Whirlpool bringing out ’recession playbook’ as demand slows, CFO says

Whirlpool Corporation CFO Jim Peters joins Yahoo Finance Live to discuss company earnings, recessionary risks, consumer demand, supply chain constraints, and the outlook for growth.

Video Transcript

- Whirlpool shares are getting a slight boost today despite the company posting mixed second quarter earnings, citing a $346 million hit on the back of its exit from Russia. Home appliance company slashed its full year profit outlook as record inflation and supply chain constraints weighs on sales. Joining us now to discuss is Whirlpool CFO Jim Peters.

Jim, always nice to see you. I was just on the earnings call and you guys talked-- said, we do assume a recessionary environment around us, and you went on to talk about how you've pulled out your recession playbook. I didn't hear this from you guys three months ago. How bad have things gone out there?

JIM PETERS: Well, here's what I would say, and all year long, we've started to see demand begin to come down a little bit, both in the US and in our international markets. I'd say what we saw in the second quarter is it just confirmed that it's probably more than a short term dip. And so that's why in the call today, Mark started talking about our recession playbook.

But really, what it is is if you look at our second quarter earnings, and we had, you know, 9% EBIT margins, which are well above what our pre-COVID levels were despite the fact that you have record inflation and you have the industry down right now year to date, and what we've been able to do is, one, manage our cost environment as best we can. And we talked about that means, as we go into the back half of the year, we'll take more cost cutting measures to offset some of that. Two, it's managing our factories and the capacity and making sure that we aren't building additional inventory.

But it also gives us an opportunity, if you think about during COVID with the supply chain constraints we dealt with and other manufacturers dealt with, we were paying premiums to try and get parts in and components in as fast as we can. And now you can begin to balance that out a little bit more and not spend as much on those premiums. So those are the kind of things that we were talking about.

But as I mentioned, we really-- what we saw we saw at the beginning of the year and knew we needed to start to prepare. But in the second quarter, it really confirmed for us that it's probably going to last throughout 2022. Now, from a long term demand perspective, though, we're very, very bullish, and we still do believe between replacement industry and the need for additional housing, especially in the US, the industry will do well, you know, on a long term perspective. But we're preparing in the short term to deal with the demand slowdown.

- Jim, when I hear the two words recession playbook, I think Whirlpool is now going to slow the pace on hiring, perhaps cut production. Is that right, or is that correct?

JIM PETERS: No, that would be correct. I mean, the first thing we did say is we are slowing down some of our hiring and just being very diligent in that process and saying, OK, what are the needs right now? What are the priorities we want to invest in? And then from a production perspective, as I mentioned before, it's really about managing your inventory levels or your supply to the demand that's in the market.

And if you look back historically, we've been relatively good at doing that. And so, you know, these are the things that we learned, whether it was in the financial crisis or in the early stages of the COVID pandemic or whatever, the things that we need to apply. And we're just applying those quickly to make sure as we head into any type of recessionary environment, we are well prepared and are set up well.

- , Jim it's Julie here. There's one analyst this morning over at RBC who said that the downgrade to the earnings per share forecast for the year is a, quote, tug on a needed Band-Aid rip. Now, to be fair, he has an underperform on the share.

So he's seeing it through that prism. But what is the risk that you guys are going to have to further downgrade your forecast, that you're going to-- you know, as we know, the situation has defied most of corporate America's expectations. We saw that from Walmart, right? So how are you managing your and investors' expectations?

JIM PETERS: Well, I think if you look at our business historically, the second half of the year is typically stronger than the first. With the guidance that we put out there right now, it would say that the second half is just slightly, very slightly, better than the first half. So part of what we've got is we've got two quarters under our belt, and we've got good visibility, obviously, into the third quarter and somewhat into the fourth quarter right now, which gives us more confidence in terms of the estimates that we're able to give.

And as I mentioned, we did adjust down this quarter just to reflect what we think the environment will do for the rest of the year in terms of demand. Additionally, you know, the thing that you have to take into account there, as I mentioned, on some of the actions we're taking as we look at a recessionary environment from a cost perspective, those weren't originally planned at the beginning of the year. And so while demand is weaker than we thought, we are beginning to take cost actions that we hadn't planned to take necessarily to help offset some of that.

And so, you know, I did read that report. Now I do think, you know, the other thing that was missing there was that our North America business still has extremely strong margins. And if you think about our company as a whole, that's a big part of it, and looking at the over 14% margins we saw within this quarter, I think you should expect to see similar margins throughout the remainder of the year, which will allow us to hit the guidance that we put out there.

- And what about in the rest of the world, where it's likely that a recession is already being incurred or experienced even as we speak, whether that be in Europe or whether that even be perhaps in some parts of the greater China region in Asia, as you kind of round out the net sales for that region too?

JIM PETERS: Yeah, well, I'd say we've been seeing it for a while in EMEA, and part of that is you have to take is the war happened in the Ukraine, and obviously there was a slowdown in our Russia business associated with that and then a broader European slowdown. We've been dealing with that already from early this year and preparing for that. And I think we have that factored in pretty well right now.

Asia, actually, because we don't have the same presence we had in China before, it's more based on our India business. Year over year, we are seeing growth because remember, they were in a lot of COVID lockdowns last year. And so while the growth is not to pre-pandemic levels, we still are seeing year over year growth there. I'd say that part of the world we've been dealing with the strongest decline for an extended period of time here has been Latin America, and the markets have been down significantly-- you know, double digits in both Brazil and Mexico for multiple quarters now.

And despite that, if you look at our Latin America margins, they've still held up really well. And some of that is we're able to take pricing to offset a lot of the commodity costs. But then they've managed their costs within their business and especially their fixed costs very well. So to your point, we've actually been seeing this for a while in areas outside the US and dealing with it pretty well as far as we're concerned.

- Jim, has inflation peaked in your business?

JIM PETERS: We said today that, listen, I think there are some areas where we saw it peak in Q2, and Q3 is where we expect the remainder of it to see the peak and the remainder. And if you think about some of our commodities such as steel, we're probably nearing and coming off or right around the peak there. Oil obviously went up and then it leveled off and stated at a little bit lower level, which drives some of our input costs around, you know, residence and other things.

And transportation costs also, you know, I think we saw a peak in Q2. But then we did see some opportunities where the costs had gone down slightly. So again, all those right now, what we're looking at is by the end of Q3, we do expect to be to probably a peak environment.

- Jim, good to see you. Thanks so much for being here walking us through your numbers. Jim Peters, Whirlpool corporation CFO. Thanks again.