CFO Jim Peters discusses efforts to fight high inflation and supply-chain issues as the appliance maker works to optimize production
CFO Journal spoke to Jim Peters, the company’s chief financial officer, about managing price increases and projecting consumer demand. Edited excerpts follow.
WSJ: Whirlpool increased its annual material inflation expectations by roughly $600 million to $1.75 billion. How does the company plan to offset those costs?
Mr. Peters: Over the last two years, we’ve seen record inflation. What we’ve said for this year is we will get to a point where our price increases will offset almost all of the raw-material cost inflation and the additional cost inflation related to logistics costs and energy that we’re seeing. Last year, we were able to offset it all. this year, [inflation] accelerated so fast in the first quarter that our pricing went from at least being in line with the increases or slightly ahead of them to slightly behind. And so we’re just catching up with the execution of our price increases to offset that.
WSJ: Are you thinking about how you can more quickly execute on price increases?
Mr. Peters: We priced for what we saw as the Covid impacts and other things driving raw-material costs. We didn’t price for the war-induced cost increases that we saw coming out of the Russia-Ukraine situation, because that drove oil up, at least temporarily, [and] increased energy costs within EMEA [Europe, the Middle East and Africa] due to that. We are seeing some increases in some other raw-material costs. [For] events like that, it’s hard to forecast. There are certain things that changed in the first quarter that kept prices inflating at a faster rate than we thought they would.
WSJ: Does that mean you will be updating your forecasts more frequently?
Mr. Peters: I don’t know that that necessarily changes the frequency because we do it pretty frequently. Every month, we go through and do a full bottoms-up type of forecast. And so we do a forecast based on the volume we think we’re going to see and where the prices are. What you’re looking for is to say, “Do I think this is temporary or do I think this is going to stay around for a while? And if I’m going to take pricing, I want to make sure that I’m pricing at a point where I do think it’s going to land.” Because if you take pricing and it’s too low, it’s hard to execute another price increase. If you come out and you take too much, you may not be competitive.
WSJ: How long does it take the company to increase prices?
Mr. Peters: On average around the globe, it’s about a 60-day run-in period. So, you’ve got two months from when you make the decision to when that price increase actually starts showing up in your invoice and you’re going to the retailers and it shows up in the consumer’s purchase price.
WSJ: Sales fell 8.2% in the first quarter compared to last year. Are you concerned about waning consumer demand?
Mr. Peters: The big driver for us was not as much consumer demand as it was our supply-chain constraints. If we look at demand, it’s still healthy. If we could have shipped what we had orders for, we would have had a rather good quarter. We still have shortages of microchips in many places. We have some shortages on other components that we’re still behind on.
WSJ: How far is demand for your products driven by temporary conditions, such as work from home?
Mr. Peters: We prepared years and years ago to be able to handle fluctuations in demand, [for example] a slowdown in consumer demand [or] a recessionary period. What we look at with those types of things is, are we flexible within our overall fixed-cost base? Are we flexible enough that we can flex up and down based on the volume of the business over a period of time and still keep our margins in a healthy place? And I think we are.
WSJ: How are you managing the current supply-chain challenges?
Mr. Peters: I always say, if it takes 100 parts to produce a washing machine, [and] we have 99, we’re in trouble. So we’re always reevaluating: What do we have all the parts for and what can we produce and therefore get out the door, and how do we maximize and optimize that production? And that’s still the case today. We’re investing more in capacity right now.
Right now you’re looking at an environment where you still have constraints on microchips. And you’ve also got a shortage of ocean containers. So we’re still day to day, week to week, month to month, managing through all of that. We do believe in the second quarter we’ll produce more than the first quarter. And in the third quarter we’ll produce more than the second quarter. We also said that throughout the rest of 2022, this is going to be something that we and many other durables manufacturers are going to be dealing with. And it’s not going away as fast as all of us had hoped or thought.
WSJ: What’s the delay in filling orders right now?
Mr. Peters: So in normal times, you would only have about two weeks to fill. At the peak of all this, we were probably looking at about eight weeks’ worth of backlog of orders sitting within our system. Today, you go between four to six.
Write to Jennifer Williams-Alvarez at [email protected]
Credit: www.wsj.com /