Whirlpool fights input costs with price increases and productivity gains

Whirlpool (WHR) reported fourth quarter and full-year earnings February 1, 2012. The company reported on its struggles with higher material costs, and its successful implementation of price increases to help offset these costs and improve margins:

“…we did have higher material and oil-related cost which came in at approximately $450 million and that significantly impacted our results last year…we still see this year 2012 estimated raw material inflation to be a headwind, and we’re forecasting those increases to be between $300 million and $350 million, but we expect to more than offset these costs with our other normal strong productivity activities.

All previously announced price increases are fully implemented, including the most recent 6% to 7% price increase effective January 1, 2012. As you know, these increases are necessary to mitigate higher material costs. As a result of a cost base price increases, our margins have substantially improved both sequentially and year-over-year. And we are well-positioned to expand margins in 2012…

…We are focused on executing the margin expansion actions already in place. We expect to benefit from: one, our previously announced price increases in every region of the world…

…we’re planning for a flat to a slight improvement in demand. We will have raw material inflation in the range we talked about, but we expect to fully mitigate those increases through our productivity.” (Seeking Alpha transcripts)

These actions both remind us of the real inflationary pressures facing industrial/durable goods companies, AND the pricing power that some of these companies have, particularly in the U.S. Whirlpool’s price increases contributed much more to margins in North America than they did in the rest of the world as the company took a “strong stance” on pricing in North America. Prices were increased in Europe in the third quarter of last year.

Management’s discussion about the difference in price elasticities in the U.S. versus the rest of the world was particularly illuminating. Management claimed that “…the [U.S.] consumer who’s in the market ever 10 years doesn’t really have a preconceived notion about what that value feature content is” whereas in consumers in emerging markets are making first-time purchases with definitive affordability thresholds. Thus, although Whirlpool saw the need to raise prices as much in these markets as in North America, the resulting elasticities prevented them from raising prices as much as in North America.

Whirlpool does not discuss future pricing, but I am expecting more price increases if the economy continues to improve, especially in the U.S.

Whirlpool's stock has surged following 4Q earnings, but it remains well off its post-recession peak in 2010