The Long and Short

Inflation cools full year guidance at Whirlpool

| April 29, 2022

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Whirlpool Corporation’s (WHR) first quarter, 2022 results beat expectations on both EPS and EBITDA. However,  price increases have not kept up with inflation, and higher prices for appliances are already causing consumer demand to wane, forcing the company to reduce its full year guidance. The company has initiated a strategic review of its EMEA business as it looks to transform its portfolio to focus on high growth/high margin businesses. WHR will likely refinance its upcoming debt maturity, though any secondary spread widening associated with a new issue should reverse course if a sale of the EMEA unit is announced later this year.

Despite the reduced guidance, WHR continues to maintain a strong balance sheet as it remains committed to its investment grade ratings with targeted gross leverage of 2.0x or below. Any potential sale or spin of the EMEA business would likely include some debt reduction to offset the loss of EBITDA associated with the unit. The review is not expected to be concluded until the third quarter.

Exhibit 1. WHR Updated 2022 Guidance

Source: WHR Earnings Presentation; APS

Updated Guidance Reflects Increased Inflationary Pressure

Even with higher pricing to help offset increased input costs, particularly surrounding steel and resin, WHR now only expects organic sales growth to be in the 2-3% range for the year.  While WHR expects price/mix to fully offset raw material inflation for the full year, supply chain constraints in North America and consumer sentiment in EMEA due to the war in Ukraine are expected to negatively impact top line growth.  Ongoing EBIT margin is now expected to be roughly 9.5%, 100 bp lower than previous guidance as there remains a lag effect with inflation pricing.  WHR will essentially absorb some increased inflation costs in the first half of 2022 and expects to catch-up in the second half of the year. In the first quarter, price/mix lagged raw material inflation by 100 bp.   As such, free cash flow/sales is also expected to be 100 bp below original guidance of 6.5%.  This translates to free cash flow of $1.25 billion for the full year, versus previous expectations of $1.5 billion.  The dividend is expected to consume roughly $400 million of free cash flow and we expect management to look to conduct roughly $1.0 billion of share repurchases, for a total of $1.4 billion in shareholder rewards this year.  WHR entered this year with its strongest cash balance in the company’s history ($3.0 billion), therefore we see no real credit risk by using $150 million of cash on hand to support shareholder rewards.

Exhibit 2. Overview of EMEA Business

Source: Company Presentation; APS

Strategic Review of EMEA Business

While WHR was witnessed some solid recovery in the EMEA business since the COVID lows, management felt that now was the best time to conduct a strategic assessment of the business, which they anticipate will conclude by the end of fiscal third quarter of 2022.  First quarter EMEA results were negatively impacted by currency translation, the war in Ukraine and an increased rate of inflation.  EMEA sales were down 7% in the quarter, with 6.5% relating to currency.  EMEA EBIT was a negative $27 million in the quarter, with decreased volumes due to the war in Ukraine accounting for $16 million of the decline, and the remaining $11 million decline reflecting raw material cost absorption.

Management noted that COVID pandemic and the war in Ukraine has led to a decoupling of global economies.   Rapid changes in the global macroeconomic environment has led to more importance being placed on regional and local scale versus global scale. Management sees a diminishing advantage of global scale due largely to supply chain restraints. More emphasis is likely to be placed on regional share positions when it comes to meeting customer needs. Additionally, management has raised the bar with respect to long-term growth goals which include: 5-6% revenue growth; 11-12% EBIT margins and FCF/sales in the 6-7% range.  While conducting a formal review of the EMEA business currently, management will be performing assessments of all their businesses against their new high growth value criteria.

Leverage Target Supports Ratings

WHR continues to target adjusted gross leverage of 2.0x or below, which we estimate was roughly 1.9x at the end of first quarter, 2022. S&P’s leverage threshold for a ratings downgrade is currently 3.5x.  Given that the EMEA business contributes minimally to the EBITDA line, we don’t see a huge impact to leverage should the business be spun or sold.  We would expect management to look to use any proceeds from a sale or spin of the unit primarily for reinvestment in the business, however they may look to pay down some debt, particularly if inflation continues at its rapid pace.  WHR has $300 million of debt maturing on 6/1/22 which they expect to refinance. Furthermore, management will look to extend the maturity of its $3.5 billion credit facility set to mature on 8/6/24.

Meredith Contente
meredith.contente@santander.us
1 (646) 776-7753

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