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Executives

Greg Fritz - Director Investor Relations

Jeff Fettig - Chairman and CEO

Mike Todman - President of Whirlpool North America

Roy Templin - CFO

Analysts

David MacGregor - Longbow Research

Sam Darkatsh - Raymond James

Jeff Sprague - Citi Investment

Michael Rehaut - JPMorgan

Laura Champine - Morgan Keegan

Whirlpool Corporation (WHR) Q3 2008 Earnings Call October 28, 2008 10:00 AM ET

Operator

Please stand by, your teleconference is about to begin.

Good morning, and welcome to the Whirlpool Corporations third quarter 2008 earnings call. Today’s call is being recorded. For opening remarks and introductions I’d like to turn the call over to the Director of Investor Relations, Greg Fritz. Please go ahead sir.

Greg Fritz – Director of Investor Relations

Thank you Jill, and good morning. Welcome to the Whirlpool Corporation third quarter conference call. Joining me today are Jeff Fettig, our Chairman and CEO, Mike Todman, President of Whirlpool North America, and Roy Templin, our Chief Financial Officer. Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Whirlpool Corporation’s future expectations. Our actual results could differ materially from these statements due to the many factors discussed in our 10K and 10Q. During the call we will be making comments on free cash flow and non gap measure.

Listeners are directed to slide 34 for additional disclosers regarding this item.

Our remarks today track with a presentation available on the investors section of our website at WhirlpoolCorp.com. With that, let me turn the call over to Jeff.

Jeff Fettig, Chairman and CEO

Well, good morning everyone and thank you for joining us today. Earlier this morning we've released our third quarter results, and now I'd like to provide you with some perspective on the quarter, and the actions that we're taking to address the changes that we see in this economic environment. Third quarter net sales increased 1% up to $4.9 billion, then earnings were $163 million, down 7% from last year. EPS was $2 a share verses $2.20 per share. Weaker demand, continued high material prices, significant currency movements, and additional restructuring plans have caused us to lower our four-year earnings gains from the previous $7 to $7.50, to $5.75 to $6 per share, and $500 to $550 in pre cash flow, which is 0 to 50 in pre cash flow.

I'd like for you to turn to slide four, where I would like to summarize the quarter. Starting with the first, the very challenging and volatile economic environment, which resulted in the decline in industry demand during the quarter, as the global credit crisis intensified. General economic indicators became decidedly more negative during the quarter. As you know, declining home values and rising unemployment have continued to impact consumer sentiment, and we saw consumer confidence levels drop to the lowest levels that we've seen in decades. Secondly, we saw a significant drop in demand in both North America and Europe as the third quarter progressed. We do expect negative demand to persist in these regions through the middle of 2009. The third area we focused on, that we continue to see, high material and oil-related cost.

Although we’ve seen a recent reduction in some raw material price trends, they remain at elevated levels and continue to have a significant negative impact on our results, despite the successful implementation of cost-based price increases, and our ongoing productivity activities. Lastly we’ve also seen very significant volatility in currency exchange rates, which impacted our business.

On slide five I’ve outlined our business priorities and how we’re addressing this environment. First of all, we’re significantly reducing our cost structure to meet these demand levels. We’re taking immediate action to align our cost structure with expected future industry demand levels. And I’ll provide you with additional details on how we’re doing this in a moment. Secondly, one of our key priorities continues to be our implementation of cost-based price increases in all major regions around the world. We must continue to pass on some of our costs to the market to enable us to overcome continuing high material costs. Third, we will continue to provide outstanding consumer relevant innovation to the market.

With our focus on new, global product launches, we will continue to offer the most innovative, new products to consumers in every region of the world. And finally, we’ll manage all of our aspects of our business to enhance our already strong liquidity position. We’re very focused on aggressively managing the capital expenditures and working capital, especially inventories. We have suspended our current Sharer Repurchase Program to ensure that we are maximizing our liquidity and funding our top priority capital investment items. Roy Templin will talk about this in more detail in a moment.

We then turn to slide six; as you may recall, earlier this year we announced the closure of four manufacturing facilities in North America, and the elimination of European production. These actions are beginning to deliver strong operating efficiencies from European production. These productions are going to deliver strong operating efficiencies and will structurally remove costs from our business. However, we determined additional actions were needed to further adjust our business to what we now anticipate for the next one to two years.

Earlier this morning we announced the closure of our Jackson, Tennessee facility, as well as a global reduction in hourly, salary, and contractor positions. Production from our Jacksonville facility will be transferred to our Finley, Ohio operations. These actions will result in the reduction of approximately 5,000 positions by the end of 2009. Reductions include reductions that have already been announced through plant closures, along with new reductions taking place now and through the end of next year. The decision to eliminate jobs and close facilities is very difficult. They are necessary to ensure our cost effective business structure. We are proactively taking the necessary steps now to adjust our cost structure and production capacity to lower expected demand levels.

On slide seven you’ll see that we expect our actions will result in the 2008 restructuring charge in total of $170 million, which is $70 million higher than our previous forecast. These actions will produce savings of approximately $275 million on an annualized basis. And again, these actions will be completed between now and the end of 2009. On slide eight we announce some of the cost-based price actions that have been announced. These actions are in addition to the previously announced actions we shared with you during our second quarter call. In North America we have announced and are now implementing an 8 to 10% price increase beginning in January. In Europe, we’re taking a 5 to 7% price increase beginning November through January, and finally in Latin America we’re increasing prices

And finally, in Latin America we’re increasing prices 4 to 5% across the region. These actions are required to partially offset the record level cost inflation that we’ve seen over the last several years. And although some commodities have dropped significantly over the last few weeks, we still have cost levels at historical highs which warrant these additional price increases. Before I turn the call over to Mike I want to note that given the volatility in today’s global economic environment, we will not be providing any 2009 forecasts today. We will provide guidance for 2009 in late January, early February per our normal update cycle. But as such we will not address any specifics regarding our 2009 outlook at this time. So now I’d like to turn the call over to Mike Todman, to give you our North American performance.

Mike Todman - President of Whirlpool North America

Thanks, Jeff, and good morning everyone. Let me start by giving my perspective on North America’s performance in the third quarter. As shown on slide 10, our net sales declined 7% during the quarter to $2.7 billion, with US industry demand for appliances declining approximately 11%. Our North America unit volumes declined approximately 11% during the quarter. On a year over year basis, we did experience unit volume decline, and that we’re below the overall industry decline, while our branded business outpaced overall industry demand levels. Our operating profit declined to $74 million in the third quarter. This decline is mainly attributable to significantly higher material- and oil-related costs and lower industry demands. Our material- and oil-based costs posted the most notable increases in our metal-based components and in diesel fuel costs. These factors were partially offset by favorable price mix and ongoing productivity initiatives.

On slide 11, you’ll see an update on the status of the key indicators behind our 2008 US industry outlook. Considering the current outlook for these components, as well as sharply lower consumer confidence, we are reducing our outlook for the US industry demand. We now expect US industry demand to be down 10% from the 6 to 7% previously expected. I would like to take a moment to discuss the major drivers of demand as we see them.

First, the trend in new home completions continued to weaken during the quarter. We are now expecting new home completions to decline approximately30% for 2008. Existing home sales continued to trend toward a 13% decline for 2008, as the monthly seasonally adjusted rate as remained near 5 million since the beginning of the year. The discretionary component of demand continued to weaken from even previously low levels as the global credit crisis has intensified, and asset values have continued to erode in the housing and equity markets. In addition, unemployment rates have continued to trend upward, with many forecasters raising the peak unemployment rate expected in this economic downturn.

Finally, we have started to see some consumers delaying replacement purchases for appliances that are beyond repair. While we expect to continue to see some of this in the near term, we believe consumers will ultimately replace these items, for which they are delaying purchases today as we have seen historically. Many of our products are considered basic necessities by consumers, and any purchases that can be delayed ultimately will need to be replaced. As Jeff noted in his opening remarks, all of these factors will likely prolong a negative demand environment, at least through the middle of 2009 in the United States. The issues in the global financial markets are also affecting industry demand in Canada and Mexico.

On slide 12 I would like to provide some historical perspective on this tough economic environment. This is now the ninth consecutive quarter where demand has declined. As this chart depicts, industry demand is at its lowest level since 2001. It also now marks the severe appliance recession that we’ve seen in three decades. From a decline perspective, we have been in appliance recession for a much greater time than the general economy in the US, and the replacement cycle will continue to become a greater proportion for demand in the near term. We continue to launch new product innovations.

Slide 13 shows some of the product launches in our North American region during the quarter. We’ve seen strong consumer and trade interest in our new Maytag laundry products, and feel these products are good examples of where we want to position the Maytag brand. The Maytag brand continues to perform well, and has increased share for four consecutive quarters. I’ll highlight just a couple of the brand launches in North America during the quarter. We launched the new Maytag brand Bravo, the first top load washer to offer a C double E tier three energy rating, the highest efficiency level in the industry. The washing machine delivers 70% water and 67% energy savings over washing machines manufactured before 2004. We also launched the Whirlpool brand eco-friendly steam queen innovation on Whirlpool brand electric rangers. The range self-cleans light spills in the oven in just 20 minutes and reduces the need for chemicals and the resulting strong odors.

Finally, I would like to turn to the outlook for North America for the balance of the year on slide 14. For the remainder of 2008 we expect industry demands to decline 10%.

In light of the continued inflationary trends, we have announced a cost-based price increase effective in January. We are implementing an 8 to 10% increase across the majority of our product lines, to mitigate the continued increase in the material and oil-based costs. While we were encouraged by recent price trends material- and oil- related costs remain elevated, and given the significant reduction in demand levels it is necessary to take these cost-based price increases to ensure that we are adequately funding our innovations to bring consumers and our trade partners the highest quality and most preferred products in the industry.

Our focus during this period will be to accelerate our productivity to reduce costs and bring our production in line with weaker demands. Two, to execute our material and cost based price increases, and three, to continue to invest in consumer-relevant innovation. With that, I will now turn the conference back over to Jeff, for his comments on the international operations.

Jeff Fettig, Chairman and CEO

If you turn to slide 16, our international operations produced solid results during the quarter, despite also there to in the increasing volatile and challenging operating environment. Our European region was impacted by weak and declining demand during the quarter. Latin American and Asian businesses continued to build upon their strong performance trends posting strong growth and profit improvements during the quarter. Overall, our results were impacted by substantial currency exchange fluctuations through the quarter. And as I mentioned earlier in light of the continued inflationary trends we’ve taken a number of cost-based price increases globally. These price increases had a very favorable impact on our results and offset some of the material cost inflation that we experienced during the quarter.

On slide 17 you’ll see our European business, where our European revenues increased by 9% to $1.1 billion. In local currencies they were about equal to last year. Industry unit demands for the region declined by about 4% year over year. Operating profit decreased $32 million to $52 million during the quarter. Lowered gains on asset sales accounted for $23 million of this cost. Other unfavorable impacts during the quarter were higher material and other related costs, lower unit volumes and lower production volumes. These costs were substantially offset by very favorable product price mix during the quarter.

Turning to slide 18, our Latin America business reported very strong third quarter results. Revenue increased 22% to $1 billion in the quarter. Excluding the impact of currency sales, were up about 11%. Operating profit increased 13% to $116 million during the quarter. We had increased unit shipments, regional tax incentives; favorable price mix and productivity drove this positive performance. Results were negatively impacted by higher material costs and the non-reoccurrence of the non income based tax credit.

On slide 19 you see the third quarter results for Asia. Sales increased 11% during the quarter, if you exclude currency they were actually up 16%, largely due to improved unit volume shipments. Operating profit during the quarter was a break-even, this was a significant year over year increase in operating profit, which resulted from higher volume and favorable trends in productivity and price mix. Once again, these favorable items were partially offset by higher material costs.

I’d like you to now turn to our outlook for the International on slide 21. In Europe, the decline of industry demand was significant as the quarter progressed and became much more challenging and we expect these demand levels to remain challenging during the fourth quarter. In Latin America we continue to see continued strong demand throughout the quarter. We do expect to see positive demand in the fourth quarter, but at a slower rate as the global financial crisis impacts many of the economies throughout Latin America. In Asia, very similar to Latin America, we experienced very favorable demand in the third quarter, but also expect there positive growth rates will continue in the fourth quarter, but at a slower rate.

So at this time I am going to turn it over to Roy Templin.

Roy Templin - CFO

Thanks Jeff and good morning to everyone. Beginning on slide 23, I’ll walk you through a summary of our third quarter performance. From a top line perspective, we saw an acceleration of the industry decline in North America and Europe, which were significantly unfavorable during the quarter. Positives were emerging market demand and favorable foreign exchange translation, which I will detail in a moment. From a margin perspective, we had positive impacts from our price mix and cost productivity initiatives. More than offsetting these positives impacts were higher material and all related costs, lower unit volumes in the US and Europe and lower asset sale gains compared with the prior year. We recorded $43 million of EPS tax credits during the third quarter, based upon both sales and the mix of those sales.

Turning to the income statement on slide 24, during the quarter we reported revenues of $4.9 billion, up 1%. Excluding the impact of foreign currency translation, our sales declined approximately 2.3%. The Euro and Brazilian Reais fluctuations accounted for the majority of the favorable currency exchange impact on our results. Our gross margin contracted 30 basis points to 14.0% for the quarter. During the previous year, we recorded $34 million of asset sale gains in Europe and North America. This amount declined to $10 million, primarily due to a European asset sale gain during the third quarter of the current year. Lower asset sale gains resulted in 50 basis point reduction in our gross margin, compared to the prior year.

We also continue to feel the impact of increased material and oil related costs. We absorbed approximately $165 million of increased material and oil related costs during the third quarter. These costs were partially offset by favorably productivity initiatives and positive price mix trends. SG&A expenses increased $63 million to $477 million in the quarter. During the third quarter of 2007, we recorded a VAT tax benefit of $12 million. Remain variance is predominately due to unfavorable foreign exchange translation and increased brand investment.

During the quarter we recorded $24 million of restructuring charges related to our previously announced restructuring initiatives, bring our year-to-date total to $72 million. The additional restructuring charges lower our operating earnings by $11 million during the third quarter when compared to the prior year third quarter. As a result of the items I just discussed, operating profit totaled $177 million, compared with $258 million in the prior year. If you look at our tax credits in Latin America, they’ve provided an incremental $18 million benefit during the quarter. This amount was more than offset by increased restructuring expenses, lower asset sale gains and the non-recurrence of the VAT tax benefit, which when combined total approximately $50 million in unfavorable year over year variances.

Translation of foreign currencies resulted in a net unfavorable impact of $13 million in the quarter. Turning to slide 25, our other income expense had a favorable impact of $14 million, mainly due to higher interest income during the quarter. From a below the operating profit line perspective, this impact was partially offset by the non-recurrence of a $7 million gain on the sale of shares in our Indian subsidiary in the previous year.

Moving to our tax rate, we reported an effective tax rate of -38% compared with 4% in the prior year. The decrease in rate compared with our previous outlook in the prior year is predominately related to a decline in expected profitability. Under US GAAP accounting, we recognize both the third quarter as well as the year-to-date impact of our reduced outlook in our third quarter effective tax rate results.

Slide 26 illustrates our working capital results for the quarter. Our working capital performance improved during the third quarter, compared to the prior year. The improvement was largely the result of lower accounts receivable days outstanding, which was predominately related to lower sales volume and a reduction in past due accounts. On a sequential basis, working capital increased to 12.2% from 11.5% at the end of the second quarter. The increase was predominately attributable to higher inventory and lower payable balances. These unfavorable effects were partially offset by lower accounts receivable days outstanding.

Now I’d like to take a moment to discuss our free cash flow performance on slide 27. For the quarter, we reported a free cash flow usage of $167 million, compared with $105 million of positive free cash flow in the previous year. The unfavorable variance is attributable to negative variances in working capital, lower cash earnings and lower proceeds from non-Maytag asset sales. Through the nine months ending September 30, our free cash flow was a usage of $349 million, compared with a usage of $83 million in the prior year. The principal drivers of the increased usage of cash were lower cash earnings, higher capital expenditures as the company accelerated cost reduction initiatives, and higher absolute levels of working capital. We will continue to tightly manage our capital spending through the remainder of the year and expect our full-year capital spending to be in the range of $535 million to $550 million.

Turning to slide 28, I’d like to spend a moment on our liquidity position. First, we have full availability of our 2.2 billion revolving credit facility. This is a committed facility, maturing in December 2010 and is comprised of a syndicate of highly rated banks. From a long-term debt perspective, we have only one significant maturity in the next 15 months. Our $200 million variable-rate note is due June 15, 2009. We have suspended our current share repurchase program to ensure we are maximizing our liquidity and funding strong capital investment programs. We did repurchase $96 million of shares during our third quarter, and have $350 million remaining under our current authorization.

Finally, as I mentioned earlier, we are tightly managing our capital spending levels to ensure we are funding critical and high-return programs. This is another step we are taking to continue to build upon our liquidity position. Lastly, to illustrate our position at the end of September, our $2.2 billion un-drawn committed lines were supporting $710 million of commercial paper. In addition, we had $425 million of cash at the end of the third quarter.

Finally, I’d like to turn to our guided summary on slide 29. Based on current economic and industry conditions, and expected additional restructuring expenses, we are reducing our full-year guidance to $5.75 to $6 per share from the previous range of $7 to $7.50 per share. We currently expect ton incur $170 million of restructuring expenses during 2008, including additional actions we announced this morning. Lower expected unit volumes around the world also had an unfavorable impact on our outlook. In fact, during the third quarter our North American operations produced roughly 10% fewer units than the prior year quarter, and we are forecasting roughly 20% reductions in units produced in the fourth quarter in both the North American and European operations. From a tax-rate standpoint, we are now projecting our full-year tax rate will approximate our third quarter rate of a 38% benefit. This is largely related to lower earnings before tax, the impact of tax credits in earnings dispersion. Additionally, we now expect to convert these earnings into free cash flow in the range of 0 to $50 million for the full year. The most significant driver of the decline is related to our lower cash earnings and unfavorable expected working capital variances.

Finally, I would like to note that we are in a highly volatile global economy and are providing you with our best available view, given the information available to us at this time. With that, I’ll turn the call back over to Jeff.

Jeff Fettig, Chairman and CEO

To close my remarks today, I’d like to comment on the macro-economic environment, and reinforce what we are doing to respond to these conditions at Whirlpool. These are very challenging and volatile times economically, around the world. We are facing one of the most challenging economic periods that we’ve seen in many decades. The demand levels are changing by large amounts around the world and the US, as Mike pointed out, the current outlook is for the lowest level of unit volume in over 7 years.

The length, and now depth, is already the largest and deepest US appliance recession that we’ve ever seen. From a cost standpoint, we continue to experience significant cost inflation across many of our key input costs. And despite encouraging trends in some commodities, we still have yet to see declines to bring these costs back to levels of even only one year ago. From a currency standpoint, we’ve seen severe and swift moves in most of our key global currencies. This will continue to be a challenge we’re managing in near term, until these currencies find new equilibrium levels for currencies world-wide.

So with this backdrop, we’re clearly focusing our priorities on executing the basics of our business very well. These include the aggressive cost-reduction actions that we previously discussed. But in addition to those actions, we are very focused on driving increased efficiency and productivity gains beyond the structural and capacity cost reductions that we previously discussed. We have been successfully implementing price increases, and we have another round of cost-based price increases going on around the globe. These increases are necessary to ensure we are sustaining the level of innovation and outstanding new products that our consumers and trade partners expect from Whirlpool.

A key part of this innovation has been our efforts in terms of building the highest quality and most energy efficient products on the market today. We view these as core product attributes and differentiators for consumers in this environment, where consumers are seeking good value. And finally, as Roy mentioned, we are taking clear steps to build upon our already strong liquidity position, to ensure we continue to be well positioned going forward. We will carefully manage all of our spending plans and focus these investments in our business on the ones that create the highest value for shareholders and for our customers.

In summary, these are very challenging economic times, but I believe we have the right pieces in place in terms of actions, products, people and our over-all focus to manage well in this downturn, and equally important, to emerge as an even stronger enterprise going forward. With that, I’d like to end here and open this up for questions you may have.

Question-and-Answer Session

Operator

Certainly, [operator instructions] Our first question will come from David MacGregor, with Longbow Research, please go ahead.

David MacGregor

Hi Jeff, Roy, Mike. The price increases – can you just talk about what percentage of your total revenues will actually be impacted by the price increases as opposed to what percentage won’t receive any increases?

Jeff Fettig, Chairman and CEO

David, globally I think if you consider the price increases that were already taken this year, which will have a carry-over effect on next year, plus the things we pointed out will go into effect between now and January 1st, I would say virtually all of our revenues worldwide will be impacted by price increases.

David MacGregor

Great. The second question I had was just with respect to raw material costs, and it seems like there’s still quite a bit of cost inflation pressure there, have you got hedge prices right now for ’09 that are above current spot market prices?

Have you got hedge prices right now for 09 that are above current spot-market prices?

Is that part of the t cash flow story here with respect to working capital?

Jeff Fettig, Chairman and CEO

David, thinking of raw materials, if you think of the big elements of our materials you would start with steel, and steel as you well know is still a question mark about what 2009’s steel prices are, if you look at today’s demand levels and today’s stock price of steel there seems to be a disconnect but we do not have a prediction yet for next year

Oil for us, which affected fuel which has obviously gone down, and that’s a variable, goes up and down with some lag in timing with oil. Metals we do hedge, and as we said in the past we are always six months out for approximately 50% of our needs, so when metals are going up, the direction is the same but we are under the curve. When metals are going down, we go down but we- given the hedge position there is a time when we may be over the curve. Given this environment, given where metals are today, we expect that to be a positive next year.

Then of course, components, the value-chain - our supply has the same challenges margin-wise as we do so some of those things that are indexed to specific metals may go down, others have specific price-increases that are in effect. The total material inflation world is not as positive as some of the recent headlines about oil and metals.

David MacGregor

Thanks for that. Just the last question on the ballot sheet. What’s the risk of good will charges at year-end and talk about what percentage of your pension assets were in equities?

Jeff Fettig, Chairman and CEO

We do a detailed impairment test as part of our annual year and closing type, which I think most companies do. The biggest component of goodwill is about $1.6 in Maytag goodwill and then we have a bunch of smaller types of goodwill and so again, we had no impairment at the end of this quarter but it is something obviously David that we monitor, on a quarterly basis but do very detailed projections as part of our annual closing cycle. With respect to your question on pensions, our targeted ration is 60% in equities and 40% in terms of fixed instruments.

David MacGregor

Great. Thanks very much. Good luck.

Jeff Fettig, Chairman and CEO

Bye David.

Operator

Our next questions comes from the side of Eric Bohard < spelling.45> with Cleaveland research. Please go ahead.

Eric Bohard - Cleaveland research

Morning, Eric.

Eric Bohard - Cleaveland research

While it’s open, can you give us some guidance of what that might mean considering what has gone on in regards to the income statement and also the cash contributions needs for that in 2009 and how that would relate to 2008?

Jeff Fettig, Chairman and CEO

Sure. Roy, why don’t you answer that please?

Roy Templin – CFO

Yes, at this point, we are going to go back to Jeff’s opening statements in his script, we are not going to talk about 2009 with any type of specificity, but just a couple of comments to help you get some guidance here. I think, first of all, David asked, what is the targeted ratio between equity and fixed instruments and I answered that, as you know, Eric, we have in fact frozen our defined benefit plans. If you look at our defined status at the end of last year, we had Eric, about $3.6 billion in liability and about $3.1 billion in assets. From a PPA perspective we were just under 90% funded in terms of the total plans, looking at all the dollar plans, with the highest funded plan being the big Whirlpool plan. Now, as you look at the current market trend obviously I would expect that gap to increase in terms of

David, that’s right. We have good will of $1.7 billion which again, we look at that quarterly, we also of course do a detailed impairment test as part of our annual closing type of which obviously I would expect that gap to increase in terms of our funded status position, but again, Eric, we are not going to get into the details with respect to what we think that is going to be or try to project that at this point in time.

I think the key variables, though are as you know, we will specify at year-end what discount rate, what the final returns are, we are also watching as- I think most companies are – whether there may be legislative changes with respect to the PPA and of course, anything else that we do internally with respect to the competitiveness of the Whirlpool Plan. So there are still a number of moving components here, again net net I just wanted to give you those facts. I can’t go into 2009 specifically.

Eric Bohard - Cleaveland research

Did you have to make a cash contribution into the pension in 2008?

Roy Templin – CFO

The cash contribution in 2008 was $85 million for the US plans, Eric.

Eric Bohard - Cleaveland research

Secondly, another housekeeping item. Can you say again what the tax rate is for 4Q implied within the guidance?

Roy Templin – CFO

Let me take a crack at that, Eric. First of all, let me start with, when we set our tax rate, I’ll talk about Q3 and I’ll walk you forward through it, if that’s okay. There are two key components with respect to our tax rate, the first thing we do is that we always estimate the annual operating what the tax rate will be and we look at two things, we look at our estimate for operating earnings and of course we look at our estimate with respect to the various items in the tax line that are coming off of or under operations. We obviously, with the drop in guidance, had a significant reduction in terms of our outcomes of earning, again, under the US GAAP rules, what that requires us to do then Eric, is in the third quarter, we took a big catch-up adjustment if you will, to get our year to date right and aligned with the line of sight we now have for annual earnings and the annual taxes on those earnings.

To put that into perspective Eric, that was about a 50-point drop in what would have been, probably a rate that you would have been expecting in the low 20s, based on upon our last guidance where we could have left it at minus 38%. Now, for the year I said my script we’ll expect the annual benefit to be the same, about 40% in terms of benefit, not expense. There is one very key item with respect to a Q4 in this annual guidance Eric to make this map work and that is, as part of the Economic Recovery Act there was a provision in there on credits, energy-efficient appliances, as you know, we have for years invested in hundreds of millions of dollars in order to be in a position to supply the market with high-energy efficient appliances. These credits are for appliances produced in the US only, they must be in excess of a rolling two-year baseline.

There are some limitations to those baselines but we do anticipate, as a result of the investments we have made thus far, Eric, to be in a position to capwise on these credits both in 2008, 2009, and 2010 here in the US. So if you take those credits plus the research and development credits and the other credits that we have internationally, we think that will be about a 37 point reduction to what would have otherwise been in our annualized effective tax rate.

Eric Bohard - Cleaveland research

And so that, to go to the end, the four-year expected is effective tax benefit not a tax expense of roughly 40%?

Roy Templin – CFO

That is correct. And Eric, I did say 37, it is actually 27 point reduction – fall in credit. Sorry about that.

Eric Bohard - Cleaveland research

And that is included within that 4-year, 40% benefit.

Roy Templin – CFO

It is included in that benefit, that is correct.

Eric Bohard - Cleaveland research

Which leads me to my next question: the 4Q guidance now understanding the magnitude of the tax benefit – within the 4Q guidance- it appears that there is a pretty significant step down in operating profit within the business, is that all North America and Europe and what drives the significant step down that is going to be taken from 3Q to 4Q?

Roy Templin – CFO

Eric, there are probably three elements to the operating step-down with 3Q to 4Q. The first one is productivity. I don’t know whether you caught this in my script or not, but Mike and his team actually took out 10 percent, when you look at units of a year in the first year of the third quarter, and both in North America and in Europe we are now estimating, we’ll take out just under 20% of the volume when compared to units produced in 4Q a year ago. So as you would have anticipated Eric, we have a much lower productivity, and in particular conversion productivity, than we have in Q4 a year ago or frankly, we would have a in a traditional fourth quarter trended rate.

The second area is the restructuring of course, that Jeff talked about, we’ll have about a $70 million dollar charge that will come through in the fourth quarter and the third area, Eric, this was also embedded into Jeff’s script, is currency, and again, you heard the positive impact of currency in our Q3 results, but of course, these rates have changed significantly, and we now expect a fairly significant reduction in terms of the fourth quarter impact from currency.

Eric Bohard - Cleaveland research

Great. Thank you very much.

Operator

Our next question comes from Jeff Sprague with Citigroup Investment research.

Jeff Sprague - Citi Investment

Just one more on the tax before I get to some other things, I’m still a little bit confused if the negative 38 was all about catching up, you hear that the tax rate is actually negative 11, so you are going to take the four-year to negative 38 based on the Q4 being a negative 100% tax rate? Is that right?

Roy Templin – CFO

Actually, it will be negative almost 300 percent when you look at the tax rate by itself in the fourth quarter. Because, again, keep in mind, Jeff, there is very little EBT, and then you have these tax credits that I talked to Eric about, so you end up getting this multiple in terms of what would be an ETR in the 4Q.

Jeff Sprague - Citi Investment

What are the cash consequences of these? Are you actually going to get cash reimbursement? When can you actually use these from a cash flow standpoint?

Roy Templin – CFO

First of all, the question is- are you going to get cash reimbursement or are these really cash credits? The answer is, yes, they are, all of these are cash credits, the energy tax credit, of which I have spoken of earlier which is by far the biggest component in this

minus call it 300 percent rate, I am rounding now, they call it twenty-year life credits which we fully expect to utilize in fact, without getting into a lot of specificity on our tax, we would expect to utilize those over the next five years and in terms of being able to utilize all the credits, and actually receive the cash with respect to this credit.

Jeff Sprague - Citi Investment

I know you want to avoid the 2009 guidance, but your comment about stirring all this together equals a 27-point reduction, does that apply going forward also, whatever the tax rate is, we should think of a number 27 points lower as a go-forward basis?

Roy Templin – CFO

That is a good question. And of course, I mentioned to Eric that we do anticipate earning these energy tax credits in both 2009 and 2010 and so your assumption should be from a normalized run rate with those credits you get a tax credit at around 10%.

Jeff Sprague - Citi Investment

Just also a little unclear on FX. FX was a positive on revenues in the quarter but you described it is a negative from a P&L standpoint. Can you just elaborate on that? And then, obviously, I guess I won’t say obviously but it looks like currency will be a big negative on the top line in Q4. What insight from the way it converted in Q3 can we take into Q4?

Roy Templin – CFO

With respect to Q3, if you think about the impact on currency for local corporations, there are two large buckets, the first bucket is the currency impact as a result of currency transactions that we have imbedded in our business. The largest transactions the third quarter were in Europe and Latin America. In Europe, first of all, we have Euro-denominated contracts, particularly in Slovakia and Poland, where we have had appreciation in the currencies in the production countries relative to the Euro so our top line in essence has been held rather constant while our cost to compute have increased and squeezed our margins. That was just under $10 million of impact in Q3.

With respect, and the largest component that we have is of course in Latin America where as you know, we export roughly 70% of the compressors that we produce in Latin America and somewhere in the neighborhood of 10-20% of the appliances again, those are dollar denominated contracts, so again as the Brazilian REI has appreciated, the cost to produce has appreciated, but our top line has remained constant in US dollars. And so Jeff, we had just under a $20 million impact in Q3 with respect to the transactions and then in the North America business we had just under $5 million a positive which was the net of the Euro versus Canada and Mexico. So the two buckets for Q3, $10 million positive

So the two buckets for Q3 $10 million positive on the translation and $23 million negative on transaction cost around the world. Now, the second part of your question is, how do you then step that forward, and I think you summarized it well, given the rapid volatility in currencies, we are now estimating that, again, in 4-2 there will be an impact on both sales as well as operating profit, and as I said earlier that’s a key component with respect to this Q3-Q4 walk in terms of operating profit.

There’s a lot of stuff moving around, but is there a rule of thumb about how we can think about currency dropping through at kind of a margin conversion rate of some sort or some rough rule of thumb so people can try to frame this.

Now you know, we used to have a rule of thumb that we were, again, absent volatility, that we were fairly neutral, but unfortunately with this type of volatility even when you over lay our head positions that we have – I just don’t have a good rule of thumb to give you there, Jeff, with respect to that.

Jeff Sprague - Citi Investment

There was a comment there that you’re seeing placement delayed beyond repair, or appliances being delayed even beyond the point of repair. I wonder if that’s anecdotal evidence or if you have some good measure of that, and what does that really implyYou would replace your refrigerator but maybe in laundry or a dishwasher, you’re seeing people just go without?

Mike Todman - President of Whirlpool North America

Jeff, this is Mike Todman. What we’ve seen, and we can pretty well measure, the impact housing has on appliance sales, what we’ve seen over the course of the certainly last quarter, and we expect to see over the probably the course of the next couple of quarters, is that consumers are now making decisions on where to spend their discretionary income. And if at all possible to delay a purchase, right now we’re seeing that happen.

What we clearly expect though is that that bubble’s going to burst at some point in time, that in fact there will be a pumped-up demand of consumers who have delayed purchases over a period of time, and they eventually will replace, as you suggested - it may be a washer or it may be a dishwasher - which they can say, “I can put off buying that for a short period of time.”

Jeff Sprague - Citi Investment

I’m sorry, just one last quick one for Roy. Roy, cash cost of the restructuring action?

Roy Templin – CFO

Just so I’m clear, we’ll have incremental restructuring of 70 million as a result of what we’ve said today. Total restructuring of the fourth quarter though will be 100, okay, so I’ll set the baseline.

Now let me talk about the announcements we made today. 70 million in the fourth quarter, about 138 million in total cost, once we completely execute these initiatives. Of that, about 115 million will be impacted on the cash flow statement or cash charges, Jeff, and we’ll have just under $20 million of cash charges in the fourth quarter this year.

Great, thank you very much.

Roy Templin – CFO

You’re welcome.

Operator

We’ll take our next question from Laura Champine, with Cowan and Company. Please go ahead.

Laura Champine

Good morning, just wanted to understand your unit expectations. I did hear in Q4 looking for down 20% North America and Europe. But I thought that in Mike’s earlier comments I heard him say that you US industry units were expected to be down 10 in Q4. If that is right, what would drive the much deeper declines in your own business in North America?

Roy Templin – CFO

Laura, there’s actually two different sets of numbers. One is the guidance we gave on demand for both North America and Europe, which was basically the same level that we saw in Q3, which in the case of North America was down about 11% and in the case of Europe was down about 4 to 5%. The minus 20% is a production number. We are rapidly taking down inventories to adapt to this environment. That will negatively impact our productivity, but we should see a profound change in our global inventory by year end, so one was demand, the other was production.

Laura Champine

We only obviously have one big, gross number for inventories and it’s tough to tell, but it doesn’t look incredibly stretched. Does that mean you expect year end inventories to be substantially lower? Or do you expect to lose share relative to that down 11% industry action.

Roy Templin – CFO

No, we would expect there to be both in dollars and days substantially lower by year end, without the constricting availability. So no, we don’t expect to lose share, but we do expect, again, in both dollars and days, to be substantially lower than where we finished in the end of the third quarter. Again, if you look at the trend data, the rapid decline almost on a weekly basis from late August through September was pretty profound. So we did finish the third quarter higher than where we wanted to be, and at the same time, adjusted downward our forecast for demand in total for the fourth quarter, so we’re adapting production to deal with all of that.

Laura Champine

And then just lastly for me, on the North American demand, it looks like the primary issue other than Macro is the OEM business. Is there anything you can do to benefit the OEM business or see improvements out of that business line?

Mike Todman - President of Whirlpool North America

Yeah, Laura, this is Mike. As you know it’s both branded OEM and you’re [OEM 0:15:1] and we did see a decline in the OEM business. But we continue to support that with all new product innovations that we can so we can keep launching products for the Kenmore brand for Sears, but we also continue and we’ve launched the new products and our own branded products. So what we expect is to continue to see growth in our brand, and we will continue to support the OEM business.

Laura Champine

Thank you.

Operator

Our next question comes from the side of Michael Rehaut from JPMorgan. Please go ahead.

Michael Rehaut

Hi, good morning everyone.

First question – sorry to be the dead horse here – I just want to make sure I have the numbers right because a lot were thrown around. With the tax rate for 08, it’s going to result in an effective 38% benefit for the full year?

Roy Templin – CFO

Yeah, I think I said roughly the same as Q3, but that’s correct Michael.

Michael Rehaut

Okay, thank you. Also, I guess I have a bunch of different housekeeping questions. The $275 million benefit and cost savings, you said those actions would be done mostly, well, started in the fourth quarter and then into ‘09. So I was just trying to get an idea of that 275, how much of that do you realize in ‘09?

Roy Templin – CFO

Well, we would estimate that in ‘09 it would be roughly just under $200 million in benefits.

And that’s just on those actions. In addition, of course, we’ll have significant productivity initiatives and other actions, so we do intend to aggressively improve our structural cost position.

Michael Rehaut

Okay. Now I understood. Also, the paper or borrowings. How would you describe your ability to continue to access the CP market, we’ve obviously heard in the papers about how at different points that market has seized up?

Roy Templin – CFO

I would answer it with that we’ve been able to consistently borrow in the CP market. We’ve had new issue maturities that have averaged somewhere between seven and forty-five days with an average maturity of about fourteen. In terms of the ability to continue, we continue to borrow in the CP market today, but I really can’t comment with respect to any future actions with respect to our availability, other than to say we’ve been able to consistently borrow to date.

Michael Rehaut

OK, also, the free cash flow guidance reduction – you had mentioned that it was primarily driven by the lower cash earnings and the unfavorable working capital shifts. I was wondering if you could maybe put some further clarity, if possible, in terms of the $500 million drop, how much was from one versus the other, and if there are any other negative impacts.

Roy Templin – CFO

There are other flips and takes, Michael, but the two big items are cash earnings and our working capital, in terms of our guidance change, and it sort of goes back to Jeff’s question earlier, the cash earnings is about $350 million reduction. Now, when you look at our cash flow statement, Michael, you’ll have to down into the tax line, again, to add back the variance with respect to tax, because you know, Jeff asked me earlier, “when do you expect to get the cash as a result of these credits that you’ve earned?” And I said it would be in future years. I’m taking you back to pure cash earnings, and that’s about 350 and then the other 250, the big bucket, is working capital versus where we thought we would be at mid-year. And there are other flips and takes, Michael, but those are by far the biggest items.

Michael Rehaut

OK, last question if you have it, the current US dollar balance on the BCX tax credits that are remaining?

Roy Templin – CFO

We’ll file a few this afternoon and we have about $790 million remaining, you’ll see that in our Q letter today, Michael.

Michael Rehaut

OK, and the recent currency devaluation didn’t have too much of an impact there?

Roy Templin – CFO

Well, you’ll see again, keep in mind, that 790 is as of the end of September, right?

Michael Rehaut

Right.

Roy Templin – CFO

So its currency changes through September.

Michael Rehaut

OK, fair enough. Thank you very much.

Roy Templin – CFO

You’re welcome.

Operator

We’ll take our last question from John O’Brian with Regan Mackenzie, please go ahead.

John O’Brian

Thanks Jeff, Roy. I just wanted to ask two questions. First one on the debt covenants, 2 billion in debt, what’s the closest debt covenant the company is right now? Given the reduction in cash flow?

Roy Templin – CFO

Again, we don’t disclose specificity with respect to numbers on covenants. We have two principle covenants as a company. One is debt-to-EBITDA, which needs to be under 3 and we were at about 2.4 at the end of the quarter and then we have an interest cover covenant, John, which again, we need to be greater than 2 and we were just under 4 at the end of the quarter.

John O’Brian

OK, thank you. The other question had to do with – looking at the commodity costs, since 2004 the company has declared commodity costs have increased about $2.2 billion, which given your shares outstanding, would be about $29 per share. How long is the lag here? We’re seeing some of the commodities come down to levels last seen in 2005, I understand that there is going to be some contract lag, but typically that lag doesn’t seem to be more than about anywhere between 3-9 months, depending on the actual commodity and how you’re hedged. So, I was curious, you’ve given a pretty discouraging outlook near term, but it kind of looks like next year, to me at least, that by mid-year you should be getting a lot of benefit from all these commodity price decreases. So, could you comment on that at all?

Roy Templin – CFO

Yeah, John, I think your thinking is sound, a couple of comments. One, given the volatility, the best of course is where is the price of oil going to be, where the price of metal is going to be, and so on and so forth, but that aside, the real issue is steel. There seems to be a huge disconnect today between the stock market for steel and demand. But until we see that radically change, that is the single largest component that we purchase and it is at really, really elevated levels, so we’re not making any forecasts yet on 2009, we’ve got a lot of work to do to solidify what our input costs are going to be and so on and so forth, but I think in terms of your thinking, you’re right with the exception of one thing, or depending on what your position is on steel. But clearly, with demand levels, where they are trending, one would think that commodities would go down.

OK everyone, well listen, thank you very much for joining us today. As I mentioned, we are in a really challenging economic environment, we are very focused on aggressively reducing our costs, we are implementing price increases in all major markets around the world and very, very focused on improving our working capital and generating cash. So, we look forward to updating you next time. Thank you for joining us.

Operator: [Operator instructions]

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Source: Whirlpool Corporation Q3 2008 Earnings Call Transcript
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