Whirlpool CEO on navigating ‘massive’ inflation challenges, labor shortage

Whirlpool CEO Marc Bitzer joins Yahoo Finance to discuss its plans to combat inflationary pressures, how they are taking the necessary steps to deal with supply chain disruptions and the labor shortage impact.

Video Transcript

BRIAN SOZZI: It was interesting third quarter out of appliance king Whirlpool. The company's profits beat analyst estimates on the back of continued strong demand in North America. Whirlpool lifted its full year earnings outlook by $0.25 and jacked up its longer term sales growth and operating margin targets. But the stock is under a little pressure here as third quarter sales were held back by the industry's supply chain bottlenecks.

Let's dissect all of this with Whirlpool chairman and CEO Marc Bitzer. Marc, always nice to see you. I know you're fresh off your earnings call. And my takeaway from the call was this, I still don't think people understand how maniacal Whirlpool is about cost management and/or as you call it, cost out. And you have the ability to overcome high periods of inflation. What are you doing right now to overcome that inflationary hit, which is still looking like a billion dollars this year?

MARC BITZER: Yeah, so, Brian, first of all, thanks for having me on the show. Let me first zoom out on inflation. We guided it toward significant inflation already with our Q1 earnings call. We pretty much kept it constant. So which, knock on wood, we basically read the signs of the correct way. Now it is significant inflation but at least we were not surprised.

And as such, in Q3, we actually dealt with 6 and 1/2 points of inflation in our P&L. And yet, the bottom line was not impacted at all. We delivered 11.1% operating margin. We feel really, really good at how we've been able to deal and mitigate inflation, not only in this quarter but in all the previous quarters.

Now, obviously, how you deal with that is a combination of you still double down on all the other cost levers you have, which of course in an inflationary environment is tough. And on top of that, we have significant pricing progress. We started that journey already last year, which is a combination of less promotional pressure, less price increases throughout the world.

So I would say the combination of strong pricing, coupled with aggressive cost takeout allowed us to completely mitigate this massive inflation challenges.

BRIAN CHEUNG: Hey, it's Brian Cheung here. Now Marc, when we talk about the macro picture, the big story has been kind of this T word. The idea of transitory that some of these supply chain issues are just something we're dealing with right now and they all bait at some point.

But you're a company that's trying to offer guidance to your analysts and to your investors. I understand James Peters was saying that your guidance for the full year you do believe to be on the low end. But how difficult is it to forecast where you see things going and when you'll expect to be able to meet the orders that you have that's building up on your backlog?

MARC BITZER: Yeah, so Brian, given that you mentioned the T word, I guess it shows people have different definition of a transitory. I'm not quite sure how long you would define transitory these days. I mean, I think the real question is, do we see an expected cyclical inflation or does it turn into a structural inflation?

I don't think it's the latter one, personally. But I think with inflation environment, we will see around us for some time. It's not going to go away overnight and we're prepared to deal with that. Now to your other question about how difficult is to give guidance. Yeah, it's always challenging. I guess company of our size wouldn't get a waiver for kind of guidance margin of error, as you mentioned the earlier example earlier on the show.

It's, of course, challenging. But I would say, even this year, we've been able to predict the key drivers fairly well. Now the elements which are always a little bit unpredictable is the supply chain constraints. Really makes it hard to predict from from, frankly, month to month, in terms of how much can you actually dial up a production.

And I think that's probably the biggest uncertainty which we still have. We made progress in Q3, frankly not as much as I wanted. But we made progress in kind of starting to increase more and more and in resolving some of these order backlogs.

JULIE HYMAN: And Marc, it's Julie here. What exactly needs to happen? Where are the worst bottlenecks or worst points of tension and what are you going to be looking for, and what should we as consumers and as people who watch the finance and business world be looking for as signs that things are loosening up a little bit?

MARC BITZER: Julie, first of all, we got to recognize there is not a single source issue which explains a lot of supply constraints. if I break it down in 3 major pieces, there's structural labor shortage. It is fairly widespread and particularly in North America. I don't think necessarily it's the reflection of wages. We actually increased our wage at double digits last 12 months. So we certainly dealt with that part of the equation. But you have a labor shortage. That's one.

Two, you still have significant component issues and challenges with suppliers who basically face the same labor shortages in other elements. Obviously, the most prominent one is the chip supply, but it's not the only one.

And the third element is transportation bottlenecks both on the big ocean freight inbound, which affect, of course, a lot of parts but even domestically. It just takes you a whole lot longer to get your products from Clyde, Ohio to California. So put that all together. These are fundamentally still the drivers.

What I still would like to highlight, we produced in Q3 more than we did last year Q3 and more than Q3 in '19. So we're dialing up production, which leads me to a positive things. Ultimately, I'm mad about people loose sight, and they may talk about all the shortages and the sky is falling or whatever.

Why do we have shortages or availability issues? It's Just because the demand is strong. The demand outpaces our ability to increase production. So is it painful because we don't want to have consumers waiting? Yes. And could we have invoiced more? Yes. But structurally, it's a positive sign and ridge is a positive sign but demand is very, very strong.

JULIE HYMAN: Marc, I also know that you all have been raising prices as a result of all of this. How much more price do you expect to take, and even though demand is robust, are you seeing any kind of demand destruction or pushback on price increases?

MARC BITZER: Yeah, so Julie, so far, we haven't seen it, frankly. As you know, I can't make a comment on a go forward pricing. But I think, in the past, the consumer reaction on this one was close to zero. So there's what we all refer to as category price elasticity. How sensitive is consumer demand to the overall category pricing? It's very, very limited.

Typically, what you see, merely, is more of a promotional pressure of the market, which explains a lot of the moves. But, no, we did not see a slowdown of the demand, which leads me to the second point and I think you implied in this one is-- some people, not you guys, but some people were referring to demand pull forward. I would exactly argue the opposite.

What we've seen through COVID is a significantly increased usage of appliances. And to give you some real numbers, we pretty much have a largest installed base of connected appliances out there, several hundred thousand. So we can exactly measure appliance usage, pre-COVID, post-COVID on freestanding ranges and ovens. We see more than 2X the usage. Washers 27% up.

And we don't expect that to radically come down because in a hybrid work environment, people will spend more days at home. So that is the fundamental driver where we do expect replacement demand, in particular, because of higher wear and tear to be very strong going forward. And that gives us a lot of confidence.

BRIAN SOZZI: yeah, Marc, you're on the mark. Really, you're on the mark here that you've seen a tremendous spike in demand this year and that will likely lead to, really, a higher replacement cycle. Can you find the workers in the US to build these products? I mean, are you having worker shortages at all?

MARC BITZER: Yeah, so Brian, I mean, you raise an issue, which is we feel it. And frankly, first of all, to set the context, we are a US producer. More than 80% of what we sell in the US is produced in the US. That's higher than anybody else because we believe in US production, with more than 20,000 people just in the factories.

So of course, immediately after COVID, the kind of people coming to work is just above the absenteeism increase, which for all the understandable reasons, people were concerned, et cetera. It slowly kept coming back. But frankly, we carried several hundred job openings from Q1 to Q2 and Q3. It's slowly getting better.

As I mentioned before, we significantly adjusted the wages more than at any time before. It's slowly getting better. But worker shortages, or call it workforce participation, starts becoming concern, particularly for a big producer like we are.

BRIAN SOZZI: It has been a heck of 18 months. Whirlpool Chairman and CEO Marc Bitzer, always good to see you. Looking forward to your Investor Day. Have a great weekend.

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