Whirlpool Q3 2022 Earnings Report

Whirlpool EPS Results

• Actual EPS: $4.49
• Consensus EPS: $5.59
• Beat/Miss: Missed by -$1.10
• One Year Ago EPS: $6.68

Whirlpool Revenue Results

• Actual Revenue: $4.78 billion
• Expected Revenue: $5.15 billion
• Beat/Miss: Missed by -$368.92 million
• YoY Revenue Growth: -12.80%

Whirlpool Announcement Details

• Quarter: Q3 2022
• Date: 10/20/2022
• Time: After Market Closes
• Conference Call Date: Friday, October 21, 2022
• Conference Call Time: 8:00AM ET

Whirlpool (NYSE:WHR) is a global manufacturer and marketer of home appliances. The company develops products designed for food preservation, laundry, cooking, dishwashing and other household needs, serving consumers through retail, e-commerce and builder channels.

Its product portfolio includes refrigerators and freezers, washing machines and dryers, ranges and ovens, dishwashers, microwaves and other kitchen appliances. Whirlpool markets products under brands including Whirlpool, Maytag, KitchenAid, Amana and JennAir, with brand availability varying by market.

Founded in 1911 as the Upton Machine Company, Whirlpool is headquartered in Benton Harbor, Michigan. The company has historically operated across North America, Latin America, Europe, the Middle East, Africa and other international markets, and has manufacturing, research and development, sales and distribution activities serving customers worldwide.

Whirlpool Q3 2022 Earnings Call Transcript

Key Takeaways

• Q3 was marked by a double-digit decline in global demand and persistent inflation, prompting a 35% cut in production and a $300 million inventory reduction; the company still delivered ongoing EPS of $4.49 and an EBIT margin of 5.5% (10% in North America).
• Whirlpool absorbed $2.7 billion of cost inflation over two years; while raw-material inflation peaked in Q3, it is expected to stay elevated through H1 2023 before moderating in H2 2023.
• The full-year 2022 outlook was revised to ~9% revenue contraction, ongoing EPS of about $19, ongoing EBIT margin of ~7.25%, and free cash flow near $950 million, though long-term targets for 5–6% profitable growth and 11–12% EBIT margins remain intact.
• As part of its portfolio transformation, Whirlpool is closing on the acquisition of Insinkerator (adding ~ $1.25 EPS in 2023), pursuing a $500 million cost-takeout program for 2023, and conducting a strategic review of its EMEA business to focus on high-growth, high-margin segments.
• Management remains optimistic about mid- and long-term demand tailwinds: replacement demand is stable or growing, housing-linked discretionary demand should recover post-recession, and there are significant expansion opportunities in India and other key markets.

Presentation

[Korey Thomas, VP of Investor Relations at Whirlpool Corporation]

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

[Korey Thomas, VP of Investor Relations at Whirlpool Corporation]

We also think the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations. Listeners are directed to the supplemental information package posted on the investor relations section of our website for the reconciliation of non-GAAP items for the most directly comparable GAAP measures. We have also provided additional information related to inventory, demand, and fixed costs that will not be regularly provided or updated in future quarterly earnings materials. 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 Marc.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Thanks, Corey, and welcome everyone to our third quarter earnings call. As you can see from our agenda on slide four, we plan to discuss today more than just our third quarter results. We are operating in unprecedented times, and we do feel it is necessary and helpful for investors to broaden the time horizon of today's call beyond Q3 and take a step back to reinforce our long-term strategy, as well as our perspective on favorable mid and long-term consumer demand trends. In the first agenda item, we will discuss the Q3 results in detail. You will see that short-term consumer sentiment and consumer demand are clearly reflective of a recessionary environment. While at the same time, input costs, which you would expect to come down in a recessionary environment, are still elevated. Needless to say that this combination impacted our Q3 negatively.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

In the second agenda item, we will show you that Whirlpool has a strong track record of successfully managing through cycles. We're laser-focused on ensuring we have the strongest business irrespective of the rapid changes in the macro environment. We have, and we will continue to take action early and decisively, and we have done so again this quarter. Beyond the current recessionary challenges, we strongly believe in the favorable mid and long-term demand tailwinds, in particular in North America. Our business is very well-positioned to win in this attractive post-recession setup. We will cover this in the third agenda item. Finally, in the fourth agenda item, I will provide an update on our portfolio transformation, which is well underway as we continue to move towards a high-growth, high-margin business. First, I'll turn it over to Joe to review our third quarter results in more detail.

[Joe Liotine, COO at Whirlpool Corporation]

Thanks, Marc. Turning to slide five, our performance this quarter was impacted by significant industry declines and elevated cost inflation that is now leveling off. In key countries across the globe, we saw double-digit demand declines. In response, we aggressively reduced our inventories by $300 million compared to the second quarter, with a 35% reduction in global production. Needless to say that this volume deleveraging impacted our Q3 results negatively. We do consider our inventories to now be very well-balanced. We delivered ongoing EPS of $4.49 and an ongoing EBIT margin of 5.5%, with approximately 10% EBIT margins in North America. While these results are below our expectations, we remain confident that we have the right strategy and actions in place and are well-positioned to deliver strong performance and shareholder returns.

[Joe Liotine, COO at Whirlpool Corporation]

Now turning to slide six, I will give more context on the magnitude of the industry decline by country. Across our key marketplaces, we faced market contractions of 10%-25% during the quarter and expect similar declines in most countries as we move through the fourth quarter. In the U.S. and throughout the world, consumer sentiment has been impacted by inflation and increasing interest rates, and the ongoing war in Ukraine and weakening currencies have further weighed on demand. Turning to slide seven, you will see the impact of corrective steps taken to reduce inventories. We lowered our inventory by $300 million from Q2 levels, despite the significantly reduced shipment volumes within the quarter. In total, we reduced production volumes 35% in the quarter.

[Joe Liotine, COO at Whirlpool Corporation]

To put this in context, this is pretty much the same level of production as Q2 2020, when we were faced with global COVID shutdowns. Even though painful within the quarter, we are now much better positioned to manage near-term demand fluctuations. Turning to slide eight. In addition to managing our inventories in response to industry decline, we are also experiencing elevated and persistent levels of inflation. Over the last two years, we've absorbed $2.7 billion of inflation across our entire value chain, thus increasing our cost of goods sold by well over 10%. We experienced increases in raw materials, freight and logistics costs, and more recently, energy costs. Aligning inventories with softer market demand was also a factor contributing to our performance. As expected, inflation peaked in the quarter and will remain elevated.

[Joe Liotine, COO at Whirlpool Corporation]

We do expect cost inflation to persist throughout the first half of 2023, and cost moderating in the second half of 2023. Despite historically high inflation and market headwinds across the globe, Whirlpool remains well-positioned to capitalize when the macroeconomic environment normalizes. Turning to slide nine, we show the drivers of our third quarter EBIT margin. We continue to deliver strong price mix of 550 basis points with previously announced cost-based price increases and slightly increased promotional activities that will continue into the fourth quarter. We responded to accelerated industry declines, and we are prepared for the upcoming holiday season. While we successfully reduced inventory, the associated volume deleveraging, alongside continued elevated logistics and energy costs, drove a 325 basis point impact in net cost. Raw material inflation was as expected and negatively impacted margins by 750 basis points.

[Joe Liotine, COO at Whirlpool Corporation]

We began to see cost actions gaining traction, which reduced marketing and technology spending, which was more than offset by the impact of foreign currency as the U.S. dollar strengthened during the quarter. Overall, we delivered an ongoing EBIT margin of 5.5%. Turning to slide 10, I'll review results for our North American region. As we continue to optimize our supply network, improving availability, we saw slight sequential share gains in the quarter. However, our revenues were down 8%, driven by weaker demand. We did aggressively reduce production levels to rebalance our inventory levels. This temporary volume deleveraging and related operating inefficiencies, in addition to continued inflationary pressures, negatively impacted our margins for the quarter. Even with these challenges, the region delivered approximately 10% margins.

[Joe Liotine, COO at Whirlpool Corporation]

Looking forward, we are excited about the unique opportunity to add InSinkErator to our portfolio of leading brands, and expect the transaction to close on October 31st. This acquisition is a clear accelerator of our ongoing portfolio transformation in delivering on our commitment of investing in high-growth, high-margin businesses. We continue to remain confident in the strength of our North American business. Turning to slide 11, I'll review results for our Europe, Middle East, and Africa region. As part of our portfolio transformation, we completed the sale of our Whirlpool Russia business on August 31st. Revenue was negatively impacted by 11 points of foreign currency. Excluding Russia and the impact of foreign currency, revenue was down approximately 8%.

[Joe Liotine, COO at Whirlpool Corporation]

The region's cost-based pricing actions were more than offset by lower volumes and cost inflation as consumer sentiment continues to be impacted by the war in Ukraine and inflation, resulting in a negative EBIT margin of 3.1%. Marc will provide update on the strategic review of our EMEA business later in the call. Turning to slide 12, I'll review results for our Latin America region. The region saw significant demand declines and continued inflation more than offsetting our cost-based pricing and cost actions. Despite these negative impacts, the region delivered more than 5% EBIT. Turning to slide 13, I'll review results for our Asia region. Excluding the impact of currency, revenue declined 1% and cost-based pricing actions were more than offset by inflation, ultimately leading to an EBIT margin of slightly below 5%.

[Joe Liotine, COO at Whirlpool Corporation]

Now, I'll turn it over to Jim to discuss our full year 2022 guidance.

[Jim Peters, CFO at Whirlpool Corporation]

Thanks, Joe. Now turning to slide 14, I'll review our updated guidance for 2022. We expect to deliver fourth quarter EBIT similar to Q3. As a result, we have revised our full year ongoing EPS guidance to approximately $19. We have reduced industry expectations for all regions except Asia, reflecting the continuation of trends we experienced during the quarter. We now expect a revenue contraction of approximately 9% and ongoing EBIT margin of approximately 7.25% for the year, with North America margins of 12%+ for the full year. We expect to generate free cash flow of approximately $950 million or around 4.75% of net sales.

[Jim Peters, CFO at Whirlpool Corporation]

While we have revised our guidance to reflect the current macro environment and expect many of these trends to continue through mid-2023, we remain committed to our long-term goals to drive profitable growth of 5%-6%, ongoing EBIT margin expansion of 11%-12%, and cash conversion of 7%-8% free cash flow. Turning to slide 15, we will discuss the drivers of our 2022 free cash flow. We now expect to generate free cash flow of approximately $950 million compared to our previous guidance of $1.25 billion.

[Jim Peters, CFO at Whirlpool Corporation]

With cash earnings of approximately $1.6 billion, we expect to continue to invest in our products and fund organic growth by unlocking capacity constraints and launching innovative products. These investments are in line with our target for capital expenditures of approximately 3% of net sales. Additionally, we lowered our working capital expectations, reflecting the previously discussed inventory reduction actions. Lastly, our expectation remains unchanged as we anticipate minimal cash outlays related to restructuring, as these actions have been largely completed. Now I'll turn it over to Marc to provide our perspective beyond 2022.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Thanks, Jim. I want to spend a bit of time to demonstrate our strong track record of successfully operating through various economic cycles. Turning to slide 17, you see that when faced with inflation across the board from materials to logistics and energy, we have responded early and decisively with cost-based pricing actions. Our strong execution of seven cost-based pricing actions and smart value-creating promotion activity has driven positive price mix in nearly every quarter since 2019. With broad-based, cost-based pricing actions across the globe in nearly every product category and channel, we have delivered a cumulative price mix impact of 13%. Turning to slide 18, I will discuss our significantly reduced fixed cost base. This chart shows the total of our SG&A, factory, and logistics costs over the past six years.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Despite the inflation, which we also experienced in parts of our fixed costs, such as logistics or salaries, we've been able to reduce the fixed cost by approximately $700 million or around 3% net reduction every year. In response to the current macroeconomic challenges, we have initiated another $500 million cost takeout program that will further reduce our fixed and variable costs in 2023. As a result of these actions, we have drastically reduced our breakeven point, which will benefit us once industry volumes recover from the current temporary weakness. This is an important step in structurally improving our long-term margins.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

As mentioned before, Whirlpool has a history of proactively responding to challenges we are facing, in particular during these past years, and we've been usually successful in managing through the headwinds of the past years, as evidenced by the financial results as shown in slide 19. Our multi-year financial performance shows our structurally improved business with expanding EBIT margins, significant EPS growth, and strong ROIC. Our ongoing EBIT margin has improved with a compound annual growth rate over 4% and our ongoing earnings per share with a compound annual growth rate of approximately 13%. Alongside strong returns on invested capital with a 6-point improvement since 2010. Now turning to slide 21, I want to address how we are well-positioned to benefit from long-term demand tailwinds.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

While we are experiencing short-term demand softness, we're at the same time very optimistic about the mid and long-term demand trends, in particular in North America. Let me start by giving you a more detailed perspective on the U.S. appliance demand. As discussed in previous earnings calls, it has two fundamental components: replacement demand, which currently represents 55% of the total market, and the discretionary demand. With the trough of the 2008-2011 replacement cycle now behind us, replacement demand has been very stable and even growing. We do expect further momentum on the replacement side of the demand due to a significantly increased appliance usage over the past years, as evidenced in the data which we see from our connected appliances.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

What has still not fully recovered from the Great Recession in 2008 is the discretionary demand side, which ultimately is driven by the housing market. Moving to slide 22, you can clearly see the strong connection between existing home sales and overall appliance demand. Existing home sales were slowly recovering from the Great Recession, but still haven't reached pre-recession levels. At the same time, overall appliance demand is also slowly recovering to essentially pre-recession levels. Turning to slide 23, we show the same data in a bit of a more granular view, as well as our prediction over the next two years. Obviously, existing home sales declined sharply in 2022, reflecting the mortgage rate shock, keeping both new buyers away from the market, as well as keeping prospective sellers from selling due to existing fixed mortgage rates, which are significantly lower than current mortgage rates.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

However, that doesn't change the fact that there's compounded pent-up demand from millennials as they reach prime home buying years. We do expect home price appreciation to slow down and housing inventory to slowly improve to more historic levels, and ultimately, existing home sales returning back to historical averages of above 6 million units per year. Now, turning to slide 24, I will share my perspective on new housing in the U.S. and its impact on Whirlpool. New housing contributes approximately 15% of appliance demand in the U.S. New housing construction has significantly lagged historical averages for more than a decade. For perspective, consider this, from 1968 to 2008, a 40-year span, there was only one year in which fewer than 1.2 million new housing units were built.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Much of a period between 2010 and 2017 was below this level, leading to the oldest U.S. housing stock in the country's history. In total, we estimate an undersupply of housing of approximately 3 million-4 million units. While we do not expect new housing to reach what we call steady-state supply of 1.7 million-1.9 million units in 2022 or 2023, we do expect 2024 to show meaningful progress towards this level. Turning to slide 25, I will share some perspective of our major appliance business outside of the U.S. We expect to win the Americas and accelerate our growth in India. India in particular has a very long runway for growth due to favorable demographics and a still very low client penetration rate.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

We also fully expect to capture replacement demand with our strong share positions in Canada, Brazil and Mexico. In India, we recently expanded our offering with a majority stake in Elica of India in 2021, and we just started the production of front load washers in India, and we want to continue to invest in this business. Combined with the best portfolio of brands, including Consul and Brastemp, each generating $1 billion in sales in Brazil, we are well-positioned outside the U.S. Let me now move on to our last agenda item and discuss our progress on our portfolio transformation towards a higher margin and higher growth business. As you can see on slide 27, these efforts have been underway for some time. Since 2018, we've executed multiple steps to streamline and optimize our portfolio, and are excited to add the InSinkErator business to a portfolio.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

On slide 28, I will remind you of the three strong pillars that will accelerate our portfolio transformation towards a higher margin and higher growth business. Our global small appliance business and our commercial appliance business both deliver strong margins over 15%. With the addition of the InSinkErator, we have taken yet another significant step and strengthened our major appliance business, specifically in North America, bringing an iconic brand to Whirlpool, one that is the largest manufacturer of food waste disposers and instant hot water dispensers with more than 70% of the U.S. industry, adding approximately $1.25 EPS accretion in 2023. As Joe mentioned, we expect the acquisition to close on October 31st. We expect to continue to invest in building Whirlpool as a higher growth and higher margin business as we continue to deliver significant shareholder returns.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Now turning to slide 29, I will provide an update on the strategic review of our EMEA business. We have been assessing a number of options for our business to a goal of maximizing long-term value. With two guiding principles as we navigate this review. One, what creates the most value for Whirlpool Corporation? Two, what is required for future success in Europe? We received significant interest from a number of parties and narrowed the discussions to refine negotiations with two strategic investors. Given the confidential nature of these discussions, we're unable to share further details, but will provide an update no later than on our fourth quarter earnings call. Again, our focus is to ensure we have the strongest business for our shareholders and employees, further supporting our portfolio transformation towards a high growth and high margin business.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

In parallel with reviewing external options, we also revisited our internal continuation plan. We have completed a pressure test of all our business segments and evaluated strategic alternatives. Additionally, we have worked diligently to develop a sustainable and attractive business case for the region. Ultimately, this will serve as a comparison and alternative path to any external option. Now let me close with a few remarks and turn to slide 30. We have a proven track record of successfully operating through cycles, and despite the significant industry headwinds we're facing, we still expect 2022 to be the second-best year in our 111-year history. We have the right strategy and actions in place to navigate the current environment. We have largely offset raw material inflation with decisive pricing actions.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

We have initiated cost actions which will deliver $500 million of benefit in 2023, and adjusted inventories to reflect the current demand. We are reiterating our long-term growth outlook, and based on the initiatives we're taking, we believe that Whirlpool will exit the current and temporary industry low at high operating margin. At the same time, we continue to advance our portfolio transformation, leaving us well-positioned to continue to deliver strong shareholder value. Now we will end our formal remarks and open it up for questions.

[Operator]

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. Your first question comes from the line of Sam Darkatsh from Raymond James. Your line is open.

[Sam Darkatsh, Managing Director at Raymond James]

Good morning, Marc, Jim, Joe, how are you?

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Good morning, Sam.

[Jim Peters, CFO at Whirlpool Corporation]

Good morning.

[Sam Darkatsh, Managing Director at Raymond James]

Good morning. Thank you. A couple questions. The first around raws and the second around production. I mean, I guess I was originally gonna ask you why the spread of possible raw material inflation in the fourth quarter was so wide, but I'm guessing that's mostly a function of you're not entirely sure yet what demand and production might look like. I'm really more interested in your 2023 thoughts. I think in your prepared remarks, you mentioned that the first half of 2023, you might see raw material inflate year-over-year, and I'm confused as to why that might be given the steel contract resets and what have you. Could you give some more quantification or clarification in terms of what you're expecting for raws next year?

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Sam, it's Marc. Let me maybe first talk about the raw materials, and then I would have Joe commenting on production reduction and how we feel about the inventories. First of all, on the raw material, you obviously saw there was still quite a bit of an element in Q3 of 7.5% impact on the EBIT margin, obviously in the COGS and more. That has, as we indicated, we expected that is pretty much peaked in Q3. However, Q4 not being materially better. Let me first talk about Q4. Part of the reason is, there's two reasons why it's not materially better. One is the spot prices have not come down a whole lot yet, but I emphasize yet.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

The second part is keep in mind, big parts of our raw material are under hedging contracts or similar contracts, in particular steel and plastics. Even though spot prices start moving in the right direction, the impact you see on the contractual terms are not yet fully visible, but they will at one point. To really clarify, and I'm glad you're raising it. On the first half, we're not saying it's increasing. We say it starts to ease. We do expect raw materials to come down and starting coming down throughout the first half. I don't think you will see a dramatic change, kind of year-over-year, and I think you'll see much more favorable comparisons with back half. We do absolutely see an easing of raw material in the first half.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

We will give you much more detail than in our January earnings call around raw material. Joe, on production.

[Joe Liotine, COO at Whirlpool Corporation]

Yes, thanks, Marc. This is Joe. Related to production, we did see the industry a little bit softer than we anticipated, so we made, you know, very decisive actions to rightsize our production and ultimately our inventory to ensure we were in sync with where we saw the market developing. We expect that kind of continuing to Q4, and so we took those actions in a sharp manner to make sure that we were rightsized, and then ready for upcoming Q4 holiday promotions and the demand that we saw ahead of us. Those actions were very pronounced, 35% reduction in production globally. As indicated in the prepared remarks, that's a level that we've, you know, not seen historically. The other parallel would be early on in COVID.

[Joe Liotine, COO at Whirlpool Corporation]

We took a similar amount of production out just given all the things happening. Very pronounced, very decisive, but it got us a nice balanced position and we think going forward, better respond to where we're gonna be with the market.

[Sam Darkatsh, Managing Director at Raymond James]

Joe, why would you ramp production back up in the fourth quarter? At least I think that's what you're anticipating based on demand still being weak and the need to retain as much price as you can in 2023 once raws come off. I'm confused as to why you just took one big bite out of the apple as opposed to keeping production really modest until you start to see stabilizing trends.

[Joe Liotine, COO at Whirlpool Corporation]

Yeah, maybe, that wasn't clear, Sam, but the intent was we rightsized in the quarter, given the environment we're in, which is slightly worse than we anticipated from an industry standpoint. That got us to the right level. From here on out, we'll essentially be you know, more in sync in managing production with output as is more typical. There isn't an assumption of a big ramp down or a big ramp up. That wasn't the implication. It was more about adjusting and synchronizing in Q3, and then now it's in sync with our expectations for Q4.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Sam, put it differently, Marc. In Q3, we produced significantly less than we sold, and in Q4, these numbers will be much more aligned. In North America, we'll pretty much sell what we produce or produce what we sell. And now in absolute terms, that may be in North America, slightly higher than Q3, but we will be very careful about not getting ahead of ourselves in production. Frankly, the other reason why we decided to take a big step in Q3, and I'm glad it's behind us, even though the P&L impacts are not fully behind us, but if we're convinced that the peak cost inflation was in Q3, we just felt why would you want to produce full volumes when you think it's the highest cost base?

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

We want to take the step now and it's behind us from an operational perspective, and that puts us in a very good position to deal with the next couple of quarters.

[Joe Liotine, COO at Whirlpool Corporation]

Maybe one add, Marc. That's true also globally. That phenomenon, while the characteristics are slightly different, those themes are true globally, which is important given all the things that we've experienced.

[Operator]

Your next question comes from the line of Eric Bosshard from Cleveland Research. Your line is open.

[Eric Bosshard, Founding Partner and President at Cleveland Research]

Thank you. Two things if I could. First of all, the price mix realization in the quarter was, I think 200 basis points different than you expected 90 days ago. What changed to influence that different result?

[Joe Liotine, COO at Whirlpool Corporation]

Yeah, this is Joe. I believe the price mix. I mean, we did get a better availability position, and as a consequence, we were able to go to market in ways that we thought were productive. Now, that go-to-market action was slightly more intensive or elevated than we anticipated originally, and that was a function of a couple things. Us being in better position from the availability standpoint and us seeing opportunities in the market. As a consequence, those were productive. In North America specifically, we were able to gain share slightly from Q2 to Q3 as a consequence of both availability and our go-to-market approach.

[Eric Bosshard, Founding Partner and President at Cleveland Research]

Okay, that makes sense. I understand the availability. Can you expand on the go-to-market approach? I guess specifically what I'm trying to figure out, is this participating more in promotions? Is this you being less aggressive on price increases? Is this retailers pushing back on price increases? Is this consumers buying down in mix? Like, something's different. I appreciate that the go-to-market availability was better, but can you expand on that a little bit, please?

[Joe Liotine, COO at Whirlpool Corporation]

Yeah. I mean, there's obviously varied components in there, so it isn't just one answer for all things. What I would say is there was some promotion involvement that we thought was accretive, so we participated there. There was also some launches. We had a new dishwasher launch that came out, and so there were some investments behind some new innovations as well. By and large, those were slightly different than when we were in a constrained environment where we didn't have either of those two assets available to us.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Eric, maybe just adding to this one. First of all, again, that's why we also include the slide about the past price increases. We have now in North America, globally, seven price increases behind us in a very short time period. We certainly haven't been shy of passing on costs to the marketplace. What happened in Q3 and more specifically to your question is, yes, the market is slightly more promotional than, for example, a year ago or half a year ago. I also want to point out it's not comparable to pre-COVID periods. It is more promotional, more promotions elevated, and that's what we probably expect to see also go forward. It's you can't compare it to pre-COVID times. Somewhere in between, that's what we're just dealing right now with.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

To Joe's point, the good news is we start seeing sequential share gains for our North American business, and that's good.

[Operator]

Your next question comes from the line of Susan Maklari from Goldman Sachs. Your line is open.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Thank you. Good morning, everyone.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Morning, Susan.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Good morning. Can you talk a little bit about the channel inventories? You know, appreciating that you took drastic steps to align your businesses, but what are you seeing out in the channels?

[Joe Liotine, COO at Whirlpool Corporation]

Yeah, by and large. This is Joe again. By and large, what we're seeing is a fairly balanced perspective across all of our channels. We don't believe that we're undersupplied or oversupplied, and a lot of that has to do with the adjustments we've made throughout 2022, I would say. You know, a few quarters back, we were still in constrained positions, but we were undersupplied. That's no longer the case. We feel like we're right where we need to be, holistically across the channels and frankly well-positioned, given we exited Q3 with all the adjustments that we made. I think that feels like a really good spot to be in and where we wanted to end.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Okay. You know, perhaps taking a bit of a longer-term approach, can you talk a little bit about how we think of the North American margin being at that 10% this quarter relative to that longer-term target that you've set for us in the mid-teens range? What are the steps that we'll need to see in order to get back there? And is that still the right range as you think about where the consumer and where the business is?

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Susan, it's Marc, so maybe I can give a perspective. Nothing has changed in our perspective about what should be long-term structural margins in North America. To be a little bit more specific, you know, when we had the North America business on 17%-18% margin, I mean, we felt that it's probably a little bit higher than we see the long-term structural margin. By the same token, we feel right now the 10% are also not reflective of structural margins for two reasons. One is just, you know, in the most simple way to explain it is kind of you have two major macro cycles are out of sync right now, i.e., demand is down and cost is up. That is, typically, cost follows demand.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Now, if you look back the last 20 years, that happened a few times, but it typically doesn't last very long. To have these macro cycles out of sync to that extreme is highly unusual and will not last very long. Two, as Joe alluded to, the 35% production cut was also true for North America. We have a significant impact of. You have a massive fixed cost business basically taking out that kind of volume that of course is, you feel it. You take these factors out of the equation, we're still coming back to these are the structural run rate margins which we communicated in the past, and we still absolutely feel they are achievable.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Now to your question about what needs to happen, the biggest step that should happen is the combination of external raw material costs coming down and us taking additional steps on our own cost take out. These are the biggest, I would say, 0-12-month levers which we have to pull and which we're committed to pull.

[Operator]

Your next question comes from the line of Mike Dahl from RBC Capital Markets. Your line is open.

[Mike Dahl, Managing Director and Senior Equity Research Analyst at RBC Capital Markets]

Morning. Thanks for taking my questions. You know, Marc, it's good to hear that InSinkErator is scheduled to close here just in the next couple of weeks. I was wondering if you could give us any insight on how that business is performing against this recent environment that you've seen in your core business? You know, how should we be thinking about the financial impacts that are embedded in guidance for the fourth quarter related to InSinkErator?

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Mike, let me maybe try to give you first answer, then I would ask Jim to more give you a little bit more financial perspective. First of all, we have not yet closed the transaction. That is expected to happen on October 31st. Now, obviously, we're very confident it will happen on that date and everything's on track. As such, we have, you know, we're not yet controlling that business. As such, we kind of cannot really fully communicate on this one. What we hear is the margins are intact, which is good. We also see similar demand or discretionary demand started coming down. The nature of that business has a little bit longer order pipeline, et cetera.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

I would say similar trends, similar actions, but the encouraging thing is the margins are very strong, keep them very strong, and the market share is very strong. Everybody experiences the same elements in housing, and InSinkErator is not immune to that. But we strongly believe this is a extremely healthy, strong, and sustainable business, and we're happy that we are hopefully, or well, not hopefully, but we're gonna be closing this transaction in 10 days from now. Jim, if you want to make comment a little bit what people should expect for Q4 and then going forward.

[Jim Peters, CFO at Whirlpool Corporation]

Yeah. Mike, this is Jim. I think, you know, last call we disclosed that, you know, we see for 2023 the impact of the InSinkErator business being about $1.25 per share.

[Jim Peters, CFO at Whirlpool Corporation]

If you think about that, the two months that we will then be consolidating within the fourth quarter here would imply, you know, right around $0.20. Also you will have some effects that are related to some of the how you account for an acquisition at the very beginning and a few things that you may have to adjust for. That's probably the maximum amount you'd see. It's gonna be a pretty immaterial impact to the fourth quarter, and the bigger impact will be next year on a full year consolidated basis.

[Mike Dahl, Managing Director and Senior Equity Research Analyst at RBC Capital Markets]

Got it. That's helpful. Thank you. My follow-up, it's somewhat related, but just given the pressures you're seeing, you've taken down your free cash flow guidance. You are increasing your leverage to take on InSinkErator. Now you've got a lower free cash flow guide. It sounds like at least through the first half of next year, you're still expecting some market pressures, some inflation pressures, so perhaps some further headwinds to free cash. How should we think about the implications vis-`a-vis plans for de-leveraging, how much net leverage you can kind of pay down post-closing of the deal and then what that means for your buyback?

[Mike Dahl, Managing Director and Senior Equity Research Analyst at RBC Capital Markets]

I know it's on pause, but just any thoughts around, kind of timing of how you're thinking about that.

[Jim Peters, CFO at Whirlpool Corporation]

Yeah, Mike, this is Jim again. I think if you remember when we talked about as we look at how we'll finance the transaction is we'll use approximately $500 million of existing cash on hand. Through multiple term loans, we will finance another $2.5 billion, which will put us about, you know, next year, let's just say on a gross debt to leverage perspective, around in the neighborhood of 3.5. You know, as you mentioned, right now we have suspended our buybacks, and we will be, you know, holding off on that until we begin to reduce our debt levels down, obviously. That's what we said is gonna be a focus go forward.

[Jim Peters, CFO at Whirlpool Corporation]

When we look at the structural cash flows of our business, which as Marc alluded to before, haven't changed, and are just being impacted right now by a lower level of demand. As that begins to come back, we expect our cash flows to come back to the levels we've seen in recent years that were above $1 billion per year, which will give us the ability to, you know, finance all of our different capital allocation priorities. Obviously continue to fund our business, pay our dividend, and bring our debt levels down. Then, you know, at some point in the future, once we get back to our targeted leverage areas, then obviously share buyback will become a priority that we will focus more on then.

[Jim Peters, CFO at Whirlpool Corporation]

I have to, you know, remind folks that if you look at the last, you know, two years leading up to this, our return to shareholders was over $2.5 billion when you look at share buybacks and dividends. It's obviously been a focus of ours. We've, you know, we will continue to have that as a focus in the future.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Mike, maybe just adding to this one. You know, we pride ourselves. We have a very strong balance sheet, and we'll have a very strong balance sheet after the InSinkErator acquisition. And that strong balance sheet gives us optionality. Just to give you two more additional comments. First of all, when we're referring to leverage, keep in mind we're referring to gross debt leverage, which is by year-end, expect to be somewhere north of three. Keep in mind that excludes the almost $2 billion cash which we have right now. That's a gross debt leverage. The other way to look at our financial structure and our debt structure, we basically had over the last couple of years a long-term debt level of about $5 billion. That is unchanged.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

What has changed is a little bit how we over the last five years refinanced and did the debt ladder. The debt ladder is very good, very long. The average cost, interest cost of these $5 billion is 2.9%, so extremely attractive in today's terms. What Jim was referring to is how we, in the short term, finance the InSinkErator acquisition, where we made the decision we, quote-unquote, "will only use $500 million of our cash and have the rest a short-term loan or term loan," and we intend to pay that down pretty fast. That then at the same time, maybe not entirely sequential, maybe to some extent parallel, will then potentially open the space again for share buybacks.

[Operator]

Your next question comes from the line of Michael Rehaut from JPMorgan. Your line is open.

[Mike Rehaut, Managing Director and Senior Equity Analyst at JPMorgan]

Thanks. Good morning, everyone.

[Jim Peters, CFO at Whirlpool Corporation]

Good morning, Mike.

[Mike Rehaut, Managing Director and Senior Equity Analyst at JPMorgan]

First question, just wanted to get a little clarity on 3Q and 4Q and some of the puts and takes. Obviously, you know, you highlighted the 35% reduction in global production, and I was wondering how much that specifically impacted your margins. If you have the absence of that headwind in 4Q, why would you have kind of similar margins? I don't know if there's a further moderation in price mix. You kind of mentioned promotions starting to kick up again. Any clarity around, you know, the impact of, again, inventory reductions in 3Q and why it wouldn't be a little better in 4Q?

[Jim Peters, CFO at Whirlpool Corporation]

Hey, Michael, this is Jim, and let me kind of start with that. If you look at the 35% reduction we did in our production in the quarter, that cost us over $100 million. When you just think about the leverage you get within your factories, and as you know, Marc and Joe have talked about the level of fixed costs we have there. That cost actually does get spread across Q3 and Q4 because some of that does get hung up in inventory during this time period, and so it flows out, you know, throughout both quarters.

[Jim Peters, CFO at Whirlpool Corporation]

Additionally, when you think about, we talked about earlier the peak of raw materials coming around Q3, which means, and Marc mentioned this earlier, while we did reduce our inventory levels and that's still the inventory that we have on hand right now is probably at a peak cost. As that begins to flow out, you think about how that flows out in Q4. That also has an impact on, you know, the margin in Q3 and Q4. That's why as we look at the, you know, the rest of the year, we do believe it'll be relatively flat. We aren't expecting a significant change in demand through those two quarters. Then, you know, the last piece is just naturally in the seasonality of our business and how the promotional environment works, even when it's reduced.

[Jim Peters, CFO at Whirlpool Corporation]

Q4 is your strongest or your highest amount of promotional spend within a year, no matter what the absolute amount is for the year. That's also why you've got that seasonality effect in Q4.

[Mike Rehaut, Managing Director and Senior Equity Analyst at JPMorgan]

Okay. No, that's a helpful rundown. I appreciate that. You know, secondly, you kind of highlighted some key variables to think about for next year, and there's been a couple questions. Just wanna try and clarify a little bit across, you know, cost takeout, which is obviously can be a big margin benefit, but also raw materials and price mix. You know, kind of talking about obviously the headwinds that you expect in the first half, but then it should turn to tailwinds in the second half, at least in terms of raw materials. I was hoping, you know, to get some of your early expectations at this point on a full year net basis.

[Mike Rehaut, Managing Director and Senior Equity Analyst at JPMorgan]

Would you expect raw materials to be a headwind or a tailwind based on current prices, you know, in the market today, in other words, steel and resins, et cetera. With the cost takeout program, should we be thinking that perhaps you're gonna give some of that back to the consumer amid a still softer demand environment? What does that mean in terms of price mix being even potentially negative?

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Michael, it's Marc, let me try to answer your question. First of all, I would say upfront, even in normal times in the October call, we would be hesitant to give you a lot of perspective on 2023, and I think we would all agree we're not exactly living normal times. Any forecast for 2023, obviously you need to take with a grain of salt. Let me just run through the items where we don't want to or can't give you today's specific answers, and where you can get a little bit more color and perspective. For the first one, going through P&L, demand, and I would say pricing is right now too uncertain to forecast.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

You know, with global demand, there's some elements driven in terms of consumer sentiments and ultimately also relating to what happens to mortgage rates, what happens to the war in Ukraine. There's a lot of macro factors which, if we like it or not, will weigh on short-term demand. Doesn't change our long-term demand or midterm demand outlook, but of course there need to be some macro concerns being reduced or eliminated before we see a significant pickup of consumer confidence. That's probably demand and correlated and/or related to different pricing is the biggest uncertainty. We will give you our perspective in January. If you wanna get my personal perspective, Q3, Q4, and probably Q1, I think we would still see a depressed and volatile demand environment. Afterwards we gotta see.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

On the cost side, the $500 million net cost reduction I was referred to earlier, we can confirm that. If you wanna say so, you can include that in your spreadsheet because that's what you will all see here in January. The raw material side we have not quantified, but obviously, as you could see or hear from our comments, we do expect gradual easing of the raw material side. Yes, on a full-year basis, we absolutely do expect this to become a positive factor. i.e., no more increase, but rather decrease of raw material, the magnitude of which we will clarify and quantify in January. We do expect a reduction of raw material cost.

[Operator]

Your next question comes from the line of Ken Zener from KeyBanc Capital Markets. Your line is open.

[Ken Zener, Managing Director at KeyBanc Capital Markets]

Good morning, everybody.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Morning, Ken.

[Jim Peters, CFO at Whirlpool Corporation]

Ken.

[Ken Zener, Managing Director at KeyBanc Capital Markets]

Hi, Jim, I wonder if you could go back to this curtailment. Just I think I'm getting confused a little bit. Obviously, what do you generally talk about in terms of unit leverage within your business? I always thought it was kind of in that 15%-20% range, and I think you just mentioned there was $100 million dollar headwinds in third quarter associated with the curtailment.

[Jim Peters, CFO at Whirlpool Corporation]

Correct.

[Ken Zener, Managing Director at KeyBanc Capital Markets]

-in North America. Was that right? That's about 3.5-

[Jim Peters, CFO at Whirlpool Corporation]

Well, not in North America, but I said there was, Ken, we see due to the reduction we did approximately a little bit more than $100 million that will come through in Q3 and Q4 through our P&L.

[Ken Zener, Managing Director at KeyBanc Capital Markets]

Q3 and Q4. Okay. I think, Joe, you talked about, you know, in various words, you know, gaining some shares sequentially, productive share gains, i.e. higher volume associated with promotions. Marc, you said nothing like pre-COVID, but still a kind of drag. I think it's obviously understandable everyone's trying to narrow in on the cost basis or, you know, where you are in terms of volume in the business. If we were to be, let's say flat next year, you know, if the margins would get us back to that, you know, longer term guidance just because this year is exiting at such a lower rate, right? Bifurcated second half, first half. I'm not sure if any of us know exactly where, you know, existing homes are gonna go next year, given where rates are right now.

[Ken Zener, Managing Director at KeyBanc Capital Markets]

Is there a way that you could kind of talk about isolate those, the margin drags associated with the production and the promotion level? 'Cause that promotion obviously helped increase your volume versus a more stable run rate. Does that make sense at all, gentlemen? It's such a big cut in the margins as we exit the year is my question.

[Jim Peters, CFO at Whirlpool Corporation]

Sure. Maybe, Ken, let me kind of start on a few of the points there, and then I'll ask Joe and Marc to. I think if you start to think about next year and the opportunities for cost reduction that will come possibly with a, you know, at least a demand headwind, as Marc mentioned in the first quarter or early in the year. As we come out of this year, you know, we'll start with a healthy level of inventory, which then allows us to run our factories in a very efficient way and allows us to hopefully, as we, you know, look at the demand environment and stay in check with it, and Joe used the word synchronization earlier, that we synchronize our production with the demand environment.

[Jim Peters, CFO at Whirlpool Corporation]

It takes that volatility out, which has a cost and has an inefficiency to it. As we look forward, I think, you know, what you saw was such a big reduction here that we talked about because the market and the demand did move very quickly. We've now adjusted to that level, and we believe we can keep our production at that level, and then as demand would increase, ramp it up appropriately. I think as you think about next year, you do get efficiencies and cost savings that are part of that broader $500 million that Marc talked about, but that's just one of many components that would be in there.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

Thank you, Jim. I think this was the last question which we had on the call. Let me maybe just quickly wrap up here. As you heard throughout the prepared remarks and also in the Q&A, we are dealing with the headwinds of what you see in a recessionary demand environment, and we're dealing with that proactively and decisively. We've done so, and we will continue to do so. At the same time, we're not yet experiencing the tailwinds which come with recession in the form of cost reduction. We will at one point, and we have also announced that we'll take on top of it additional cost actions internally in how we further bring down fixed and variable costs. Beyond the short-term recession environment, the critical question is how we position to a post-recession environment.

[Marc Bitzer, Chairman and CEO at Whirlpool Corporation]

On that note, as you hopefully heard, we continue to be very upbeat about the mid and long-term demand trends, which spells significant opportunities for us. With everything which we've done on reducing and lowering break-even points, with everything we've done on product innovation, branding, I think we're very well positioned for a post-recessionary environment, which at one point will come. With that in mind, I thank you all for joining us today and wish you a wonderful Friday. Thank you.

[Operator]

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

Participants

Executives

• Korey Thomas, VP of Investor Relations
• Marc Bitzer, Chairman and CEO
• Joe Liotine, COO
• Jim Peters, CFO

Analysts

• Sam Darkatsh, Managing Director at Raymond James
• Eric Bosshard, Founding Partner and President at Cleveland Research
• Susan Maklari, Senior Equity Research Analyst at Goldman Sachs
• Mike Dahl, Managing Director and Senior Equity Research Analyst at RBC Capital Markets
• Mike Rehaut, Managing Director and Senior Equity Analyst at JPMorgan
• Ken Zener, Managing Director at KeyBanc Capital Markets