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Alan Hsieh

Davy Bui

WHR AT A GLANCE

P/E ► 19.2 AVG EV/EBITDA ► 10.5 AVG ROA ► 3.5% AVG ROE ► 7.5% AVG Debt to Equity ► 3.14 AVG Current Ratio ► 1.20 LOW Interest Coverage Ratio ► 1.40 AVG

 

 

 

 

 

 

Whirlpool is a manufacturer and marketer of major home appliances. Its products are found in the kitchen and the laundry room and carry 13 different brand names, such as Whirlpool and KitchenAid. Whirlpool sells its products to retailers, distributors and directly to builders and installers.

Whirlpool acquired its domestic rival Maytag Corporation in FY 2006, creating the largest household appliance manufacturer in the world.^[1] However, as growth of the housing market slowed and contracted in 2007, so did Whirlpool's domestic revenue growth. This was exacerbated by rising material costs that eroded the company's margins.

However, the company's revenues are buoyed by internationally diverse operations. Whirlpool Corp. (WHR) is the world’s largest appliance maker with operations all over the world. Specifically, they generate 57% of sales in North America, 20% sales in Europe, 20% sales in Latin America and 3% sales in Asia. While a little weak in the Far East, they’ve got a pretty good view of the current economic dynamics playing out across the globe.^[2]

Business Overview

Organization

Whirlpool organizes its operations by region, each business unit focused on one of North America, Latin America, Europe, and Asia. Whirlpool has 44 manufacturing centers^[3], 31 of which are outside the United States. Whirlpool analyzes its cost structure and demand environment to "efficiently address the current demand environment that we are seeing going forward," and closed 3 North American (US and Mexico) plants in FY 2007.^[4]

Whirlpool has historically divested non-core businesses in the last 3 years to focus on "core" segments, following the acquisition of Maytag, selling the Amana microwave and vending machines businesses in 2006, and the Hoover vacuum business in 2007.^[5]

Products

As indicated above, Whirlpool's main products are laundry appliances, refrigerators/freezers, cooking appliances, dishwashers, mixers and other small household appliances. WHR employs more than 130 industrial designers in four design centers and 3,500 engineers in 26 research centers. The design of Whirlpool's highest end products focuses around "6th Sense" technology, which adapts appliances to their surroundings. For example, "6 Sense" refrigerators adjust conditions to best keep food fresh, and driers adjust their timing and heat depending on the load size.^[6]

Financial Overview

Geographic Breakout

Whirlpool reports business units by geography as it considers each to be nearly a free standing business, with its respective manufacturing and distribution arms. Brands are localized by region as well.

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^[8]

Top line revenues provide a cursory overview of growth opportunities for a country. North American growth has slowed dramatically in 2007, while Asian and Latin American growth have accelerated noticeably. The only region which saw margin erosion was North America. This table doesn’t tell the whole story, however, as Europe also saw eroding sales once you exclude currency effects so it’s probable that Europe’s margins are being held up mainly by foreign-exchange.

In understanding what caused the topline growth seen above, the underlying unit volume gives a clearer picture of how much growth is caused by inflation of price or adjusting of product mix rather than volume growth. In this case, unit movement in North America actually contracted between 2006 and 2007, a source of concern for the future. Latin America and Asia still demonstrate double-digit or near-double-digit growth , with Europe in between.

Implied unit sell prices are driven out by proxy between these numbers, dividing top-line revenues by unit volume corrosponding to each region. They give an idea of the price-inflation that each region is experiencing. Morever, the value provided by the European and Asian regions are lower than those provided by the two American regions, likely highlighting different margin structures as well as a different product mix. ^[9]

North America

North American revenue growth has slowed dramatically in 2007 after 2006, from 34% growth to less than 1% growth. This is caused by an underlying decrease of 6% in units sold, leading to price inflation on each of the units. The Cost of Goods Sold for the NA segment is highest, and is trending higher, as can be seen in the Gross Margin figure, decreasing GM from 14.8% to 12.5% from 2005 to 2007. The decrease in gross profitability is mirrored by a decrease in operating profitability, with overhead and administrative (SG&A) cost components also decreasing margins. This was caused by increased raw material costs.^[10]

International Operations

International revenue has increased dramatically, although its contribution is still less than that of all North American revenues (40%Int. compared to 60% NA in FY 2007). Growth rates for each of the regions have exceeded double digit figures in FY 2007 and present significant growth opportunities for Whirlpool. The cost structures in each of the regions varies, with European gross margins trending upwards from 15.8% to 16.6% from 2005 to 2007, with an accompanying increase in operational profitability. Margins in Asia appear to have been a concern, with negative operating margin between 2005 and 2007, although it is trending into positives.

^[11]

Product Analysis

Underlying Units by Product are not available; however, the revenues earned by each type of product do show that growth is down for all unit types from the double digits in 2006 to single digit growth in 2007. This is caused by the slowdown in underlying units sold in the North American business region, which accounts for 60% of the company's total revenues. The best performing segment is "Other" which accounts for segments that account for less than 10% contribution to total revenues in aggregate.^[12] Getting over general slowdown in product movement will not be easy to overcome.

Trends/Forces

International growth and higher margins abroad present opportunities for WHR

WHR has sales in over 170 countries worldwide. WHR has focused on adding depth to its international presence, growing sales to Latin America and Asia, which grew 27.7% and 21.9% respectively in 2007.^[13] Management's success so far in growing international revenues lends confidence in the face of WHR's decreasing sales to the US market, which is characterized by declining appliance industry demand and lower original equipment manufacturer sales.

Brand equity will aid in revenue growth and margin expansion

Whirlpool is a top brand in the appliance market across all of its markets, in terms of unit sales and average sales price per unit. There is little cannibalization between the brands in Whirlpool's portfolio, and Whirlpool's higher and lower end brands serve distinct markets, such as KitchenAid vs. Ropper. Whirlpool's future growth is likely to target higher-end and higher margin products, moving into markets previously the realm of appliance manufacturers such as Sub-Zero.^[14]

U.S. Housing Market related woes will slow down domestic growth

Whirlpool's products are exposed to the up-and-down nature of the housing market. Current concern over a drop in house construction and sales threatens sales through the "new install" channel to new housing installers, which constitutes 15% of WHR's sales.^[15] Moreover, in a "virtuous cycle" where U.S. Housing Market prices are rising, individuals can borrow against home equity in order to finance home appliance purchases. This is no longer as fiscally responsible in a declining market, as purchases to improve home value against home equity are swamped by the decrease in equity. This partially explains WHR's severe North American unit volume decrease and revenue slowdown in 2007 as the U.S. Housing market soured.

Raw Material Costs and Inflation will continue to hurt WHR's margins unless they aggressively pass-through costs

In 2007, WHR had approximately $600 million in higher material and oil-related costs. For the 3.5 years prior, WHR experienced unprecedented cost inflation, which increased input costs from 2004 by nearly $2 billion.^[16] The primary inputs into WHR's business are steel, oil and resin, and other base metals.^[17] Whirlpool believes that it can begin passing through costs to customers, as its Gross profit margin (see above) is significantly lower than in 2003, but it unclear how the competition and customers will respond. If competitors are willing to continue operating at a lower margin, and customers value prices more than Whirlpool's features, the company will lose share.^[18]

The company is just getting slaughtered on material costs, which make up about 65% of their operating expense. The main components of material costs, in order of importance, are steel, oil & related products (plastics, resins, etc.), logistics (transport costs) and base metals.

Competitors

• General Electric Company (GE)
• Electrolux
• Kenmore
• Haier
• Samsung
• LG Electronics
• Siemens AG (SI)

There is price pressure from all these competitors for a somewhat commoditized product, so winners in this market have the best cost structure. Points of differentiation largely lie in technology and marketing attempts by the companies. Whirlpool has segmented its brands into higher, midrange, and lower-market brands that have cost structures to match. Whirlpool's chief future growth opportunities lie in Latin America, which does not have a compelling domestic alternative, and Asia, which is characterized by stiff competition with Korean, Japanese, and Chinese manufacturers. Its American operations are also under attack by threats of import, and its European options have strong local competition.

On an overall scale, as can be seen in the Market Share section, Whirlpool's revenues have a larger Revenue share than unit volume share, implying that Whirlpool's products contribute more to global market revenues than to unit volume, implying higher sell prices. This places Whirlpool's brand in the higher-end of the market on an overall basis.

Market Share

The two primary metrics for market share in household appliances are Unit Volume and Revenues. For the global market, summary of market size from 2002-2006 is as follows:

^[19]

From this data, Whirlpool's market share can be inferred using its own data.

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References

1. ↑ International Herald Tribune "Maytag and Whirlpool close deal" August 23, 2005
2. ↑ Whirlpool FY 2007 10-K "Consolidated Net Sales" F-4
3. ↑ Whirlpool FY 2007 10-K "Properties" pg 10
4. ↑ Seeking Alpha. Whirlpool FY2007 Earnings Call Transcript
5. ↑ Whirlpool FY 2008 10-K "DISCONTINUED OPERATIONS" F-26
6. ↑ Datamonitor Company Report. "Whirlpool" June 28, 2007
7. ↑ Whirlpool FY 2007 10-K "Consolidated Net Sales" F-4
8. ↑ Whirlpool FY 2007 10-K "Consolidated Net Sales" F-4
9. ↑ Whirlpool FY 2007 10-K "Consolidated Net Sales" F-4
10. ↑ Whirlpool FY 2007 10-K "Risk Factors" pg.7
11. ↑ Whirlpool FY 2007 10-K "Gross Margin, Selling, General, & Administrative" F-5, F-6
12. ↑ Whirlpool FY 2007 10-K "Products and Markets" pg.2
13. ↑ Whirlpool FY 2007 10-K "Results of Operations" F-4
14. ↑ Whirlpool FY 2007 10-K "Products and Markets" pg.2
15. ↑ MarketWatch "A Wrinkle in Whirlpool's growth story" Feb. 10, 2008
16. ↑ Whirlpool FY 2007 Earnings Call Transcript
17. ↑ Whirlpool FY 2007 Earnings Call Transcript
18. ↑ Whirlpool FY 2007 Earnings Call Transcript
19. ↑ Datamonitor Industry Reports. "Global - Household Appliances" July 15, 2007
20. ↑ Whirlpool FY 2007 10-K "Results of Operations" F-4