absorbed over $400 million in the fourth quarter by approximately a 10% increase on cost of goods sold.
Despite this we delivered over 9% ongoing EBIT margins and over 16% EBIT margins in our North America business again, demonstrating the earnings strength of our region and the actions we took controlling margins over the years.
We now expect higher levels of inflation to persist throughout the year and have increased our full year cost inflation expectations by $600 million.
The $1 8 billion.
We also expect a higher price mix contribution as a result of additional recently announced price increases.
We are positioned to deliver strong second half of 'twenty two.
Existing the year with actions fully offsetting cost inflation in other words. There is currently a lag between inflation pricing, but we expect a catch up in the second half and remain confident in our actions. However.
However, supply disruptions impacting shipments in the first half of 2022.
Alongside the accelerated cost inflation led us to revise our full year ongoing EPS guidance from 2007 to $29 previously to now 24 to $26.
Lastly is the confidence we have in our business and the strength of our balance sheet, we continue to fund innovation and growth and return cash to shareholders.
This includes a 30% year over year increase in expected capital investments and a 25% increase in our quarterly dividend.
And we are on track to return approximately $1 5 billion in cash to shareholders in the year.
Now I will turn to our first quarter highlights on slide five.
Again, we demonstrated solid performance in the first quarter delivering ongoing EPS of $5 31, and ongoing EBIT margin of nine 4%.
Our successful go to market actions in every region, partially offset over $400 million of inflation in the quarter.
Lastly, we returned a significant level of cash to shareholders with $533 million of buybacks and increased our dividend for the 10th consecutive year.
Turning to slide six we show the drivers of our first quarter EBIT margin.
As evident a number of extraordinary items impacted the quarter and we still delivered strong margin.
Price mix delivered 600 basis points of margin expansion led by the successful execution of our pricing actions in each region across the globe driving positive price mix.
Net cost negatively impacted our margin by 250 basis points, largely driven by increased logistics and energy costs, which were intensified by the Russia, Ukraine conflict. Additionally, raw material inflation continues to be a significant year over year headwind negatively impacted margin by 700 basis points loss.
Lastly, our strong discipline related to marketing and technology investments positively impacted margin by 50 basis points.
Overall, we're pleased to deliver solid operating margins and what remains a very challenging environment and remain confident in our ability to sustain and grow margins in the future.
Now I will turn it over to Joe to review our regional results.
Thanks, Mark and good morning, everyone turning to slide eight I will review results for our North American region.
We delivered $2 8 billion of revenue driven by our previously announced cost based price increases.
First quarter industry shipments represent one of the strongest quarters on record despite being negatively impacted by a constrained supply chain low inventory levels and production disruptions.
We believe the industry will ultimately continue to grow beyond these record levels as the fundamental strength of consumer demand trends remains intact.
During the quarter, we experienced increased inflation and operational inefficiencies. In addition to the negative impact from temporary volume deleveraging, we delivered a fundamentally higher level than when we entered the pandemic sustaining very strong EBIT margins over 16% demonstrating the lower fixed costs.
<unk> of the region.
Lastly, our previously announced pricing actions that are coming online in Q2 are on track and position us to fully offset cost inflation as we exit the year.
Turning to slide nine I'll share more context about demand in the region.
Demand remains at sustained strong levels and all indicators point to multi year growth beyond these levels historical.
Historical growth of approximately two 5% alone indicate that the industry has yet to fully recover from the great financial crisis with well over 5 million units needed to catch up.
This is in large part due to the fact that housing remained well below historical and structurally needed levels for over a decade.
This is still the case today, which we're seeing play out with housing demand that is constrained by supply.
Next add the expectation of strong replacement cycles as we compare against a period 10 years ago when the industry grew at approximately 4%.
Then combine this with consumers higher usage of appliances, which has remained elevated well after consumers have emerged from Covid lockdowns, we see demand is even further room to grow.
In summary, we remain unwavering in our confidence and multiyear demand expansion in North America.
We remain equally confident in the strength of our business and its strong brands that serve the needs of millions of consumers daily.
Turning to slide 10, I'll review the results for our Europe , Middle East and Africa region.
The region's revenue decline is attributed to negative impact from currency and reduced volume as demand in the region was impacted by the war in Ukraine and the subsequent impact it had on consumer confidence.
Excluding the impact of currency the regions price mix actions almost entirely offset the negative impact of demand.
For the quarter the impact from our operations in Russia, and Ukraine resulted in an approximate $16 million EBIT decline year over year.
At this time I want to pause and address the war in Ukraine.
It is a time of great concern for us all.
And it is devastating to see the impact it is having on the lives of so many people.
Our primary focus is the safety and wellbeing of our colleagues and their communities and we remain hopeful for a peaceful resolution.
We remain supportive of Ukraine and its people.
We are proud of the support our teams have provided to refugees we will continue to support our colleagues through this situation.
In closing for the overall region EBIT margin contraction was the result of increased inflation, partially offset by cost based price increases including actions that came into effect during March.
Turning to slide 11, I will review results for our Latin America region.
Net sales growth of 4% driven by cost based price increases offsetting expected industry weakness.
The region delivered strong EBIT margins of seven 1% despite the current inflationary environment.
Turning to slide 12, I'll review the results of our Asia region.
The region's revenue decline is largely attributed to the whirlpool China divestiture.
Excluding this the region declined by 5% year over year.
The region delivered EBIT margins of four 8% driven by cost based pricing actions offset by lower revenue and inflation.
Lastly, COVID-19 related disruptions and Lockdowns in India began to ease as we exited the quarter.
Now on slide 13, I'll turn it over to Jim to discuss our perspective on 2022.
Thanks, Joe and good morning, everyone now turning to slide 14, I'll review, our perspective on the external environment and what actions we have in place to exit the year with a strong second half first let us address market concerns and misconceptions about demand.
Underlying consumer demand remains strong.
Even with the impact from continued supply constraints and disruptions alongside the spillover effects stemming from greater geopolitical events we.
We remain very confident that the fundamental strength of consumer demand trends will remain intact over multiple years with.
With the reorientation towards the home and hybrid work models the underlying demand strength is here to stay.
This is supported as post reopening we continue to see consumers using their appliances at sustained and much higher rates.
Next historic levels of inflation, notably in raw materials energy and logistics will impact us throughout the year How's.
However, our previously announced pricing actions are on track and position us to fully offset cost inflation as we exit the year.
Disruptions continue to impact the supply chain and inventories remained at low levels, but again, we have taken action announcing over $200 million.
In refrigeration projects built and cooking investments driving automation capacity and innovation increased capacity and dishwashers to support the strong demand for our products.
In total we expect to increase our capital investments by 30% year over year.
We have the right actions in place and are confident in the underlying consumer demand strength.
Now on slide 15, I will discuss our full year 2022 guidance.
We have revised our 2022 full year guidance to reflect the increased inflation, we expect to absorb alongside the industry disruptions that we experienced in the first quarter.
We now expect 2% to 3% revenue growth and ongoing EBIT margins of approximately nine 5% for the year.
Next we expect free cash flow of $1 billion to $5 billion or five 5% of net sales.
This represents a full year EPS range of $24 to $26.
Turning to slide 16, we show the drivers of our full year ongoing EBIT margin guidance.
We now expect to deliver 725 basis points of price mix and increase of 125 basis points led by additional price increases that have already been announced.
Next we expect net cost takeout to negatively impact margin by 100 basis points, a 50 basis point increase largely driven by increased logistics and energy costs, partially offset by our ongoing cost reduction initiatives.
We now expect our business to be negatively impacted by $1 5 billion to $1 75 billion.
Were 725 basis points and raw material inflation.
This is an increase of 225 basis points led by higher resin and component cost.
On a full year basis raw material inflation is fully offset by our price mix actions.
<unk> as we continued to invest in our business, we expect increased investments of 25 basis points in marketing and technology.
And we no longer expect a negative impact from currency we.
We expect to deliver 55% to 60% of our earnings in the second half as we exit the year with our actions fully in place.
We are confident in our ability to again navigate a supply constrained and inflationary environment and deliver approximately nine 5% ongoing EBIT margin.
Turning to slide 17, we show our regional guidance for the year.
We have aligned our global growth expectations to reflect the current consumer sentiment in EMEA.
Along with supply constraints in North America.
We expect the North America industry to be approximately flat on a full year basis as the industry recovers in the second half of the year.
We remain very confident in the fundamentals of the demand environment for North America supported by broader home nesting trends and under supply of housing market and a strong replacement cycle, we remain equally confident in the strength of our business and its brands.
In EMEA, we have reduced our growth expectations to negative 5% to negative 3% as a result of the broader impact from the war in Ukraine.
This includes a significant demand reduction in Ukraine and Russia.
Lastly, Latin America, and Asia industry expectations remain unchanged from our previous guidance.
Regarding our EBIT guidance, our expectation for North America to deliver very strong margins of approximately 16% remains unchanged.
In EMEA, we expect margins to recover in the second half to low single digits, resulting in a full year margin of approximately zero percent.
On a full year basis, we expect our EMEA results to be impacted from our operations in Russia, and Ukraine by approximately $300 million in revenue.
In Latin America, we expect to deliver EBIT margins of approximately 7% as positive price mix is partially offset by inflation.
Lastly, we expect to achieve EBIT margins of approximately 6% in Asia, driven by topline growth, partially offset by inflation.
Turning to slide 18, we will discuss the drivers of our 2022 free cash flow.
We have reduced our cash earnings expectation to approximately $2 2 billion due.
Due to previously mentioned factors.
Our capital investment expectations remain unchanged at $700 million as we continue to invest in our products and fund organic growth. These.
These investments include unlocking capacity constraints launching innovative products and furthering our digital transformation journey.
We continue to plan for a moderate inventory build as we begin to recover our inventory position, particularly in the United States we.
We anticipate minimal cash outlays related to restructuring or post integration activities. As these have been largely completed.
Overall, we expect to deliver free cash flow of $1 $25 billion or approximately five 5% of sales our balance sheet remains very healthy and we expect this to continue into the future now.
Now, let me recap what you've heard over the past few minutes.
Our first quarter results demonstrate that we are a different whirlpool delivering structurally improved EBIT margins no matter the operating environment, we have the right actions in place to deliver a solid 2022, including our previously announced cost based price increases of 5% to 18% addressing inflation across the globe next.
Strength in consumer demand trends remains unchanged the strength of our balance sheet and our strong cash generation expectations provide us with significant optionality.
We will continue to invest in the business to support accelerated growth and innovation, while returning approximately $1 $5 billion in cash to shareholders. These.
These actions demonstrate the confidence we have in our business and our commitment to drive strong shareholder value now on slide 19, I will turn it over to mark to discuss our portfolio transformation, including the strategic review of our EMEA business.
Thanks, Tim now on Slide 20, I will begin with why we are discussing portfolio transformation.
Not only during this past quarter, but over the past few years, we've done a profound assessment of rapid changes in the global macro environment and how our expected global businesses are positioned to win in the future.
As we sit here to date, we are operating in a very different world than we were just 10 years ago.
Short it is a less global world, where we are experiencing a fundamental global decoupling, which obviously has far reaching consequences for any global company.
A world with rising geopolitical and trade tensions along with global supply chain vulnerabilities and high inflation from freight and logistic costs by 10 years ago global scale benefits and the advantages of global asset utilization very significant we're now experiencing a diminishing advantage of global scale.
At the same time were benefits of regional and local scale become even more compelling and emphasized the strategic importance of leading regional share positions.
Put it differently businesses that are structurally in a weaker position will be more impacted by the unfavorable macro trends in businesses that are in a structurally stronger position.
At the same time, we had whirlpool have raised the bar for our long term value creation, which we have announced in October of 'twenty one we.
We expect our businesses to support 5% to 6% growth almost doubling our previous value creation growth targets.
And growing profitability with 11% to 12% EBIT margins and high free cash flow conversion.
It is with this value creation criteria that we critically assess all of our businesses.
Now moving to slide 21, I will discuss our overall portfolio transformation move.
And we will accelerate our portfolio transformation towards higher margin and higher growth businesses.
This will have far reaching impacts on capital allocation, our restructuring plans, while the absence of them, but also on M&A and potential divestitures.
We'll achieve success with three strong pillars, one strengthening refocus our major appliances business.
We will leverage our number one position in North America, and Latin America, and regional strength across the Americas and prioritize our investments to win in the Americas.
At the same time, we will drive our high growth and profitable business in India as penetration rates accelerate growth.
In the not too distant future, India will be among the three largest global markets and we are well positioned to win there.
We will continue to develop and build upon our consumer direct business with leading innovation met transforms consumer experiences and increases engagement with our appliances.
We will do with profitability at over 12% EBIT margin led by the strength of our North America business.
Two we will grow our small domestic appliance business. This business is more global in nature with both distribution structure in place to continue to grow at an outpaced rate.
With her kitchenaid brand, we own the most desired small domestic appliance brand in the world and we will further accelerate our organic growth at the same time, we're assessing inorganic growth options in pursuit of serving our consumers full cooking journey.
With our innovative presence and leading position that dates back to the loan to value on a kitchenaid <unk> at 1919, we are positioned to do this by driving portfolio accretive margins of over 15%.
Third grow our commercial appliance business to date. This is clearly the smallest of these three pillars with a healthy commercial laundry business in North America.
What makes this segment attractive is we inherent attractive margin profile of more than 15% EBIT.
Coupled with high level of free cash flow conversion as well as with somewhat counter cyclical and stable nature of our business.
It also provides opportunities in natural synergies across technology that can be cascaded to our residential business.
The significant progress of our company for years in a row, all time record earnings and cash flow has now put us in a position to embark on this portfolio transformation.
The opportunity of this transformation would not have been available to US 10 years ago.
We have a very disciplined approach to M&A and remain selective to pursue only value, creating acquisitions that make long term strategic sense for our business.
While im a first want to recognize that this is not a short term transformation and will require hard work I am excited and frankly energized about the path in front of us.
<unk> demonstrated that we will put up today is very different from a whirlpool overpass. This will create an even stronger and more valuable company and position ourselves for the future.
Now I will turn to slide 22 to discuss the strategic review of our EMEA business.
This business has undergone significant changes and in the last two years, we have taken it from a contracting and loss, making business in 2018 to a profitable and growing business in 'twenty one.
That structure growth is based on share gains in key countries, where we have leading positions in.
With strong brands consumers love and higher margins our results successfully implemented cost actions and a focus on growth of highly profitable building products.
As we look at this business, we do so with both the evolving external landscape, including the war in Ukraine, and our performance to date.
While we continue to have confidence that this business can achieve attractive EBIT margins, we have to acknowledge that the timeline to achieve these margin levels may take longer than anticipated.
Now continuing to slide 23, I will explain our expectations surrounding any actions we may take.
We are assessing the long term value creation opportunities in EMEA, including the option of continuing ownership as is today.
Ultimately, we're reviewing what creates the most value for Volvo cooperation and what is required for future success in Europe again to be clear all options are being assessed.
We expect to conclude this review by the end of the third quarter this year.
I will now close my remarks with a few comments.
We operating in a very dynamic work of course, we are we've just delivered another strong first quarter fundamentally stronger than pre pandemic levels with actions in place to deliver strong second half.
And we are well positioned with strong profitable leading businesses, our balance sheet, which provides us optionality and consumers who have never been so engaged with appliances.
We are well prepared to accelerate the focus of our portfolio in high growth and high margin businesses.
<unk> our company for our future as a different whirlpool operating in this very different world.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
First question comes from the line of Susan Mcclary from Goldman Sachs. Your line is open.
Thank you good morning, everyone. Good morning, Susan.
My first question is despite all the moving parts and the unexpected events I mean, obviously your north American margin was incredibly impressive and certainly well ahead of where we were.
And I guess in the spirit of no good deed goes.
Despite the 16% this quarter you left the guidance flat for the year for that region. So can you talk a little bit about how youre thinking of the cadence of that margin as we go through the next several quarters and how we should be thinking about that and what would potentially drive any upside relative to the guide that you have out there.
Hi, Susan this is Julio team yeah in terms of the North American business I mean, we feel.
Feel strong about the consumer demand continues to remain healthy which is really positive we feel really good about our value, creating go to market actions and how we've executed that over a long period of time and that also is a positive in terms of our overall margin. We had a lot of different factors playing into there we did it.
Again announced price actions that were.
<unk> January one that helped us mitigate a lot of the cost elements, we are still seeing quite a bit of.
Inflated cost and we are still seeing quite a bit of disruption in our supply base kind of limiting our topline growth and so on balance we feel that the approximate 16% EBIT for the year still the appropriate target for the North American business at this time, Susan. It's also Mark maybe just turn your question to positive the way I look at it.
<unk> had a Q1 margin of 16% full year.
16% guidance and the same globally, we had $9 four and we're guiding towards 952 way I would look at it is right now we're already on the right run rate.
We significantly de risks our outlook for the year, having said betterment to Joe's point, we have fervor price action already announced they will help us on the upside.
But we all know there is still volatility out there with raw material prices et cetera. So I think it gives us the appropriate and necessary protection to really deliver the margins, which we laid out.
Okay. Okay. That's helpful.
I do have a follow up question, but first just on that is there anything we should be thinking about in terms of the.
The sequential cadence of the margins in North America, as we update the model.
Susan It's Marc again.
For your model, probably keep it pretty stable, but will always be some pluses and minuses, but it's pretty stable.
And again, we feel good about where we had a Q4 Q1.
Steady despite all the moving parts as you laid out so I think the team has done a really good job managing towards.
Stable and sustainable margins.
Okay and then my follow up is obviously.
Announced the strategic review of your EMEA operations.
Obviously, noting that all options are kind of on the table for you can you just give us a bit more detail on how youre thinking about the potential set of opportunities out there and I guess within that we have seen over the last year or so your decent interesting.
Kind of transactions, where you are able to keep the whirlpool brand in certain regions and kind of financially benefit from that while sort of de risking the business a bit. So can you talk about whether that's a potential within this or just what are the sort of opportunity sets out there.
Yes, Susan obviously were announced today.
Or it yesterday, a broader acceleration of our portfolio transformations, there's many moving parts and we're looking at where we can grow organically and Inorganically and obviously, we also not with strategic review of our European business.
Again just to reemphasize.
In Europe , we've done really good progress over the last two or three years turn from loss making to.
Our profitable business now, but we have been growing but of course. The question is as I alluded to earlier.
How come Europe fit into our broad portfolio, particularly after we raised the bar for performance and so as such the questions out there.
It really delivers the greatest value to Whirlpool Corporation, but also what is the best structural answer to.
To improving our business in Europe , so in that context, and EMEA literally all options on the table.
I referred to retaining the business. We also referred to changing ownership, but there could be also hybrid solutions and between similar to what you laid out so we're going through a process and again expect an answer maybe not completion, but an answer in terms of what we have in mind and how we would pursue it by the end of Q3.
Your next question comes from the line of David Macgregor from Longbow Research. Your line is open.
Yes, good morning, everyone.
Good morning, David David Basketball.
Yes, good morning, I just wanted to ask.
<unk> on the portfolio transformation.
Sure.
As you transform the portfolio into higher margin businesses, how much additional capital Julian may need to deploy and can you talk about your targeted ROIC.
Yes.
Yes.
David I mean first of all.
Shifting the portfolio transformation can be ultimately driven by thinking about resource multiple levels.
<unk> first of all the ongoing capital.
Where we put it as a company and frankly, we already announced this year, we will invest more in the Americas capacity new products.
Have you ever dimension is probably going forward you should we want to invest less in restructuring Robert put the dollars behind growing business and high margin business. So let's call. It <unk> put more weight by internal shift of resources.
We talk about external opportunities obviously.
There is no point in its premature to talk about which specific ones, but I would suggest in general terms referred too.
The combination of a strong balance sheet.
And a much stronger underlying earnings potential in our company and actual earnings give us just a lot of optionality in terms of call. It firepower out there, which is something which we didn't have available to us five or 10 years ago. So it gives us a lot of options in multiple levels, having said that we will consistent.
That stay consistent mindful in terms of we're not going to overspend will look very critically at all opportunities out there.
But again between balance sheet and earnings power of our capacity is fairly significant and I think David.
Think about it also this is Jim go forward is we've always had a pretty consistent level of capital we invest in our business based on on the size and all that and that will continue to be at that type of level, but as we invest in additional businesses the amount of capital and could remain the same we're going to invest in some of those the other thing yes.
ROIC ROIC targets haven't changed at all and if you look at some of the portfolio work. We're doing we're obviously looking at assessing the future ones that performed below our target ROIC level and then as we do acquisitions go forward and things. Obviously initially they may not be at that ROIC level.
But then as you generate synergies and grow them, that's where we see these are businesses that will contribute to our longer term.
Increase in ROIC.
Yes that makes sense.
Thanks for that and then just as a follow up.
Can you comment on the opportunities in commercial appliances, and I realize you have an existing commercial laundry business.
Comparable and maybe you could size that for us, but what do you build a stronger presence in cooking refrigeration categories, where you're thinking about being just.
Sort of a really strong niche player or do you see growth essentially holding our leadership position in commercial appliances.
David Let me begin first of all repeat why we believe it's an attractive business segment and again, but also based on our own experience.
It is inherently very strong margin business, it's a very stable business. It's not only the initial sales has been the ongoing support for spare parts and kind of fleet sales. If you want to say, so we have pretty high cash flow yields and <unk>.
Certain elements are a little bit counter cyclical to our residential business. That's why we like this business.
Why we a couple of years ago started to acquire small business commercial laundry.
But frankly is not only commercial laundry we have welcomed.
In our commercial cooking and kitchen segment, adding might know is even bigger than the commercial laundry segment. So that will be a business, where we would have to grow through acquisitions.
Now it is in its nature, it's a little bit more reach less global some of your business, but is a very attractive, but it's again, it's too premature to talk about what we may target for or whatnot.
But as a kind of an area, where we want to grow it is actually very high on our priority list.
Your next question comes from the line of Sam <unk> from Raymond James Your line is open.
Good morning, Marc Jim Joe I hope each of you are well.
Good morning, Sam.
Couple of questions getting back to the.
European Strategic review first.
And Mark.
We've talked about this obviously a lot in the past.
Prior reticence to potentially monetizing that.
The business was that there was a fair amount of shared technology and R&D and <unk>.
Clearly managing control of the Whirlpool brand was an issue as well has any of that changed.
Specific I guess, what I'm getting at is I know all options are on the table, but.
Realistically is the sale of the entire.
Business.
A possibility or is it more you're looking to potentially sell off a minority stake and retain some of those assets.
So Sam again can only repeat all options on the table, but you raise our relevant points.
A a potential decoupling of partial decoupling of Europe is not a trivial matter, it's technology for brands, where I can assure you we would.
We would put contracts in place to have either control or in direct control of our brands.
So there'll be a limit to how much you really have.
The clear sale.
Elements, which we want to still keep a certain element of control technology is a big one but also here as we've demonstrated by.
There are solutions and are set up they can ensure our long term interest of our global scale and getting some global synergies and not completely losing them and these are some of the options we should look at.
And are there any parts of the EMEA business that are higher margin and separable or is the business, mostly a monolithic.
Type of operation that it would be.
More of a holistic transaction.
I would argue.
Theres not a lot of pieces, but you can easily just parcel.
Kind of cut out or whatever.
So it is more a one piece of our business.
And as such it's not like you can separate certain individual country from rest of Europe . Because there is a very strong connection supply base and technology base. So I think you're talking about the overall EMEA region as a total.
Your next question comes from the line of Michael Rehaut from Jpmorgan. Your line is open.
Thanks, Good morning, everyone. Thanks for taking my call.
Questions.
Firstly I just wanted to.
Switch back to the North American segment for a bit.
Obviously with.
Volume industry volumes down 4%.
Yes.
You guys continue in your revenue down 8%, despite solid positive price mix.
It appears that our appears that this quarter, mainly the share loss has accelerated a little bit.
<unk>.
Obviously, you continue to have challenges with supply chain, but we're probably four to six quarters into these supply chain challenges.
Just wanted to get a sense number one.
Is correct in terms of Directionally thinking about the share losses this quarter and number two you alluded to some increased investment in the back half and capacity expansions, but.
How should we think about ultimately resolving this kind of ongoing supply chain the supply chain challenges that appear.
There have been the bigger factor in.
This ongoing issue over the last several quarters.
So Michael it's Marc let me just address it first of all on the.
Demand side and there is.
It may sound like semantics, but I still want to clarify a couple of things.
What we see in North America, you referred to the minus 4% demand that is supply consumer demand is strong in fact very strong you have a situation, where it's very clear, but demand outstrip supply by a wide margin and that has been growing for several quarters.
Continued to some extent so the underlying demand is very strong.
We are also relevant to refer to this page nine which we have in the presentation, which shows you. The long term demand trends there are strong.
Of course, if you compare technically Q1 versus Q1 last it's slightly down most people who side, but still up 20% versus 2019 and 2020 service demand is strong we don't see going away replacement is strong and housing will also be strong so.
Our issue and we talked about it has been our supply chain was not capable of catching up on matching the demand side.
And even today, we have a fairly sizable number of back orders.
And that ultimately comes back to.
Throughout the pandemic.
North American production was slightly disadvantaged been Asia production, that's as simple as it is and we are by a long shot the biggest producer in North America, we're still.
80% of what we sell in U S is produced <unk> and that has been proven pandemic a slight disadvantage because they have been less constraints on Asia production. It appears right now with tight start shifting.
Partly because of a COVID-19 wave in Asia, but we are also seeing now.
<unk> of our supply constraints in Q2 beds. This also in combination is we started investing more in capacity not only in our own capacity, but also in our supply capacity. So.
It will not go we magically overnight, but it appears the tightest shifting so we're actually <unk>.
The reason, we're confident where we can ramp up our supply, but frankly, it's still will remain a volatile environment. So it is just choppy out there, but right now.
At least what we see in Q2 turns to a a better yes, I'd say Michael This is Jim too just to point out is all of those things that Mark just mentioned despite that fact and despite the inefficiencies that cause it's caused us.
We're still generating 16% margins within North America and so.
We are dealing with with all the issues in the supply chain constraints, but we're able to manage our business in a way that it's not impacting our margins right now.
Okay, all right understood appreciate that.
I guess just also some little bit of further clarity on the portfolio transformation and strategic review of Europe .
If you kind of take a step back and look at the various components of.
What you are trying to achieve.
From a broader portfolio standpoint.
Obviously, you kind of talk about the fact that you are all options are being assessed for EMEA.
But as you said before.
It's kind of hard to decouple, the business or break apart the business in any substantive way.
So while.
Obviously, again youre kind of assessing our options.
Does appear that.
More or less.
Sure.
That an outright sale in most elements maybe retaining some.
Ownership.
The Whirlpool brand, maybe some kind of smaller.
Facets of a transaction, but when you talk about your three pillars and investing in the Americas in India, a higher margin business. It just appears that EMEA. Obviously is the the peg that doesn't fit and so just trying to make sure that I'm understanding that correctly that.
In effect.
It does appear that a large sale.
Most of the assets at least.
To us at least.
What it sounds like Youre, saying and number two though in terms of the reinvestment of the proceeds from such a transaction how should we think about that should it be more.
Share repurchase is there going to be an element of reinvestment.
Highlighted inorganic growth opportunities just trying to think of the different.
Redeployment of <unk>.
The proceeds.
Michael first of all with regards to Europe , I would not yet jump to any conclusion about what is more realistic less realistic.
So what I said earlier, the decoupling is not trivial, but it's doable.
And of course, it's easier if you have.
A trusted part number ever side of a transaction managed a lot easy, but it's doable.
Yes, an outright sale as possible. It is one of the options, which you look at and then we will go for an objective assessment about all the pros and cons, which again also include retaining the business.
Yes.
And we are baseline and we got to set our own opportunities and how we drive our margins to required levels and need to compare but how does it stack up to some other options, but so.
At this point I really would not exclude any of options, which we look at yes, I would say Michael on your question on the proceeds and that again, we're very early in the process, but I think this doesn't change our capital allocation strategy right now and if you look at we've been focused obviously on returning cash to shareholders, but as mark talked about.
Earlier, and even we've talked about this recently with the strength of our balance sheet now.
Our looking at inorganic growth opportunities and so those two are going to be part of the capital allocation strategy and balance, but it doesn't change the priorities that we have it just over time gives us more to invest in higher growth or potential high growth areas of our business.
Your next question comes from the line of Eric <unk> from Cleveland Research Company. Your line is open.
Thank you and good morning.
Hi.
A question on a follow up first of all relative to 90 days ago.
Separate consumer demand and shipments.
Trying to figure out what looks different.
The industry shipment number you took down from up two or three 2% to flat so trying to figure out what changed that caused you to revise that.
And then secondly, it sounds like while that's changed you haven't seen anything different with consumer demand, but I just wanted to understand that with greater clarity and that's indeed the case.
And Eric I can take it I think the biggest change which we see.
Which has been reflecting forecast in Q1.
The supply was shorter than we had in mind and prevent the entire industry had in mind. So that's why I would put the Q1 industry shipment number entirely down to supply chain constraints, we know our own numbers and we know I mean, obviously, we can read the rest of the industry does so because we don't think that supply will catch up what we lost in Q1 from the rest of the year.
<unk>.
That's what you see reflected in there, but we have a way to look at this zero percent full year guidance basically means yet we're planning for roughly 3% growth industry growth for rest of the year.
Okay, and then and then secondly.
Within the guidance you lowered that.
The industry shipment numbers, you've raised the raw material number.
Your performance versus the industry is a bit wider than it was and yet the margin guidance is held and so what is better within the business or within profitability to offset.
These two or three other things that are worse.
Yes, I'd say, Eric this is Jim if you take a look at it we did reduce the margin guidance slightly to the nine 5%, but the biggest thing that offsets this significant increase in materials as the additional pricing that we announced within the first quarter and that will now see running in throughout the second and the third quarter.
For our business.
And so that's as we talked about earlier as we've seen higher material costs. We continue to take cost based price increases to offset that and it's just a matter of the timing for the year and it's why we've reduced the margin down slightly to reflect that our pricing is now catching up with some of the cost increases we've seen and it's not just on materials obviously it's.
Also been on things such as logistics costs and energy costs that were all significantly higher and have accelerated at a rate greater than we originally thought they would this year.
Your next question comes from the line of Liz Suzuki from Bank of America. Your line is open.
Great. Thank you so SG&A had been running about $500 million per quarter for the last six quarters and got pretty sharply in the first quarter and as a percent of sales is the lowest it's been in decades, a how much of that reduction in SG&A was the result of transitory factors like the temporary layoff of plant work.
And Clyde or in other words, how much of that reduction is sustainable and how much cost is expected to come back in the supply constraints and production issues.
Yes. This is Jim and I think if you step back and take a look at it partially there is a benefit in there from currency translation as we translate everything into dollars from around the globe that has helped us reduce that too in our walk we talk about marketing and technology investments, which were were lower year over year within.
This quarter, but then we expect to invest more in the back half of the year. So that's another big driver of third thing is we had a business in China last year that also had a significant amount of SG&A in it and Thats now structurally out of there because we don't consolidate that business anymore.
Got some ongoing cost reductions that continue to benefit us in there and we've talked about those in the past, but we see the full run rate of those coming in in this year and then we have some smaller moving parts that can be things such as a small gain on a property sale, but then offset partially by increases in bad debt reserves in places like the Ukraine, So theres a lot of <unk>.
Factors in there, but I think you have to look at that and say at least half of that plus is probably what I would say is a structural run rate reduction and the other is just maybe timing of things as I said like marketing and technology investments.
Okay, that's really helpful and then.
Follow up question is just about.
2002, 2022 price increases are able to catch up to inflation by the second half could there be some favorable flow through from pricing versus inflation in 2023 that we should be considering.
Yes.
This is mark in the current environment is still volatile but to be honest.
A lot of moving parts, which will happen before now.
'twenty, three but having said that with all the actions, which we have right now put in place, particularly on the pricing side, but also will be doing supply site apps.
Absent of fervor massive volatility shocks on the raw material side I think we will have very strong exit run rates coming out of Q4, which by definition should spillover then in 'twenty three but again the caution I have right now even entering the first quarter, we didn't have a war on our radar screen.
So this is a very dynamic to put it mildly environment and we just got to prepared for everything, but having said that absent of major shocks. We will have very very strong exit run rates.
Your next question comes from the line of Dan Oppenheim from Credit Suisse. Your line is open.
Great. Thanks, very much and thanks for taking the call.
Wondering in terms of the supply difficulties that you've spoken about initially there's a talk in terms of the 30% increase in capex over the course of the year.
Later, you talked about these.
She was easy and shifting here in the second quarter, just trying to get a better sense in terms of how meaningful that is in terms of what you are saying with the easing or if we should.
Think about that as more sort of thing.
But later in the year in terms of significant progress on that.
Benefiting the NSE.
Capex comes through.
Yes, Tim this is Julio <unk>. So we did talk about how March performed a little better and we expect that kind of ramp continue into Q2, it's going to be a slight improvements into Q2, and then a bit more meaningful improvements into Q3 and Q4, there's a lot of factors in here, but we've seen already indications.
That gives us a bit of optimism and then we've seen some actual performance and slightly better and so that combination kind of sets forth. The Q2, that's going to have improvement, but really the bigger ramp happens in Q3, and Q4 with our exit rate in Q4 that shows us kind of the opportunity to get growth back in share back that we have been discussing.
Okay, Great and then secondly wondering about.
With the comment about the free cash flow for the year, how to think about inventory levels over the course of this year.
Just.
Overall.
In terms of investment.
Yeah. Dan. This is Jim I think is as we pointed out that as we go throughout the year, we do expect to build inventories slightly as we began to see in later in the year some recovery in certain areas of our supply chain, but it shouldnt be significant for the year and what we're guiding to out there right now.
It was about a $200 million increase year over year in working capital and the biggest portion of that will be as I mentioned in inventories, we just try and get our level of stock within our own logistics network to a healthy level as we begin to fulfill some of the backlog of orders. So the next step is for us to to continue to increase.
The health of our own supply chain.
Your next question comes from the line of Mike Dahl from RBC Capital. Your line is open.
Hi, This is actually Chris kalata on for Mike Thanks for taking my questions.
So our first question is I was hoping you could give us an update on the current state of your Russian operations today.
And.
Maintaining a presence theyre going to complicate any potential EMEA divestitures in the future.
Yes, I can take this one so we as we published we have a local for local production in Russia.
Mitch historically satisfied about 80% or 90% of our volumes in Russia.
We are not importing goods from our European sites into Russia, but we maintain a very low level production basically keeping the lights on in our Russia factory.
Is that sustainable over time, it's probably not but right now we keep it running to a certain volume of course fully compliant with all sanctions and everything else.
I want to point out Russia is not the reason why we look at the strategic review.
In Europe , Russia has been a good and important market for Europe , but that's not the reason why we look at the strategic review.
It's a number of factor them, a broader equation in the long term landscape and.
US like many other companies will of course carefully considered but what strategically is possible or not possible in Russia going forward.
Understood.
And just turning back to your your demand outlook in North America.
You're expecting demand to remain.
Strong in the second half, even though leading housing indicators are starting to decelerate and clearly there is more uncertainty around demand going forward.
Just want to get your sense on rationale for this and confidence around around making that assumption at this point.
It's mark in all honestly I don't see where you see more uncertainty with demand I said earlier, but demand clearly and has for the last two years outstrip supply by a wide margin.
Replacement is as strong as ever and the Covid pandemic and now also the more hybrid work models will further accelerate replacement because you basically have a higher usage of our clients and we.
You will see a confirmed even two years.
Into the pandemic so our outlook on the fundamental long term consumer trends in North America, <unk> ever been and so on.
I, just don't see that slowing down.
It's on the housing side I know, there's talk about mortgages. If you look at the fundamental demographic trends.
Age of the housing stock.
The demand out there.
I wouldn't bet against U S housing and we're certainly very optimistic about the long term U S housing trends.
Okay, so with that it looks like we're coming to the end of the Q&A session. So first of all thank you all for joining us today as you've just seen and heard.
But Q1, we feel very good about very solid Q1.
Obviously, a lot of moving parts as some of you pointed out in the quarter and the environment around us, but I think we've demonstrated.
Yet again, we can.
Deal with a lot of challenges.
We have put all the right actions in place to have a very very strong second half and as it comes to the portfolio transformation. We will keep you updated and particularly once we come to the <unk> earnings call. After the third quarter with that in mind. Thanks, again for joining us and have a wonderful day.
Ladies and gentlemen that concludes today's conference call you may now disconnect.
Okay.
Okay.
[music].
Okay.
Yes.
Sure.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Yes.
Yes.
Sure.
[music].
Yes.
Thank you.
[music].
Okay.
Thanks.
Yes.
Thanks.
Okay.