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Whirlpool Corporation (NYSE:WHR)

Q2 2014 Earnings Conference Call

July 23, 2014 10:00 AM ET

Executives

Christopher Conley – Senior Director-Investor Relations

Jeff M. Fettig – Chairman and Chief Executive Officer

Larry M. Venturelli – Executive Vice President and Chief Financial Officer

Michael A. Todman – President-Whirlpool International

Marc R. Bitzer – President-Whirlpool North America and EMEA

Analysts

Michael J. Rehaut – JPMorgan Securities LLC

Denise Chai – Bank of America Merrill Lynch

Kenneth R. Zener – KeyBanc Capital Markets

Jay C. McCanless – Sterne, Agee & Leach, Inc.

David S. MacGregor – Longbow Research LLC

Megan McGrath – MKM Partners

Sam Darkatsh – Raymond James & Associates, Inc.

Eric Bosshard – Cleveland Research Company

Operator

Good morning and welcome to Whirlpool Corporation’s Second Quarter 2014 Earnings Release Call. Today’s call is being recorded.

For opening remarks and introduction, I would like to turn the call over to Senior Director of Investor Relations, Chris Conley.

Christopher Conley

Thank you, and good morning. Welcome to the Whirlpool Corporation’s second quarter 2014 conference call. Joining me today are Jeff Fettig, our Chairman and CEO; Presidents, Mike Todman and Marc Bitzer; as well as Larry Venturelli, our Chief Financial Officer. Our remarks today track with the presentation available on the Investors section of our website at whirlpoolcorp.com.

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 10-K and other periodic reports, as well as on Slide 2 and in the appendix of this presentation.

Turning to Slide 3, we want to remind you that today’s presentation includes non-GAAP measures. We believe that these measures are important indicators of our operations as they exclude items that may not be indicative of, or are unrelated to results from our ongoing business operations. We also think that the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations. Listeners are directed to the appendix section of our presentation beginning on Slide 39 for the reconciliation of non-GAAP items to the most directly comparable GAAP measures.

With that, let me turn the call over to Jeff.

Jeff M. Fettig

Well, good morning, everyone, and thanks for joining us today. As you saw in our earnings release from earlier today, overall, our results were largely in line with our expectations. As we’ve managed through a challenging short-term global demand environment. Our second quarter ongoing business earnings per share were up 11% versus last year, and these results were primarily driven by record profits in our North America business. Overall, the underlying fundamentals of our business remain strong. we received global demand trends improving, and we expect second half earnings to ramp up due to a variety of reasons.

If you turn to our financials on Slide 6, excluding the impact of foreign currencies, our revenues were up about 1% versus last year. Our ongoing business earnings per diluted share increased by 25%, or up approximately 11% to $2.62 compared to $2.33 last year.

Turning to Slide 7, and factoring in the first half actual performance for industry demand, we have revised our regional industry demand assumptions. Globally, we expect second half industry demand levels to improve versus first half. For North America, and specifically the U.S., we have revised our industry demand assumption to be up about approximately 5% per year.

We did have a slow start for the year in January and February, but March – since March, March through June, we’ve had very strong growth over 6%. So this adjustment really just reflects the slow start, which we saw in January and February.

In Europe, we see about the same. we continue to expect flat to up 2% industry for the full year as a region continues its recovery. For Latin America, we are revising our industry assumption to flat to minus 3% for the full year. Again primarily due to the short-term impact that we expected and saw from this year’s World Cup and some uncertainties around government elections in Brazil. And finally our Asia industry forecast is flat for the full year, with China being down for the year and India being up. Again overall we remain very confident in the underlining fundamentals of our business and have multiple opportunities to achieve profitable growth.

Today our business performance has put us in a very strong position as a company. This has allowed us to enhance our returns to shareholders as we announced in April dividend increase and $500 million share repurchase authorization. We have significantly increased our brand and product investments and we will see acceleration in new product introductions in the second half of the year.

But at the same time we are significantly improving our global operating platform. And this has demonstrated by our recently announced agreements to purchase majority stakes in Indesit Europe and Hefei Sanyo in China. This will allows us to significantly increase the scale and size of our operations in both of these important markets in the world. So on total we are very well positioned we are on track for a record year of operating performance. And we are setting up a platform for future growth and very strong value creation.

So at this point in time we will get into regional details and I’d liked to turn it over to Marc Bitzer.

Marc R. Bitzer

Thanks Jeff and good morning everyone. Let me begin on slide 9 by reviewing North America’s record performance in the second quarter. Starting with the top line, net sales of $2.7 billion for North America were up 3% compared to the prior year period and up 4% excluding currency.

So operating margins expand by 60 base points in the quarter due to unit volume growth in US major appliances and the benefit of ongoing cost productivity along this cost and capacity reductions. More of an offsetting unfavorable currency and higher material cost, we also increased our investments for our brand marketing and support of new product launches that drives continued growth.

Our ongoing business operating margins were 10.6% for the quarter, the record second quarter, ongoing business operating profit $285 million compared to $262 million in the second quarters of 2013. The consistent and disciplined execution of our actions resulted in the fifth quarter of year-over-year revenue growth and the 11th consecutive quarter of year-over-year margin improvement.

Now let me take a moment to talk about our expectations for 2014 as shown on slide 10, overall we were pleased with our record operating profit in the first half. US appliance demand has rebounded from a slow winter start as March through June T7 industries up 6.6% compared to the prior year. However we are adjusting our full year industry forecast to approximately 5% which is the lower end of our previous guidance range as we don’t expect benefit to fully make up from a slow start with 7% growth level. Macro economic indicators point to a strong second half as we are seeing the lowest unemployment rates in September 2008.

New housing starts and existing home sales are improving and live in ranges of our expectations for the year. And finally we believe strong replacement demand will continue as consumers replace older appliances for our innovative energy efficient product. In addition we expect positive net cost productivity from our ongoing programs to accelerate in the back half of the year. And in the second half of the year we are excited to launch many innovative new products in almost every four business product category. We are also driving growth beyond our core business as shown by our recent announcement that Procter & Gamble to introduce a revolutionary at-home clothing care system called Swash. And our expansive fleet of launches within the KitchenAid small appliance business.

Turning to slide 11, you can see an example of our new Maytag dishwasher that is part of our new Maytag brand design that follows our successful Maytag Man brand campaign. Maytag dishwashers are our quietest dishwasher ever with strengths to handle tough loads. It also features in the industry exclusive stainless steel silverware basket and a tiered upper rack to hold large plate and taller items.

I will now talk to the second quarter results for our Europe, Middle East and Africa region as shown on slide 13. Sales were $746 million, compared to $731 million in the prior year, excluding currency, sales decreased approximately 3% year-over-year.

The cost and capacity-reduction initiatives, which will put in place combined with ongoing productivity programs and improved product mix, have delivered another quarter of positive operating profit. Operating profit of $2 million improved by $8 million compared to the prior year period and operating margins improved 110 basis points.

Now turning to slide 14, our market environment in the Eurozone remains somewhat soft and expect – and we are seeing some recovery and expect normal seasonality as we progress throughout the year. We expect positive operating profit and margin expansion driven by continued benefits from our ongoing cost productivity programs, and our previously announced restructuring initiatives. And we continue to focus on our innovative new product launches and growth beyond our core, specifically with the growth we’ve seen in the KitchenAid small appliances categories within Europe, Middle East and Africa.

Turning to Slide 15, as Jeff mentioned, we were extremely pleased to sign the binding agreements to become majority shareholder of Indesit. We are trying a 66.8% voting stake in Indesit from Merloni family for €11 per share. To date, we have acquired 4.9% of voting shares of Indesit. Value of this transaction is €758 million, or approximately $1 billion.

In addition to the share price, Whirlpool would assume indebtedness of Indesit front loading, and we intend to pay for this acquisition with cash on hand together with private, domestic and international public debt financing. And we expect judicial and the regulatory approvals by the end of 2014. Once the transaction is closed, we will launch a mandatory tender offer in accordance with Italian law to acquire additional shares.

Slide 16 highlights our opportunity to create significantly more efficient and value creating appliance business in Europe. With a tremendous strategic fit for complementary country positions, products, brands and distribution, and with efficiencies in R&D, capital spending and value chain costs, as well as operational scale, which increased volume and more effectively, integrating our product platforms.

Now given our proven track record of generating value with our acquisitions with high confidence and our ability to execute this transaction successfully, and we expect to more than double our presence in the world’s largest appliance market and create value for our shareholders. Once we complete the integration for the reason that I previously described, we expect our combined European business to EBIT margin of 7% to 8% and free cash flow generation of 6% to 7%, which will make Europe a significant contributor to the overall financial results of Whirlpool Corporation. And we expect it will take about three years to fully achieve its benefit.

Following the closing of a transaction, we will provide investors with our detailed plans on how we intend to create this profitable growth and shareholder value with recent important acquisition in Europe. And now, I would like to turn it over to Mike.

Michael A. Todman

Thanks, Marc. If you turn to slide 19, you will see our Latin America results. As expected our second quarter results were primarily impacted by lower demand as consumers focused on ground goods purchases during the World Cup. Sales for the quarter were $1.1 billion, despite industry volumes being down approximately 17%, our net sales excluding currency and BEFIEX decreased approximately 4% compared to the previous year.

We continue to gain share both year-over-year and sequentially as we benefited from our compelling brands and the beginning of new product introductions. We also benefited from previously announced price increases for which the benefits will accelerate and increase in the second half of this year. Our ongoing business operating profit for the quarter totaled $87 million compared to $111 million in the prior year period.

Improved product price and mix was more than offset by lower unit volumes, higher material cost, and foreign currency. GAAP operating profit totaled $87 million compared to $135 million in the prior year period which included $24 million of BEFIEX tax credits.

Turning to slide 20, for our expectations of the region and given the continuation of the World Cup in July and the government elections in Brazil, we are now lowering our industry assumption to flat to down 3% for the year. However, we continue to believe that the macroeconomic indicators in Brazil point a long-term healthy demand growth as unemployment is at historically low levels below 5%. Real wages are growing, inflation is within the target range, and debt as a percent of income is primarily driven by increased investments in housing.

All of these signs are positive for appliance industry growth. We also expect to continue outperforming the industry and growing our revenue given our strong market position and current competitive environment. Our recently announced price increases will impact the second half by helping to offset negative currency impacts and significant levels of inflation experienced throughout the year. And we are launching over 100 new models in the second half across all product lines and with exciting innovation.

In summary, we do expect the strong second half performance in our Latin America business due to the already discussed price increase benefits, the launch of exciting new products and the tough currency comparisons being behind us.

Our second quarter results in the Asia region are shown on slide 23. Overall market demand will soft, but improved versus the first quarter as the Chinese economy continues to grow at a more moderate pace. In addition to the overall slow down in China, our business was down significantly. Our trade customers began reducing their Whirlpool inventory in anticipation of the integration with Hefei Sanyo and the expected delivery of new product lines. This resulted in a sales decline of over 80% for the second quarter compared to prior year period and therefore had a significant impact on margins and production.

We expect that after the transaction closes, we will return to far more positive revenue growth as we launched our new integrated product lines. The short-term trade actions are having a significant impact on our current business due to reduced shipments and production volumes as indicated in our adjusted guidance.

Post-approval, we are confident this acquisition will put us in a very strong position as we entered 2015.

Net sales during the quarter were $211 million, compared to $246 million in the prior year period. Excluding the impact of currency, sales decreased approximately 9%. GAAP operating profit of $4 million, compared to $14 million in the prior year, and operating margins declined 370 basis points, compared to the prior year period. The benefits of cost based price increases in ongoing cost productivity were more than offset by the trade adjustments of volume in China, higher material costs, and foreign currency.

Turning to slide 24, we continue to execute ongoing productivity actions and cost based price increases across the region to offset inflation and currency and to execute new product launches. We are also on track to become the majority shareholder of Hefei Sanyo to accelerate our growth in the emerging Chinese market.

As shown on slide 25, and as previously announced, we are in the process of acquiring a 51% stake in Hefei Sanyo for approximately $547 million. Hefei Sanyo’s expanded distribution, competitive products, and complementary manufacturing combined with a proven management team and significant capacity to enable growth will provide us with an outstanding platform for growth in China.

As you can see on slide 26, the approval process in line with our expectations, and we have received the majority of the required approvals for this transaction over the past 12 months. The transaction remains subject to the Chinese securities regulatory commission approvals, tax clearances, and payment approvals as well as share registration at closing. We continue to expect the transaction to close by the end of this year, or possibly by the end of the third year.

Investment, integration, and transition cost, which began in the second quarter, will have a negative impact to earnings and cash during 2014. However, once combined, we expect this transaction will be meaningfully accretive in 2015, which would be the first year post-integration.

Now, I’d like to turn it over to Larry.

Larry M. Venturelli

Thanks, Mike, and good morning everyone. Our second quarter results were in line with our expectations, and we are on pace to deliver another record year of ongoing business operating performance as shown on slide 29. We are adjusting our full-year guidance to reflect the impact of investment and integration cost related to the pending acquisitions of both Hefei Sanyo and Indesit.

As Mike mentioned, our trade customers in China are reducing their inventories and anticipation of our integration with Hefei Sanyo, which is impacting both our GAAP and ongoing EPS guidance by approximately $0.50 per share. And the pending acquisition of Indesit in Europe is impacting our GAAP EPS guidance by $0.25 per share, as we incur additional investment expenses in 2014.

Our guidance for annual GAAP diluted EPS is now in the range of $10.30 to $10.80 per share, and annual ongoing business diluted EPS is now $11.50 to $12 per share, which represents a 15% to 20% improvement versus a year ago. Our expectations for 2014 free cash flow of $600 million to $650 million now reflect the impact of these two adjustments.

Overall, the underlying fundamentals of our business remain very strong as we continue to invest in our business and bring innovative products to our consumers across the globe. As I speak to the financial results on slides 30 to 32, you will see how we continued to expand our ongoing business operating margin in the first half, and expect to deliver another balanced approach towards margin expansion, resulting in an 8% plus margin for the full year.

For the first half, price mix was up 0.5 point, and we continue to expect to realize 0.5 to 1 point of margin, driven by our cost based pricing increases, innovative new product launches and growth beyond our core business. Our cost and capacity-reduction initiatives contributed another 0.5 point consistent with our full year guidance.

For the first half, our cost productivity more than offset material cost inflation of $100 million to deliver a positive quarter point of margin expansion. Our ongoing cost productivity for the year is on track to more than offset approximately $150 million to $200 million of year-over-year material cost inflation, and expected to deliver a positive 0.5 point of margin through 2014.

As planned and previously communicated, our increased marketing technology and product investments, primarily reduced margins by a 1 point during the first half. And we expect them to have a negative 0.5 to 1 point of margin impact for the year. Overall, our fist half margins were firmly on track with expectations and consistent with our expected full year improvement.

For the second quarter, ongoing business operating profit benefited from improved product price and mix, ongoing cost productivity and the benefits from cost and capacity reductions, lower volumes, largely attributable for the short-term impact from the World Cup in Brazil, higher material cost, unfavorable currency and investments in marketing, technology and products, negatively impacted results.

We continue to expect a stronger second half as we introduced a significant number of new products, productivity ramps up, Latin America price increases fully take effect and tougher first half currency comparisons are behind us. We believe our expected margin improvements combined with positive revenue growth will enable us to deliver strong double-digit improvement in ongoing business earnings per share during the second half.

Graph on Slide 33 illustrates expenses associated with our cost and capacity-reduction initiatives. The actions we have been taking over the past couple of years, and into 2014, represented generational change to our footprint in cost structure. The additional cost and capacity-reduction actions we took early in year, which we addressed this out by recovering European market and continued to expand our margins.

For the first half, we incurred approximately $63 million of charges, and for the full year, we expect approximately $100 million of charges and $80 million of ongoing benefits. As we continue to improve margins and grow revenues, our plans to deploy the cash generated from our business are solid, as shown on Slide 34.

We are funding the business for growth and significant product introductions in the second half, including capital expenditures between $625 million and $675 million for the year. We’ve recently increased our quarterly dividend on the company’s common stock and authorizing the share repurchase program.

Finally, as previously mentioned we are on track with our acquisition, majority stake in China’s Hefei Sanyo and have recently announced our intention to purchase the majority stake in Italy’s Indesit. In summary, given our profitable growth trends increased investment capacity and strong balance sheet, we will balance funding for all aspects of our business to ensure the best long-term value creation for our shareholders.

Now, I’ll turn it back over to Jeff.

Jeff M. Fettig

Thanks, Larry. I’ll summarize our expectations for this year on Slide 36. As we mentioned, we are expecting to significantly ramp up our second half earnings, based on what we’re seeing our improvement in global demand trends, our continued investments in our brands and new products will support a very strong lineup of new innovative product introductions during the second half. We are achieving higher prize mix, which should continue an accelerated rate in the second half, and finally, the normal higher seasonality of productivity, we fully expect to happen.

Additionally, as I mentioned in the previous remarks, the Hefei Sanyo acquisition provides us a true transformation on growth opportunity in China. We will more than buyback to our size in this very important emerging market. And the Indesit acquisition in Europe provides a various significant opportunity to position our European business for competitiveness, leading the growth and ongoing value creation; both of these transactions are on track to close by the end of the year. We remain confident in our ability to deliver another record year of operating performance in 2014.

Further out, I would like to turn to slide 37, which really highlights how we’re creating multiple paths to profitable growth. First, I would remind that our North America region, we believe we are still in the early stages of the replacement cycle, as well as a multi-year housing rebound, and as we mentioned in the last call, we’re beginning to see improvements in discretionary demand.

So we see several years ahead of us with good industry demand growth. Secondly, our pending acquisition of Indesit in Europe is a very important part of a comprehensive strategy and provides us to improve our competitive position in Europe, and very importantly, create a consistent and meaningful source of value creation for our shareholders.

And again, Hefei in China establishes a broad platform for growth in China’s emerging market, which still has world levels of appliance penetration, as we will 10x our distribution throughout that country. We also have very good opportunities to increase appliance penetration and continue to gain market share throughout the Latin American regions, given our strong brands, our proven gains of innovation and overall cost leadership.

In addition, as we continue to expand globally, we have opportunities to fully leverage our fixed cost structure, and ongoing cost productivity programs to ensure our competitive position and continuing to improve our margins. We have a strong cadence of bringing innovative products to consumers and leveraging the best brands in the appliance industry around the world.

We are driving both revenue and margin world by also extending and expanding beyond our core appliance business, where such products that you’ll see on KitchenAid small appliances line, which will now sell in the many, many markets around the world and also, our water business where we’re growing in all parts of the world.

So in total, we believe these multiple paths to profitable growth provide us with great opportunity to achieve our value creating objectives and we will ensure that we continue to deliver strong value creation for our shareholders.

So with that, I’d like to end our formal remarks and open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Michael Rehaut, JPMorgan. Please go ahead, your line is open.

Michael J. Rehaut – JPMorgan Securities LLC

Thanks. good morning, everyone.

Jeff M. Fettig

Hi, Mike.

Michael J. Rehaut – JPMorgan Securities LLC

First question I had was actually, and obviously a lot of activity in China and Europe, but I wanted to focus on your biggest region, the North American market, and specifically, just get a little bit of incremental color if possible on the trends during the quarter, as you mentioned, volumes improved in the second quarter and maybe perhaps not enough to maintain the overall shipment guidance. But if you could go into a little bit more detail in terms of the competitive market, if you view from a competitive standpoint, if incentives or discounts in the industry are stable, how you’re seeing some of the different end market drivers, new construction versus repair a model, any kind of interesting trends from both the end market perspective, and the pricing and discounting perspective.

Marc R. Bitzer

Hey, Michael, it’s Marc Bitzer. Thanks for the questions, it’s obviously, 10 questions embedded in one question. So let me try to give you – split it up in both industry and then our own performance in this quarter. First of all, on the industry, if you just look at the second quarter, the U.S., the market actually has grown 5.8% in T7, which basically the exact in the range of what we earlier indicated 5% to 7%, and the reason why that’s exact from the range is because the underlying macroeconomic indicated are exactly what we have them, i.e., if you look at housing starts, we continue to see above $1 million, existing home sales (indiscernible) new number we always said it’s slightly above $5 million, it is slightly above $5 million and unemployment rates are favorable, or getting better.

So I would say from a fundamental growth drivers from a market, nothing has changed, the only difference on a full year perspective is just kind of the last six or eight weeks that we have in Q1, I don’t think the markets are strong enough to just mathematically make it up for rest of the year.

But the underlying run rate of the industry, we still see in the original 5% to 7% range, and that’s an important factor and everything, which we see today on current trends are exactly confirming that direction. You ask about the overall promotional environment, I would say same comments as I made the last earnings call, by and large unchanged, there’s always promotions in the market, we participate when we can create value for our brands and our shareholders. And if we don’t see, we don’t participate.

So we don’t see a radical change in the second quarter, based on promotional activities. If you now come a little bit more to our own performance in the second quarter in the units and I also saw in the earlier analyst reports, I think there may be some confusion out there. Yes, it is true, that for Whirlpool North America, we published 0.6% volume decline.

However, it is very important that we made that point earlier, these units encompass way more when these T7 industry shipments, which typical people compared to. In these units, (indiscernible) 6% it’s the T7, it’s the additional major domestic, which we call T12, it also includes Mexico, it also includes Canada, and it also includes more domestic appliances.

If you would just go down to the T7, which we don’t think we don’t typically publish, but we have roughly a mid single-digit unit growth, which would indicate that we’re pretty much held our market share by and large. And that is despite, and that is an important despite, us having availability issue on our laundry products, which is our biggest category. But it is also important to note these availability issues are behind us they were Q2 events and they are behind us and we are fully back on track.

Michael J. Rehaut – JPMorgan Securities LLC

That’s a great answer. I appreciate all the detail, just as quick second question for Larry, if I could, the guidance coming down about $0.50 on an operating basis, fully attributable to the China trade inventory issues, but additionally, your industry outlook for several regions was notched down a little bit. So I was wondering if there was anything in the overall view that’s kind of offsetting a look for a little bit of reduced volume if that’s from the margin side or corporate expense or any of the other line items?

Marc R. Bitzer

Yes, Michael we mostly took down our industry guidance assumptions in North America, Latin America and you’ve seen the Asia adjustment reflected in our guidance, I think the thing to point out is that if you look at countries like Latin America, where we are gaining share and we are benefiting from price increases that is largely enabled us to offset the industry guidance change.

Jeff M. Fettig

Michael this is Jeff, I would add to give the industry assumptions for demand are marginal. And they really reflect what’s already happened in the first six months. So, on a go forward basis we feel actually pretty good about run rates for demand and on top of what we can do in the second half. So we see a actually improving demand revenue growth environment for the second half.

Larry M. Venturelli

I just add Michael, if you look at the half point sales run rate we mentioned a few things, Marc mentioned January, Feb weather had a lot of currency in the first half, World Cup availability, China customer inventory reductions, if we strip that all away, our half one run rate is in the mid single-digit. And that certainly supports what we would expect in the second half of the year.

Marc R. Bitzer

Okay, next question.

Operator

We will take our next question from Denise Chai with Bank of America Merrill Lynch. Please go ahead your line is open.

Denise Chai – Bank of America Merrill Lynch

Great, okay, thank you for taking my question. So just in terms of the laundry supply issues that you had in North America, can you kind of quantify how big that was?

Marc R. Bitzer

Hey, Denise its Marc, we are not going to go into the specifics of quantifying it. However it has been material, I mean, laundry is overall biggest category and majors and we basically in preparation for a major product launch which we have in Q3, we had to some what limit the production capacity as we go through this massive shift on the assembly line and the tools. So for temporary that was a about six week issue, but six weeks of laundry (indiscernible) availability have material impacts, I would just directly say its clearly above $10 million, clearly.

Denise Chai – Bank of America Merrill Lynch

Okay, got it. And then in – term can you talk a little bit more about the pricing increase that you are putting through this quarter, and what you are seeing for orders after the World Cup?

Michael A. Todman

Yes, Denise, it’s Mike Todman. We had already talked about in our first quarter earnings call that we had executed that price increase. And what we said is that it would step up over the course of the rest of the year. And so what we are expecting is to see, significant step up in the third quarter and as we go into the second half for that price increase. And to date, July was still relatively soft is because of the World Cup; but what we are seeing is a pick-up in orders and inline with what our expectations.

Denise Chai – Bank of America Merrill Lynch

Okay, great, thanks. Excuse me, and just lastly in terms of the Indesit acquisition can we get some kind of little bit more detail in terms of your high level thoughts there you mentioned seeing, you mentioned that a 7% to 8% operating margin might be possible in three years, what needs to happen, what do we need to see for that to happen. And what would be the casings of that kind of improvement presented from qualitative; you can into a little bit there. And also you are expecting $80 million of ongoing benefits in 2014 from restructuring, so far we haven’t seen a whole lot. So is that still $80 million for the full-year of 2014?

Jeff M. Fettig

Denise, this is Jeff, let me answer the last question first. Yes, we actually are seeing some of them Denise, in terms of the improvement of Europe, but they do accelerate in the second half and we will deliver at least $80 million worth of benefits on a full-year basis. As it relates to Indesit in Europe, and first of all, if you just take your public data that’s combined companies are over $7 billion odd company. So we certainly gives us a competitive scale to accomplish a lot of things not similar to some of our past large scale acquisitions in terms of benefits.

In terms of the timing, I would start with and again just based on public data and certainly our business in improving. They indicated through their guidance that their business is improving. So there is a baseline that we believe we can build off of and without getting into all the details it would be really optimizing the opportunities we see of a much larger scale business across the value chain. So and again in terms of timing it’s premature for us to talk about that, but Marc comments of 7% to 8% EBIT company is clearly within our expectations and it does take sometime to ramp up. You ought to think of a ramp up as opposed to waiting three years because we certainly wouldn’t plan to wait for three years.

Denise Chai – Bank of America Merrill Lynch

Okay, and let me just slip one more in here. There was a pretty meaningful increase in inventory, could you talk about what was driving that was it timing or something else. And in terms of U.S. retail inventory levels of appliances, would you say that that correction is done because I think you were saying that all year long you had seen sell through exceed sell in.

Larry M. Venturelli

Denise, this is Larry. Our inventories as planned they are up year-over-year, we have significant number of new product launches in the second half of the year and due to that we did increase levels of inventory now. We will bring that level down throughout the balance of the year as we normally do, but we did plan for higher inventory.

Marc R. Bitzer

And Denise its Marc. To your question about U.S. retail inventories, I would say buy and large our sell through of our products during Q2 exceeded the sell in on our products which basically tells you that – you probably had a slight inventory burn in our branded products in the second quarter.

Denise Chai – Bank of America Merrill Lynch

Okay, can you see if that’s done yet, any sense because it’s been going on for quarter while now?

Marc R. Bitzer

Well, the market is – consumer market is good, our brands were in high demand. So I think that I can’t predict by retailer, but I think in total we expect to have good demand.

Denise Chai – Bank of America Merrill Lynch

Great, thank you so much.

Larry M. Venturelli

Thank you.

Operator

And we will take our next question from Ken Zener with KeyBanc. Please go ahead. Your line is open.

Kenneth R. Zener – KeyBanc Capital Markets

Good morning gentlemen.

Larry M. Venturelli

Hi, ken.

Kenneth R. Zener – KeyBanc Capital Markets

So busy quarter here, just we saw some pretty index for you guys (indiscernible) I would just reiterate the usefulness given you guys comments about the market and investors perception. Second, related to the U.S. market given the implied back half volume that you’re talking about for the industry, which you’ve already been doing. Given that it’s a tougher comp in terms of the growth rates last year. What kind of – from a growth rate perspective given their higher growth rates, what gives you confidence of visibility into that? I mean is it the shipment; is it the declining inventory that you are seeing domestically?

Marc R. Bitzer

Hey Ken, it’s Marc Bitzer. First of all, I’m commenting the second half against the background of industry assumption; back half is 5% to 7% consistent with what I said earlier. And the confidence which we have on our own volume growth in that environment is a) we have a massive amount of new product launches in particular laundry, but also KitchenAid and small domestic appliances throughout the entire third quarter and then laundry in the fourth quarter, so there is a large number of product launch is coming.

In addition, we know at least in our products trade inventories are low, and we see that as a business right now progresses, we have pretty strong shipments. So that gives us all the confidence for back half and of course we have a pretty firm indication of what we should expect around from the promotion period in Q3 and Q4. So put it all together we are very confident behind our plan.

Michael A. Todman

Ken, the market data March through June is up 6.5%, July looks good. So we feel pretty confident with it as Marc said.

Kenneth R. Zener – KeyBanc Capital Markets

Good. And I guess Marc, you made the comment on or Larry is the $10 million related to the laundry. I’m assuming that is that EBIT or is that sales $10 million?

Marc R. Bitzer

Hey, Ken it’s Marc. I said significantly above $10 million and it is EBIT.

Kenneth R. Zener – KeyBanc Capital Markets

Right, $10 million will be $0.09, okay, so that was good. Now moving on to another thing, such a risk quarter here, the $0.50 ahead in China or related at trade inventory. If tax affects that $50 million I mean again towards $40 million EBIT, my recollection was you guys had north of $200 million of sales. Could you correspond the high EBIT impact relative to the $200 million and why that was – I guess a surprise to you guys if that wasn’t in guidance already?

Larry M. Venturelli

Well, original guidance was profitability in China, and as Mike mentioned in his script, sales are down significantly. So it will be – our base China business which was a loss.

Michael A. Todman

Yeah, and Ken, as Mike explained that the wildcard in the whole China situation is the timing of the approvals. They set many levels of approvals, we got through most of them very quickly in fact quicker than what we thought on our internal plan. But, we still have that – as Mike talked the equivalent of the SEC approval as well as the tax and all that. In fact – as though, our trade partners now believe that ultimately this is going to work out and they are preparing to do business with the new entity and the fact that they are preparing basically they didn’t buy from us. And so we are basically – until we get this all combined, we’re basically not selling anything in China. And I think we have new lines ready to go and so on and so forth, but again we just need to get this done. We are optimistic we will get it done soon, but there is a transition cost, it was not forecastable simply because the variable of approval.

Kenneth R. Zener – KeyBanc Capital Markets

Okay, as it sounds – it seems like the EBIT relative to the sales of $200 million-ish, would imply a very high incremental EBIT versus…

Michael A. Todman

Well, basically you have all fixed cost and the under absorption, not all was cash, because some of it’s burdening stuff, but yeah, our whole fixed cost structure which we are now reducing very aggressively, but the fact as we’re on, let’s call on the small existing Whirlpool business, we basically don’t sell anything.

Kenneth R. Zener – KeyBanc Capital Markets

Yes, we’ve taken a beat in there. Well, I hope the guidance impact this year is a function of the upside when you choose to give guidance for that acquisition.

Marc R. Bitzer

Well, and as Mike said and I think you’re still on the one chart, I mean it will be earnings and cash negative this year, as we absorb all these transition expenses and we do expect the approval this year, but we expect it to be a nice contributor to our overall operations beginning next year.

Kenneth R. Zener – KeyBanc Capital Markets

Very good, the next point, Europe, Marc, really we appreciate the 7% to 8% margin in guidance directionally in year three and my calculation that’s roughly 450 in EPS, compared to roughly $0.60 today from Europe. so it’s obviously, very meaningful. Could you address if any, the volume assumptions that would underlie that, or is that simply consolidation of the functions like distribution and overlay in production areas?

Marc R. Bitzer

Hey, Ken. First of all, let me come back to process where we are, we signed, but we have not completed and there’s several approvals that what we have to go through. I would just argue, please bear with us until we close the transaction, and then we will show you all the details about baseline assumption, synergies, restructuring, industry forecast, breakdown and everything including cash flows by year. It is just premature and inappropriate given the state of a process where we are to go into these details.

Kenneth R. Zener – KeyBanc Capital Markets

Understood. Thank you very much, gentlemen.

Marc R. Bitzer

Thank you.

Michael A. Todman

Thanks, Ken.

Jeff M. Fettig

Thanks, Ken.

Operator

And we’ll take our next question from Jay McCanless with Sterne Agee. Please go ahead. Your line is open.

Jay C. McCanless – Sterne, Agee & Leach, Inc.

Good morning everyone.

Michael A. Todman

Good morning.

Jay C. McCanless – Sterne, Agee & Leach, Inc.

First question I had is on the small appliances in North America. can you discuss what percentage that is of revenues now, and quantify, and give us some numbers around what kind of growth you saw year-over-year in that business?

Marc R. Bitzer

It’s Marc and first of all, we don’t break down what we have FDA revenues for the rest of our business. However, let me just make a broader comments, we have on small domestic appliances, if you look the last three or four years, we had a really, really strong growth trajectory, very strong, clearly above market average and clearly above rest of the company. We have this year in North America a little bit of setback, which is related to two specific trade partners, who kind of took inventory down, there were some challenges, which I would say is not reflective of the overall long-term growth trend, and it’s also not reflective of what we see for example, in Europe, they are small domestic a third growing heavily. Having said that, we have maybe, one of the largest product launches ever in Q3 in small domestic appliances, that’s why I’m very confident, we very quickly get back on the growth trajectory, but it was somewhat a negative for us in Q2.

Jay C. McCanless – Sterne, Agee & Leach, Inc.

All right. and then just one other question with the Maytag has been another – was a topic conversation in the last conference call and it sounds like a fairly large product launch coming for 3Q, directionally what should we expect for North American operating margins that there’s still going to be a lot of SG&A loaded into there, if you could give us some guidance I’d appreciate it?

Marc R. Bitzer

Yes. It’s Marc Bitzer, again. First of all, in the product launches, the ones which I referred to earlier are multi-brand product launches that were basically, particularly on top-loaders, which is a bulk of our laundry business, where we have a number of launches pretty much from September this year until Q1 next year, almost the entire top-loader line. So that is obviously a big and significant and impact to all our brands.

In addition, we had a number of dishwasher launches, which also continued to progress and some of our product categories, so that is just giving the side of our laundry business is massive and impact of our North America business. As you probably also know, we don’t give margin guidance by region and by quarter. I would just generally say that we have the North America 11 consecutive quarters on year-over-year market expansion and I don’t intend to break that spring.

Michael A. Todman

And the only thing I’d add to Marc, if you look at our 0.5 margin and what we’re guiding to for the full year, we do expect second half to have a nice margin increase and we would expect that in all three of our largest regions around the world.

Jay C. McCanless – Sterne, Agee & Leach, Inc.

Great, thanks for taking my question.

Michael A. Todman

Thank you.

Operator

And we’ll take our next question from David MacGregor with Longbow Research. Please go ahead. Your line is open.

David S. MacGregor – Longbow Research LLC

Yes. good morning, everyone.

Jeff M. Fettig

Good morning, David.

Michael A. Todman

Good morning, David.

Marc R. Bitzer

Good morning.

David S. MacGregor – Longbow Research LLC

Jeff, congratulations on this, it’s a nice job there.

Jeff M. Fettig

Thanks, David.

David S. MacGregor – Longbow Research LLC

I guess I wanted to give Mike to talk a little bit about Latin America. and so far, the discussion is seemed to have been focusing around the impact of the World Cup, and not as much perhaps on the macro developments down there. and so is it safe to assume that your view on the weakness down there is largely associated with the World Cup and now that’s behind us, we should begin reverting back to a more normal market condition, or is there bigger macro condition down there that really is at play?

Michael A. Todman

No, David as I said in the script, we think that the underlying macro environment is actually pretty good. When you look at on unemployment rates, they were down, real wages are up above 3%, inflation is kind of in that band, it’s around 6%. So we’re actually feeling pretty good about the macroenvironment. there are some things, the World Cup was won. there are some elections going on. so you never know what short-term impacts those are going to have. but largely, we think, we’re going to get back to, certainly a better growth environment and scenario, and if you think about it, in the first quarter, the market was up 10%, and that was down 17% for the second quarter. so what we’re expecting is the market to rebound, and certainly be flat to positive as we go forward.

Marc R. Bitzer

And David, I would add, as we’ve talked in the past, there’s really three pieces of our Latin America business, as Brazil appliances, there is the appliance business is in all the other 30 market surrounding Brazil and there is our global compressor business. And in fact matter is our Brazil appliance business has been even in this environment, performing extraordinarily well. There was clearly a volume head in Q2, which we fully expected, but even with that, our appliance business performed very well. The real weaknesses have been more international, which I mean, Argentina, Venezuela, et cetera, et cetera, perhaps Colombia is really a strong market in that group.

Although we’re now seeing that improve, and the other part was global compressors, which where we have the big presence in China and with a very, very double-digit decline in the first half of the year in refrigeration that impacted that. so all the pieces were coming back, but I think the one misconception is that our Brazil appliance business is weak and it is not, the market was weak, but our business was very strong.

David S. MacGregor – Longbow Research LLC

Okay. And then Jeff, if I can get just you to talk about sort of the discussion that’s in the public forum right now, concerning General Electric’s appliance business and the possible sale of that business, your largest competitor in the builder channel, maybe you could talk about sort of the competitive strength of the competitor vulnerabilities of your builder channel business versus a change of ownership in that business. how does that influence your overall North American competitive situation?

Jeff M. Fettig

David, I mean I only know what I read about, as you do. So I can't really comment specifically on that situation. I can’t comment on our business is we feel very good about our position in the builder channel itself, we’ve made significant inroads over the last five or six years. And those inroad and start with the fact that we got an outstanding brand portfolio.

We can meet the needs of virtually all price levels of the marketplace which is a huge advantage. So that supported by again that can, we hit even during the downturn. We invested heavily in new product innovation. And then thirdly, we built that market has specific system requirements from ordering, delivering, servicing et cetera, et cetera. And we built up our capabilities which were massive investments over a long period of time. And so we have those capabilities. As does the competitor you talked about. So anyway we’re growing, we’re winning new customers, it’s a market that’s going to continue to grow for sometime. And I don’t see any change in the trend that we currently have.

David S. MacGregor – Longbow Research LLC

Thanks, very much guys.

Jeff M. Fettig

Thank you.

Operator

And will take our next question from Megan McGrath, MKM Partners. Please go ahead, your line is open.

Megan McGrath – MKM Partners

Good morning,

Marc R. Bitzer

Good morning.

Megan McGrath – MKM Partners

Most of my questions have been answered. But just a couple of quick follow-ups. In Europe does the pending Indesit acquisition put any of your recent, I mean its cost saving initiatives on hold, until you get that completed.

Marc R. Bitzer

Hi Megan its Marc Bitzer. No we already announced restructuring initiatives up fully on track and will be implemented and executed. So that is not impacted by Indesit.

Megan McGrath – MKM Partners

Okay, great. And then just one final follow up on Latin America you’ve talked about rising prices to offset higher inflation it looks like that didn’t occur in the second quarter was that more of just a timing issue or was the inflation more aggressive than you had initially anticipated.

Jeff M. Fettig

Yes, Megan, what we said actually at the end of the first quarter. We had already announced these price increases and that they would scale in if you will over the course of the year. And so what we are expecting is to benefit more from the price increases in the third quarter and the fourth quarter. And as we’ve go throughout the year, but it’s the same price increase that we took its how we introduced in our real life.

Megan McGrath – MKM Partners

Great. Thanks so much.

Operator

And our next question comes from Sam Darkatsh with Raymond James. Please go ahead, your line is open.

Sam Darkatsh – Raymond James & Associates, Inc.

Good morning, Jeff, Marc, Mike, Larry, how are you?

Michael A. Todman

Good, thank you.

Sam Darkatsh – Raymond James & Associates, Inc.

Most of my questions also have been asked and answered. But to also follow-up question. First regarding Larry the $0.50 item the trade inventory transition how much is that impact that $0.50 is in the back half of the year versus was already recognized in the second quarter.

Larry M. Venturelli

$15 million in Q2 the balance would be in the back half.

Sam Darkatsh – Raymond James & Associates, Inc.

And should we I guess Mike assume that this is a permanent impairment of your legacy Chinese business I mean at some I don’t imagine that business is coming back even after the Hefei deal is consummated.

Michael A. Todman

No, what we are expecting is to actually resume and grow from the business. And we – as we introduced new model lines, we’re certainly expecting not only to recover, but to grow as we expand distribution into all the distribution outlet. So no it would not be permanent.

Marc R. Bitzer

So what was the reasoning behind the huge take down at retail I’m confused. Well, if you think about it Hefei Sanyo is about (indiscernible). And so what the trade knows is that there would be new model lines coming in, there is probably some new terms and so what they are basically doing is kind of protecting at this point if you will there their inventory, they are marking sure that they don’t have too much as they know these new lines are going to be introduced. And so it’s kind of a one-time adjustment, but they will re-buy as we move forward and as the – and from the new combined entity as the transaction is closed.

Michael A. Todman

Okay, as I guess what was surprising about is that wouldn’t have been flushed out within the due diligence process that that type of scale response would be a possibility.

Jeff M. Fettig

Sam, this is Jeff as I said before the variable is the timing approval, so that was – that is a variable and we saw this in the second quarter which was bigger and more than we previously thought, but the fact now is it’s still dependent upon the approval, so that was hard to forecast it.

Sam Darkatsh – Raymond James & Associates, Inc.

Understood. Last question, the acquisitions that you are making the two of them plus I’m guessing the future restructuring that’s going to occur in order to integrate, does that free cash flow usage preclude any share repurchase activity this year or next.

Jeff M. Fettig

No.

Sam Darkatsh – Raymond James & Associates, Inc.

So we might expect share repurchase activity in the back half of the year once if you generate their free cash?

Michael A. Todman

What I would say Sam is we do intend to repurchase shares in the future and we continue to balance the various aspects of capital allocation we have, but our intention would be in the future, yes we would be repurchasing stock.

Sam Darkatsh – Raymond James & Associates, Inc.

Okay, thank you both. Thank you all, appreciated.

Jeff M. Fettig

Thank you.

Operator

And we will go next to Eric Bosshard with Cleveland Research. Please go ahead. Your line is open.

Eric Bosshard – Cleveland Research Company

Thanks, two things. First of all on the – your performance versus the AM, I appreciate the distinction that it’s a bit of apples versus oranges, could you just flush out a little further in 1Q I think your units were up meaningfully more than the industry number 4 versus 1 and then that reversed obviously this quarter from triple points ahead that’s 6 or 7 points behind. You just explain a little more would change some markedly between 1Q and 2Q in that apples versus oranges comparison?

Marc R. Bitzer

Hey, Eric this is Marc Bitzer again, just coming back to my earlier comments I said that in Q2 if you look at the AMT-7 shipments that were mid single-digits, so I didn’t say we are down, we actually were up mid single-digit, so which also means the rest of – difference to the overall unit shipments came from Canada small domestic and some other businesses, on the means on our AM shipments we are pretty much held market share year-over-year directly. In Q1 we picked up market share year-over-year and now we held market share.

Eric Bosshard – Cleveland Research Company

I guess, sorry to make my question clear, the non T7 it looks like the performance was much weaker in 2Q than it was in 1Q that’s what I’m trying to figure out what was different in 2Q versus 1Q?

Marc R. Bitzer

I think the biggest difference you would see I mean year-over-year is Canada and small domestic appliances.

Eric Bosshard – Cleveland Research Company

And is that – can find the 2Q or is that ongoing, how should we think about that?

Marc R. Bitzer

I mean as I mentioned earlier we are very confident in our small domestic appliance business for the back half of the year, it’s just back different number product launches.

Jeff M. Fettig

And again the AM market sluggish and it has been impacted by currency therefore having significant price increases and that’s got to settle its way through.

Eric Bosshard – Cleveland Research Company

Okay, and then the second question, Jeff, in Europe the 7% to 8% margin target three years out is I think more than you’ve made in the past. I’m just curious as you look at both the market and the new business or platform you will be operating there. What’s different on either side of that that would allow this to make margins that you haven’t achieved in the past?

Jeff M. Fettig

Well, first of all we have achieved those in the past, that’s been albeit a while. Second of all there is – I think if you look at the one or two companies they have big scale these are not new levels for the industry and Marc you might want to comment on kind of the parameters.

Marc R. Bitzer

I mean, Eric to the earlier comment, I mean obviously we will give you all the details post-closing and many of you will understand the assumptions about scale, synergies, restructuring and baseline assumption. But I really want to refer back to Jeff’s earlier comment. We made 7% plus margins in the 90s, we made 6% plus margin in 2000 and with a lower scale position. To Jeff’s earlier point there are players in Europe, who make 8% or 9% operating margin on sustained base. So these are not of the normal margins, but obviously the key will be for you to understand post-closure of the ingredients and how we come up with that plan.

Eric Bosshard – Cleveland Research Company

Okay, thank you.

Jeff M. Fettig

Okay, with that, we’re going to conclude the call here. Thanks everyone for joining us today and we look forward to speaking with you next time.

Operator

This does conclude today’s program. You may disconnect at this time. Thank you and have a great day.

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