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Whirlpool Corp. (NYSE:WHR)

Q2 2007 Earnings Call

July 20, 2007 10:00 am ET

Executives

Larry Venturelli - VP, IR

Jeff Fettig - Chairman & CEO

Mike Todman - President, Whirlpool North America

Roy Templin - CFO

Analysts

Michael Rehaut - J.P. Morgan

David MacGregor - Longbow Research

Sam Darkatsh - Raymond James

Eric Bosshard - Cleveland Research Company

Laura Champine - Morgan Keegan

Jeff Sprague - Citigroup

Presentation

Operator

Good day, everyone, and welcome to today's Whirlpool Corporation Second Quarter 2007 Earnings Release Conference Call. Today's call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Larry Venturelli. Please go ahead.

Larry Venturelli

Good morning, and welcome to our second quarter earnings conference call. Our opening remarks will refer to a slide presentation, which is available on our Investor web page. During the call we will be making forward-looking statements to assist in your understanding of Whirlpool's future expectations.

Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K and 10-Q. During the call, we will be making comments on free cash flow, a non-GAAP measure. Listeners are directed to slide 34 for additional disclosures regarding this item.

Now I would like to turn the call over to our Chairman and Chief Executive Officer, Jeff Fettig, for his opening remarks. Jeff.

Jeff Fettig

Thank you. And good morning, everyone, and thank you for joining us today. As you saw earlier this morning, we released our financial results for the second quarter, and you can find these results, which are shown on slides two and three.

For the quarter, net sales increased 3% to an all-time company record of $4.9 billion in revenue. We delivered $161 million in earnings from our continuing operations, which translated into $2 a share, which was up about 60% from the $100 million or $1.26 per share that we reported a year ago at this time.

The increase in earnings for the quarter reflect several items, which include strong brand performance and operating profit improvement within each of our international businesses, the efficiency benefits associated with last year's acquisition of Maytag, productivity improvements combined with very strong cost controls all around the world, and a lower effective tax rate.

I'm very pleased that during the quarter that all of our regional businesses reported improved year-over-year operating and profit margin. And as we expected, second quarter results were negatively impacted by significantly higher material costs, which primarily were within base metals, component parts, and steel. We also, as expected, saw lower demand in the U.S. We had increased brand investment and a pension curtailment charge in our U.S. business during the quarter, as well.

Regarding our North American business, we are very encouraged by the U.S. industry demand trends that we saw late in the second quarter. While weak industry demand in the U.S. has been negatively impacting our results during the past year, shipment trends began to improve during the second quarter, and we believe that demand will begin to return to moderate growth levels during the second half of this year.

The Maytag integration is progressing well and as planned. And as we discussed with you last time or last quarter, we are implementing the Maytag integration really in three phases. Our initial integration efforts have been focused on fixing Maytag's cost structure.

A significant portion of this work was completed during first half of the year, which included the sale of the Hoover floor-care business, transfer of production related to the closure of two Maytag laundry locations to our Ohio facilities, as well as consolidating administrative, procurement, R&D and other supply chain functions.

We will be closing the remaining Maytag laundry facility in the fourth quarter of this year, and by the end of the year we are very confident that we will have significantly improved the old Maytag business cost structure.

The remaining two phases are very important to our integration, and are focused on brand investment and growth, which includes utilizing our innovation pipeline to reinvigorate the brand product offerings in the marketplace.

In the second quarter and through the balance of this year and throughout the first part of next year, you will see a themes (ph) of innovation and acceleration of product development, delivering on our longstanding Maytag brand promise of durability and dependability.

We will continue to focus on the brand by making appropriate brand investments and by driving growth through product innovation, we will continue to expand our distribution, and the development of a very distinct visual brand language for all Maytag products.

In line with these growth plans established for Maytag, we did increase brand investment during the second quarter. This planned increase was in support of our new product introductions and the brand positioning which reinforces the attributes of dependability, durability and quality with our customers.

Maytag's advertising to consumers has been extremely limited over the last several years, and we believe this increased advertising support is one of the key investments that we're going to make and are making for the brand's future growth and profitability. Overall, we are very confident and have strong confidence that our actions that we're taking will position will the Maytag brand for growth during the second half of 2007, and beyond.

Also as we discussed during our last call, we have resumed during the quarter our share repurchase program. During the second quarter, we repurchased approximately $100 million of common stock in the open market. We have approximately $365 million remains open under our $500 million share repurchase program. We continue to believe our stock is undervalued and we intend to remain active purchasers of our stock going forward.

Our guidance for 2007 is shown in slide four, and I would like to point out a couple of changes that we are making in terms of the inputs to guidance. First, due to the success of our Maytag integration efforts, we now expect to realize efficiencies in excess of the $400 million that we talked about earlier for 2007. This is significantly above our original estimate.

Additionally, due to now rising oil prices, we expect the combination of material price increases and oil related costs to increase by approximately $570 million. This is up from the $500 million guidance we gave you in April. But combined, we still continue expect our earnings to be in the $8 and $8.50 per share range from continuing operation, and for free cash flow to be in the $600 million to $650 million.

The priorities that we embedded in our 2007 guidance, which are listed on slide five have not changed. We really remain focused on five specific areas to address the significant material cost increase environment that we continue to see.

And, again, just as a reminder, those priorities are realizing the Maytag efficiencies, which are going very well. Secondly is continuing the acceleration of our new product innovation globally. Third, which we will talk about later today, the growth of the Maytag brand. Fourth is to drive cost productivity around our global operations. And lastly, and very importantly, managing our overall mix of brands and products and innovation, which does include cost-based price increases that we've implemented previous to this call.

Joining me today for the call is Mike Todman, our President of our North American Business, and Roy Templin, our Chief Financial Officer. I'm going to now turn this call over to Mike to discuss both the North American and International performance for the quarter.

Mike Todman

Thanks, Jeff, and good morning, everyone. Let me start by giving my perspective on North America's performance during the second quarter. During the quarter, we reported improved operating income and margin expansion versus a year ago. These financial results were achieved during a very difficult material cost and demand environment, and while also executing the integration of Maytag.

We were able to offset these headwinds by combining strong acquisition efficiency realization with the favorable impact of higher average sales values and an improved price mix from our innovative brands.

As expected, industry unit shipments of appliances declined approximately 1% for the quarter, and about 5% for the first half of 2007. We did begin to see positive industry trends in June and also in early July, after several months of steep year-over-year declines. These recent trends reinforce an improving industry environment and are consistent with the guidance we previously provided.

We continue to expect moderate growth in the second half of the year, which will contribute to a stronger second half financial performance, and we anticipate that the annual industry demand in the U.S. will decline by approximately 2% to 3%.

As you will see on slide six, second quarter revenue from Whirlpool North America of $3 billion was down approximately 6% versus the year ago period. While total company share increased from first quarter levels, we did experience year-over-year declines, primarily within our OEM business.

For our branded products, the Whirlpool brand continued to gain share, and our premium business of KitchenAid and Jenn-Air remain very strong. As expected, Maytag year-over-year brand share was down. However, brand share was essentially equal to first quarter levels. I will speak about our growth plans for Maytag in just a moment.

Finally, our value brands, which tend to be more price sensitive, have experienced significant margin pressure from increased material cost. To recover these material cost increases, we consciously took price increases at the expense of share in some categories.

With new product innovation launches, increased distribution, execution of our Maytag growth plan, and the vast majority of our acquisition integration activity behind us, we fully expect to increase share in the second half of the year. To close out my discussion on second quarter financial performance, shown on slide six, I should also highlight that our operating profit of $179 million for the quarter reflects increased brand investment in support of the Maytag brand innovation launches, and a pension curtailment charge.

I would like to make a few comments regarding where we are in the integration and growth plans for the Maytag business. Consistent with our original plan, we are following the outlined approach that you see on slide seven. We have completed significant portions of our integration plan, and much progress has been made over the past several months, addressing Maytag's cost structure.

Acquisition efficiencies from the combined company have been robust and continue to track above our initial plans. With the integration activity largely implemented, we are now in the midst of our product innovation and growth plans, which are being supported by additional brand investments. These plans started in the first quarter with the introduction of the Centennial and Bravos top load washers, which can be seen on slides eight and nine.

During the second quarter, we also introduced the new Maytag Epic washing machine shown on slide 10, and the Jenn-Air brand launched a complete collection of appliances in an oiled bronze finish shown on slide 11. This cadence of new innovative product introductions will continue well through 2008.

By this time next year, we will have turned over a significant percentage of the Maytag product line. As such, you will see significant product differentiation and innovation launches over the next several quarters, which clearly support the Maytag positioning of dependability and durability.

This commitment to brand investment, innovation, and growth has enabled to us increase our distribution during the first half of this year, and positions us to grow the Maytag brand share during the second half of 2007 and into 2008. Along with new Maytag innovation, we will continue new product launches, like the new KitchenAid Architect Series II shown on slide 12.

Going forward, as you can see on slide 13, our business focus for 2007 remains realization of Maytag efficiencies, Maytag new product launches and brand investment, improvement in margin realization, introducing new product innovation to the market and delivering strong levels of productivity.

In summary, we do expect second half results in North America to improve based on improved industry demand, continued strong acquisition efficiency realization, the ramp up of productivity initiatives, benefits from new product launches and share improvement, and lower year-over-year material and oil-related cost increases in the second half of the year.

Turning now to our International business, you will see on slide 14 that we have made good progress on International growth. Following our strong performance in 2006, momentum in our international business continued through the first half of 2007. Total International operating profit reached $271 million during the first six months of 2007, and margins increased from 5.4% to 7.5%.

For our European business, shown on slide 15, revenue increased 10% during the quarter to a record $900 million, led by continued strong performance of the Company's Whirlpool brand and innovative new product offerings. In local currency, sales increased approximately 3%. Year-over-year unit shipments for the region exceeded industry demand during the quarter, which was estimated to have increased 2% to 3%.

Record second quarter operating profit of $51 million increased 20% over last year's comparable period, and margins expanded as favorable mix, productivity and lower benefit costs offset higher material costs during the quarter. In Europe, our innovation cadence remains strong and we continue to leverage our global operating platform and customer knowledge.

As you can see on slide 16 through 18, we introduced the Whirlpool Evolution Emotion Hood with dual functionality, the Bauknecht Super Echo energy conserving washing machine, and the Whirlpool Never Defrost freezer during the second quarter.

Based on current economic conditions, the company continues to expect full year 2007 industry unit shipments to increase approximately 2% to 3%. On slide 19, you will note that our European business focus during 2007 remains continued improvement in the overall mix of our business to expand margins, manufacturing, productivity and cost reduction initiatives, and leveraging our global product innovation.

For our Latin American business, shown on slide 20, we reported record second quarter revenue and operating profit. Sales improved 29% to $822 million from last year, reflecting robust industry growth and market share gains in appliances, a favorable macroeconomic environment in Brazil, cost-based price adjustments and strong consumer demand for the company's innovative brands.

Excluding currency translations, sales for appliances and compressors increased approximately 18%. During the quarter, we extended our leading market share position in Brazil, as our regional unit shipments of appliances grew 22%, exceeding industry shipments, which are estimated to have increased by 18%.

Record second quarter operating profit of $95 million increased significantly over the prior year period. The region reported a strong second quarter operating profit margin of 11.6%. Strong appliance demand, productivity, and price increases implemented to mitigate higher material costs contributed to the improved performance versus a year ago.

Innovation continues to be a cornerstone of our Latin American business. During the quarter, the region introduced both the Brastemp One Fitness microwave and Retro Mini refrigerator, shown on slides 21 and 22 and the Consul brand introduced the innovative Mare washing machine, shown on slide 23.

Based on the current economic environment in Brazil, the company continues to expect full year 2007 appliance industry shipments to increase 15% to 20%. As indicated on slide 24, our focus in Latin America during 2007 is on strong cost productivity, margin realization, and acceleration of innovation launches.

On slide 25, Asia's first quarter sales of $163 million increased 23% from last year. Excluding the impact of currency, sales increased approximately 13%. The region reported improved operating profit results during the quarter, largely driven by strong growth within India.

The favorable impact from successful new product launches, such as the Mastermind frost free refrigerator, shown on slide 26, improved product mix and cost-based pricing, offset higher material costs during the quarter. Based on current economic conditions, the Company continues to expect 2007 industry unit shipments to increase 5% to 10%.

Slide 27 shows our continued business focus in Asia during 2007 is to, one, extend our product offering and accelerate new product launches, expand distribution and leverage our global innovation, continued expansion of China procurement and technology, and drive strong manufacturing productivity.

Now, I would like to turn the call over to Roy Templin for his financial review.

Roy Templin

Thanks, Mike, and good morning, everyone. As Jeff discussed earlier in his opening comments, we earned $161 million or $2 per share from continuing operations for the quarter, compared to $100 million or $1.26 per share last year. Included in these results are some discrete items in the current year second quarter, which I would like to highlight.

First, a lower effective tax rate, which increased earnings by approximately $0.27 per share when comparing the current year effective tax rate to the prior year. Second, a pension curtailment charge, which reduced earnings by approximately $0.14 per share. And, third, a cumulative charge for variable stock-based long-term compensation, resulting from the company's significant increase in stock price during the second quarter, which reduced earnings by approximately $0.09 per share.

All of our businesses reported year-over-year operating profit improvement during the quarter, combined with margin expansion. Outside of the U.S., our financial performance exceeded expectations for the quarter, as both appliance demand trends and international economic conditions remained solid.

Our U.S. business was negatively impacted, as expected, by lower demand and significantly higher material and oil related costs during the second quarter, and first half of this year. Globally, our material and oil related cost increases were approximately $157 million for the quarter, and about $305 million through the first half of the year. Roughly 75% of these increases were experienced in the U.S.

Acquisition efficiencies continue to remain strong. During the quarter, the efficiencies were $120 million, and integration costs were approximately $10 million. For the first half of the year, total efficiencies were $227 million, and one time costs were $24 million. We are encouraged by U.S. demand trends exiting the second quarter, and believe we will see flat to moderate growth in the second half of the year.

In addition, while year-over-year material cost increases will remain significant. We should experience a lower year-over-year increase in the second half of the year, when compared to the first half. These factors, combined with productivity initiatives, new product launches and the continued benefits from acquisition efficiencies, will improve our second half performance within the U.S.

I’ll now make some additional comments on our second quarter consolidated earnings performance. Before I begin, and as a reminder, during the first quarter of this year, the company adopted changes to its segment reporting, consistent with realignments made to our regional business operations. Regional results for 2006 have been reclassified to reflect these changes and are shown on slide 28.

Turning to slide 29, you will note that interest income and sundry improved approximately $14 million from 2006. This improvement primarily reflects foreign currency gains on balance sheet positions held in various countries around the world during the quarter. Last year, these positions resulted in $7 million of expense, while this year's results were a $7 million gain. Interest expense declined about $7 million from the prior year, reflecting an overall reduction in our debt balance, and the replacement of maturing higher cost debt during 2006 with lower rate debt.

Our effective tax rate was 14.5% during the second quarter, compared to 25.5% last year. As we stated during our first quarter earnings conference call, the adoption of FIN 48 will most likely cause additional volatility in our tax rate from quarter-to-quarter. Although we continue to expect an overall annual rate in the mid 20s for the entire year, Whirlpool was required to recognize the benefit of two discrete items related to international tax reserves established prior to 2007 during the second quarter. The recognition of these two items in the second quarter reduced our second quarter tax rate below our estimated annual operating rate.

Finally, you will note that equity in affiliates and minority interests, which are associated with our Latin America operations, and a European equity investment, negatively impacted year-over-year earnings by $8 million.

Turning to slide 30, I will briefly comment on our cash flow performance. Cash used in continuing operations of $6 million was $87 million lower than last year's results. As current year results include higher restructuring primarily in support of the Maytag integration, and a higher pension contribution. Overall, working capital levels as a percentage of sales ended the quarter at 12.4%, versus last year's reported level of 12.0%.

Our overall inventory position at the end of the quarter, increased $265 million from the same period last year. The year-over-year impact from currency increased inventories by about $90 million, due to appreciation in both the Euro and the Brazilian Real. Material cost increases and safety stock for product transitions moved added an additional $85 million. And the remaining $90 million represents about two excess days, which we expect to work off by the end of the year.

Turning to slide 31, given our accelerated rate of achieving efficiencies in the first half of 2007, we now estimate we will exceed $400 million in efficiencies in the current year, significantly ahead of our original schedule. Our revised estimates for integration costs shown on slide 32; have not changed from our previous guidance.

As Jeff previously discussed, our earnings per share guidance remains $8 to $8.50 per share for 2007, and free cash flow is expected to be between $600 million and $650 million. We resumed our share repurchase during the quarter and purchased $101 million of common stock, which equated to about 915,000 shares. We have approximately $365 million available for purchase under our current authorization.

Now, I will turn the call back over to Jeff.

Jeff Fettig

Thank you, Roy. Let me recap some of our view for the balance of the year. To begin, we do expect continued strong performance within our international businesses. At this point in time, we are encouraged by the U.S. demand trends that we saw exiting the second quarter. And we believe that with an improved demand environment, combined with our acquisition efficiencies, our ramp up, which we expect in the second half of the year of our productivity improvements, and the Maytag product innovation, we will significantly improve our performance, as expected, in the U.S. during the second half of the year.

Overall, we will continue to address globally, this heightened global material cost environment through the things we've talked about, which include new product innovation, increased productivity throughout our global operations, successfully improving our overall mix of business as we have done to date. And where appropriate, implementing cost-based price increases.

Finally, we do remain very well positioned to realize efficiencies, as Roy spoke about, in excess of $400 million from the Maytag acquisition. And we’re very excited about the growth plans for Maytag throughout the second half and into 2008.

At this point I’ll stop, and I’ll open this up for questions. Operator, if we could proceed with the Q&A portion of this call.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Michael Rehaut with J.P. Morgan.

Michael Rehaut - J.P. Morgan

Hi, good morning.

Jeff Fettig

Hi Mike.

Michael Rehaut - J.P. Morgan

A couple of questions. First, just focusing on the share trends for the quarter. Were those within the expectations that you had going into the quarter, and may be you could highlight within OEM, and Whirlpool branded. Where were their particular strengths did? Were the Whirlpool share gains may be not as strong as last quarter. And OEM, what's going on with Sears, if you could shed any light?

Jeff Fettig

Sure. Well, let me have Mike Todman answer that.

Michael Todman

Yeah, Mike, let me just start with kind of the general share trends, and actually the share trends in general coming from the first quarter to the second quarter are in line with what we’d expected, except for the OEM share is lower than what we had expected. But the Whirlpool brand, it did gain some share and was very strong. We feel very good about our premium brands, both KitchenAid and Jenn-Air, and those were very strong.

The Maytag brand was right where we thought it would be, and just was about flat in share quarter-over-quarter. So, really it was the OEM brand. Now we feel pretty confident that as we go through the second half of the year. With some of the new product introductions that we have coming into the third quarter and the fourth quarter with Sears, that allow to help them with the plans and actions that they also have in place. So, we feel good about what we've got coming up through the third and the fourth quarter.

Jeff Fettig

And to be clear, on the Maytag brand, which there have been some comments about, year-over-year, it is down. And we expected that, as we’ve gone through this transition. We've closed two major facilities, production facilities, and transferred production. So, as we transition through this, we had to move up old stock off floors and then ramp up with the new and put on our new, particularly in fabric care.

So this is largely in line with our expectations. Versus the first quarter, it was marginally up, and we think really the full impact of the Maytag improvement is going to show as we have these new products in the marketplace in the second half of this year.

Michael Rehaut - J.P. Morgan

Great. Thank you. And can you give us an idea what pricing in North America contributed to the top line?

Roy Templin

Well, Mike…

Michael Rehaut - J.P. Morgan

As a percent?

Roy Templin

Michael, it's Roy. If you look at North America Q2 to Q2 a year ago, the price mix impact in North America was just about a point of positive improvement year-over-year.

Michael Rehaut - J.P. Morgan

And was that more price versus mix, or…?

Roy Templin

It was about equal.

Michael Rehaut - J.P. Morgan

Okay.

Roy Templin

In terms of price mix. That's in their gross margin.

Michael Rehaut - J.P. Morgan

Okay. And just last question, understanding, of course, that does continue to be some volatility with FIN 48, but with some of those difficult to ascertain the factors aside, given that you’re still looking for a mid-20s full year tax rate, is it safe to assume then that for 3Q and 4Q, you are looking at maybe, a 30% type number, or how should we think about that in terms of modeling?

Roy Templin

Well Michael, let me just say. We don't give quarterly guidance, but I think where you are going is exactly right. If you look at our rate through the first half of the year, we came out of the first half at 19%. So in order to get that mid-20 kind of rate for the full year, you are correct and that our rates will be elevated in the back half of the year to get back to that number.

Michael Rehaut - J.P. Morgan

Okay. Great. Thank you.

Operator

We’ll take our next question from David MacGregor with Longbow Research.

David MacGregor - Longbow Research

Good morning everyone.

Roy Templin

Hi David. Good morning to you.

David MacGregor - Longbow Research

I just wanted to be clear on this OEM share loss. Was it just weakness within the Kenmore traffic or have you, by any means, lost any Sears business? And has any of that business been awarded away to other manufacturers?

Mike Todman

David, this is Mike Todman. It's actually the Sears outlet share that's gone back. We have not lost any share within the OEM, within the Sears group.

David MacGregor - Longbow Research

Okay. Good. I just wanted to be clear about that. So it's really just weakness, mainly in their traffic. Can you talk a little more about the brand investments at Maytag? And I know last year in the second half, you were pretty diligent about rolling over a lot of your SKUs in the Whirlpool line, and I think it showed up nicely in the first quarter pricing. I wonder to what extent we could expect to see much stronger pricing within the Maytag brand offering as a result of the new product introductions and all the innovation you plan on rolling out in that category?

Mike Todman

Yeah Michael, let me, maybe comment on that. What we did, as you know, is we've introduced some new products within the first half of the year, some within the first quarter and the second quarter. In order to support those new product introductions, we invested in brand investments to kind of reinvigorate and reintroduce that Maytag brand into the marketplace. We feel very good that it is commanding the appropriate price level in the marketplace.

As we move into the third quarter, we’re going to be introducing some new products in the front-load area, washer area, which we think, again, will help support the brand and the pricing that we will be able to command in the marketplace with that brand. So all of these investments are really around the right product innovation to support the Maytag brand positioning around durability and reliability. And we think with that positioning, we will command the appropriate price in the market.

David MacGregor - Longbow Research

Is there any chance you could give us some sense of, at least a range on what kind of pricing you expect is achievable from the revitalization?

Mike Todman

No, that's very difficult to do in that sense, because essentially, it's the products and where we’re introducing them in the marketplace.

David MacGregor - Longbow Research

Maytag efficiency is now greater than $400 million. Can you talk a little bit about the source of the incremental efficiency, Jeff?

Jeff Fettig

Well, David, really it's across the board. If you look at the entire value chain, as we said, in the very beginning we said we have two appliance companies that we’re basically integrating into one. I would say every bucket of the value chain we have had a very disciplined process applied to this from day one. We've got people accountable for each piece of it.

The big-ticket items certainly have been, and most recently, have been the factory closures. But you ought to think about it, everything from product to supply chain to manufacturing to SG&A and so on, as we complete these projects, we’re yielding more efficiencies in total than we had originally forecasted.

David MacGregor - Longbow Research

So there aren't one or two elements within that number that are featuring more predominantly?

Roy Templin

David, this is Roy. David, if you think about, Jeff is exactly right, first of all. If you think about the three big buckets that we've talked about with respect to efficiencies, procurement, manufacturing efficiencies and then the SG&A redundancy improvements, all three of those large buckets have improvement and are driving this increase.

And so, I know the second part of your question will be SG&A versus cost of goods sold. As we've said historically, those first two items both come through margin, and this third item comes through SG&A. But again, increase is an improvement in all three of the large buckets.

David MacGregor - Longbow Research

Okay. Good. Final question, just if you could help me with, sort of the outlook for 2008 on your working capital and your CapEx?

Roy Templin

Yeah. You mean 2007 or…?

David MacGregor - Longbow Research

No, I'm trying to think a little further ahead here.

Roy Templin

Well, David, we’re not going to comment on 2008 today. I will tell you, I will comment though, and give you a little perspective with respect to the rest of year. As you know, working capital as a percent of sales was 12.4 at the end of Q2, and as you'll recall, we were at that same place at the end of Q1. Our commitment, and we've said this earlier, David, and we remain confident in our ability to do this, is to achieve a working capital level below where we ended the year last year, which you'll recall, David, was 11%. And so again, as we look out for the rest of this year, we expect to take our working capital down to below 11%.

David MacGregor - Longbow Research

Okay, and then CapEx?

Jeff Fettig

David, the other perspective, I would give you, is that if you look at our guidance for free cash flow this year, 600 to 650, that's about 3% to 3.3% of revenues. And I think you know our longer term goals were 4% to 5% of revenues. So we’re not giving any guidance for 2008, but we expect as we go forward, that we are able to deliver higher levels of cash from our operations.

David MacGregor - Longbow Research

And are you able to talk at all about a little CapEx at this point?

Jeff Fettig

No.

David MacGregor - Longbow Research

Okay. Thanks, guys.

Operator

We’ll take our next question from Sam Darkatsh with Raymond James.

Sam Darkatsh - Raymond James

Good morning, Jeff, Roy and Mike. How are you?

Jeff Fettig

Hi, Sam.

Sam Darkatsh - Raymond James

Three quick questions. First off, Befiex, Roy; the tax credits in the quarter, I missed it. If you said it, I missed it. Did you mention that?

Roy Templin

I don't know that we said a number, Sam. The number in the second quarter was 27 million, which you’ll recall is down a little bit from the first quarter, where we had $30 million of Befiex in the first quarter.

Sam Darkatsh - Raymond James

And how would you suggest we look at that on a quarterly basis? Is that the run rate you think, as long as the business holds up?

Roy Templin

Well, Sam, let me answer your question this way. The reason we don't do any forward forecast on Befiex, it's sort of like any other kind of tax and that Befiex tax credits are really dependent upon a couple of things. One; the level of volume in Latin America, and two; which makes this a little bit more difficult to predict is the mix within that volume, because depending upon the mix, you get a different level of the Befiex credit.

So, it's tough for us to project it going forward, Sam. But again, as a reminder, we came out of last year at 23 million in the fourth quarter, 30 million in Q1, and again, 27 million here in Q2.

Sam Darkatsh - Raymond James

Okay. Next question is a bit granular, Roy. I apologize for it ahead of time. Your free cash flow walk that you provided in your press release has proceeds from sale of assets in non-Maytag businesses of $50 million. But it looks like the first half of the year, if you add the Maytag proceeds along with the sale of non-Maytag business, and it comes to 120 million. How do I reconcile that? And based on your guidance of 600 to 650, what was your cash usage in the first half? I guess this is what my real question is?

Roy Templin

Sam, I'm sorry. I may not understand your question here. I'm going to have to ask you to at least to repeat a part of it.

Sam Darkatsh - Raymond James

Roy, I'm sorry. In the walk, where you give the guidance of $600 million to $650 million, you have 1,175 to 1,225 of cash flow from continuing operations. You have $625 million in CapEx. And then, you have $50 million from proceeds from asset sales, and that's how you get to 600 to 650?

Roy Templin

Right.

Sam Darkatsh - Raymond James

That's what I'm referring to.

Roy Templin

Okay.

Sam Darkatsh - Raymond James

I'm guessing, based on that definition, what was your cash flow usage in the first half of the year?

Roy Templin

Well, Sam, first of all, let me go back to the $50 million. Again, that's asset sales exclusive of the adjacent businesses from Maytag. So, again, I hope, I'm understanding your question correctly.

We had $20 million year-to-date through first half of the year on asset sales, of which, again, this is an annual guidance number that you are referring to here. We expect that number for the full year to be $50 million. But, again, very importantly, that number is exclusive of any of the adjacent business sales.

Sam Darkatsh - Raymond James

Got you. So then by that definition then, you would have used $188 million of cash in the first half, so then you would be generating roughly $800 million or so in the second half of positive cash flow. Is that correct?

Roy Templin

That's correct.

Sam Darkatsh - Raymond James

Okay. I just wanted to make sure I was clear with that.

Jeff Fettig

It's also in line with our normal seasonal pattern.

Sam Darkatsh - Raymond James

Right. I understand that. I just wanted to make sure of the exact magnitude of it. Last question before I refer to others. You mentioned higher brand support spending in the quarter. What was that on a year-on-year basis, roughly?

Roy Templin

North America or consolidated, Sam?

Sam Darkatsh - Raymond James

Yes.

Roy Templin

Okay. North America, it was about half a point, and that equates you back to about a little over three-tenths of a point for the consolidated numbers in terms of impact.

Sam Darkatsh - Raymond James

Thank you much.

Operator

We’ll take our next question from Laura Champine with Morgan Keegan. Your line is open. Hearing no response, we will move on to Eric Bosshard, Cleveland Research Company.

Eric Bosshard - Cleveland Research Company

Good morning.

Roy Templin

Good morning.

Eric Bosshard - Cleveland Research Company

A couple of things. First of all, on Maytag, can you give us a sense of what the revenues are of that business on a year-over-year basis?

Jeff Fettig

Eric, no. We really don't break out specific brand financials. But I think you can kind of look at the past and see where it was on the old Maytag. It is proportionately close to being the same.

Eric Bosshard - Cleveland Research Company

Okay. I guess asked differently, the Whirlpool, the legacy portfolio, can you talk about it? I mean when you look at the segment down 6% and the industry down 1% in units, I know that doesn't include price, was the difference of performance versus the industry, was Whirlpool in line with the industry or slightly worse than the industry? And then the delta is Maytag? Is that the right way to think about the…

Jeff Fettig

No. Eric, what we said was if you look at, maybe give you two pictures. One, we have been growing Whirlpool brand share. Our premium brands, which we don't really look at as much on a market share basis as revenue, but our premium brands have been strong, which are Jenn-Air and KitchenAid.

And if you look at the market share year-over-year losses that we had, the predominant share loss came from OEM. The next biggest driver, as Mike explained, was from what we call our value brands, which are the more price sensitive, lower end brands that we sell across different retailers across the country.

Which for two reasons, one, that's part of the low-end market, the weakest part of the market. And, two, as we said, we have had a significant material cost effect on this, in that we took price increases and we had market share losses.

And then the third contributor of that, year-over-year, was what we call, consider the transition share loss we expected to have in Maytag as we retool the product lineup and get it redistributed and go through all the transitions.

So that's how I characterize our market share position quarter-over-quarter, or year-over-year versus the first quarter, we made some marginal increases in market share. So its, our view is, we bottomed out really late last year in the first quarter, and now we're kind of moving into the growth phase with our consumer brands.

Eric Bosshard - Cleveland Research Company

Okay. And then the traction, how would you characterize the traction? I know there have been a lot of significant Maytag new product introductions in the first half and in the second quarter? How is the traction and the progress on those, such as the Maytag and Best Buy progressing and some of the things you've done with Amana?

Michael Todman

Eric, we are actually feeling pretty good about where the Maytag brand is tracking and how it's going. As you know, we introduced the brand into Best Buy in the second quarter. And what we are seeing through sales of that brand is we have had some very strong weeks in some of the key categories within Best Buy.

And so we think that that trend will continue. We expect that brand will be fully forward by the end of July in Best Buy, and as that does, it is increasing the draw of consumers into Best Buy.

So, we are feeling good about that. And we are actually seeing an increase in sales on the Amana brand. So for both of the Maytag brands, as we look forward what we are seeing is fairly strong performance.

And we think it will only continue into the third quarter as we begin to introduce new products. And one of the things I do want to make sure I note that is in Best Buy, we've had some of the top selling SKUs, have been the Maytag brand.

So we are feeling pretty good about the fact that with a very short introduction period, it's moving fairly well.

Eric Bosshard - Cleveland Research Company

Secondly, with the upside in the synergies this year, I'm wondering, I know you are not talking about 2008. But I'm wondering how does that impact 2008 and I guess, specifically, does that mean that you're just going to get more of what you were going to get in 2007?

Or will there be a meaningful incremental amount that comes in 2008? In other words, the increment that was expected to show up in 2008, does that show up in 2007, or is there a further meaningful chunk that shows up next year?

Jeff Fettig

I would answer that to be both. We don't have any specific numbers on that, but one, we are getting the efficiencies faster and, two, we are getting more. But there will be a tail of this, obviously, in 2008. But I would caution on the other side. I don't want to let pass this very significant inflated material cost market.

We had, 2005 was the biggest increase we have ever seen in our history in material costs. And I think we came in at about $530 million, although, that being without the Maytag business. This year, we are at $570 million.

So it's, our ability to offset that, we have demonstrated that. We continue to demonstrate that. We are going to, we are using all the different tools at our disposal to be able to do that.

I think we feel very confident about the cost reductions and efficiencies that we can drive. The little bit of a wild card out there is what's going to happen to material prices.

Eric Bosshard - Cleveland Research Company

And then my last question. It sounds like your second half assumptions include a belief that this acceleration in demand in the market that we have seen in the last handful of weeks is going to continue.

Can you just give us a little more color on what you are seeing, and perhaps even what you are seeing with mix in that as well, just that you are seeing the market pick up at this point in time?

Jeff Fettig

Yes, Eric, I think that's a good point. Coming in this year, really late last year, everyone, including ourselves was concerned about a demand shock in the marketplace, and we saw it. We saw it in the fourth quarter. It accelerated and bottomed out in the first quarter.

We saw, by the way, those were also the quarters we were going up against the toughest year-over-year comparisons. We expected, based on our forecasting of both the replacement market, the retail market and the contract market, that the market would be down approximately 5%. That's basically how it turned out.

The housing market, we believe, is going to continue to be depressed at least through the middle of 2008. But I'd remind you that that's 20% of the market, and that we have proportionately a lower share of that market than we have in the traditional replacement market.

So really what is, I would say the housing is coming in as we expected and we are seeing what I would call is a typical replacement market that's starting to drive the growth. We are going against weak year-over-year numbers.

So, in our forecast of minus two to three, that clearly implies we expect to see a couple of points of growth in the second half of the year. And basically, that's what we're, so far, we are pretty comfortable with what we've seen over the last several weeks that that's happened.

Eric Bosshard - Cleveland Research Company

Perfect. Thank you.

Jeff Fettig

Thank you.

Operator

We’ll take our next question from Laura Champine with Morgan Keegan.

Laura Champine - Morgan Keegan

Good morning. Am I live now?

Jeff Fettig

Yeah Laura, we got you.

Laura Champine - Morgan Keegan

Good morning. I’m I live now?

Jeff Fettig

Yes Laura. We got you.

Laura Champine - Morgan Keegan

Great. Maytag, you mentioned that there might be some new product costs and some branding costs, and it seemed to imply they might be one time in nature, might of combined with that pension curtailment charge, major your EBIT margins look a little lower in that business than they should.

Is that true that some of those are one time, or do you think those are just ongoing brand building and product launch costs we need to expect?

Jeff Fettig

Well, the pension curtailment of approximately $14 million is, I think you ought to consider it's non-run rate type of thing. The brand investments, I think the point we tried to make that relative to the first quarter, we had a fairly big increase. I don't think those should be viewed as abnormal.

There are a lot of product introduction costs and floor display costs and so on. So a portion of those, I would say that you always have with new product introductions, but the brand investments and innovation investments you should not consider as one time.

Laura Champine - Morgan Keegan

And then, Jeff, just for clarity, was that $14 million or $0.14 a share on the pension curtailment?

Roy Templin

Laura, it’s actually equates back to about the same thing. It is, it's just slight under $14 million, and it's $0.14 a share on the quarter.

Laura Champine - Morgan Keegan

Great. Thank you.

Operator

We’ll take our next question from Jeff Sprague with Citigroup.

Jeff Sprague - Citigroup

Thank you. Good morning.

Roy Templin

Hi Jeff.

Jeff Sprague - Citigroup

I guess at one level, thinking about share loss at legacy Maytag and on the low end, and maybe even OEM is not surprising. What I found a little bit interesting and surprising, though, is that price mix only up 1%, because those share loss dynamics seemed like they would argue for positive.

Roy Templin

Jeff, Jeff, we maybe ought to clarify that. The margin impact was about 1 point. The revenue impact was dramatically higher. In fact, we had the highest portfolio average selling price we have ever had in the second quarter.

So it's more in the range of, I guess on the revenue side, it's probably close to the range of 5%.

Jeff Fettig

That’s right.

Jeff Sprague - Citigroup

Revenue price mix is 5% and how does that…?

Jeff Fettig

From a revenue standpoint, from a margin standpoint, Roy's comment, it was about a point.

Jeff Sprague - Citigroup

Okay. And then is that also equal weighted between price and mix roughly?

Roy Templin

A little heavier mix than price.

Jeff Sprague - Citigroup

Okay. And on pension, Roy, you mentioned cash contributions to pension this year. What's going on there? What did you do year-to-date and what do you expect for the year?

Roy Templin

Yes, Jeff, we had, actually it was just sub $30 million contribution that we made, actually it was in the first quarter of this year, compared to no contribution sort of year-to-date a year ago.

And it was actually to one of the Maytag plans. We used part of the proceeds from the Hoover sale to fund one of the Maytag plans. I think, as you know, Jeff, we’re sort of positioning ourselves at an enterprise level, getting ready for the Pension Protection Act which kicks in the first of next year.

So we did make a contribution. We took a tax deduction for it last year in 2006. But again, on a year-over-year comparable, there were no contributions this time a year ago.

Jeff Sprague - Citigroup

Okay. And does the curtailment charge relate to Maytag?

Roy Templin

No, it does not. It's actually it's our Fort Smith operations in North America.

Jeff Sprague - Citigroup

Okay. And could you just remind us what the Befiex was in Q2 last year?

Roy Templin

Q2 last year, Befiex was $12 million.

Jeff Sprague - Citigroup

Okay. And just one final point, to be clear on the divestitures of the Maytag assets and other properties that's in your cash flow statement, do the gains or losses associated with that flow through the purchase accounting, or is that now going through the regular P&L?

Roy Templin

I'll answer your question in two parts, Jeff. First of all, again, all the adjacent business proceeds are on a separate line of the cash flow, because again, I don't want, make sure we don't have those confused with the other asset sales.

And the second part of your question, though, is there is no gain or loss associated with those dispositions. That's all a part of purchase accounting and was adjusted through goodwill. So, again no P&L effect from the disposition of those businesses.

Jeff Sprague - Citigroup

Great. Thanks a lot.

Operator

We’ll take a follow up question from Michael Rehaut, J.P. Morgan.

Michael Rehaut - J.P. Morgan

Thanks. A couple quick questions. First, I was wondering if you could break down the material and oil-related costs? What the year-over-year Delta was for 1Q and 2Q. And as far as the overall 570, perhaps you can break it down, if possible, by like steel, energy, and other large items.

Roy Templin

Yes, Mike. Let me Mike explain, I don't think we knew exactly what you said, but let's give you two looks at it. In the 570 for the year, we've given you the first quarter and second quarter. If I add those right, I think it's $305 million so far this year.

So, although we raised the forecasts and they are increasing, they will be proportionately lower in the second half than they were in the first half. That's one point. And as a percent of sales, given we have our higher sales base on a margin base, they'll be, although very impactive, they will be less impactive than they were in the first half.

In terms of the makeup of our cost structure, and I think we've talked about this before, but our number one purchase is steel. Number two is plastics, resins, which are driven by oil. Number three are logistics-related costs. And number four, beginning because of the raised increases getting close to number three, are base metals.

And I would just say that a couple of years ago, we had the big oil shock and that's kind of continued to ebb up. We had the big steel shock and that continues to largely be indexed to the market price. The huge increases have been in both the base metals and then the corresponding impact that that has had on the component prices.

Many of our suppliers buy the same base metals, they've had the same shocks, so we’re seeing increases in that area. So, round numbers, I'd say about 20% of our challenge is in steel, 35% to 40% in base metals, and the balance in large amount is in components.

Michael Rehaut - J.P. Morgan

That's very helpful. I appreciate it. The other question, just on the pension curtailment charge, you went into a little bit of detail there. What triggered that and is that something that we could see reoccur at all over the next year or so?

Roy Templin

No. Michael, there's no reoccurrence per se for that unit. Again, what happened was the union ratified a change from a defined benefit program to a defined contribution pension plan. You'll recall, Michael, we actually did this in a couple of our plans a couple of quarters ago.

And what happens when we have a change like that is, as you know, the accounting rules have you smooth gains or losses into pension expense over appropriate periods of time. When we actually changed the plan in Fort Smith, we had unrecognized losses that we, in essence, accelerated into the second quarter results, and that's what triggered the reductions.

Michael Rehaut - J.P. Morgan

Great. Thank you.

Operator

We’ll take our last question from David MacGregor with Longbow Research.

David MacGregor - Longbow Research

All right. Last question, thank you. I would like to get the discussion away from pension curtailments and Befiex credits and talk about the international business, where you seem to be doing extremely well.

There was a time, I guess, a number of years ago, where people felt that the European business would reach some sort of a limit at around 8% operating margins because of the structural costs of doing business in Europe and so on and so forth. Can you talk just a little bit about the sustainability of the international results given raw material cost inflation?

And I realize you'd indicated I think 75% was in North America but maybe there's more to come in the international business. And also, the extent to which you think, Mike, that you could get beyond a 7% or 8% operating margin in Europe and maybe get to higher ground than that?

Mike Todman

Yes, David, let me just first of all talk about the European business. I think, as you know, over the course of the last several years, we’ve been putting in a very competitive, both operating structure and platform, but at the same time, introducing new products into the marketplace in that business.

And that’s really given us the opportunity to really have sustainable growth. And that's what's happened to that business over the long term. I think that the range that you’re talking about in terms of operating earnings is absolutely a range that we feel very comfortable about, and I think that that business can achieve given all of the things that we have done over the past couple of years.

And I would tell you that if you look at our businesses all across the world in the international frame, we have been able to do things to offset the material cost impacts. Again, we’ve been doing the same kind of introductions and innovations, product innovations with the brands that we have. We have our business in Brazil, is not only dependent on the growth of the marketplace but also our position and our brand's position in the marketplace. And so we feel very good about the ability to sustain those growth levels. So I would tell you that, sure, I do believe that this is very sustainable.

David MacGregor - Longbow Research

I know that the North American consumer has been on a trend towards higher price point, more fully featured, more energy efficient appliances for the past five or six years, and it's shown up nicely in terms of your ASPs. And I think you mentioned earlier, this was the highest portfolio pricing quarter in the history of the firm.

I'm just wondering to what extent in Europe you’re seeing certainly a cyclical recovery. But I wonder to what extent you're seeing in Europe the emergence of a secular trend, somewhat similar to what's been unfolding in North America for five or six years, as consumers sort of come out of this longer term economic funk, and want to get caught up with where the Americans are with respect to energy efficiency and more fully featured?

Mike Todman

David, directionally, we see some more, perhaps not yet having the full magnitude that we’ve seen in the North American market yet, but directionally, we see those same type of trends, and I would also say in emerging markets, which does have albeit smaller, a fairly substantial household income base that mirrors the U.S. or Europe, we are also seeing small niche opportunities in those markets.

So, I think the key message here is where we bring meaningful innovation to the marketplace, we’ve seen strong acceptance by consumers around the world. And if that means at a higher price, they see it as a value, they don't necessarily see it as a higher price, because the performance or the feature or the design is something they value and there's a lot of price elasticity in terms of what consumers are willing to pay.

David MacGregor - Longbow Research

Good. And then just final question. You talked earlier about price-based or commodity cost-based pricing initiative, however you termed it. But it's basically price increases. Can you talk a little bit about the posture of the North American retailer with respect to price increases? Are they helping you on this? Do they push you back a little bit on this? To what extent are they helpful or not helpful in terms of achieving higher pricing?

Mike Todman

Well, David, I'd just say that the North American retailer is no different than anywhere, and what they want to do is be competitive in the marketplace. And so as long as we are providing them with competitive products and brands that consumers come in and buy, and they are able to earn the appropriate margins and have business, then they support what needs to be done in the marketplace. And so what we’re finding is working with them in that way, that we are able to deliver the right kind of pricing in the market.

David MacGregor - Longbow Research

So you’re saying with the innovation and everything else, you’re getting retailer support for price increases?

Jeff Fettig

Yes, David, we really, I don't want to get into much detail. I think Mike's general comment is how we view the marketplace, and as you know, it really depends on your level of competitiveness. And where we’re competitive, it's no issue. If we have competitive issues, we have to address them.

David MacGregor - Longbow Research

Okay. Thanks, gentlemen.

Jeff Fettig

Okay, well thank you, everyone. Thank you for joining us today. And we look forward to talking to you next time.

Operator

Thank you, ladies and gentlemen. Once again, that does conclude today's conference. We do appreciate your participation.

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