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Executives

Greg Fritz – Director of Investor Relations

Jeff M. Fettig – Chairman, Chief Executive Officer

Michael A. Todman – President, Whirlpool International

Marc R. Bitzer – President, Whirlpool North America

Roy Templin – Chief Financial Officer

Analysts

Sam Darkatsh - Raymond James

Laura Champine - Cowen and Company

[Ray Horn] for Michael Rehaut - J.P. Morgan

David MacGregor - Longbow Research

Todd A. Schwartzman - Sidoti & Company, LLC

Jeffrey Sprague - Citi

Eric Bosshard - Cleveland Research

Whirlpool Corporation (WHR) Q4 2009 Earnings Call February 2, 2010 10:00 AM ET

Operator

Good morning and welcome to Whirlpool Corporation’s fourth quarter and year end 2009 earnings call. Today’s call is being recorded. For opening remarks and introductions I would like to turn the call over to the Director of Investor Relations, Greg Fritz. Go ahead sir.

Greg Fritz

Thank you, Chris, and good morning. Welcome to the Whirlpool fourth quarter conference call. Joining me today are Jeff Fettig, our Chairman and CEO; Mike Todman, President of Whirlpool International; Marc Bitzer, 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’s future expectations. Our actual results could differ materially from these statements due to the 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 31 for additional disclosures regarding this item. Our remarks today track with the presentation available on the Investors 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 again thank you for joining us this morning. Before I begin I do want to briefly discuss the leadership changes we announced in mid-December and that Greg just referred to in the opening comments.

First of all, Mike Todman who was previously the President of North America is now serving as President, Whirlpool International. In his new role he will be accountable for Europe, Latin America and Asia regions as well as our global information systems. Mike’s also accountable for several key global, strategic areas including our innovation and global energy efficiency initiatives.

Marc Bitzer who was previously President of our U.S. operations has moved into the role of President, North America. Both Mike and Marc are two highly capable leaders I’m very confident will do a great job in their new assignments and they’ll be representing their respective region on this call.

Turning to the release as you all know earlier this morning we released our financial results for the fourth quarter and for the full year. You can see these results on Slide 2. As we outlined to you last year at this time, we faced a very challenging macroeconomic environment on a number of fronts. All major markets were in decline at that time and we felt that we were likely facing a year with significant revenue decline, higher costs and volatile currencies. For the full year this proved to be accurate as our revenues declined by 10% versus 2008 levels.

We also at that time outlined the key drivers of our business and separated them into two categories. On one hand we talked about areas that would positively impact our business and things that would negatively impact our business. The negative impacts were significantly lower demand levels, the impact of foreign currency and very volatile material costs. The positive impacts on our business related to our swift, aggressive action to address this challenging environment particularly in regarding our costs and working capital initiatives. These actions helped to improve our operating margins by 1.1 points to 4% during the year despite a substantial decline in sales.

In addition, we reported for the year a record level of free cash flow of $1.1 billion during 2009, which has significantly strengthened our company’s financial position. If you turn to Slide 3 we highlight our execution against the key operating priorities that we established for last year. From a cost standpoint we had a very strong year. We were able to significantly lower our breakeven point through the structural cost reductions across our global organization. We also continued to build a foundation, a very strong global product platform designs and the supporting component [commonization] initiatives that go along with them. These actions lowered our costs, improved our quality and increased our speed to market from design to market launch.

And overall I’m very pleased with the progress we’ve made in these areas of the business which will continue to benefit us this year.

Moving on to cash, again we had the best year ever in terms of generating free cash flow. Our aggressive focus on working capital reduction, particularly in the area of inventory, resulted in a substantial source of cash flow during the year. This performance in addition to our note issuance and credit agreement extension significantly improved our financial and liquidity positions.

Finally, our market execution goals for the year were to have a good balance between price mix and market share and during 2009 we finished the year with positive price mix and very good share performance in all of our key global markets.

Slide 4 highlights one of the most important aspects of our spending initiatives last year. In this case, it’s what we didn’t cut and that was our investments in new product innovation. We continue to invest in our business during the downturn as R&D and capital expenditures actually increased as a percent of total sales. These investments will yield strong gains in new product innovation over the next 12 months and reflects the continued commitment we have to bringing new consumer relevant innovation to the marketplace on a continuous basis.

Turning to Slide 5, we expect to have a strong year for innovation with our pipeline now over $4 billion in future revenues. From a product perspective you’ll see major launches as Laundry, Cooking and Refrigeration impact. Marc Bitzer will touch on a few of these products in a moment but we expect to have a very strong year of innovation globally across our product line.

We do see many great opportunities for growth in markets around the world, largely enabled by this record number of new product innovation launches that we have scheduled for this year. On Slide 6 I’ve summarized our current demand outlook for 2010. Overall we expect global industry demand will show modest growth globally in 2010. Obviously there’s still a high degree of uncertainty in many facets of the global economy, but we do feel that we’ll see in 2010 growth from a low base.

In the U.S. we expect major appliance demand to increase by about 2 to 4%. This would mark the first full year of positive growth in four years and is largely driven by a more normal replacement market. In Europe we expect conditions will remain relatively more difficult with industry demand being flat to 2009 levels. As you would expect, there’s a large range of outcomes by country, but overall we’re starting to see demand stabilizing and are forecasting flat demand for the year. In Brazil we continue to see very strong underlying fundamentals and we’re forecasting industry demand growth to be in the range of 5 to 10% off of the strong year this year. Finally, we expect the markets that we serve in Asia will grow in the 3 to 5% range. We expect India to continue to show very strong growth, leading the region.

Finally I would direct your attention to Slide 7 where we provide our 2010 financial outlook and guidance. For the full year we expect to generate earnings per share in the range of $6.50 to $7 per share. Also for the full year we expect to generate free cash flow of approximately $400 to $500 million this year. We expect the positive impacts to our operating performance will be a continuation of the significant cost reduction from productivity that we had last year, which again will be a significant contributor to our improvement in earnings. In addition, we certainly expect higher unit volumes will contribute in part to our overall revenue growth and aid in improving our margins.

For the full year we expect price mix and currency impacts will be generally neutral to our operating results. And finally on the unfavorable side, we still see material and oil cost inflation increasing and we expect it will impact our operating results in the $200 to $300 million range compared to last year.

At this point in time I’d stop here and I’ll turn it over to Marc Bitzer for his review of our North American operations.

Marc R. Bitzer

Thanks, Jeff, and good morning everyone. Turning to Slide 9 I would like to briefly go over some of our key accomplishments from 2009.

As Jeff mentioned earlier, we maintained a strong commitment to innovation investment both in the form of R&D and capital expenses. And from a market standpoint we delivered a strong increase in our branded share during the year and during Q4 in particular. We also made strong progress in reducing our cost structure, a double digit reduction in manufacturing capacity, a reduced [stress] in the structure by nearly $200 million or 1 percentage point of sales.

Finally, we saw strong improvement in our logistics network. We have completed our move to a new regional distribution center footprint, we have implemented a new home delivery model that we believe best of class in our industry and we expect this will yield both a better service level as well as a reduction in delivery costs.

On Slide 10 we detailed fourth quarter results for North America. We marked the first quarter since Q1 ’07 that we posted a year-over-year sales increase in North America. Our unit shipment growth exceeded the market growth. We reported operating margin of 5.2 percentage points and that’s a 6 point improvement over the year before. And that was largely driven by cost and productivity initiatives and higher volume, partially offset by the lower price mix.

On Slide 11 you can see some of our news innovation. As you know we are focused on providing consumers with the greatest value by offering a preferred brand that they can depend on with the most and knowledge of features in the most cost efficient way possible. From a dishwasher and disposal [cleaner] to a completely new, side-by-side refrigerator platform, our cadence of new product introductions remains very strong. There’s one product on this Slide that I will talk about in more detail and that is our new Whirlpool brand Vantage top-load laundry pair. You will see on that Slide that this product features an LCD touchscreen control. It’s the industry’s first USB port that allows consumers to update and customize washing cycles and other controls. And finally the fit, finish and design of this product is a leap forward from an industry [setting] class model.

Turning now to our industry outlook for 2010 on Slide 12, I reviewed some of the background on the components of demand. As part of our forecast we expect to see a 27% increase in new housing starts or approximately slightly above 700,000 units. We expect existing home sales to improve approximately 7% during the year and we’re looking for consumer confidence to be stable to slightly up and they will remain at historically low levels or slightly above that. Consumers are still very cautious given the many uncertainties in the economy and we expect this to remain the case with our 10% unemployment assumption. While general consumer uneasiness lingers, we expect to see stable replacement demand for the year versus some delayed purchases during the beginning of 2009.

To summarizing, based on our current estimates of these economic variables we believe the U.S. industry demand will increase 2% to 4% in 2010, which is still well below historical long term demand levels.

And now I would like to turn it over to Mike for his review of international operations.

Michael A. Todman

Thanks, Marc, and good morning everyone. Let me begin with the general overview on Slide 14. During 2009 we saw a return to strong economic growth in Brazil and India. These markets not only had a much faster return to general economic growth rates, but they also saw appliance demand return to growth rates well above the general economy.

Europe remained the most challenging region from an international perspective as we managed through a broad contraction in most economies. From a Whirlpool perspective we focused significant restructuring resources on the European region during the fourth quarter to better align our cost structure with industry demand levels and insure an appropriate structure for 2010 and beyond.

Overall, during 2009 we made strong progress toward our cost reduction goals across the region and strengthened our share position. Turning to Slide 15, our European sales improved 2% in the quarter. In local currency, sales declined approximately 9% from the prior year. Our unit shipments declined approximately 9% year-over-year which was largely in line with the estimated industry demand levels during the quarter.

The region reported an operating profit of $19 million compared with the $2 million earned in 2008. Results were unfavorably impacted by lower volumes while lower costs and higher price product mix harshly offset these challenges. While we have taken necessary actions and made progress in our European region, results remain below satisfactory levels and we will continue to adjust our cost structure accordingly.

Fourth quarter results from our Latin American business can be found on Slide 16. The region reported sales of $1.2 billion compared to $777 million in the prior year period. Excluding the impact from currency, sales increased approximately 28%. The sales increase was driven by favorable foreign currency exchange and strong demand for our appliances in the Brazilian market. Results were partially offset by lower tax credit monetization levels and product price mix. Operating profit totaled $138 million compared to $110 million reported during the prior year period.

Our fourth quarter results in the Asia region are shown on Slide 17. Net sales increased 34% during the quarter to $188 million, up from $140 million in the prior year period. Excluding the impact of currency, sales increased approximately 27% compared with the prior year period. The sales increase was driven by strong results across the region. With our new industrial joint venture in China, and our strong presence in India, we are well positioned to benefit from the growth trends in these markets. Operating profit during the quarter was $6 million compared with $3 million reported in the prior year. The operational improvement was primarily related to higher unit volumes. These improvements were partially offset by lower price mix.

A few minutes ago Marc talked about our ongoing investment in our brand portfolio and a strong cadence of new product introductions. That is the case not just in North America but around the world as we continue to provide consumer relevant innovations to consumers everywhere. On Slide 18 you’ll see just a few of our international product launches.

Slide 19 summarizes our outlook for international operations. Overall, appliance industry demand in Brazil and India remains strong and ahead of general economic growth rates. We are seeing some commonalities in both of these markets including improved affordability, a developing middles class, a low base of appliance penetration rates compared to the U.S. and Europe, and solid economic fundamentals. These factors, combined with Brazil’s appliance stimulus program, have strengthened our position in those markets. The Brazil stimulus program ended effective February 1. Although we do not yet understand the impact of this change, it is important to note that all trade inventory prior to that date still qualifies for the tax holiday.

In addition, we believe that the underlying demand is strong, irrespective of the stimulus program because of low interest rates and underlying economic conditions. And we continue to be very positive about the prospects for our Latin American business in 2010.

In Europe, however, we expect demand to stabilize during 2010 and we continue to pursue aggressive actions to improve our results in the region. And finally in Asia, our strong performance in the quarter highlights the early success of our joint venture that allows us to continue to add new product offerings and we see significant growth opportunities in the region, particularly in India and China.

And now with that I’d like to turn it over to Roy Templin for his financial review.

Roy Templin

Thank you, Mike, and good morning everyone. Beginning on Slide 21 I’ll walk you through a summary of our fourth quarter performance.

Our net sales performance marked the first global unit volume increase we have had since the first quarter of 2007, with our units increasing approximately 9.5% from the prior year. Our revenue was also favorably impacted by foreign exchange translation which accounted for approximately 7 points of the year-over-year increase. The favorable impact from currency was primarily related to a stronger Brazilian real and the euro when compared to the prior year.

Looking at our margins during the fourth quarter, the positive year-over-year increase was primarily from our productivity and cost reduction actions. These actions were partially offset by lower price mix and BPX monetization, which declined $21 million from the prior year.

Finally, before we take a look at the income statement in detail, there are a few items I would like to highlight. The first is a $46 million accrual related to a previously disclosed legal action pertaining to a collection dispute in Brazil. This was recorded in interest and sundry expense. The second item related to interest and sundry was a $13 million expense related to previously capitalized transaction costs. We also recorded a net favorable $13 million adjustment related to operating and income tax settlements in Brazil in response to revised government options.

Turning to the income statement on Slide 22, we reported net sales of just over $4.8 billion, an increase of 13% from the prior year. Our gross margin rose 3.1 points to 14.1%. As I mentioned previously, the most significant favorable impact on our gross margin improvement related to our cost and productivity actions which were partially offset by lower price mix.

SG&A expense totaled $427 million. Foreign currency translation and the non-recurrence of an asset sale gain in the prior year accounted for over 90% of the year-over-year dollar increase. Restructuring expenses totaled $55 million during the quarter and were largely related to cost reduction actions in Europe. We currently anticipate recording restructuring expenses in the $100 million range during 2010. This amount will be partially offset by curtailment gains due to a previously announced facility closure. Finally, our operating margin expanded to 4.1% from .2% in the prior year.

Turning to Slide 23, I wanted to touch briefly on interest expense. Related to the revised tax settlement terms in Brazil, noted in my earlier remarks, part of the settlement adjustment was recorded in interest expense. Excluding this settlement, our interest expense would have increased mainly due to higher average borrowing rates due to our notes issuance during the second quarter. Turning to interest and sundry expense, the items I mentioned earlier substantially offset favorable year-over-year currency resulting from prior year losses on balance sheet positions and an asset impairment, again recorded in the prior year.

Finally turning to our tax rate, we recorded an income tax credit of $10 million during the quarter corresponding to an effective tax rate benefit of 11%. The fourth quarter credit was slightly below our previous quarterly expectation, largely as a result of higher pretax income and the establishment of reserves for foreign tax audits. Our annual tax credit of 21% fell within our previously disclosed range. For the full year 2010 we are currently estimating a tax credit in the range of 15% to 25%. Finally, we reported EPS of $1.24 per share including a $0.40 per share negative impact from the legal accrual that I noted earlier.

Moving to our full year free cash flow results on Slide 24, as Jeff mentioned earlier we had an outstanding year. The strong working capital performance during the fourth quarter exceeded our expectations in every part of the world. As a percentage of sales, our full year free cash flow was 6.4% which is well ahead of our long term objective in the 4% to 5% range. Our full year free cash flow generation of approximately $1.1 billion, in addition to our term note issuance during the second quarter and the extension of our revolving credit facility through August of 2012, has substantially improved our financial position.

Turning to Slide 25 we show our net liquidity position. As you can see from this chart, our net liquidity position has improved to approximately $3.3 billion from $2.1 billion at the end of 2008. At year end our cash balance stood at $1.4 billion and we had full availability under our revolving credit facility.

On Slide 26 you can see we have significantly reduced our net debt balance to the lowest level in four years. We feel very good about our ability to continue to fund our restructuring and product innovation initiatives. We have also consistently paid our dividend throughout 2009. After funding these operating initiatives, a key priority going forward is improving our credit metrics with a goal of returning our credit rating to pre-recession levels.

Finally, turning to our financial outlook on Slide 27, we are expecting to report earnings per share in the range of $6.50 and $7 per share. This compares to the $4.34 we reported for 2009. As Jeff reviewed previously, we expect to have favorable impacts from increased global unit volume as well as our ongoing cost reduction and productivity initiatives. In addition to these factors, the Brazilian government recently announced that it will not renew the IPI Tax Holiday Program that has been renewed several times since mid-April. But there will likely be some lag until all lower IPI based products clears the inventory pipe, as Mike referenced earlier. We have anticipated this change in our outlook.

From a headwind perspective we are assuming material and oil related costs to increase in the range of $200 million to $300 million in 2010. And turning to our cash flow outlook, we are projecting free cash flow from between $400 million to $500 million. Capital expenditures are expected to be in a range of $525 million to $575 million during the year. After our strong working capital performance in 2009, and with our expectation of higher global unit volumes, we expect working capital will be a use of cash during 2010.

And with that, I’ll turn the call back over to Jeff.

Jeff M. Fettig

Thanks, Roy. I’m going to now turn to Slide 29 where we outline our key operating priorities for 2010. As you will notice, many of these priorities remain unchanged from what we outlined for 2009.

We continue to have a very strong focus on cost reduction across our global enterprise. As Roy previously mentioned, we’ll be taking additional restructuring actions during 2010 from previously announced actions, as well as some new actions to continue to drive lower structural costs; lower capacity levels; in taking productivity and other cost initiatives to offset material costs. In total we think we’ll be able to expand our operating margins from our cost activities.

Cash flow also remains a very high priority for us in 2010. As we mentioned, we had a record year for cash flow last year and we expect to generate solid free cash flow during 2010. This is despite our expectation that we will have some working capital build during the course of the year as we return to sales growth. And certainly given the amount of certainty there remains across the globe and the effects that we’ve seen over the last year, the global financial crisis, you should expect that we will carry a higher cash balance over the course of the year than we maybe historically have, and we think it’s appropriate in this period of time.

From a market execution standpoint we will continue to balance our share and price mix as we manage our business in 2010. We feel very good about our innovation pipeline and the cadence of new products that we’ll bring into the market during the course of the year. We expect these new products to help us build our branded position during the year.

Our successful execution on these priorities will enable us to deliver strong earnings growth during the course of the year.

I’d now like to turn to Slide 30 and take a moment to discuss our long term, value creating objectives. We view 2010 as a year of full recovery for our company, where we regain a large portion of our revenues that declined both in ’08 and ’09 and improving our operating margins. From this base we expect to build in 2010, we’re recommitting to our value creation objectives for revenue, for earnings and for cash. And that means from a top line perspective we would expect to continue to target annual sales growth in the 5% to 7% range, earnings growth in the 10% to 15% range and continuing to improve our free cash flow as a percentage to sales and try to manage it between the 4% to 5% range.

We are emerging from one of the most challenging economic environments that we’ve seen in decades. I think a very strong message for us is that I believe we are emerging this period as a much stronger company. We have substantially lowered our breakeven point, substantially improved our financial strength and expect to bring a very strong cadence of new products to the market during 2010 and beyond. While the economy remains volatile, we feel we are well positioned to meet our long term value premium objectives and we’re repositioning ourselves for significant values for our shareholders in 2010 and beyond.

I’m going to end here and I’d now like to open this up to call out [any] questions you may have.

Question-and-Answer Session

Operator

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

Sam Darkatsh - Raymond James

First off, the Latin American expectations of up 5% to 10%, obviously the comparison especially in the second half is going to be pretty onerous and Mike I know you referenced this, but how much did the IPI favorably affect sales units in 2009? And how can you tell how much is the underlying economy helping that business versus the incentives? That would be my first question. My second question has to do with price mix. You’re expecting neutral price mix in 2010, although it looks like price mix degraded pretty sharply in the tail end of 2009. Why does that stabilize would be my second question.

Michael A. Todman

Okay. Well, Sam, let me try to answer your first question relative to the market in Brazil. If you remember the IPI tax holiday was actually put on in April of 2009 and we still saw growth in the Brazil business, you know, over 30%, which essentially says that it was not all driven just from the IPI tax. Now you know they’ve just repealed if you will that tax, so it’s hard for us to know exactly what the outcome’s going to be but suffice it to say there’s probably about 30 to 45 days of inventory in the system that will qualify for the tax. And then after that our view is that the underlying economics, both with low interest rates and the general economic conditions, is going to continue to drive a favorable market environment for us. So I feel pretty confident about that.

The other piece is that we’ve got the international businesses, the Chiles and Colombia’s and etc., which as you know were down significantly in 2009 and we expect to have some recovery in those markets. So you know I can’t give you an exact number of what the IPI tax drove but we feel very comfortable about the 5 to 10% range.

Jeff M. Fettig

Let me take the price mix question. You know first of all we view managing price mix as a very important capability throughout our global operations. And you know last year, 2009, was the third year in a row where we’ve been able to manage positive price mix in a very competitive global marketplace. So you know our attention is no different in 2010. I would also say that every year we get there in a different way, whether it be price or like-for-like pricing, regional and product and brand mix and that sort of thing. You know the way I would describe it is the story for 2010 is a little bit different. In some high inflation markets like India, we’ve already announced and taken a price increase for 2010. We did that in December. In other regions like Europe we finished the year driving very positive price mix.

You know the U.S. gets a lot of attention where we had negative price mix in the fourth quarter. You know there we’re very pleased with where we are today. You know going off of last year and the first half of the year and fourth quarter of ’08, very high comparisons year-over-year so we’re comping against our highest levels of the previous year. And I see innovation as being the driver of our ability to drive mix in the U.S. So you know, you put it all together, you know it’s hard to predict at the beginning of the year but we have given our track record the last three years I feel pretty good that we’re going to be able to manage that at least to neutral for 2010.

Sam Darkatsh - Raymond James

The tail end of 2009 price mix degrading, was it mostly price or mostly mix?

Jeff M. Fettig

That was a combination of both.

Sam Darkatsh - Raymond James

It wasn’t one of them driving it, per se?

Jeff M. Fettig

No.

Operator

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

Laura Champine - Cowen and Company

Roy, a lot of below the line items moved earnings around in 2009. You had some legal expenses that presumably are one time, but can you run us through what your below the line assumptions are in your earnings guidance on tax, interest, sundry? A better picture on that would be helpful.

Roy Templin

Sure, Laura. I’ll try to go in the order that you see them in the P&L. First of all with respect to interest expense, you know I made the comment that a part of this Brazil tax settlement in the fourth quarter distorted what otherwise would be our run rate. And I think I’ve said on prior calls the normal run rate for us right now with the base of interest we have is about $60 million a quarter or $240 for the year. Now, Laura, we obviously have the capability to use cash should we decide to do so on the first of May when our $325 million 8% senior note becomes due. Obviously if we use cash, that will change the trend that I’ve just given you, but net net it’s about $60 million a quarter. Interest and sundry, you’re right, we’ve had some one time events this year particularly with now this legal dispute in the fourth quarter and of course the compressor settlement earlier in the year.

Laura, you know over the years our other income, other expense or interest and sundry has been about $50 to $60 million of expense. If you wanted to increase that somewhat for higher legal costs related to the compressor investigation, that might be prudent to do so which might take you to more of a run rate like $70 to $80 as you look out going forward in the very near term.

From a tax rate perspective, again I said in my script that you know we’re projecting the tax rate for next year at about the same level of credit that we had this year. Now initially that may not seem real intuitive, but there’s two pieces, Laura, that really offset one another. One is logically the credit would get smaller year-over-year because we’re going to have a much higher base of earnings and therefore that brings down the overall credit that we have as a company. Offsetting that, though, Laura are two things. One, we do think that given the innovation and the energy efficiency wrapped around the innovation that we’ll deliver to the market in 2010, that we will earn higher energy tax credits. And as Mike indicated earlier now with the repeal of the IPI tax holiday, while there will be some volume impact from that we do expect to see and experience higher BFX tax credits in Brazil in 2010.

Operator

Your next question comes from [Ray Horn] for Michael Rehaut - J.P. Morgan.

[Ray Horn] for Michael Rehaut - J.P. Morgan

First question, wondering if you could just drill down a little bit more into the 2010 operating margin expectations, particularly in you know North America, you know if you guys can kind of get back up to more of a normalized operating margin there in 2010. And also in Latin America, with the monetization of the BPX tax credit do you think you can get the margins back up to like a 12%, 13% range?

Jeff M. Fettig

Well, let me give you a couple of perspectives. One, you know expanding our operating margin is amongst the highest priorities we have throughout the company and we made progress last year. We expect to make further progress this year and I think you can dimension that by our earnings guidance because that largely would all be operating margin expansion. You know the levers that we’re driving certainly will benefit everywhere from some improvement, not a lot, but some improvement in volume, but really significant improvement in our ability to continue to drive cost productivity in costs. Again as you heard me say earlier we expect price mix to be neutral.

So yes, I do expect a very big improvement. We do expect it around the world, every geography. I mean basically the lower the operating the margin, the higher our expectations for improvement. But we do expect it in all parts of the world. I’ll speak for just a moment on North America and then let Marc Bitzer make some general comments about North America. And also I mentioned Europe. Europe obviously kind of hit the low point, they were negative in the second quarter of last year, they’ve improved every quarter since, so obviously we’re expecting a good improvement in Europe. Latin America is at a very strong level. In fact, ex-BPX they’re at or near some of our highest margins ever but yet given the robustness in that economy, given our market position and our product high point of innovation, you know, we expect to continue to improve our operating margins.

So you know if we have more BPX, that will only help those margins. But we look at it both with and without and certainly without we’re driving towards some margin expansion. And Marc, I’ll ask you to comment about North America.

Marc R. Bitzer

I mean for North America we feel very comfortable about the active run rate which we carried out in Q4. And without getting too much into the statistics but two big components drive mix very much along the same line of what Jeff outlined globally, we expect for North America. Take into account both pretty high comparable rates in the first half of last year of 2009. At the same time a very big amount of product innovation coming into particularly the latter half of 2010. So price mix we expect a neutral impact in the full year very much in line with global perspective.

And the other element is along the same lines of what we’ve done very well in 2009, continue to focus on cost productivity improvements which overall should help our growth margin.

[Ray Horn] for Michael Rehaut - J.P. Morgan

Actually drilling down on the cost reduction in productivity, you had also mentioned your run [too] of about $200 to $300 million. Do you guys think the productivity and the cost reductions are going to more than offset $200 or $300? Or are you guys expecting some additional opportunities on the cost saving side?

Jeff M. Fettig

Well, yes. Our first task is to minimize the $200 to $300 million but that’s right now the range where we see it today. But the direct answer to your question is yes. As we did this year, we expect our combined global cost reduction activities and our productivity coupled with, you know last year as I said we radically lowered our breakeven point to the volume level. So with some additional volume and with these cost reduction productivity activities, we expect to expand our margins meaning we exceed these cost [savings].

[Ray Horn] for Michael Rehaut - J.P. Morgan

Then the $200 to $300 million raw materials, how much of a raw material increase is that baked in in terms of like steel and oil prices?

Jeff M. Fettig

Well, that’s what it reflects. The $200 to $300 million includes oil, steel, base metals, components, etc.

[Ray Horn] for Michael Rehaut - J.P. Morgan

On a percentage basis year-over-year, like where do you guys think steel can end in 2010 versus 2009?

Jeff M. Fettig

I’m not projecting that by category. I’d say that the biggest factor and probably uncertainty is oil and [inaudible]. You know where it is today, it’s up substantially from a year ago, where it hit a much lower level. So that’s probably the biggest driver. Steel just due to its weight is probably second and then components, base metals and so on are probably third.

Roy Templin

I think the other thing to keep in mind is two things. One is as you know we do hedge commodities and so many times it’s difficult to look at the commodity curves and then link it directly back to Whirlpool. That’s the first point. The second point is keep in mind the circular flow of some of these components as Jeff indicated, because we see it not only in the commodity prices but then within the components, motors, pumps, compressors, electronics, etc., that we purchase to put into our products. So you sort of get a double impact there.

Operator

Your next question comes from David MacGregor - Longbow Research.

David MacGregor - Longbow Research

Just one more on commodities. What percentage of your total 2010 raw materials requirements are price protected as of today?

Jeff M. Fettig

David, this is Jeff. I don’t have that statistic in front of me. I would just say that steel, you know obviously that’s our biggest purchase. In the emerging market that’s always open discussion. In the big markets like Europe and North America we do have agreements within ranges, so I think our steel is pretty predictable, at least in the big markets.

You know oil, oil resins, we don’t hedge it. We can’t hedge oil so that is what that is. Resins are related to oil and they generally have some type of broad band of range there. And then I would say all of our strategic components and that kind of stuff is pretty firm. So I don’t know what that equates to in terms of a percentage but that would be the color around those areas.

David MacGregor - Longbow Research

As I was looking at your Slide 30 where you talked about long term value creating objectives, Jeff, there was no mention of the longer term 8% EBIT margin goals so I guess I wanted to just see if that’s still sort of your frame of thought on EBIT margins.

Jeff M. Fettig

Yes. You know we’ve talked about operating margins. Our expectation for what we believe this business out to be able to deliver over time and we’ve absolutely not changed our expectations about that, 8%.

David MacGregor - Longbow Research

So just on that point I guess two parts to the question, and I know the question was asked earlier about trying to drill down. Maybe I’ll ask the question a little bit differently. What’s the extent of your unrecovered commodity cost inflation today? And secondly, what’s your capacity utilization rate today?

Jeff M. Fettig

David, we don’t give out capacity utilization rates but I would say we took out close to 5 million units of production capacity in the last 15 months. And the things we’ve already announced for this year we’ll take out more. I would say our utilization is increasing faster than the market has improved.

Roy Templin

To build on what Jeff said, just a couple of statistics because Jeff’s right. The issue is that if we get real specific then we end up getting in some competitive sensitive areas.

David MacGregor - Longbow Research

The 5 million unit number is very helpful. That helps a lot.

Roy Templin

So we took out just below 10% of the units from a breakeven unit perspective in 2009, so a big number. Secondly when you look at units produced, because we’re comfortable giving that number, David, year-over-year in the fourth quarter 15% but you would expect us to be, right, because we were so low a year ago. But for the year we still ended up with about 3% unit production decline across the company versus a year ago, David.

David MacGregor - Longbow Research

Is there any way you can address just the unrecovered commodity cost inflation over the last five years and just where you are? I guess I’m just trying to understand how do you cover this 300 to 400 basis point gap from where you are today at 8% margins.

Roy Templin

You know, David, over the last five years let’s say the raw materials cost increases were well over $3 billion. And I think if you go back to five years ago, the margin at 5.5 to 6%, you know, we’re still short that much in terms from all of our actions from recovery. So again, 200 to 300 is not insignificant at all but I think given our scope and capacity, given I don’t think 2009 was a one time event. You know we have at least as strong a global initiative on this in 2010 as we did in 2009. We have less headwinds on terms of things like volume and currency. We still have material to deal with, but I feel very comfortable, given what we know today that based on these assumptions we will execute very well on costs and productivity. We should be able to more than offset these costs and have cost improve our margins in 2010.

David MacGregor - Longbow Research

Could I get you to address the Kenmore issue and you’d mentioned a couple of quarters ago you thought you’d be Delta neutral this year, you’d replace the lost business. Can you elaborate a little further on where you are in that?

Marc R. Bitzer

As you know we don’t get into the specifics of a contract with any given trade partners so what I can tell you, however, is there is business as we stated before in similar calls. We do expect for 2010 a somewhat lower OEM business in total. At the same time we expect to more than mitigate that through brand of business growth with Sears and with other trade partners. So we feel very comfortable, very well prepared to mitigate any potential OEM offers.

Michael A. Todman

David, the only thing I would add is a big part of that transition already started in Q4 so if you look at our Q4 performance, you know, as we said we expect to rapidly grow our branded business. That happened in Q4. We lost some OEM business or it went away in transition, so that transition’s really already started last year.

David MacGregor - Longbow Research

Do you expect to have any negative revenue repercussion at all in 2010, just because there’s a gap from a timing standpoint?

Michael A. Todman

What we said has not changed. For the full year 2010 we expect to maintain and improve our market share in the North American market and that basically means more branded share and less OEM.

Operator

Your next question comes from Todd A. Schwartzman - Sidoti & Company, LLC.

Todd A. Schwartzman - Sidoti & Company, LLC

Just a follow up on Sears. Where are you with the Jenn-Air business at Sears at this point?

Marc R. Bitzer

On the Sears Jenn-Air business as you know and has been previously communicated, Sears had the Jenn-Air business for many, many years and there’s a significant amount of individual replacement demand which goes with [inaudible]. Sears has stepped up significantly in their commitment in terms of [inaudible] requirement on the respective floors and they have upgraded a lot of floor requirement, and that business from what we see is progressing pretty well.

Todd A. Schwartzman - Sidoti & Company, LLC

Is there any way to get some numbers in terms of the incremental business from you?

Jeff M. Fettig

No, we don’t break out any specific branded numbers.

Todd A. Schwartzman - Sidoti & Company, LLC

Can I get you to speak to 2011 tax rate assumption at this point? Maybe even in a range?

Roy Templin

No. I’m comfortable going out in 2010 and as I said that’s based on all of our current assumptions. As you go out into 2011, two things that you need to think about, Todd. One is I’ve said before piercing through [inaudible] that exist in today’s rate, you know this company’s normalized run rate would be a tax expense of about 30%, high 20s to 30%, Todd. And so that’s point number one. Point number two would be keep in mind that under the current legislation, the energy tax credits will end this year. And so as you know that’s been a big impact with respect to that otherwise normalized rate and those credits will end this year. But beyond that, it’s too early for me to go out in 2011.

Todd A. Schwartzman - Sidoti & Company, LLC

Is it possible to provide any additional color on the pricing environment by geographic segment?

Jeff M. Fettig

Look, we never talk about forward pricing. You know we have had some markets and I mentioned like India where based on high demand levels and also high inflation levels, we’ve taken some price increases that were announced late last year. But overall you know I would say we don’t see any big changes around the world. We’re focused on really driving a positive level of mix, using our innovation to drive that mix. We’re seeing some demand recovery in some of the like the North American market which is a big help, but that’s really all I can say at this point in time on pricing.

Operator

Your next question comes from Jeffrey Sprague – Citi.

Jeffrey Sprague - Citi

Just first on BVX, you guys recognized about double in Q4 what you did in Q2 and Q3 and I thought the tax credit regime down there was not allowing you to recognize BVX?

Roy Templin

Yes, Jeff, this is Roy. That’s a good question. If you look at the details of, as you know this thing’s been extended a couple of times, but there was a very important detail in this last extension which enabled us to recognize more BVX credit but also of course we incurred more IPI tax result. And here it is, Jeff. If you look carefully at the last extension, they basically did the extension by energy efficiency category. They have categories A through E, more energy efficient to less energy efficient. So on those lesser energy efficient models, the holiday went away and so what you’re seeing is it’s the impact of the mix of business we had, but you’re right. Net net we had more IPI tax in there for an incremental billing to monetize, although no where near where we’ve been in the recent past but certainly greater than Q2 and Q3.

Jeffrey Sprague – Citi

And Roy, would your guidance kind of assume that some kind of normal BVX of $120, $130 million a year for 2010?

Roy Templin

I think that’s too high, Jeff, and I say that because you know the way I think of this is we have a couple of recent goalposts. You have two years ago, where had $169 million. That’s too high because as Mike said we had a period of tax holiday in addition to the very important point that everything that’s in the trade that they purchased without IPI tax of course can be sold to the consumer without the IPI tax. That’s one. And the second thing is if you look at the fact that it’s dependent upon a mix of business and our demand, I think Jeff it’s fair to say it’ll be greater than the $69 that we just had in 2009 but less than the $169. And I would have a number closer to $100 million versus your $120 plus.

Jeffrey Sprague – Citi

Just on free cash flow, obviously there’s some big swings between ’08 and ’09. I’m just trying to think about the idea of normal cash flow in the 4% to 5% range. Just my observation here but if we average ’08 and ’09 to take out that volatility you get about $500 million free cash flow a year on kind of average earnings over those two years of about $5. You know now we’re looking at $6.50 to $7 in earnings and we’re talking about cash flow that’s the same as those prior two years, maybe lower, in the $400 to $500 million range. I’m assuming there’s some pension funding and maybe some other dynamics, but could you just elaborate on that? Is there anything there we should be aware of in thinking about how the cash works through this year?

Roy Templin

Well, first of all I think to your broader question of course you have a margin change assumption in your broader equation, right? So as you look at the value creation objectives that Jeff shared, obviously you get the higher margin. As you know, Jeff, our principals sort of year in and our out, the principal pipe for cash flow in any business of course is your after tax earnings and so that’s a very important element with respect to that.

I’ll come back to the second part of your question, though, and you’re right. As you look at next year’s guidance it sort of falls in the level of what we’ve seen combined the last two years. I think a couple of key things. One is we are expecting and of course it’s clear in the guidance to have higher cash earnings in 2010, but that is going to be offset by working capital. Working capital will be a use of cash as we again grow our working capital to support and elevate demand levels. But remember now that’s coming off of a $618 million source of cash in 2009, so it makes the comparables a little bit hard to follow.

The other area that’s important, Jeff, to your question is the other operating accounts. And as you know and you’ve asked me I think in the prior quarters, that’s been a big line item for us in this year because of two things. One, we’ve had non-cash charges that are negative in the earnings but then positive in other operating because there’s no cash associated with them. And the second area is as you would have expected and we did experience, we have lower promotional payments coming into the year. For example, I mean that was roughly $100 million when you take our normal trended cash flow, a better improvement in 2009, that won’t be there in 2010 and of course wasn’t there in the prior years before that.

Pension funding which was the third piece of your question, you know all up I think two things. One, we did make a voluntary pension contribution of $74 million, which is embedded in the 2009 cash flow. As a result of that, Jeff, we will have no required minimum contributions in 2010 for the U.S. pensions. We may or may not elect to fund some monies but again there’s no required minimums. When you look at the all up funding, that’s looking at pensions, 401(k) and OPEC, because that’s really the relevant question given the frozen status of our plans, we’ll be at about $160 all in for funding for all benefit plans versus $290 in 2009.

Jeff M. Fettig

And Jeff, to answer your question on a go forward, you know absent any changes in any given year the simple answer is I think over time and our long term value creating goals, our focus and desire to significantly expand our operating margins will directly play into our ability to get that 4% to 5%.

Operator

Your next question comes from Eric Bosshard - Cleveland Research.

Eric Bosshard - Cleveland Research

On the inputs and the cost savings, can you give us what the 2009 numbers were and what the 2010 looks like?

Jeff M. Fettig

I’m sorry, Eric, would you explain that a little? I’m not quite understanding your question.

Eric Bosshard - Cleveland Research

Sure. I think you characterized it the inputs input pressure in 2010. I think you indicated it was 200 or 300. What was that number in 2009?

Jeff M. Fettig

I believe we originally in 2009 the number was close to 200 but it actually lessened throughout the course of the year and it was negative but not very much.

Roy Templin

Basically flat, Eric.

Eric Bosshard - Cleveland Research

And then what were the cost saves or restructuring saves, however you would characterize that? I know that productivity is sort of more along the way but can you just give us any sense of the cost saves achieved in ’09 and if there’s a sense of what that number is in ’10?

Roy Templin

Eric, I think your question is we’ve been projecting the cost savings that we were going to have around the actions we had taken in the fourth quarter of last year. We did end the year with about $175 million of cost savings from those actions, which is spot on what we estimated. We had $55 million of benefit in Q4. And Eric we continue and we see no reason to believe that we will not achieve the $270 million of annualized benefit in 2010. We are absolutely on pace to do that.

Eric Bosshard - Cleveland Research

So that’s roughly another $95 million of savings in 2010?

Roy Templin

That’s correct.

Eric Bosshard - Cleveland Research

Secondly, with the free cash flow progress last year and you indicated you have this note coming due in May but what are the thoughts on the capital structure? Are there thoughts on restarting the share repurchase? Can you just give us some thoughts on that?

Jeff M. Fettig

Certainly our priorities are fairly consistent. Number one is to fund the business. We’ve indicated what that is and that’s nothing out of the norm in our guidance. Along with that is paying down debt and appropriately funding our pension obligations, which we’ve dimensioned what that is and you can see it. Right now whether it be share repurchase or dividend, that’s obviously a board level decision that we look at over time to time. But I would say that is not our top priority right now. You know we did say that we would be carrying a higher level of cash than what has been our historical norm for the reasons that we explained and I think that’s a common thing across many companies these days.

So right now it’s just very focused on driving this execution of the business, bringing these new products to the marketplace and funding debt pensions are a priority.

Eric Bosshard - Cleveland Research

And then lastly within Europe where you said there were some restructuring efforts focused in the fourth quarter, can you give us any sense or guidance of the magnitude of the efforts and how that can manifested in profitability improvement in 2010?

Michael A. Todman

Essentially, we had two areas where we had the restructuring. One was just in the salaried workforce and we had some fairly significant reductions there. And the other was to reduce if you will the people that we had in our factories. And so we really took down if you will the workforce that we had in those places and I think you know in Europe that it takes a little while for that to flow through. We expect to see some great benefits from that in 2010.

Operator

It looks like that’s all the time we have for questions today. I’ll turn the call back to our speakers for any closing remarks.

Jeff M. Fettig

Well, again I just want to thank you for joining this call today. We look forward to updating you on our next call in April. Thank you.

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Source: Whirlpool Corporation Q4 2009 Earnings Call Transcript
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