Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Whirlpool Corporation (NYSE:WHR)

The Morgan Stanley Global Consumer and Retail Conference Call

November 20, 2013 10:55 AM ET

Executives

Larry M. Venturelli – Chief Financial Officer and Executive Vice President

Analysts

Kristen Rossi – Morgan Stanley & Co. LLC

Kristen Rossi – Morgan Stanley & Co. LLC

Good morning everyone. My name is Kristen Rossi and I’m with Morgan Stanley’s Investment Banking Practice. And I’m pleased this morning to welcome Whirlpool to our conference. As you all know Whirlpool is a global leader in its sector and this is a very exciting time in the company’s evolution. We look forward to hearing more about the story today from Larry Venturelli, who is the Chief Financial Officer of Whirlpool and we thank him very much for joining us.

So with that I will turn it over to Larry.

Larry M. Venturelli

Well, Kristen thank you very much and good morning everybody and welcome. I’m going to spend a couple of minutes in giving you a general background of the company of Whirlpool for those of you who aren’t familiar with our story. I’ll spend a little bit of time talking about how we’re structurally operating, I’ll give you a perspective of our value creation strategy and I’ll wrap it up with a review of our 2013 performance.

If you look at the first slide on the wall here, you’ll note that last year we were $18 billion global business. We are the largest manufacturer of appliances in the world. Our sales this year will be closer to $19 billion. If you look at our business geographically, our North America business, we have the number one share within North America. We’re about two times the size of our nearest competitor. Very similarly to Latin America, our largest business is in Brazil and we have the number one share there and again two times the size of our nearest competitor. In India, our market share is number two, number three and in Europe, Middle East and Africa we have the number four share.

So given our competitive position, the foundation that we built, global foundation we built over the year, we are very, very well poised for both future growth and margin expansion. We believe we have some of the strongest consumer brands in our industry. I must talk a little bit more about that in just a minute. Given our global footprints around manufacturing, procurement, technology, we do have a leading scale globally in the appliance industry. And given our current distribution network and future distribution network that we are developing, we think we are very well positioned for a period of good growth within the appliance industry and specifically for Whirlpool going forward.

If you think of growth, we really break it down in these four categories. One is geographical expansion. If you think of countries like China, India, Brazil, we’re still relatively low penetration appliances. We have ample opportunity to grow geographically. We continue to invest within product even during the downturn in some of the developed markets. In U.S. and Europe we continue to invest heavily in capital and engineering and our pipeline of product remains very, very strong as we enter into this year and into future years.

If you think of product lines, a great example of that is just within some of the emerging markets where China and India are primarily a washing machine and refrigeration market, we have the ability to grow our product lines within both emerging and developed markets. Channel share growth, a great example of that it’s been primarily within the U.S. is within the builder’s channel where we’ve gained share over the last few years and taking advantage of a rebound and housing within the U.S. And then we have that strategy for several years to grow beyond the core business, which I’ll take you through in just a second.

I’ll start with the brands and the products. We have $6 billion plus brands in our portfolio, you all recognize Whirlpool. Whirlpool is a global brand, Maytag primarily within North America, KitchenAid which is becoming more and more of a global business both in the major appliances and small domestic appliances. We also have two of the strongest brands within Brazil, Brastemp which is a top 5 consumer brand within Brazil and Consul, so we are able to really service the master premium in within Brazil. And we also have a global compressor business, the only company in the world with a global compressor business.

I’ll talk about geographical expansion, but penetration. This is a great chart that really shows penetration level of appliance, so you can see to the far right countries like India, which really have a little over 10% penetration and China which is about a little over 20%. I think 2.5 billion people population between these two countries and the ability to continue to grow within these markets. I’m going to talk a little bit later about an acquisition we recently announced was in China. They’ll be a step change for us. But countries within Latin America, Mexico, Middle East and Africa continue to provide us with ample opportunity to grow the business and continue to expand our margins.

I’m going to talk a little bit about our recently announced China acquisition. We announced back in August that we’re acquiring – we’ll be acquiring 51% stake in Hefei Sanyo. This is a very strong and growing presence within Brazil has a very large distribution network, primarily growth for them has been in the traditional channel. Whirlpool today, if you think of our business today is about $250 million. We have today about 3000 points of distribution. This acquisition from a distribution perspective will provide us 25,000 to 30,000 points of distribution in this traditional trade channel. It also comes with three world-class manufacturing facilities.

The company has a record of strong growth and margin expansion coming with a great team. We are right now in the regulatory approval process and we would expect to close this deal by the end of next year. But certainly this accelerates our growth within, as I showed you before, an area of the world that has – will have continued long-term opportunity from a penetration perspective, but also expanding product line and also provides a nice export platform for us.

The way we also look at our business, traditionally you probably would see and think of the Whirlpool as major appliances, which is the T-12 which is the top 12 appliances. We still continue to have opportunities of growth within the core appliance business in every area around the world. We also have what we call extended core business which is products or services that are dependent on or related to our core business, I mentioned the compressor business. We also have a consumable business if you think of filters or refrigerators and then expanding beyond the core of our business. The best example of that is the KitchenAid stand mixer business, which again is as mentioned becoming more and more of a global business and we’re increasing the product portfolio of that.

We also have our water businesses within India and Brazil and the fresh product business which is a consumable or laundry products. And lastly within that picture is Gladiator GarageWorks, which is really [indiscernible] appliances for the garage. These businesses represent about 22% of our revenue base today. They are growing much faster than our core business. They are growing at 10% to 15% rate at nice margins. You can see our core business from a long-term revenue growth perspective. We expect that to grow 4% to 6%. In general, in total, we expect growth within Whirlpool annually be in the 5% to 7% range to be except currency this year were right within that range to this year.

Another very important element of growth is within the U.S. and there is a couple of things that are happening with the U.S. but I’m sure a lot of you have heard about and talked about housing environment within U.S. in a normal environment for us. So you can see the chart here, the blue line on the left axis talks about – shows you new housing starts, which we believe on average should be around 1.5 million starts a year and the far right axis is existing home sales which is 5.2, 5.3. You can see by the chart, the green line that today where housing starts are about 950,000 starts a year, so we are far from what would be a normalized year. And why is that important for us for every new home equates to about four new appliances, and every existing home sale equates to about two new appliances. So we are really in the – I would say the first – the third inning of growth within housing and this is a big demand driver for us going forward.

During the downturn, we also gained share within this channel. We have over a 40% share within the builder’s channel. We’ve invested over time and developing a supply chain to be able to service, one home at a time. And it is a nice competitive advantage that we have. The other thing that’s happening in the industry, and this is a chart of the U.S. appliance industry, unit shipments. The thin line is really will be a normalized curve within the appliance industry going back to 1969.

As you could see in the periods of 2004 and 2005 and probably based on the blue line is really the peak of the industry. And why this is important is our appliances moreover last on average about ten years. So we’re beginning to anniversary really the replacement of the peak in the industry. In fact, if you were to draw a line between the peak of the industry to today, we’re about 25% below the peak. And if you were to say on average what the industry should be over that time period, we’re about 15% below today what would be a normal demand curve. So there is a lot of positive momentum within the U.S. from a volume perspective.

The other thing I would mention is during the downturn over the last several years, a couple of things happened. We took out a lot of capacity. We acquired Maytag in 2006. That volume, all that volume from Maytag is essentially in existing Whirlpool facilities now. So we’re able to really leverage this volume growth going forward. And it allows us to continue to grow but also expand our margins. So from a long-term perspective, from a growth perspective due to geographical expansion, product line extension, some of the extend and expand business as I talked about, we would expect long-term growth to be in the 5% to 7% range.

Margin expansion this year will be – will in the year over 7%. We set a goal back in 2010 to get to 8% by 2014. We are on the path to get to that 8% growth. We’re well within that path. We would expect the company to generate 10% to 15% earnings growth. This year our growth is about 40%. And then with the growth and margin expansion, cash generation we’d expect to be 4% to 5%, this year we’re around the 4% from a free cash flow perspective.

So switching 2013, what we’re seeing is continued demand trends within the U.S. especially. This will be the first year in a few years that we’ve actually seen demand growth within the U.S., so again largely driven by housing, and also replacement cycle and we’re also seeing return to more of the discretionary purchase. We have a very robust pipeline, the new product introductions and I don’t mean within U.S. only, I mean that globally. We are continuing to see this year combination of both growth and revenue expansion and margin expansion. Material costs are although high or stabilizing. And we’ve had some success although we’d some negative currency. We’ve been successful to offset that and grow our margins. And also in addition, we’re generating cash and investment capacity for the future.

Our financial guidance for the year, you can see the EPS – diluted EPS of $10.45 to $10.65, our ongoing business operations $9.90 to $10.10, the only difference between the two we’ve taken out tax credits that the company has received out of Brazil and also out of the U.S. Those are main differences that are driving that. And also we’ve announced a restructuring program back in 2011, restructuring expenses backed out of that also. And free cash flow, we would expect to be $6.90 to $7.10.

From a cash flow priority perspective, these are the things that we had set out at the beginning of the year, funding the business obviously through capital and engineering, and new product development. We’ve had some debt maturities that we termed out, pension contributions that we continue to make. We wouldn’t expect much of a change in our pension contributions from current levels that we have today. And then return to shareholders, we’ve increased our dividend this year.

We began repurchasing the stock. And as I mentioned before, we did announce the acquisition in China that we are in the process of closing on right now and we expect that to be closed by the end of next year following regulatory approval. So that is the overall kind of the story. From Whirlpool perspective, we hopefully give perspective of the company as how we structurally operate, our value creating opportunity as a company.

And with that I will open it up for any questions.

Question-and-Answer Session

Unidentified Analyst

Hi, there. Thanks a lot. Could you maybe just talk a little bit more about the China acquisition and specifically about distribution? What cities they are in? How far penetrated they are into the country? What types of store level export that you have there?

Larry M. Venturelli

Yes, I would say primarily – while whether this distribution in the Tier 1 and Tier 2 cities, the distribution network for the traditional trade is about 25,000 points of distribution. So what you’re seeing is coastal around the coast but also inland in some of the lower tier cities. To give you an example, that 25,000 to 30,000 points of distribution compares to a market leader that has about 50,000 points of distribution. So within this acquisition, we continue to gain distribution, but also the acquisition, the company itself primarily up until the fourth quarter of last year, which primarily is washing machines and in the fourth quarter introduced refrigeration.

So what we’re seeing from what they’re saying is very strong growth of 40% this year and margins continuing to be in the 8% to 9% range. But a lot of opportunity within the traditional channel not only for current, for washing machine or refrigeration, but if you think of expanding your product line to other appliances also creates a lot of great opportunity from a value creation perspective. Other questions.

Kristen Rossi – Morgan Stanley & Co. LLC

Could you please expand a little bit more about the conditions in Brazil and in Europe, U.S. is turning, but are those markets just stagnant right now?

Larry M. Venturelli

Let me start with Brazil and then I’ll move into Europe. For us we have – in Brazil we have about 45% share where our growth there year-to-date is around 6.5%, 7%. Competitive environment there is we are the number one share, Electrolux is also has a large presence within Brazil. Mabe was the number three competitor in there and they’ve recently filed for bankruptcy. So the competitive environment for us given our brand strength and I should mention the Brastemp and Consul brand. Brastemp brand is a premium brand within Brazil has a very, very high preference so as the Consul brand which shows more the mass elements. But what we’re seeing in Brazil is very, very low unemployment, which is a great sign.

We’re also seeing in emerging middle class, historically where you’ve seen growth within the major cities. Really where you’re seeing a lot of the growth now is outside the major cities in North, Northeast and England. Our credit availability is still very good within Brazil. By our accounts, what some of the things we’ve read and seen and analyzed it, the consumer goods market in Brazil between 2010 and 2020 will double. You saw from the chart from a penetration perspective still relatively low penetration within Brazil. So we see Brazil as a – continue to see Brazil in a very bullish life.

Our growth, we will continue to grow in Brazil, but we have opportunities outside of Brazil where we have about a third of this year that we have within Brazil, so outside of the countries within Brazil or within Latin America, but also in the Caribbean. So from our perspective, the Brazil – the overall Brazilian economic factors remain very strong and the competitive environment remains I think for us given our brand strength a really favorable environment.

Europe, Europe remains a tough market. I think most to say we’re probably I would say at the bottom. We not expect to see a downturn within Europe. And Europe still remains – our business primarily Western Europe still remains highly fragmented. So I think you’ll see several things over time. I think you’ll see probably more restructuring in Europe. I think continued improvement in productivity to improve margins. Nobody is really making money in Europe today.

I think the other thing is within the European market, you’ll begin to see – you have to see more of a consolidation of the marketplace within – especially within Western Europe where we have a higher preference. So I think there is a – I think I would say that we would see Europe solely improving over time. But I wouldn’t say there would – I would say we’ve seen the – we’ve seen that it has a downside of it. I think we’re probably flattened out and what we should see improvement going forward.

Unidentified Analyst

Could you just discuss the major competitors and how that landscape has changed over the last decade? Thanks.

Larry M. Venturelli

Yes, within the U.S. market or worldwide? I think what you’ve seen over – from a worldwide perspective, continued consolidation within the industry. I think if you were to look at Whirlpool, Electrolux, GE, Haier, Samsung, LG, if you think more of a global nature of the business, within the U.S. market itself, fairly consolidated, I mean, the major domestic players Whirlpool, GE, Electrolux probably have about 85% of the share today. I would say Korean, Chinese 15% plus share. Within Latin America, what you’ve seen, primarily Whirlpool with the Brastemp, Consul Brand, Electrolux, Mabe making up the majority of the share within Brazil. Outside of Brazil, you have a kind of a mixture. You have a mixture of what I would say U.S. based Asian based players.

And in India, what you’ve seen is we’ve been in India for several years. Samsung and LG have been for several years and now what you’re seeing with India probably more of the Japanese and Chinese. So the competitive landscape continues to be I would say strong competition, but what you’re seeing and what time as we – as well I’d say a few of the players becoming more global and especially in countries like China where you’ve seen consolidation within China you’ll probably see more and within Western Europe obviously more consolidation over time.

Unidentified Analyst

If you look at that chart with number of appliances sold, if you think about that by category, what – which category has had the bigger declines in the peak?

Larry M. Venturelli

I’m sorry I missed your question.

Unidentified Analyst

If I look at this chart [indiscernible] you had a number of appliances sold

Larry M. Venturelli

The number of appliances sold?

Unidentified Analyst

Yes, as the chart showing for the U.S. market…

Larry M. Venturelli

For the U.S market?

Unidentified Analyst

Yes.

Larry M. Venturelli

Yes, so in the U.S. market probably $36 million…

Unidentified Analyst

$36 million…

Larry M. Venturelli

Yes.

Unidentified Analyst

If I look at that by category, what – which category has had the bigger declines in the peak? And if the U.S. housing market recovers, which one would you expect to start growing the fast earlier?

Larry M. Venturelli

Well, I mean it’s a good question. I mean you’re talking from peak to trough, the chart that shows the industry decline. In the U.S., which is you’re seeing is refrigeration and laundry products making up larger percentage of the market followed by Rangers dishwashers. So I would say proportionately you saw a proportionately a similar decline in each is just the market is more heavily weighted to laundry and refrigeration in the U.S. So there is no one specific product that you saw was proportionally hurt more to the entire industry in all of the appliances within the industry, pretty much fell by about the same amount on a percentage wise.

And then if you think of a replacement of those appliances on average or around 10 years, you’ll probably have a little bit higher aging in ranges than you would within our laundry products. But in general, I would say the ages of appliances of around 10 years, replacement cycle.

Unidentified Analyst

Okay, yes, it’s following up on that. Okay, how has that ASVs changed since the peak that supposed just volume here on ASVs.

Larry M. Venturelli

The average sales are…

Unidentified Analyst

Yes.

Larry M. Venturelli

I would say what you saw in the U.S. through 2011 probably would be I would say somewhat of a decline and what you’ve seen since 2011 is an increase in ASVs coming out of the recessionary period. So 2011, 2012 and certainly in 2013 apples-to-apples, you would see an increase.

Unidentified Analyst

We mentioned that your views were in the third inning or so of appliance demand recovery in the U.S. Could you just talk about the trajectory of your long-term growth there and how you guys are thinking about that, anything you maybe saw with the spike in rates this summer and how that changes anything?

Larry M. Venturelli

The question is on growth trajectory in the U.S. We’ll provide some formal guidance when we report our earnings in January when we give guidance for next year. But in general, within the U.S., the market will grow by 9% this year and the average market and normalized market in the U.S. are probably around 2% to 3%. Given the dynamics, that are accruing within both housing and replacement cycle, we would expect an above average year going forward, but we’ll provide specific guidance going in our January call, that’s what we see next year to be. But I would say what you are seeing is you should have a couple of very good – some very good year within the U.S. given kind of the demographics and also where we are at the replacement cycle and where housing is, we are still very even though 950,000 start sounds like a lot, we are still well below the $1.5 million that would be more normalized.

Unidentified Analyst

Could you also talk about your cost structure relative to the last peak of the cycle and where it stands versus major competitors?

Larry M. Venturelli

It’s a good question. A couple of things if you go back and kind of what’s happened over the last several years is a few things. One is we’ve taken a lot of capacity, primarily within the U.S. over the last several years. So two things have happened, we’ve taken out capacity, but we also acquired Maytag and literarily took all that capacity and all that volume and all but for one facility, put it into existing Whirlpool facilities. The other thing is our mix of business is different on the top line if you think of, back a decade ago we had a higher percentage of our business that was OEM and now we are much more towards the branded side of the business.

And thirdly, as I mentioned this expand and extend business was very small that time and now we’ve seen a lot of that growth within that business. So our footprint, the mix of our business is much different and when we took capacity out, we were very conscious to make sure that when the industry volume came back that we would be able to absorb that volume with the existing facilities. So it’s a different cost structure and different mix of business then if you are looking at prior cycles.

Okay, I don’t think there are any other questions, so I very much appreciate your interest. Please let us know if you have any other questions, but thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Whirlpool's Management Presents at Morgan Stanley Global Consumer and Retail Conference (Transcript)
This Transcript
All Transcripts