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Whirlpool Corporation

Q1 2009 Earnings Call

April 27, 2009, 10:00 a.m. ET

Executives

Jeff Fetig- Chairman and CEO

Roy Templin- Executive Vice President and CFO

Michael Todman- President Whirlpool North America

Greg Fritz- Director of Investor Relations

Analysts

David Macgregor- Longbow Research

Laura Champine- Cowen and Company

Sam Darkatsh- Raymond James

Jeff Sprague- Citi Investment Research

Eric Bosshard- Cleveland Research

Michael Rehart- J.P. Morgan

Operator

Good morning and welcome to Whirlpool Corporation’s First Quarter 2009 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 First Quarter Conference Call. Joining me are Jeff Fetig 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 many factors discussed in our latest 10K and 10Q.

During the call we will be making comments on free cash flow, a non-GAAP measure. Listeners are directed to Slide 32 for additional disclosures regarding this item.

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

Jeff Fetig

Good morning everyone and thank you for joining us today. I think you’ve seen earlier this morning we released our first quarter financial results. Now I’d like to give you an update and a summary of where we are.

For the first quarter net sales came in at $3.6 billion, which were down 23% over the first quarter of 2008. This decline was driven by unfavorable foreign currency translation and significantly lower unit sales volumes. At a constant exchange rate revenues declined by about 14% due to lower demand.

Our earnings per share came in at $0.91 per share compared with the $1.22 that we reported last year and while there are several moving parts in the quarter we did see very strong year over year improvement in our North American and Asia businesses where our overall operating margins improved and margins remain strong in Latin America and declined in Europe.

For the quarter free cash flow improved by $73 million year over year despite sharply lower production volumes. Overall I believe we made very good progress in our cost reduction initiatives throughout the company. We continue to execute our previously announced restructuring actions and made significant progress through all the key cost reduction areas that we’ve targeted.

If you turn to Slide Four here we list the key factors impacting our business. These are the ones which we outlined on our last call and today I want to provide you with an update on where we are today.

On the positive side we are on track to significantly reduce total product cost. We’ve taken swift and aggressive actions through product redesign in moving towards global standards for parts and components. We’ve also implemented productivity and quality improvements, which are positively impacting our conversion rates and we’re also realizing the restructuring benefits from what we’ve previously announced relating to manufacturing footprint relocations and overall job reductions.

The second area that we are aggressively attacking is non-product cost primarily related to our SG&A levels. Our efforts during the quarter to reduce headcount and decrease spending in most areas are yielding very good results. In total we reduced our first quarter SG&A costs by more than 25% in dollar terms and we also reduced levels as a percent to sales in what was we see one of the most challenging sales decline environments that we’ve seen.

The third area which is very much benefiting our business is through improved price and mix. During the first quarter we realized a three point margin improvement as a result of favorable price mix. While price mix will remain one of our key priorities for the year we expect that the rate of increase that we’ve had will somewhat mitigate itself in the second quarter and the rest of the year.

There are several reasons for this. First, we see a somewhat more challenging demand environment than we previously expected. Secondly, in some markets around the world we see that some consumers are trading down in mix although we’ve had very good success with both our innovative products and our energy efficient products.

Finally we begin comping against positive price mix numbers in the second quarter and beyond so although you’ll see a reduction in year over year percentages as the year progresses overall we continue to expect that strong price mix management will be an important contributor to our margin expansion for the year.

The two other areas where we expect to see continued positive benefits are in cash generation and they are working capital and capital spending. From a working capital standpoint we made good progress in managing inventories down during the quarter. As a result, we were in line with our normal seasonal trend in working capital and we continue to expect working capital to be a significant source of cash generation as we continue to progress throughout the year.

On the capital side we expect to reduce our capital spend by at least 10% for the full year and our plans remain on track to do this. We have significantly reduced all non-product capital spend but we’re continuing our investments in new product innovations including some very exciting new product launches in every major product category in all regions of the world throughout the year.

Innovation does attract consumers to our global portfolio of leading brands and it generates higher margins. We’re making continued but focused investments in innovation and our global innovation pipeline remains very strong.

We continue to see demand, material costs and currency having a negative impact on our business this year. There have been some pluses and minuses in each category since our last call however.

First, I would say that demand is slightly weaker than our previous expectations and I’ll detail that in a moment. Secondly, we now expect material costs to be modestly better from our previous estimate. During the first quarter we continued to experience higher material cost but we see a downward trend in prices of some of our key inputs. There is a lot of volatility in many of these costs and we anticipate that they will continue to mirror demand patterns in the global marketplace. But on balance I would say that things continue to move in the right direction.

The third area that I will mention; during the first quarter we saw a lower level of foreign exchange volatility compared to what we experienced in the fourth quarter. While foreign currency translation remains unfavorable rates have been by and large in line with our expectations.

Overall, the factors affecting our business in 2009 remain largely unchanged and we remain focused on generating cash and reducing costs in every part of our business to align to minimize those factors which are having a negative impact on our business.

Now I’d like to spend a moment on our regional unit demand outlooks, which are shown on Slide Five. In the US and Europe we’re seeing some signs that demand is stabilizing at lower levels. We now expect industry volumes to decline by 10% to 12% in the US and in Europe we expect industry demand to decline by about 10%.

In Latin America based on our current economic outlook we are confirming our previous expectation of appliance industry unit growth in the range of flat to down 5% and in Asia also we expect to remain flat to 5%.

Moving to Slide Six we can continue to expect for the year our earnings to be in the $3 to $4 per share range and we expect to generate positive free cash flow in the range of $300 million to $400 million. Of course our projections are based on our current economic assumptions and environment and the plans that we have in place today and while there is some volatility and uncertainty remaining in this economic outlook our focus is firmly on taking all the actions needed to insure that we address this difficult economic environment.

At this point I’ll turn the call over to Mike Todman to update you on North America.

Michael Todman

Thanks Jeff and good morning everyone. I’ll begin by reviewing North America’s performance in the first quarter.

As shown on Slide Eight our net sales declined 20% during the quarter to $2.1 billion with US industry demand for T7 appliances declining approximately 16%. Excluding the impact of foreign currency exchange our sales decreased 17%. While our year over year volume declined substantially during the first quarter we did experience a slowing of the decline as the quarter progressed. The volume decline was more than offset by favorable price mix and our ongoing cost reduction efforts including reductions in overhead and SG&A costs. These areas benefited from reduced head count and other cost reduction initiatives that aligned our capacity levels with demand.

During the quarter we realized an operating profit of $164 million compared to $44 million reported in the prior year quarter. The improvement in profit was due to favorable price mix, our ongoing cost reduction initiatives and an $87 million gain related to the curtailment of a retiree health savings account. Results were partially offset by significantly lower production levels, higher material costs and a $23 million expense related to a supplier-related product recall. Excluding special items our operating margin improved to 4.5% compared with 1.7% in the prior year.

Turning to Slide Nine I would like to take a moment to discuss the industry demand dynamic during the quarter. You’ll see that we experienced the most acute US industry demand decline in the first two weeks of the first quarter as many of our trade customers went through a significant de-stocking of inventory. During the balance of the quarter we saw the rate of decline and industry demand decrease compared with the first two weeks. In fact, excluding the first two weeks demand declined approximately 12% on a year over year basis versus the approximately 16% reported for the quarter.

Given the demand in the first quarter as shown on Slide Ten for the full year we now expect US demand to be down in the 10% to 12% range. Looking at the components of demand we now expect to see a 41% decline in new home completion. This is down approximately six points from our previous estimate. Our forecast for existing home sales remains unchanged at a 9% decline.

In addition, we continue to expect discretionary spending to have a negative impact on overall results as high unemployment levels persist. Some consumers continue to delay replacement purchases even for appliances that are beyond repair due to the economic uncertainty. However, 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 it is just a matter of time before these buyers return to the marketplace and when economic concerns subside we are better positioned than ever before with better products, a heightened focus on energy and water efficiency and even more consumer relevant innovations.

We are seeing, as evidenced on Slide 11, consumers are purchasing energy efficient appliances. Energy efficiency represents a great financial value to consumers especially during these tough economic times. During the quarter we were recognized with the 2009 Energy Star Sustained Excellence Award by the Environmental Protection Agency and the Department of Energy. This marks our tenth Energy Star Award and our fourth consecutive Sustained Excellence win. Today, we offer the widest array of energy and water efficient appliances to the global marketplace.

Our priorities for 2009 in North America are shown on Slide 12 and we are executing to these priorities. During the quarter demand levels were less than expected. We remain focused on appropriately adjusting our production levels and inventory to expected demand levels throughout the year.

Our cost reduction efforts during the quarter were strong. We are acting with speed as we manage all costs across our business including manufacturing and supply chain costs through focused lean activities, organizational SG&A costs and all other costs that do not impact making, selling and distributing our appliances.

We continue to execute the previously announced restructuring plans in the areas of reduced labor and production capacity. Production ceased at the Oxford Mississippi plant this month and the close of our Jackson Tennessee facility is scheduled for August.

In addition, we continue to optimize our volumes and price mix in the marketplace by insuring we strike the appropriate balance between volume and realizing our price mix. We are executing this by continuing to introduce new product innovations in our brands that our trade customers and consumers are benefiting from.

Yet, despite this focus, given the demand environment we have increased our promotional activity on selected products in the marketplace. As a result, in the second quarter and for the balance of the year we expect our price mix to be impacted by the lower demand levels and the fact that some consumers are choosing to trade down when it comes to appliances during this period of uncertainty.

While we continue to balance our volume and price mix beginning in the second quarter year over year comparisons will be against favorable price mix trends in the prior year. As such, while we expect to continue to see improvement in price mix we do not expect to see the level of year over year improvement we posted during the first quarter.

Finally, with regard to our consumers and trade customers we will continue to accelerate our disciplined and systematic approach to deliver the right product at the right value. This is particularly evident as we have already discussed in the area of providing consumers to the efficient products. We continue to execute our priorities and adjust our business to perform during this challenging economic period.

With that, I will turn the call back over to Jeff for his comments on our international operations.

Jeff Fetig

I’ll now turn to Slide 14 where we have an overview of our international operations, where our results were somewhat mixed during the first quarter.

Results were unfavorably impacted by exchanges rates, which lowered both sales and operating profit. We saw significantly lower demand levels in Latin America markets outside of Brazil and in Europe while our Asia and Brazil businesses delivered very solid results during the first quarter.

On Slide 15 you’ll see our European business where our European revenue decreased by 26% in the quarter. In local currency sales declined 12% from the previous year. Industry unit shipments declined by approximately 14% year over year. During the quarter we saw weakness across nearly all major markets. Eastern European countries remain the most challenging.

Our European operating profit declined to break even levels compared to the $45 million earned in 2008 and again these results were impacted significantly by unfavorable currency changes and sharply lower production rates. Unfavorable foreign currency accounted for approximately 30% of this decline and our ongoing cost reduction efforts partially offset these results.

I will turn now to Slide 16 to review our Latin America business where revenues declined by 26% during the quarter. Excluding the impact again from currency, sales decreased by about 9%. Appliance results reflect very strong results from Brazil and our performance out-paced the industry during the quarter. In contrast we saw weak demand from most appliance markets outside of Brazil in the region as well as in our global compressor business, which is feeling the effects of substantially lower demand levels in the US and Europe.

Overall, our operating profit fell to $57 million compared to $119 million last year. Our results were adversely impacted again by unfavorable foreign currency, lower unit volumes, higher material costs and a $26 million expense related to an operating tax settlement, which we recorded during the quarter. Partially offsetting these results were favorable productivity initiatives and other cost reduction efforts.

There are two additional topics I’d like to mention about our Latin American operations. First of all, recently the Brazilian government initiated a program aimed at stimulating appliance demand. This program reduces sales tax levied on products sold and is modeled on a similar program which they instituted earlier this year in the auto industry. We do expect positive demand benefits in Brazil from this program as a result of lower sales tax rates and in fact we’ve seen some preliminary evidence of a positive impact in pickup in consumer demand.

From a Whirlpool perspective however, the temporary reduction in this sales tax rate will have an unfavorable impact on our ability to monetize VPX tax credits during the quarter and therefore this will likely have a net negative impact on earnings during the second quarter.

Second, as we disclosed previously, in February we received a grand jury subpoena from the US Department of Justice requesting documents related to an anti-trust investigation of the global compressor industry. Whirlpool subsidiaries in Brazil where our compressor business is headquartered and Italy also received requests from authorities seeking similar information.

As we stated then we are fully cooperating with all governmental investigations and we’ve taken actions and we’ll continue to take actions to minimize our potential exposure.

As you all know, these matters are extremely complex and the timing of this is difficult to predict. We’re dealing with the laws of several different jurisdictions around the world, each with its own process and procedures. The final outcome of these matters will depend and on many factors and variables. Today it’s premature for us to speculate as to the potential outcomes at this time and due to the nature of these ongoing investigations we won’t really make further comments on this matter at this time.

Let me now turn to Slide 17 and talk about the first quarter result of Asia. Net sales decreased 13% during the quarter. Excluding the impact of currency sales increased 3% compared with the previous year. Our operating profit improved to $5 million versus $2 million last year and the year over year increase in operating profit is primarily due to productivity improvements and favorable product price mix. We did have unfavorable currency impacts, which partially offset these favorable results.

Now I’d like to turn it over to Roy Templin for the financial review.

Roy Templin

Thank you Jeff and good morning everyone. Beginning on Slide 19 I’ll walk you through a summary of our first quarter performance.

From a top line perspective we saw significant weakness across most major markets during the first quarter with the exception of Brazil, India and China where demand was relatively stable. Industry declines in our largest markets, North America and Europe, were the steepest we have experienced since the beginning of the recession. In addition to the decline in global unit volume as we previously communicated to you we experienced a significant revenue decline as a result of unfavorable foreign currency exchange rates.

One of the notable bright spots within this challenging macroeconomic environment was price mix. From a margin perspective we had positive impacts from our price mix and the enterprise-wide cost reductions we previously communicated to you. Offsetting the substantial positives were sharply lower global unit production volumes, unfavorable foreign currency exchange and higher material and oil-related cost.

Finally we monetized $35 million of DTX tax credits during the quarter and recorded several special items during the quarter, which I will now discuss on Slide 20.

This schedule outlines the impact of special items during the quarter. On the favorable side we’ve recorded an $89 million benefit related to the indefinite suspension of the annual credit to retiree health savings accounts. In addition, we adopted the modified units of production depreciation method during the first quarter, which resulted in a favorable P&L impact of $8 million.

For the full year we expect this change will favorably impact our results by approximately $74 million based upon our current production forecast. We feel the units of production method better reflects the usage of assets with revenue generation from the assets and is a preferred method relative to the straight line method.

We had several unfavorable special items during the quarter that more than offset these favorable factors.

First, we agreed to the settlement of a previously disclosed operating tax case in Brazil. This had a total pretax impact of $42 million during the quarter. As you will note from this chart we recorded this amount in several line items including $13 million in interest expense. Second, we incurred $24 million of restructuring charges during the quarter related to our previously announced programs. Third, we recorded a $23 million charge related to a product recall that we announced in March. Finally, we incurred $21 million of cost in our interest and sundry expense related to legal cost and a mark to market loss from a commodities derivative contract.

Turning to the income statement of Slide 21, during the quarter we reported revenues of $3.6 billion, down 23% from the previous year. The unfavorable impact from foreign currency translation accounted for nine points of the decline and was predominantly related to the appreciation of the dollar against the Brazil Real and the Euro. In addition to this weakness however, we continued to see unfavorable effects across most of our major currencies.

Our gross margin increased 1.4 points to 14.7% for the quarter. Even excluding the special items noted previously our gross margin improved on a year over year basis despite losing nearly one quarter of our revenue base. This achievement was predominantly driven by significant improvements in our price mix and progress in our previously announced restructuring and cost reduction initiatives.

These favorable items were partially offset by substantial declines in global unit production, which resulted in significant unfavorable productivity variances. We also experienced substantial unfavorable variances in foreign exchange and material cost during the quarter.

SG&A expenses decreased $113 million to $327 million in the quarter. The variance was largely driven by lower SG&A expenses related to cost reduction initiatives. Foreign currency translation and the retiree medical plan change accounted for approximately $41 million of the improvement. Notably, our SG&A improved as a percentage of sales to 9.2% from 9.5% in the previous year despite the significant drop in revenues.

During the quarter we reported $24 million of restructuring charges related to our previously announced programs compared to $8 million in the previous year. As a result of the items I just discussed operating profit totaled $166 million compared with $159 million in the prior year. Unfavorable foreign currency exchange rates resulted in an unfavorable impact of $34 million on our operating income during the quarter, which more than offset the $24 million of net benefits of special items during the quarter.

We are pleased with this performance given the sharp reduction in revenues during the quarter.

Turning to Slide 22 our Other Expense had an unfavorable impact of $47 million during the quarter related to foreign currency exchange, legal costs, higher mark to market losses on derivative instruments, an operating tax settlement and other items. As noted on a previous chart approximately $24 million of these costs were related to special items recorded in the first quarter.

Moving to our tax rate; we reported an income tax benefit of $16 million during the quarter compared to an operating tax expense of $3 million in the prior year. The year over year benefit is predominantly related to lower year over year pretax income and the corresponding impact of various tax credits.

Slide 23 illustrates our working capital results for the quarter. Our working capital balance improved during the first quarter compared to the prior year on a total dollar basis. As a percentage of sales however, it increased 2.3 points as sales declined substantially from the prior year.

Our inventory balance was down on both a sequential and year over year basis during a quarter where we traditionally build significant inventory. The most significant unfavorable variance was largely driven by accounts payable.

As you know, we reduced our production levels significantly during the first quarter as we did in the fourth quarter. As such, we have significantly reduced our purchases. This has had a substantial impact on our first quarter payables balance. Going forward as our production rates stabilize we expect to see our payables balance return to normal and have a positive impact on our cash flow for the remainder of the year.

Now I’d like to take a moment to discuss our free cash flow performance on Slide 24. For the quarter we reported free cash flow usage of $371 million compared to a usage of $444 million in the prior year. The favorable variance is largely attributable to lower outflows in other operating accounts, which is primarily related to lower promotional, warranty and incentive compensation payments.

During the quarter we had a one-time payment of $26 million related to a global multi-year IT licensing agreement that will not recur for the remainder of the year. For the full year our capital spending is expected to remain in the range of $450 million to $500 million.

On Slide 25 we look at our first quarter cash flow in the context of our five-year average. As many of you know we traditionally have our weakest free cash flow generation during the first quarter as working capital, promotion and other payments represent a significant use of cash.

As you can see, our first quarter cash flow was largely in line with our historical average. We traditionally generate a significant amount of cash flow in the remaining nine months of the year and our expectation for this year we feel with some of the unusual variances in our accounts payable due to our decision to have strong inventory controls we believe we are in a good position to generate significant working capital benefits for the remainder of the year as production rates normalize. As such, our full year outlook for free cash flow is unchanged at $300 million to $400 million.

Turning to Slide 26 I would like to spend a moment on our liquidity position. We had $656 million outstanding under our $2.2 billion revolving credit facility and we are in full compliance with our covenants. 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 15th.

As we announced earlier we successfully amended our credit facility during the first quarter. This amendment resulted in a half-turn improvement in both our leverage and interest coverage covenants, which now stand at 3.5 times and 1.5 times respectively.

In addition, we gained additional relief from the exclusion of up to $100 million of cash restructuring cost from our income calculations and $200 million of derivative positions from our debt calculation.

Finally, I’d like to turn to our outlook summary on Slide 27. As Jeff mentioned, based on current economic conditions and our plans we expect to earn $3 to $4 per share during 2009. As you might expect, there have been several moving parts to our underlying assumptions as the quarter progressed.

On the positive side, we have three effects that I would like to discuss. First, as I mentioned earlier, we have adopted the modified units of production depreciation method, which results in a favorable $74 million impact for the full year. Second, we now expect a full-year tax benefit of approximately 15% to 25%. As you know, given our lower levels of pretax income the various credits we record significantly impact our rates from quarter to quarter. Finally, we are seeing some improvement in our expected material costs for the full year.

Some unfavorable items I would like to highlight are as follows; as Jeff mentioned earlier, we lowered our full year outlook for demand in North America and Europe. In addition to the volume adjustment we expect to realize slightly lower price mix than our previous expectation for the balance of the year as Mike discussed earlier.

As we previously disclosed we amended our credit agreement, which resulted in higher bowering cost and fees and recently the Brazilian government enacted an appliance sale tax program that significantly reduces our payment on these items during the next three months. While we expect this to have a positive impact on demand in Brazil it will significantly reduce the amount of BTX credits that we will monetize in the second quarter.

We expect to recognize only a nominal amount of BTX credits in the quarter compared with the $35 million that we recognized in the first quarter. If this program expires in July as currently legislated we expect to begin to return to more normal utilization levels in the third and the fourth quarter.

Finally, based on our current outlook for global mix of business we expect unfavorable foreign currency impact to be at the high end of our previously announced range of $100 million to $150 million.

On balance, we expect the previous items to offset and we are leaving our outlook unchanged at $3 to $4 per share. At this point I’ll turn the call back over to Jeff.

Jeff Fetig

Thanks Roy. Let me sum up our comments today. Overall, the global economic situation is largely playing out in line with the expectation that we’ve had. Clearly this is a unique period where we’ve seen significant declines in global consumer demand for the last eight months and rapid volatility in exchange rates.

Overall I feel quite positive that we move quickly to readjust our business to these economic realities and as I mentioned we have a very strong focus on three things. One, significant cost reduction across the business, secondly, market execution, which is striking the right economic balance between volume and price and mix and third, driving strong cash generation.

To date I believe we’re on track on all these and I believe this has been reflected in our first quarter results. Short term we don’t expect the economic environment to significantly improve although we’re now seeing some stabilization in most markets and by stabilization I mean that the rate of decline in the consumer demand is lessening and that global currencies are trading in a much narrower range.

Our overall view remains the same. The first half of 2009 has been and will continue to be a very challenging market from a demand decline perspective. We do still believe the second half demand levels will improve although still be negative but much less so than we are seeing in the first half of the year.

We will continue to take very strong actions required to significantly reduce our costs, lower our break even levels and best in winning consumer innovation and generating cash. These priorities will insure our financial strength and position and position us very well for value creation as demand levels normalize over time. I’d like to end my comments here and we’ll now open up the call for questions.

Question-and-Answer Session

Operator

Thank you sir [Operator Instructions]. We’ll take our first question from the site of David Macgregor from Longbow Research; your line is open.

David Macgregor- Longbow Research

Can you just talk in hopefully quantitative terms about the impact of I guess future cost savings from restructurings that have occurred to date that are not yet reflected in the first quarter results?

Roy Templin

David, this is Roy, good morning. As you look at the benefits from the restructuring we had $25 million of benefit as you know in the fourth quarter of last year. In 2009, David, we are estimating that we’ll have a total of $165 million in benefit from those actions. I want to be clear here; the $165 million is not incremental to the $25 million. It is the cumulative reductions through the end of this year and then through the end of 2010 we think that number will total $230 million of benefit and that will be our run rate going forward David.

David Macgregor- Longbow Research

Just with respect to these cost savings, which are pretty impressive I guess what are the elements here beyond depreciation? Can you talk a little bit about the extent to which its being generated from labor versus head count reductions versus plant closings? Can you just break it open for us a little bit?

Jeff Fetig

Think again going back to what we talked about, think about it in two parts; product and non-product. In the product area we are getting material productivity from the things I talked about including cost design changes, eliminating material from the product cost, moving to global standards and communizing parts and components and getting more scale from the volume that we have. Those are the primary drivers of material productivity.

In our factories in terms of conversion we not only have lean manufacturing activities but quality improvements are improving our conversion rates, which are greatly challenged by the volume reductions that we have. We also are looking at significant improvements in our warehousing and logistics costs and that sort of thing.

So really, every piece of the business we have under a microscope and we’re managing every both fixed and variable cost to drive savings. In SG&A, again, it’s a number of items. As we’ve talked about we have reduced both jobs and benefits. It’s a very difficult decision but appropriate for this environment. Spending is also under a microscope and we’re spending only where it’s important to run today’s business and invest in the marketplace today.

So we have a cost management system that we’ve been building over the last two or three years deployed around the world. We measure every week, every month, every quarter our cost savings in every part of the business and we are running it at a very strong rate now that we expect to sustain throughout the course of the year.

David Macgregor- Longbow Research

Do any of these cost savings put market share at risk?

Jeff Fetig

I don’t think so. We talk about having a balanced approach to the marketplace. As I look around the world in the first quarter our North America market share was roughly equivalent to fourth quarter so sequentially it was flat with strong VMR. I think we gained some market share in Latin America. We gained a few tenths of a point in Europe so we are not taking away investment where it counts for this kind of period.

Operator

We’ll take our next question from the site of Laura Champine from Cowen and Company; your line is open.

Laura Champine- Cowen and Company

Good morning, just a couple of things; if you could give the consolidated EBIT impact from foreign exchange and then if you could comment on what’s left in the BPX bucket? I realize you’ll be recognizing very little in Q2 but if I could get a sense of what’s left over the long term that’d be great.

Roy Templin

Sure Laure; Laura, on BPX you’ll see when we file our Q this afternoon we have $518 million remaining in terms of the balance of BPX that you’ll see later today.

Let me talk a little bit about currency, which was the first part of your question and I think we probably captured this a couple places in the script but let me pull it all together.

For the quarter, Laura, we had $44 million of impact at the EBIT level. We had $34 million negative in operating profit and we had another $10 million negative in other income and other expense. The bulk of the impact on operating profit is coming from translation.

As you know, Laura, we really have two buckets that we get impacted from. The first is just as a result of our global footprint where we produce in currencies that is different from the currencies that we might actually have the revenues generated from we obviously have translation. Then of course we just have the translation of…The bulk of the operating impact in the quarter was coming from translation versus transaction. Then in OIOE we had about $10 million, which is again the net reduction year over year as the result of balance sheet positions that we hold across the globe in currencies other than that local currency or local functional currency for the operation.

Laura Champine- Cowen and Company

Just as a quick follow-on, Roy, what was the total consolidated impact of currency on your earnings a year ago Q1 2008?

Roy Templin

If I look at 2008 I don’t know if I have that separate here. Again, I’m giving you the year over year changes here. The Other Income Other Expense is ten different and it was a nominal amount in Operating Profit Laura. I think I remember actually through the three quarters last year it was only $6 million so in the first quarter the operating profit impact had to be a very immaterial number.

Operator

The next person in queue is Sam Darkatsh from Raymond James; your line is open.

Sam Darkatsh- Raymond James

A couple questions if I might; first off, a clarification question. Roy, the depreciation is going down by $74 million, which unless I’m misunderstanding something with the accounting standards your Cap ex guidance of 450 to 500 does that mean you’re now spending depreciation in terms of Cap ex because your overall depreciation levels are going down?

Roy Templin

Roughly speaking, Sam, that is correct yes.

Sam Darkatsh- Raymond James

Why wouldn’t you be under-spending depreciation meaningfully in this type of environment?

Roy Templin

Well, again, let me talk a little bit about what we’re spending in Cap ex because if you look at the first quarter on the surface and I made this comment in my script, Sam, but it may not be clear.

If you look at what we traditionally spend in a first quarter sort of year in and year out we typically spend about $85 million in fixed capital in the first quarter. The number is obviously higher this year Q1 and Sam, that increase is coming almost entirely from the technology investment that I referenced in my script.

This is a global multi-year investment that we made in technology. It actually enables us to improve the efficiency of our technology across the globe. Again, we had the one-time payment, a multi-year contract but it’s distorting what otherwise would be sort of the fixed capital trends that we have in the first quarter.

We still expect, Sam, for the full year to be in that 450 to 500 range.

Jeff Fetig

And Sam, the other thing I would add is that the capital we are spending, which is fairly significantly below last year and recent run rates in the last three or four years is focused on very significant new products that are coming to the marketplace, which are not only very innovative they come with substantial cost reductions and quality improvements.

The last piece of it is a fairly substantial portion of our capital that’s not being spent on new products is being spent on redesign of products that I mentioned earlier and therefore is driving our cost reduction so we think this capital is very well being focused on those things which drive results this year and next year.

Sam Darkatsh- Raymond James

Two more quick questions if I might; the first one would be what are your new assumptions now, Jeff, for price mix versus material inflation specifically? Then the second question would be Slide Nine was very helpful in terms of the weekly trend in North America for wholesale shipments. Would we look at something very similarly if you showed us sell through versus sell in or how do those trends look and how much did the retailers take out of inventory?

Jeff Fetig

On material, Sam, material prices if you will; we had indicated, again, the year around $200 million. That is better. It could be as much as $50 million better but having said that I would note that as Roy pointed out we do have a negative currency. The currency is at the high end so that somewhat offsets each other, a net gain overall.

Price mix we talked about around 2% for the year. We were 3% the first quarter so off to a good start. That 3% rate we don’t think will continue at that rate. Probably under 2% for the year somewhat given some of the mix changes would probably be an appropriate estimate at this point in time. I’ll ask Mike to talk about the consumer trends.

Michael Todman

Sam, if we look at sell through for the quarter it actually would have been at about the rate of demand if you take out those first couple of weeks so it was even with around that 12%, maybe slightly lower and what we did see is kind of a continued progression of better consumer purchases over the course of the quarter.

Operator

We’ll take our next question from the site of Jeff Sprague from Citi Investment Research; your line is open.

Jeff Sprague- Citi Investment Research

Just a handful of questions; first, Roy, I’m just trying to kind of work to an earnings bridge here. How do we think of the tax effect on the change in depreciation? Should we use kind of a normalized tax rate as we think about what that adds to your earnings profile here?

Roy Templin

That’s fair Jeff.

Jeff Sprague- Citi Investment Research

Then on price mix I believe all the discussion we’ve been having and the numbers that have gone around on the call have really been on the profit side of the equation. Can you give us a little color on what price mix did on the top line and whether it’s biased one way or the other? Is it really a price driven thing or is it more on the mix side?

Roy Templin

Jeff, I’ll take that, it’s Roy. If you look at the total net sales rec for the quarter as you know our sales were down right at 23% and about 16% of that was the volume reduction. Price mix, Jeff, was a favorable 2% and foreign currency was an unfavorable 9%.

Jeff Sprague- Citi Investment Research

And as you’re looking at the I guess somewhat erosion of price mix over the balance of the year it sounds like it’s mostly a mix that you see shifting down this consumer preference issue or do you think there is some downward bias on price also?

Jeff Fetig

Jeff, first of all it’s a lessening of the increase is the way I would describe it compared to what we had in the first quarter and it’s I would say a combination of two things. One is some and I emphasize some markets around the world are showing a lower product mix if you will and I would say promotional activities are probably consistent with what we’ve seen to date so I don’t see a big change there. But I would say it’s much more of a mix than anything.

Jeff Sprague- Citi Investment Research

Roy, could you give us that same walk you just gave on North America; those are the total Whirlpool numbers but if I look at North America down 20 how that breaks out?

Roy Templin

I sure can, yes. For North America specifically, Jeff, volume down 22%, FX was again a negative 3% and then for North America price mix was a favorable 4% for a net delta of minus 21.

Jeff Sprague- Citi Investment Research

I guess finally from me just around the whole BPX question; was this adverse settlement of $26 million in any how related to the issue of contesting how BPX is used or does it relate to BPX at all or is it a separate matter?

Jeff Fetig

No Jeff. It’s a five or six-year old matter in Brazil. It has nothing to do with BPX. There’s over 800 companies where the government basically had a favorable ruling on IPI. It has nothing to do with BPX, an IPI abatement if you will. Then they reversed themselves two years ago and that’s what created the liability and then it’s still being disputed in the courts. But there was a settlement offer to all companies at the end of the first quarter and we chose to take that settlement.

Jeff Sprague- Citi Investment Research

Just one follow-on on BPX; the fact that you can’t use it in Q2 so has the Brazilian government essentially decided to “pay” for this tax reduction, consumer tax reduction by disallowing BPX or is there…?

Jeff Fetig

No, not at all. Let me break it into two parts. Our BPX tax credit has not changed and as you’ll see it’s well over $500 million; the validity of that credit has not changed. The vehicle by which we monetized it on a monthly and quarterly basis was a credit of the we call it IPI but it’s really a sales tax and we credit against that on all sales.

Well given that the government has temporarily suspended that sales tax credit we therefore have nothing to monetize against during the quarter. It has nothing to do with the credit. It has to do with our ability to monetize.

Operator

We’ll go next to the site of Eric Bosshard with Cleveland Research; your line is open.

Eric Bosshard- Cleveland Research

Two questions, first of all the tax rate now is guided to a full year 15% to 25% benefit and I think previously that had been sort of a 5% or 10% expense; is that right?

Roy Templin

That’s correct Eric.

Eric Bosshard- Cleveland Research

What changed to drive that swing?

Roy Templin

That’s a good, fair question. Eric, two things I should mention; one is, at these EBT levels given that we have the energy tax credits that we have in our overall base of taxable income our effective tax rate is very volatile and moves up and down the scale very quickly.

The short answer to your question in terms of what happened or what’s different is we have more favorability coming off of assumptions we had made with respect to tax planning coming into the year versus where we now think we’ll end up for the year and that’s the key driver of the change. But, again, I only pause and say I want everyone to be careful that it’s a very volatile rate right now just because the overall EBT is so low and the credits that we have are so high and this thing really moves quickly up and down.

But that’s the short answer, Eric; it’s more effective planning strategies than what we’d assumed coming into the year.

Eric Bosshard- Cleveland Research

Then secondly, the original three to four guidance contemplated a higher tax rate and I don’t think it contemplated this $74 million swing in depreciation. What are the big items on sort of the other side of the equation that are negating those or should we view this $3 to $4 guidance as extremely conservative?

Roy Templin

A couple of things here, Eric, in terms of the big items and basically all these will sort of link up to Jeff, Mike and my comments on our scripts. Taking the global volume from 8% to 10% obviously had a negative impact. Jeff referenced slightly lower price mix. We do and we have of course assumed higher revolver interest from our revolver amendment that we did in the first quarter. Currency is now more negative as we move to that high end point on the overall currency guidance and then lower BPX coming off of this IPI change that Jeff just referenced earlier. Those are the big offsets Eric.

Eric Bosshard- Cleveland Research

The other question I wanted to ask is that North American units I think you just indicated were down 22% in a market that was down 16%. Can you talk about what’s going on that’s driving this underperformance of units relative to the market and how you see that comparison playing out and why through the rest of the year?

Michael Todman

Eric, this is Mike. To be honest, we actually feel and we talked about this in the fourth quarter coming in or on the fourth quarter call, which is that we were going to balance our market share with appropriate price mix and we continued to do that in the first quarter. Actually, sequentially we picked up a little bit of market share and we felt good about that.

What we expect to do is over the course of the year sequentially is begin to improve our market share position. But we’re going to continually keep the balance of getting price mix and market share in front of us. So, in the first quarter just to put it in context we were able to improve our margins by five points based on this price mix so it had a substantial positive impact on our business.

Eric Bosshard- Cleveland Research

Then one last question; inventories were down year over year but I think down kind of half of the rate of sales, down 12 versus the overall sales down 23 and I know both have an impact from currency. But is there a point at which we should reduce production levels, you should reduce production levels to match current inventory to sales or how are you thinking about managing the inventories to get back in line with sales?

Jeff Fetig

Eric, you’re absolutely right. In fact, we’ve done that in both the fourth quarter and the first quarter where our production has reductions; particularly in the case of North America and Europe are well below our sales decline levels.

Historically we always have a seasonal inventory build in Q1 and Q2. We had an inventory decline this year by a couple hundred million dollars so we are tracking pretty much spot on where we want to be at this point in time of the year. Sequentially even with negative demand trends we have a seasonal increase in revenues Q2 to Q1, Q3 to Q2 so we’re pretty much where we want to be.

I think we’ll cross over some time in the second quarter based on the assumptions we’ve laid out but we’re pretty fixed on keeping inventories lower and the path we’ve been on really for the last six months is getting us there.

Roy Templin

Eric, it’s Roy; just to quantify Jeff’s comments a little bit. If you look year over year production units in North America were down 25% year over year and in Europe were down 20% so to Jeff’s point pretty substantial reductions with respect to production take out.

Operator

We’ll take our last question from the site of Michael Rehart from J.P. Morgan; your line is open.

Michael Rehart- J.P. Morgan

The first question just on the changes in the different inputs to the full year guidance; I appreciate the detail. Hopefully I can press my luck and get a little bit more. In terms of you kind of went through different line items but on an EBIT basis and that would just basically be before the interest in sundry and the interest expense perhaps I can walk through this with you later. What is the net delta in terms of what your thinking was three months ago versus today?

Jeff Fetig

Michael, I will maybe go back to my comments. This is a very unique environment. There’s volatility literally across every part of the business. The ability to forecast line item details as you can imagine is very difficult in this period.

I guess at a macro level we’ve tried to outline the things that were positively affecting us and the things that are negatively affecting us. In balance, with pushes and takes on each, I guess as I look at today on the positive side we’ve gotten more cost takeout than we originally expected and we’re off to a good start price and mix so those are the two positives.

Our inventories are pretty much where we thought although the timing of the payables that is not yet fully reflected in cash flow; it will be. The demand is somewhat worse than we had expected although as we talked about I think a lot of that was the beginning of the year the holiday hangover effect if you will and the fact that retailers like everyone are managing liquidity. Retailers around the world have taken inventories down to levels not seen before but that has been a negative. Materials are mildly more positive and currencies are more negative.

In total that’s why I say I feel very good that our overall assumptions aren’t largely changed but the makeup of them are changing every day.

Michael Rehart- J.P. Morgan

I appreciate that. The higher interest expense was one of the things you mentioned Roy. Can you give us a sense of what that’s going to be for the full year?

Roy Templin

On the revolver, Michael, it’s going to be about $30 million roughly.

Michael Rehart- J.P. Morgan

In terms of a net increase year over year?

Roy Templin

That’s correct.

Michael Rehart- J.P. Morgan

Lastly I was wondering if you could just walk through some ideas in terms of changes in share in North America. Jeff, I think in your prepared comments you said that you believe North American share was flat sequentially but your overall units or volume was down 22% and for the quarter the industry shipments were down 16%. I was wondering if you could kind of maybe reconcile that and give us Whirlpool branded, Maytag brand, OEM what’s going on in the different buckets?

Jeff Fetig

Let me just give you the total; I’m not going to break out the individual brands Michael. We talked about this the last couple of calls. In the third quarter last year we took a fairly major price increase across our largely our US business and also that was the time material costs were skyrocketing and so on. We balanced with a price increase in volume during that period of time and we lost a lot of share between Q3 and Q2; we expected that. We actually sequentially increased share in Q4 versus Q3 and we were flat to slightly up Q1 to Q4.

But if you look on the year over year basis yes we lost share because actually first quarter last year was our highest share quarter of the year. Look, we have to get appropriately…We have to have appropriate economics in the marketplace. We’re gaining our share through the strength of our brands and in innovative new products. That’s the way we’re going to earn share every day.

I think economically if you look at our results it’s been the right balance to strike during this period of time.

Michael Rehart- J.P. Morgan

Any update in terms of Sears? I know there’s always chatter quarter to quarter and year to year but if you can give us any sense of how you’re doing with Sears in terms of Kenmore and Whirlpool branded product?

Michael Todman

We actually feel very good about our business with Sears, both on a quarter to quarter basis and as well as sequentially, both in terms of the Kenmore product as well as our branded sales. They continue to be at the levels that we expect and we feel very good about it.

Jeff Fetig

Everyone, thank you for joining us again today and we look forward to talking to you in July, thank you.

Operator

This concludes today’s teleconference; have a great day. You may disconnect your lines at any time.

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Source: Whirlpool Corporation Q1 2009 Earnings Call Transcript
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