Whirlpool Corporation Q4 2008 Earnings Call Transcript

 |  About: Whirlpool Corporation (WHR)
by: SA Transcripts


Good morning and welcome to Whirlpool Corporation’s fourth 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

Thank you Kevin and good morning. Welcome to the Whirlpool Corporation fourth quarter and year end 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’ll be making forward-looking statements to assist you in understanding Whirlpool Corporation’s future expectations. Our results could differ materially from these statements due to many factors discussed in our latest 10-K and 10-Q. During the call we will be making comments on free cash flow, a non-GAAP measure. Listeners are directed to Slide 30 for additional disclosures regarding this item.

Our remarks today track with the presentation available on the Investor’s section of our website at whirlpoolcorp.com. With that let me turn the call over to Jeff.

Jeff M. Fettig

Well good morning everyone and thank you for joining us today. As you saw earlier this morning we released our fourth quarter and full year results and now I’d like to take a few minutes to provide you with some perspective on the quarter, the year and I think very importantly the actions we’re taking to address this very difficult economic environment that we see in 2009.

As you all know, the global economic slowdown accelerated during the fourth quarter and in fact has deteriorated rapidly over the last six months. The negative volatility has created substantial challenges in our business and the following areas of demand; currency impacts; and costs. Let me start with demand.

During the quarter, we saw a steep drop in global unit demand which made for a very challenging sales and production environment. This was primarily due to accelerated declines in our North America and European businesses during the quarter. In response to these demand levels, we took aggressive measures to reduce our production rates to insure inventories did not get out of line. This did have, however, a significant impact on our operating margins during the quarter.

The second area where we saw a lot of negative volatility is in currency. During the fourth quarter we saw significant and rapid movements in exchange rates. In fact the world magnitude was 20 to 50% on some of our major currencies around the world. This volatility had a very unfavorable impact on our results during the quarter, well beyond what we would consider to be normal. And we’ll talk a little bit more in detail about that in a moment.

And the third area was the costs. We continue to face high material and world related costs in the quarter. Quarter over quarter, material costs were $150 million higher due to the increases we’d seen all year through the spikes that we saw in raw materials in the third quarter of the year. And although we’ve seen a recent reduction in raw material trends, they did remain at elevated levels during the fourth.

I return to on your slide – to Slide 4 to summarize our year where we did a number of things, one to address this environment. First of all we did implement structural cost reduction actions as I mentioned to align capacity with demand. As part of this effort, we made a difficult decision which we announced in October to close five manufacturing facilities and to reduce approximately 5,000 positions globally by the end of this year.

These actions are in place and are now beginning to deliver strong operating efficiencies and will structurally remove costs from our business. In addition to this, we are implementing additional cost actions to further adjust our business to lower demand levels and I’ll talk more about those in a moment.

Also during 2008, we executed cost based price increases in all markets around the world. These increases were aimed at partially mitigating the record raw material and oil related inflation we saw throughout the year. These 2008 actions will have a positive carryover benefit to our margins in 2009.

As I mentioned, we reduced global production rates below demand to reduce our inventory levels. And also we continue to invest in innovation. Our innovation pipeline remains very strong. Innovation not only attracts consumers to our brands, it drives an overall business mix improvement for our business that generates higher margins. As such we are going to continue to make focused investments in innovation going forward in 2009.

And finally, despite this very volatile environment really in all parts of the world, we were able to either maintain or grow our market position in all major markets around the world.

I’ll now turn to Slide 5 where I outlined the areas that we see most impacting our business in 2009. On the positive side we do expect to significantly reduce our total product costs despite expecting higher material prices. We’ll be able to do this by taking aggressive actions in product redesign; commonization of components; productivity improvements which will positively impact conversion; improvements in quality; and the restructuring benefits of our previously announced activities which related to manufacturing footprint and job reduction.

The second area which will be positive to our business is the way we’re aggressively attacking our non-product costs, primarily related to SG&A levels and logistics costs. In these areas we’ve taken actions in literally every part of our business by reducing headcount; freezing salaries; reducing some benefits; adhering strict reductions at all travel and all discretionary spending. We’ve also reduced and redirected a portion of our consumer marketing spend to trade marketing. Given the current environment, we believe conversion of point of sale is the most effective use of these investments.

In the area of logistics, we’ll benefit from a steep drop in oil and in a low demand environment like we’re seeing we see opportunities to realize lower tariff rates. So in total, we expect SG&A and logistics costs to be substantially lower in 2009 than in 2008.

The third area we see benefiting our business is through improved price and mix. Again as I said the actions that we’ve taken in 2008 will largely carry forward benefits to 2009. We continue to see favorable mix opportunities with our new product innovation and in the area of energy efficiency. Energy efficiency is a growing consumer preference in most markets around the world. And as you know, Whirlpool is the leader in offering the largest number of energy efficient products to the marketplace today.

We see in this tough demand environment value is a strong buying preference and that energy efficiency as opposed to just lower prices is increasingly seen as a great value offering. Together these things are having a positive impact on our mix. Globally this year we expect to realize approximately two points improvement to our price mix than in 2008.

The last two areas where we expect to see positive benefits for cash generation are in working capital and capital spend. For 2009 we expect working capital to be a significant source of cash generation. From an overall perspective, lower revenues and unit production although a negative on our P&L will have a positive impact on our working capital.

In addition, we’re taking very significant actions to reduce inventory while still providing great product availability to our customers. This is made possible due to the reduction of the five manufacturing facilities that I’ve previously discussed and also by having less build up of inventory for major product change overs.

Our capital spend will be 10 to 15% lower in 2009 than in 2008. And this will represent a $50 to $100 million improvement in cash generation compared to last year. We have significantly reduced all non-product spend, but and I’d emphasize we are continuing our investments in new product innovation.

The negative impacts in our business this year are demand; material prices; and currency. Overall globally we expect to see about an 8% decline in our global unit volumes during the year and at current currency rates we anticipate about a $1 billion revenue reduction just from currency translation alone.

Lower demand impacts our results in two ways. First there are simply lower gross margin dollars due to lower demand. And second is the negative effect of our fixed cost rates on lower units. We are addressing this and rapidly reducing our fixed cost base to minimize and ultimately offset this impact.

Material costs in 2009 are expected to be up by about $200 million. Clearly we’ve seen a very positive turn in oil, base metals and steel in some markets compared to what we were seeing in mid-year 2008. The overall increases did increases in some component costs and the carryover effect of the significant mid-year 2008 increases that we incurred. As you all know, there’s a lot of volatility in many of these costs and we anticipate that overall costs will continue to move in relation to overall demand levels.

The last area which will negatively impact us this year is the overall impact of foreign currency due to the significant moves which we saw in the fourth quarter in all of our major currencies. We see negative impact to these currency moves in our P&L in three different areas. First is simply the translation of our international profits to U.S. dollars. The second is the operating transaction effect between production markets and selling markets. And third we see it for a period of time in certain balance sheet adjustments.

In a relatively stable currency market we’d normally have very little P&L impact due to our hedging approach and the natural balance of our business. The rapid and significant moves we saw in the fourth quarter had a very unfavorable impact on our P&L, which you will see in the fourth quarter. But if today’s currency levels remain intact for the full year, we do anticipate an unfavorable impact to our P&L in 2009 in the $100 to $150 million range.

Let me sum this up by saying that we’re clearly focused on generating cash and reducing costs in every part of the business to align ourselves in this highly volatile environment. We have implemented significant actions to date in all parts of our business and will continue to do even more as we go throughout the year.

I’d move now to Slide 6 where we offer our earnings guidance. This year we expect our earnings to be in the $3.00 to $4.00 EPS range for 2009. For the full year we expect to generate positive free cash flow in the $300 to $400 million range. I would emphasize we are basing these projections on the economic environment that we outlined today in the business plans that are currently in place. Clearly there is a lot of volatility and certainly in the economic outlook, and our focus is firmly on taking all actions needed to insure that we succeed during this difficult environment.

I’ll stop here and turn it over to Mike Todman to update you on the North American business.

Michael A. Todman

Thanks Jeff and good morning everyone. Let me start by giving my perspective on North America’s performance in the fourth quarter. As shown on Slide 8, our net sales declined 18% during the quarter to $2.5 billion with U.S. industry demand for key seven appliances declining approximately 10%. Excluding the impact of foreign currency exchange, our sales decreased 16%.

While we had been experiencing lower demand in the U.S. through the first nine months of the year, we had been having more favorable industry demand in Mexico and Canada on a relative basis. During the fourth quarter we saw these trends deviate significantly from the first nine months. For the quarter, the U.S. business was potentially in line with our previous outlook while Mexico and Canada experienced declines that were greater than our previous expectations. Overall, our year-over-year volume declined substantially during the fourth quarter.

As we had discussed with you on our third quarter call after strong market momentum during the first half of the year we experienced lower volumes during the third quarter due to announced and implemented price increases. While we experienced continued volume pressure during the fourth quarter, we did see a marked improvement in our share on a sequential basis. As we have previously noted, we are seeing the most pressure with our value brands which have the largest percentage increases in price.

During the quarter we reported an operating loss of $20 million. The decline to profit was due to significantly lower revenue; costs associated with adjusting our production to the demand environment; and higher material and oil related costs. In addition, we had an unfavorable impact of $32 million due to a supplier related product recall. These factors were partially offset by favorable price mix; ongoing cost reduction initiatives; and a $23 million gain related to the sale of an asset.

On Slide 9 we provide our industry outlook for 2009 and some background on the components of demand. Our forecast calls for new housing demand to reduce industry growth by approximately four points in 2009 based on a 35% decline in new home completions. In addition, we expect existing home sales to decline 9% during the year. We expect discretionary spends to decline given that lower consumer confidence and high unemployment are expected to persist throughout most of 2009.

In addition, given the general consumer unease we continue to expect to see some consumers delaying replacement purchases even for appliances that are beyond repair. However, we should note that many of our products are considered basic necessities by consumers and any purchases that can be delayed ultimately will be replaced. As a result, we believe that these buyers will return to the marketplace as some of the broader economic concerns subside.

Based on current estimates of these key economic variables, we believe that the U.S. industry demand will decline 10% in 2009 with continued high levels of uncertainty. Slide 10 shows that 2009 will mark the fourth consecutive year of a U.S. industry decline. In addition, the magnitude of this downturn is now projected to be the worst on record with the major appliance industry contracting by approximately 11 million units over a four year timeframe. As this chart depicts, overall industry demand is forecast at its lowest level since 1998.

Finally, given this challenging demand environment I would like to turn to our key priorities for North America in 2009 on Slide 11. These priorities are to appropriately adjust our production levels and inventories to expected demand levels; manage all costs across our business including manufacturing and supply chain costs through focused lean activities; organization and SG&A costs; and all other costs that do not impact making, selling and distributing our appliances. We will also continue to execute previously announced restructuring plans in the areas of reduced labor and production capacity.

And finally, to optimize our volume and price mix in the marketplace. As you know we have executed cost based price increases in 2008 and have announced an additional 8 to 10 price increase effective January 1, 2009. While we continue to expect to realize favorable price mix during the year, we will balance this with optimizing volumes and insuring that we provide consumers with great value.

Finally, with regard to our consumers and trade partners we will continue to accelerate our disciplined and systematic approach to deliver the right product at the right value. This is particularly evident in the area of providing consumers with the widest array of energy efficient products. We have always believed that energy efficiency and consumer value go hand-in-hand and this has allowed us to provide the most energy efficient products to the marketplace for many years.

During 2008 as you may know we received the Energy Star Sustained Excellence Award for the ninth time over the past ten years. We currently offer approximately 600 Energy Star qualified appliances, more than any other appliance manufacturer. Today these products offer consumers an outstanding value which provides substantial reduction in lifetime ownership costs.

All of our actions are focused on providing consumers with the greatest value by offering brands they can depend on with the most innovative features in the most cost efficient manner. We are in a challenging period where we are facing low demand but have urgently taken the steps necessary for our business to perform during this difficult economic time.

With that I’ll turn the call back over to Jeff.

Jeff M. Fettig

Yes. Let me turn to Slide 13 to discuss our international business. Here too in our global international markets we saw deterioration at different levels in terms of economic activity in the different markets in the regions. Our results were once again unfavorably impacted by exchange rates on both sales and in operating profit, but also from significantly lower demand levels particularly in Europe.

Our Latin America-Asian businesses delivered very good results even though the growth of these markets either slowed or declined. I’d speak then on Slide 14 to Europe where European revenue decreased by 16% in dollars for the quarter and local currency declined 7% from the previous year. Industry shipments, however, declined approximately 10% year-over-year. Our operating profit had a significant decline to $2 million positive in the fourth quarter.

Our results were heavily impacted by unfavorable fluctuations in currency; significantly higher material costs; and then of course these sharply lower production rates which were significantly lower than our sales decline.

Turning to Slide 15, our Latin America business revenues again in dollars decreased 26% in quarter. Excluding the impact of currency our sales were down about 14% but that varies very differently in different parts of the business. These results reflect a much lower demand in the Latin America market outside of Brazil. Brazil was fairly steady. And we also saw a large decline in our global compressor operations.

Operating profit in the period declined by about 30% to $110 million. Our results here, too, were impacted by unfavorable currency; lower revenues; and higher material costs. We were able to partially offset these negative impacts with favorable price mix and overall cost reductions.

On Slide 16 we reflect our Asia business. Here our sales in dollars declined 10%. Excluding currency our sales increased about 7% due to higher volumes and a very favorable price mix. We had a positive operating profit in the quarter of $3 million compared to the previous year loss. And again this year-over-year improvement in profit came from the higher volumes; favorable productivity; and price mix. Here too we had negative material costs and unfavorable currency impact.

To provide you with a broad outlook at our international business on Slide 17, I would say based on what we currently see in terms of the economic conditions we anticipate these markets, too, to remain somewhat challenging and expect that in Europe for example full year industry demand is expected to decline by about 8% from 2008. We expect demand in Latin America in terms of shipments to be flat to down about 5%. And also the same in Asia, flat to down about 5%.

So with that I’ll turn it back to Roy for the financial review.

Roy W. Templin

Thanks Jeff and good morning everyone. Beginning on Slide 19 I’ll walk you through a summary of our fourth quarter performance. From a top line perspective we saw significant weakness across most major markets during the fourth quarter. Industry declines in our largest markets North America and Europe were the most severe during the fourth quarter. In addition to the decline in global unit volume, we experienced a significant revenue decline as a result of unfavorable foreign currency exchange rates.

On the positive side of the ledger we did see continued favorable gains from positive price mix during the fourth quarter. From a margin perspective we had positive impacts from our price mix and SG&A cost reduction actions. More than offsetting these positive impacts were higher material and oil related costs; lower global unit volumes; and unfavorable foreign currency exchange.

Finally, we monetized $38 million of BPX tax credits during the quarter and recorded asset sales gains of $43 million. From an expense standpoint, we recorded $77 million of restructuring expenses and $32 million of expenses related to a product recall.

Turning to the income statement on Slide 20, during the quarter we reported revenues of $4.3 billion down 19% from the previous year. The unfavorable impact from foreign currency translation accounted for six points of the decline and was predominantly related to the appreciation of the dollar against the Brazilian real and euro. In addition to this weakness however we had unfavorable effects across most of our major currencies.

Our gross margin contracted 4.7 points to 11% for the quarter. Our gross margin was impacted by three main areas; significantly lower unit production volumes, higher raw material and oil based costs, and unfavorable foreign currency exchange. Material and oil related costs increased $165 million during the quarter. These items were partially offset by favorable price mix which was significantly positive during the quarter.

SG&A expenses decreased $135 million to $379 million in the quarter. The variance was largely driven by lower SG&A expenses related to cost reduction initiatives and lower overall incentive compensation expense. Foreign currency translation and asset sale proceeds accounted for approximately 40% of the dollar improvement.

During the quarter we recorded $77 million of restructuring charges related to our previously announced programs compared to $15 million in the previous year. Our fourth quarter restructuring expense resulted in a 1.8 point reduction in our operating margin. As a result of the items I just discussed, operating profit totaled $10 million compared with $332 million in the prior year. The combination of higher restructuring costs; unfavorable foreign currency exchange movement; and higher material and oil related costs accounted for approximately 80% of the year-over-year reduction in operating income.

Turning to Slide 21, our other expenses had an unfavorable impact of $23 million mainly due to unfavorable foreign currency exchange during the quarter. Moving to our tax rate, we recorded an income tax benefit of $160 million during the quarter compared to an income tax expense of $39 million in the prior year. The year-over-year benefit is predominantly related to the recognition of energy tax credits and lower North American income during the fourth quarter.

Slide 22 illustrates our working capital results for the quarter. Our working capital balance improved during the fourth quarter when compared to the prior year. Excluding the impact of foreign exchange, our working capital levels were roughly flat with the prior year.

Now I’d like to take a moment to discuss our free cash flow performance on Slide 23. For the full year, we reported free cash flow usage of $101 million compared to free cash flow generation of $521 million in the prior year. The unfavorable variance is largely attributable to lower cash earnings compared with the prior year and unfavorable variances in working capital. Our 2009 capital spending is expected to be in the range of $450 million to $500 million.

Turning to Slide 24 I’d like to spend a moment on our liquidity position. First we had $247 million outstanding under our $2.2 billion revolving credit facility and we were in full compliance with our covenants. This is a committed facility maturing in December of 2010 and is comprised of a syndicate of 22 banks. From a long term debt perspective, we have only one significant maturity during 2009 which is our $200 million variable rate note which is due on June 15.

Now I would like to expand upon a comment included in this morning’s release. We have initiated discussions with banks to seek additional flexibility within our capital structure. We are proactively taking steps to assure our future financial flexibility given the generally negative and highly volatile global economic environment. Given that these discussions are ongoing, I will not be able to comment further on this matter. Should anything change with respect to finalization of a decision on this topic, we ill make a public announcement at the appropriate time.

Finally, I’d like to turn to our outlook summary on Slide 25. As Jeff mentioned, based upon current economic conditions and business plans we expect to earn between $3to $4 per share during 2009. Slide 25 provides you with some direction on our key operational drivers. We expect to experience significantly lower industry unit volumes during the year. Jeff and Mike detailed our assumptions by region earlier, but we expect North America and Europe to remain the most challenging markets during the balance of the year.

From a currency standpoint we anticipate a negative impact on our full year results based upon recent exchange rates. Finally, we expect material costs will be unfavorable for the full year. We are currently projecting a $200 million unfavorable impact for the full year 2009. We expect productivity and price mix to be favorable factors during 2009. Productivity is expected to be a significant positive during the year based upon the many factors that Jeff noted earlier. We are currently executing our previously announced restructuring programs as well as a significant amount of additional actions which we expect will drive substantial savings during the year.

We also expect our global price mix results to be favorable in 2009 as a result of our previously announced pricing actions and ongoing product mix initiatives. Finally I would like to note that we are in a highly volatile global economy and we are providing you with our best available view given the information available to us at this time.

Now I’ll turn the call back over to Jeff.

Jeff M. Fettig

Thanks Roy. Let me take a minute to sum up our comments today. Clearly we are in a very difficult global environment. We are not expecting this to change soon and we do expect to see a lot of volatility throughout this recession.

Our top priority is to take all the necessary actions needed to maintain and insure our financial strength and flexibility through this prolonged economic downturn. To do this we’re focusing all of our resources on doing three things very well. The first as I’ve mentioned is to radically reduce our global cost structure and production capacity. In essence, lowering our overall break-even level significantly which will enable us to deliver profitability even in this extreme demand environment that we see today.

The second area is to drive those actions across the business to generate cash. To insure that we can appropriately invest in our business and at the same time reduce our overall debt levels. And third as we’ve mentioned in a number of cases we will effectively balance our volume, price and mix equation to optimize our overall results. We won’t chase volume in a down market. We also won’t advocate our market position. We clearly have the right tools in the form of great brands and product innovation to achieve our fair share of the market and in the same time improve our margins with our price and mix actions.

Finally I would say that I do believe we understand the global dynamics of every part of our business and we are in the midst of a very negative economic period that again we’re not expecting to change soon. We will take, have taken and will continue to take all necessary actions to insure we deliver the best possible results during this period, providing very importantly we also will be partaking the right actions to insure that we emerge from this economic period as an even stronger company that will have significant value creation upside when we return to a more stable demand environment.

The actions we’re taking today will significantly lower our overall cost structure and breakeven point. Our brands, our product innovation and our overall business execution will only get better during this challenging period. And I believe with these fundamentals in place we’ll be in a great position when the global economy does recover to do what we would consider more normal economic growth levels.

So let me end here and I would now like to open this up for questions.

Question-and-Answer Session


Very good sir. (Operator Instructions) Your first question comes from Sam Darkatsh - Raymond James.

Sam Darkatsh - Raymond James

First off and I guess this would be the 800 pound guerrilla in the room. Jeff with demand falling off as it is and you’re asking for pricing as much as others in the industry are, what have you seen thus far in terms of the stickiness of the pricing? And help us with your expectations. I know you’re expecting two points for positive pricing in mix for the year, but help us reconcile when on the one hand very difficult business environment and on the other hand the need to get pricing and the likelihood of receiving that.

Jeff M. Fettig

Sam, in fact a large number of these actions have been in place for several months. So we’ve got pretty good data in parts of the world whether it be Latin America and Asia, parts of Europe, parts of North America and we did in some markets early on lose some market share based on that. Without exception all of these markets are to date they are retaining this price mix and we are recovering systematically the market share through our other actions like new product innovation and our point of sales conversion work.

We have scaled down our expectations since October, September when we thought material costs were going to be dramatically higher than where we see them today. We’ve taken some of this and reinvested it with the trade in terms of conversion and trying to not only bring some consumers in to shops but to convert them once we get them in.

So I would say to date we have a pretty good – some cases a month, same cases two to three months where we have a pretty good idea what the run rate is with all this. And I think they’re pretty much aligned with the expectations that we shared with you.

Roy W. Templin

Sam, its Roy. Just to give you a little perspective to Jeff’s comment on run rate for 2008 we ended the year with about 1.5 points of positive price mix. We came out of the year though in Q4 with 2.7 points of positive price mix. Basically 50-50 Sam between price and mix, just to give you a little bit of perspective in terms of run rate.

Sam Darkatsh - Raymond James

Second question and you just referred to this a little bit, Jeff, but in North America looks like the value brands you might have lost same share, then Latin America looks like you lost share again. Was that as a result of the increased pricing? Or is that something fundamentally happening in the industries and at what point do you expect the share particularly in North America and Latin America to stabilize?

Jeff M. Fettig

Well let me talk about that and then I’ll let Mike talk about the U.S. First of all as we talked before in the U.S. we took a fairly substantial mid-year price increase. We had a very strong share position for Q1 and Q2 last year. We took a fairly strong price – a much needed but strong price increase mid-year. We lost share in the third quarter. In the fourth quarter we improved our share versus third quarter but year-over-year it was still down. So the trends were going in the right direction. I would say in the U.S. and in terms of Latin America we’ve [inaudible] share.

In fact for the year we actually increased share for the regions. We did in any given month I think in September and perhaps October we might have lost a little bit of share in Brazil but by year-end that had largely come back. And we’re in a pretty good position there.

Michael A. Todman

This is Mike. Let me just add on to what Jeff said. As you know we had a lot of momentum in the first half of the year. As Jeff said we implemented the price increase in mid-year. We have seen sequentially in all our major brands improvement in share from the third quarter to the fourth quarter and frankly we’re expecting those trends to continue in the first quarter of the year. So that we get back to the share levels that we’re comfortable with. They may be slightly below last year but they certainly will be sequentially improved with over even the fourth quarter.

And what we are doing with our pricing is selectively assuring that we provide the right value to consumers. And that is driving appropriate price mix in the marketplace.

Sam Darkatsh - Raymond James

My last question and I suppose this would be to Roy trying to go through your free cash flow guidance and trying to determine what working capital as a source of funds might be, I mean you have $225 to $300 million in net income, about $100 million in the lighter CapEx versus depreciation, you have $75 million in asset sales – there’s going to be some takes to that. I’m guessing that the pension contributions, the cash restructuring over the expense, but I’m trying to figure out what the other line items in the cash flow statement might be to give us a sense of where – of how much of it is from de-cap and how much of it is operating.

Roy W. Templin

Sure Sam. Let me – I’ll start with your first question and then I’ll come back and touch upon pension and your question on restructuring cash as well. First of all you’ve got the big components right. When you look at our cash earnings and you look at the delta between depreciation and amortization and CapEx it’s somewhere around $375 million of true cash earnings.

And if you look at what we’re committed to in the way of benefit funding and I’ll come back and specify that for you, but benefit funding if you look at the hedge commitments we have outstanding and the cash flows related to those, and then you look at our standard accruals for restructuring, warranty, etc., you end up with about $50 to $100 million of positive cash left over in terms of those commitments relative to the overall cash earnings.

Then as we said in our release this morning we’ll have between $50 and $100 in asset sales and then Sam that leaves you with roughly $200 million of favorable cash coming out of working capital. Jeff talked about this. I talked about it in our script. We plan to hold working capital at a minimum flat with the current year. We ended Q4, Sam, with 10.0% working capital as a percent of sales.

What that means is we have to take tough actions and Jeff talked about this in his comments in terms of managing the inventories down with lower demands. But as we do that obviously that’s a natural source of cash generation for the company in 2009.

Now your questions on pension specific, Sam, our funding pensions specific and again this is based on our own policy and the latest policy changes that we understand coming out of Washington would be $80 million of funding in 2009. And from a restructuring commitment, Sam, we’re looking at cash – we ended up using $20 million in Q4 as we indicate on our last call we came in right at the $20. We’ll use about $65 million in 2009 and then the remaining $25 million to cash related to restructuring will happen in 2010.

Sam Darkatsh - Raymond James

So your free cash flow already includes the cash contribution that you’re going to be making to the pension over and above the P&L impact?

Roy W. Templin

It does, Sam. That’s correct.


Your next question comes from Eric Bosshard - Cleveland Research.

Eric Bosshard - Cleveland Research

Can you provide a little more color on Latin America? I think the revenues were down sharply relative to what the trend has been there and I guess I’d like to understand a little more what’s within that and your conviction on 2009. And then also how the tax credits should play out in an environment now where the revenues seem like perhaps they’re contracting there.

Jeff M. Fettig

Yes, Eric, let me give you a quick snapshot here. You know first of all think about our Latin America business as three different parts. There’s our global compressor operations in Embraco and [inaudible]; there’s our Brazilian appliance business and then there’s the 32 appliance market outside of Brazil within that Latin America. You know in terms of kind of fourth quarter and so on I would say that compressor operations face a significant decline in demand which you would expect given that they saw the OEM’s who if they were like us were rapidly reducing their inventories.

And I would say also the large international markets, those markets outside of Brazil, had a fairly steep decline in demand. Our Brazil business was actually fairly flat to solid if you will and was least impacted during that period of time. So those are the three components. As for going forward, I do think the first part of the year as people continue to adjust inventories and the general overall state of demand that we will have decline in our compressor operations.

The Latin America markets outside of Brazil on one hand they’re diverse so you have a lot of complementary nature to it. On the other hand they’re volatile, so I would say that they will decline. We don’t give a forecast on exactly how much but we see them declining. Brazil we see as again fairly solid, solid meaning no growth if you will. Roy can speak about the BPX but in general the BPX was all driven off the Brazilian business at the exports and we are expecting lower exports which is reflected in our BPX.

Roy W. Templin

Yes, Eric its Roy. Good morning. Eric a couple of comments with respect to BPX, first just a little bit of background perspective as you will recall we export about 70% of our compressors and 10 to 20% of the appliances that we produce in Brazil. The BPX credits are really an offset to a tax called the IPI tax which in essence is very similar to a value added tax, which each of those taxes are based upon the type of product produced with laundry having the most significant tax all the way down to microwave and air con which have no IPI tax associated with them.

As we look at 2009 we do and we have in this guidance forecasted lower overall BPX tax credits. Now part of that Eric is simply due to foreign currency translation. If you noted in my comments we had $38 million of BPX credits this year relative to $49 million in Q4 last year. So that $11 million dealt the bulk of that delta, Eric, was currency driven versus demand or mix driven.

Eric Bosshard - Cleveland Research

And then secondly on the working capital situation with the volumes down as much as they are and you talk about maintaining I think inventories flat on a year-over-year basis is there a consideration that you should be doing more than having flat inventories and a sharply lower global unit environment?

Jeff M. Fettig

Yes, Eric, actually my [inaudible] said. “Wait,” he said. If we only kept our working capital as a percent to sales flat we would yield X. We clearly intend to yield cash out of working capital and reduce inventories both in absolute dollars but also in rate. So our two big levers there are to your point lower demand and revenues with the same percentage would yield a cash from working capital, but in addition we expect inventory rates to be better therefore generating even more working capital than just percentage wise.

Roy W. Templin

Yes, I think the other relative comment, Eric, with respect to working capital as you transition from ’08 to ’09 you saw on our cash flow statement this morning and you’ll see more details I know when we file our 10-K, but obviously our payables position at the end of 2008 was significantly lower than 2007 and frankly significantly lower than where it typically is because of the fact that we took down 20% of our production in both North America and Europe. And so that’s another key item with respect to the roll over year-over-year on working capital.


Your next question comes from Michael Rehaut - J.P. Morgan.

Michael Rehaut - J.P. Morgan

I have a couple of questions actually but the first question just was hoping if you could give us some more granularity on the cost actions in terms of the benefits you expect for ’09 and specifically how it would affect the different regions? And sort of what you’ve taken already that would benefit into ’09 and what contractions that you might take and if possible to give that to some degree on a regional basis.

Jeff M. Fettig

Michael, this is Jeff. Actually I’ll give you the totals. I’m not sure I can break it down regionally sitting right here. But what I did say was because I would say all these are proportional because we’re doing aggressive things around the world is that if you remember in my remarks I said we will significantly reduce our product costs. That would imply that all these actions I outlined have to be greater than the $200 million of raw material cost increases we expect plus the volume impact of conversion which is fairly substantial.

So and what I talked about was product redesign – in other words, products we’re coming out with are redesigned with less material content in them. Commonization of components – with every one of our new mega projects they’re developed on a global basis and we have a dramatic simplification of components and more global scale on those components. We continue to aggressively deliver lean manufacturing initiatives in all our global manufacturing facilities which is a plus. We expect the cost of quality to go down as our quality continues to get better.

And then we’ve got and I don’t have the exact number in front of me but the overall restructuring benefits we talked about last fall we will be delivering either in the form of product cost reduction if they’re product related or in SG&A if they’re SG&A related. So in total again what I’m saying is they have to overcome the negatives which are the $200 million raw materials and the volume.

On the SG&A logistics side again these are significant and I don’t want to break out but it’s between $200 and $300 million of lower costs in SG&A when just combined year-over-year. So if you think about that that’s – and again these are directionally the same in all regions although I would say probably that the biggest beneficiary of these is in North America.

Michael Rehaut - J.P. Morgan

Before I just hit on my next question also on some of the big pluses and minuses for next year, you know you were good enough to give your view on raw materials that would be a net $200 million but I would assume that perhaps it might be a bigger net negative in the first half of the year and perhaps even a slight positive in the back half of the year. I was wondering if you could give us a view on how you’re thinking first half, second half or even quarter-by-quarter.

Jeff M. Fettig

I think the important thing you think about here is the significant run up – you know it was only July when oil was at $147 a barrel. And spot steel prices were $1,100, $1,200 a ton. So parts of our business had significant mid-year onward price increases, so from that perspective they actually will have – they had a run up in Q3 and Q4, they will have declines versus Q4 declining costs, but quarter over quarter, year-over-year they’ll be substantially higher. So a little bit how this plays out for the year I would say generally speaking to your point, on a year-over-year basis we’ll have higher material – the majority of it in the first half and very little in the second half.

Michael Rehaut - J.P. Morgan

I was wondering also if you could give a little bit breakdown on the tax rate what was going on there in the fourth quarter. I believe you had guided to the full year being about a – and correct me if I’m wrong here, roughly like a 38% benefit and that on our numbers got us somewhere around the $130 million benefit and it came in for the full year of $200 million or so. I was wondering if you could kind of walk through the changes there and also what type of tax rate you’re expecting in ’09 and ‘010.

Roy W. Templin

Sure, Michael. It’s Roy. First of all you’re right we guided to roughly a minus 40% tax rate for the year at the end of Q3 and we ended up at minus 82. And Michael that entire miss is almost entirely driven by the lower overall EPT that we had in the quarter relative to what we said we thought we were going to have when we did our guidance in October.

With respect to next year’s tax rate we estimate that rate Michael between 5 and 10%. And the key drivers as you think about sort of the typical statutory rate of 35%, we’ve got a 15 point reduction for the energy tax credits. We’ve got about a five point reduction coming from the BPX that we’re projecting for next year. And then about a five point reduction coming from tax planning initiatives that we have under way that will impact 2009.

And then the difference between the five and the ten Michael will ultimately be determined upon the overall dispersion of our income. Right now we are projecting more dispersion to lower tax countries which would give us a little bit of a benefit with respect to our rate next year.

Michael Rehaut - J.P. Morgan

And you think that five to 10% range you may be closer to 10% if North America rebounds a little bit? But that type of a number for 2010 as well or would any of those other initiatives, the energy or the tax planning initiatives fade in the out year?

Roy W. Templin

Well, as we said on the last call we think and we’ve estimated that we’ll earn about $100 million of tax credits in ’08, ’09 and ‘010. But beyond that, Michael, I can’t really comment on the 2010 tax rate at this point.

Michael Rehaut - J.P. Morgan

Where were the other gains on sale? You had $43 million for the quarter over all. I think you only broke it out in North America.

Roy W. Templin

Yes, we had 23 in gross margin and $20 million roughly in the other income other expense, Michael. Excuse me, in SG&A. I’m sorry.

Michael Rehaut - J.P. Morgan

But regionally though?

Michael A. Todman

Europe and the U.S.


Your next question comes from David MacGregor - Longbow Research.

David MacGregor - Longbow Research

You talked about your manufacturing being down about 20% on the quarter. I was just wondering if you could quantify for us the impact on the P&L from the plant idlings and the curtailments?

Jeff M. Fettig

Dave I can’t give you an exact number other than to say – I mean, simplest thing is if you take our production over our fixed costs in manufacturing you know the per unit rate was quite substantial. It varies factory by factory place in the world in total but it was a substantial number. I can’t quantify it for you.

David MacGregor - Longbow Research

How achievable was – you talked earlier about getting your breakeven down significantly. What’s an achievable number?

Jeff M. Fettig

Well, as I told you think of it two ways. All of our fixed costs in manufacturing are reflected in our product costs and we said that we would have significant product cost reduction overcoming increases in raw materials and the volume effect of less manufacturing. So I would say our product cost reductions are going to be a substantial number. If you just do the math and relate it to our earnings you’d see it would have to be over $500 million just on the product side.

And then I gave you the SG&A logistics number. You ought to think of the largest portion of SG&A as fixed cost base and a portion of logistics at a fixed cost base. And I said that’d be near $300 million. So it is a big number. And we think it’s very achievable and appropriate for this environment.

David MacGregor - Longbow Research

You talked about the raw material costs being up $200 million year-over-year, raw material and energy related. How much of that is yet to be negotiated or how much of that is pretty much locked up at this point?

Jeff M. Fettig

I’d break it out in a couple of ways. I would say in principle you know North America and Europe generally have more locked in contracts although they’re very few contracts that even go a year anymore. A lot of them are indexed to whatever their raw material element is. But we have I would say the large majority of those things in place, which mean they’re at some level but within a band of variability, let’s say on a quarterly basis.

Probably the two things out there that are more variable is outside of Europe and North America and largely in the emerging markets steel is generally a daily, weekly, monthly negotiation if you will. And in oil related as I just mentioned logistics obviously is adjusted a lot faster. So I don’t know a percentage but I’ve got to believe we’ve got probably 80% of our costs at least defined within a band today.

David MacGregor - Longbow Research

And then just on the two covenants, can you give us an update? I know that you don’t have full visibility on the elements of those covenant calculations.

Roy W. Templin

Yes, David, it’s Roy. David with respect to covenants let me say a couple of things. One we have $247 million out on our revolver at the end of the year. We were in full compliance with our covenants. David as we looked at the volatility both in the global demand levels and particularly the volatility that we saw in the fourth quarter with respect to currency, we proactively initiated discussions with the banks to take steps to insure we had more flexibility with respect to both our financial flexibility and liquidity.

I really can’t say a whole lot more than that at this point in time, David, other than we had less cushion than we felt comfortable with given the volatility that we’re seeing, particularly in the last quarter of the year. And so again we proactively launched those discussions with the banks.

Jeff M. Fettig

Dave, just let me add to that as well. You know what I said and we firmly believe our number one priority is to insure the financial strength and flexibility of this company during this prolonged downturn. And to Roy’s point you know there’s a lot of unknowns out there. You know how long and how deep will this demand part of this recession last. As you saw in the fourth quarter currency swings at 20 to 50% within the quarter. The complete – the volatility in the material costs market.

You know all of those things combined just gave us the belief that anything we do to enhance our flexibility is good and that’s to Roy’s point that’s why we really entered into some of these discussions.

David MacGregor - Longbow Research

Now on your covenants I realize you’re in discussion with your bankers now and I don’t want to sort of press you on a point that’s going to complicate those discussions but your debt to EBITDA covenant was less than 3.0. Your interest coverage was greater than 2.0. Did you end the quarter through either of those covenants?

Roy W. Templin

No. We were in full compliance with those.

Jeff M. Fettig

No. As I said in my comments, David, we were in full compliance with our covenants at the end of the year.


Your next question comes from Jeff Sprague - Citigroup Investments.

Jeff Sprague - Citigroup Investments

Just a follow up on that, Roy, can you tell us where you are on debt to EBITDA as it’s defined by the credit agreement?

Roy W. Templin

Jeff, I’m not going to comment as I said to David given where we’re at. I’m not going to comment any further than what I’ve already said beyond we’re in full compliance as of the end of the year.

Jeff Sprague - Citigroup Investments

As the credit agreement stands now, what is the consequence of a covenant break if you don’t succeed in renegotiating?

Roy W. Templin

Again, Jeff, I’m not going to – I don’t want to speculate on a covenant break. We are and have been in full compliance with our covenants. And it really isn’t – it isn’t appropriate for me to comment on what might the actions going forward because again we’ve been fully compliant with our covenants to date.

Jeff Sprague - Citigroup Investments

Can you tell us where your pension deficit actually finished the year?

Roy W. Templin

Sure I can, Jeff. We ended the year with a deficit of $1.3 billion. As you’ll remember we came out of the year before at $500 million. So our deficit grew by about $800 million Jeff in the year. That was driven off of a negative asset return of about 20% and a lower discount rate in 2009.

Jeff Sprague - Citigroup Investments

And did you go through a year-end exercise on Maytag? You know, market cap today is sitting near what you actually paid for Maytag. I’d have to think there was some impairment discussion going on there.

Roy W. Templin

Well, I think someone asked me on the last call Jeff with respect to impairment and I said at that point in time we actually do impairment studies both on you’re talking about the intangible assets to good will here. We also do them relative of course to our deferred tax position as well.

We do those analyses Jeff on a quarterly basis but of course year-end we do a much more thorough analysis with respect to the value of our intangibles, good will and our overall deferred tax positions. And we did not have any issues for any impairment with respect to those assets at the end of the year. But we did complete very thorough analyses in each of those areas.

Jeff Sprague - Citigroup Investments

The asset sales, what are the origin of these? Are these just kind of random facilities that have become available as you’ve shrunk the footprint? Or is there some certain complexion to what you’re finding to divest in this period?

Roy W. Templin

It is, Jeff, and as you know we execute the GOP and Jeff talked about the five facilities and we look to streamline our G&A facilities as well and G&A assets. That’s what’s driving these numbers.

Now let me clarify because there may have been some confusion on Michael’s question earlier. Again there’s $43 million, $23 of those came through the margin and $20 came through SG&A. So the geography of those, the $23 million that came through gross margin is the North America benefit and the $20 million again related to other corporate assets that came through SG&A. And you’ll find that in other corporate or other in eliminations which is that last line on our key stats worksheet. So it’s not in a region per se, it’s in the corporate center.


Your last question comes from Laura Champine - Cowen and Company.

Laura Champine - Cowen and Company

I just wanted to confirm that I heard Roy say that you expect pension contributions of $80 million. And then had a question on your thoughts on continuing to pay the $1.72 dividend.

Roy W. Templin

Laura, you are correct. The pension contribution for this year ’09 is estimated to be $80 million.

Jeff M. Fettig

Yes and Laura this is Jeff. Regarding the dividend obviously our board determines our dividend level. We’ve made no changes to date. Amongst all the things we look at all the time, we consider it and again to date we’ve made no changes.

Greg Fritz

Thank you.

Jeff M. Fettig

Well listen everyone again we appreciate you dialing in today and we’ll look forward to talking to you next time. Thank you.


This does conclude today’s teleconference. Have a great day. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!