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Executives

Gregory Fritz - IR

Jeff Fettig - Chairman & CEO

Mike Todman -- President of Whirlpool North America

Roy Templin - EVP and CFO

Analysts

Sam Darkatsh - Raymond James

David McGregor - Longbow Research

Michael Rehaut - JPMorgan Securities

Eric Bosshard - Cleveland Research

Laura Champine– Morgan, Keegan & Company

Jeff Sprague - Citigroup Investment Research

Whirlpool Corp. (WHR) Q4 2007 Earnings Call February 5, 2008 10:00 AM ET

Operator

Good morning and welcome to Whirlpool's Fourth Quarter and Year End Earnings Call for 2007. We will now turn the call over to Mr. Roy Templin, Executive Vice President and Chief Financial Officer.

Roy Templin

Thank you Curtis and good morning everyone. Before we begin our opening remarks I would like to take a minute and introduce our new Head of Investors Relations, Greg Fritz. Greg comes to Whirlpool Corporation with both sell-side experience as well as corporate experience, with Greg's most recent role being with Stoneridge Incorporated, where Greg was the Director of Corporate Finance and Investor Relations. I'd like to say, we are very excited to have Greg on our team and we look forward to his contributions in our Investor Relations role over the coming years.

And also I'd like just to take a moment to thank Larry Venturelli. I think many of you know Larry has actually played dual roles here for a period of time, both as our Corporate Controller and our Head of Investor Relations. So, we would like to thank Larry for all his extra work as well.

And at this point, I will turn the call over to Greg for our opening statements. Greg?

Greg Fritz

Thank you, Roy and good morning. Welcome to the Whirlpool Corporation fourth quarter and year-end conference call.

Joining me today are Jeff Fettig, our Chairman and CEO, Mike Todman, President of Whirlpool North America, and Roy Templin, our Chief Financial officer.

Before we begin, let me remind you that as we conduct this call, we will be making forward looking statements to assist you in understanding Whirlpool's future expectation. 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 and non-GAAP measure. Listeners are directed to slide 41 for additional disclosures regarding this item. To begin today's call, Jeff will provide an own review of the quarter and the outlook for 2008, Mike will discuss our North American operations, Jeff will then cover International Operations and Roy will review our financial performance and outlook.

Our remarks today track of the presentation available on the investor section of our website at Whirlpoolcorp.com.

With that let me turn the call over to Jeff.

Jeff Fettig

Well, good morning everyone and thank you for joining us today. As I am sure you have seen earlier this morning, we did release our financial results for both fourth quarter and the full year.

Overall in 2007, we delivered both record sales and earning per share and what was as we discussed throughout last year, a very challenging global economic environment. The two major challenges that we faced all during the year, first the US appliance demand, where we saw year-over-year demand decline by almost 6%, which was the largest decline we have seen in over two decades.

And secondly, we had approximately $600 million in higher material and oil-related costs. In fact during the last three and half years, we continued to see unprecedented material cost inflation, which has increased our input costs since 2004 by nearly $2 billion.

During 2007, we did accomplish a very major milestone by completing the Maytag integration. We achieved our cost efficiency goals one full year ahead of our plans, when we first announced this.

We also improved our cost productivity performance across the globe and generated more than $2.5 billion of revenue from our innovation pipeline. So, overall we are pleased with our 2007 results particularly given these economic challenges that have taken place.

I will now turn to the slide presentation, starting with slide 4. Where you will see that our annual revenues increased 7% to $19.4 billion, our earnings from continuing operations came in at $8.10 per share, which was up 28% over 2006. And as we have seen over the last several years one of the key drivers of our financial performance and revenue growth has been our ability to generate higher average -- global average selling prices, which you can see on slide 5.

During 2007, our ASV is increased by more than 7%. As I mentioned we delivered over $2.5 billion in revenues from projects, which came out of our innovation pipeline. As we exit 2007 our pipeline remains very strong and we estimate we have now about $4.5 billion of new product revenues from projects and we anticipate continued innovation driven growth as we go forward.

These innovations continue not only to fuel our growth, but also improve our overall margins. So, we are very positive about our new products come in to market early 2008, especially on new Maytag launches, which Mike Todman will talk about in a moment.

Turning to our balance sheet, we have made great progress in strengthening our overall balance sheet and reduced our debt by $243 million during 2007. We also returned $502 million to our shareholders in the form of dividends and share repurchases.

On slide 6, we list the major trends, which we expect to see in 2008 and these are the foundation for the key assumptions, which we build into our plans and guidance. First, as we have seen throughout 2007, we expect to see genuine weak and negative demand in our large mature economies that are the United States and Europe.

We expect continued strong demand in our key emerging markets like Latin America, India and China. We will see increases in continuing material commodity inflation and finally we continue to expect volatility in movement in our global currency markets.

Given this economic backdrop, as seen on slide 7, we believe we are in position to continue our strong performance in this economic environment 2008. We have been successful in navigating through some of the issues due to several key durables, which I would like to mention.

First of all our business is very geographically diverse. Currently, about almost 50% of our revenues come outside the United States. Our International markets were experiencing higher growth rates and expanding profit margins, which is helping to mitigate a weaker US market.

Secondly, we have industry leading, global consumer brands in most major markets around the world, and they continue to increase consumer investments and a very strong cadence of innovation.

The third reason is our global cost platform and steel is unmatched in the appliance industry. And we believe we have very significant opportunity to generate continued productivity throughout our global supply chain and infrastructure. And finally I would say that, we feel very good. We have an experienced global management team in place that have successfully managed conditions before and we expect that to continue.

So, looking ahead to 2008, which is shown on slide 8, we expect to see the front there; the details of our estimates are the following. First of all we expect the US market will decline in 2008 from 3% to 5%, we will go through the details about that later. We expect our International businesses in total that continue to grow with positive demand trends. In Latin America and Asia we expect to see industry demand in the 5% to 8% range and 5% to 10% range respectively. While in Europe, we expect overall demand to be flat versus 2007.

The general trends that we have seen in the last several months continue to point towards negative industry demand trends in the United States and Europe. As such, we expect those markets will be down more in the first half of the year with moderate recovery in growth in the later part of the year. Turning to our input cost, we estimate material all related cost will increase by approximately $350 million in 2008.

Turning down to slide 9, which reflects and lists our priorities for the year. We plan to offset both weak industry demand and higher material and oil-related cost by leveraging our strong portfolio of brands and building on the positive market share momentum, which we saw in the latter half of 2007.

Our plans include significantly higher investments in innovation and advertising. We expect 2008 will be our one of our strongest years ever for new product launches, which adds to already strong consumer brand preference for our key brands. Secondly we will deliver again very strong consumer brand preference for our key brands. Secondly, we will deliver again very strong global productivity as we continue0 to optimize steel and the efficiency of our global operating platform.

The third area, which I would mention, which is consistent with recent announcement that we have made, which includes the closure of LaVergne, Tennessee facility, Reynosa, Mexico and Newton, Iowa in North America. We continue to adjust our cost structure and capacity to efficiently address the current demand environment that we are seeing going forward. All these decisions always are difficult, optimizing our operating platform is critical to ensuring our cost leadership position that we currently enjoy.

And finally in response to the continued material and oil-related costs environment we have announced in or implemented cost-based price adjustments in most major markets around the world. Given the unprecedented materials inflations we have seen over the last three and half years, now going into the fourth year, we have taken the position that current inflation and costs must be passed through the market place and that is the plan that we are executing today.

So as we step back and put all this together, I would summarize our expectations and our 2008 performances as follows: We expect moderate revenue growth, we expect material cost increases, higher restructuring cost and increased brand investments will negatively impact our margins by a little over two points, which we expect to more than offset through very strong productivity, the benefits of the reduction in our cost structure from the announced manufacturing changes we have already made, positive brand and product mix driven by our innovation and cost-based price adjustments.

The successful execution of our plans will lead to a positive revenue growth, improved profitability and improved free cash flow. With that for 2008, we are giving our first guidance, which were we stated that we expect our earnings per share to be in the $8.50 to $9 per share range and free cash flow to be between $600 and $650 million.

With that I'll now turn the call over to Mike Todman to discuss our North America business.

Mike Todman

Thanks, Jeff and good morning everyone. Let me start by giving my perspective on North American performance during 2007. Clearly as Jeff mentioned, 2007 was a challenging year for our US business. We completed the integration of the largest acquisition of company history, faced the toughest appliance demand environment in 25 years and absorbed significantly higher material and oil-related costs.

Despite these challenges, we exited the year with fourth quarter results, which included operating profit of $175 million, representing a 41% improvement over 2006 and our operating profit margin increased 1.7 points from the prior year. Our market share improved significantly from third quarter levels in all of our branded products, especially Maytag, increased share from the last quarter.

Our fourth quarter results benefited from strong acquisition, efficiency realization, improved product mix and productivity improvements. Results were partially offset by significantly higher material and oil-related cost and lower industry demand. Overall our fourth quarter industry appliance demand was down approximately 6%, however, our North American sales declined by only 1%.

Our performance compared to the industry was positively impacted by a favorable product mix. Before providing our outlook on 2008, given the current demand environment, I would like to provide a little background on the US appliance industry and the factors which impact demand.

As you can see on slide 13, it shows the progression of new housing related demand in United States. You can see over the past three decades, new housing construction continues to decline as the percentage of overall appliance demand. During the 1980s, new housing construction represented approximately one quarter of all major appliance demand. Since the 80s new housing -- the new housing portions of the industry demand has consistently declined, and now stand at approximately 15%. In fact since 1980 the other components of US T7 appliance industry demand such as replacement and discretionary have grown at a compound annual rate of about 3%. This is a notable trend as we look to the future.

On slide 14, you will note that during 2007 the combination of new and existing home sales represent approximately 30% of total appliance industry demand. More importantly replacement demand represents just under 50% of US demand with the balance of the market tie to discretionary purchases which tend to increase with consumer confidence and the strength of new market place innovation. Turing to our outlook, we are forecasting US industry demand to decline by 3 to 5 percentage points in 2008.

On slide 15, we have broken up the components and our assumptions for 2008 US industry demand. First, replacement demand consistently added 1% to 2% to industry growth each year for the past three decades, and we fully expect this trend to continue in 2008. Many of these purchases are related to the replacement of units that consumers are either unable to find or are uneconomical to repair.

Our forecast calls for the new housing demand to reduce industry growth by 3 points in 2008 based upon a 20% decline in new home completion and approximately 25% decline in new housing start. We also expect the existing home component of demand to reduce industry growth by about 2 percentage points.

This expectation is based on a 13% decline in existing home sales. Historically a 6% change in new home completions or existing home sales is translated into a 1% decline in the industry demand. The purely discretionary component of demand is expected to reduce industry volume by about one point.

Based on these current estimates of the key economic variables, which impact the US appliance industry, as I stated before, we believe that the industry will decline approximately 3% to 5% in 2008. The current outlook points to a more challenging environment during the first half of the year.

Given the challenging demand environment, our 2008 priorities are as follows: One accelerating growth of the Maytag brands, two successfully launching new product innovations supported by brand investments, three offsetting material and oil-related costs to cost-based price increases and strong productivity and four cost structure changes to balance production and demand.

I will now briefly touch on these. As you recall, as shown on slide 17, our initial plan for Maytag is first to complete the integration and improve the businesses cost structure. We have fully completed this phase of our plans.

During 2007, we began positioning Maytag to grow. As I mentioned earlier, we had positive share trends exiting 2007. We are now in the growth place of our clients. An example of this is shown on slide 18, in which we illustrate our brand revitalization for the front-load laundry category. As you can see, 2008 provides significantly more innovation across more price points than Maytag has ever had historically, and we are supporting this and other launches with significant consumer advertising.

Two, we are accelerating new product innovations for all of our other brands and continue to grow our brands through new product introductions. Throughout the year, we will introduce a record level of innovations shown on slide 19, under our leading brand names, including 72 new product launches. These launches will be supported with significant consumer brand investments throughout the year.

Three, our North American operations will continue to introduce cost based price increases and deliver strong productivity to offset material and oil-related related cost increases. And finally four, as recently announced we will make appropriate cost structure changes, to better balance production-in-demand, as we continue to drive cost productivity throughout the organization.

With that I will now turn the call back over to Jeff for his comments about our international operation.

Jeff Fettig

Thanks Mike. During 2007 our international operations delivered another year of record revenue growth and operating profits. For the full year revenues grew by 19% and our operating margin expanded by 2.3 points.

Slide 22 shows the revenue growth and profitability trends of our international businesses since 2004. And you will know that all three regions have shown strong revenue growth, combined with significant operating profit expansion, over the last three years, and that would more than double the operating profit margin from approximately 4% in 2004 to nearly 9% this year.

Our international growth opportunities remain very significant. Our results increasingly show that we are successfully growing our innovative consumer products and brands throughout the world. For our European business, which is shown on slide 23, we delivered a record full year and fourth quarter revenue and operating profit. Revenues for the quarter reached $1.1 billion, increasing 12% from the prior year, local currency revenues were approximately unchanged.

Industry unit shipments for the region declined 1% year-over-year during the fourth quarter. Our improvement [rather] in the industry is led by the region's top selling Whirlpool brand combined with the new innovative product offerings that we brought out during the latter part of last year.

Record fourth quarter operating profit totaled $73 million, increasing 22% from last year and we hope the results reflect improved product mix and productivity. Partially offsetting the improved operating profit performance was significantly higher material costs that we saw year-over-year during the quarter.

In Europe, our innovation cadence remains very strong and we continue to leverage our global operating platform and our global innovation pipeline.

On slide 24, I'll turn to Latin America business, where we also reported record full year and fourth quarter revenue in operating profits. Revenue increased 30% to $1 billion during the quarter, excluding the impact from currency, sales increased by approximately 12%.

Industry unit shipments of appliances in the region grew by about 11% during the quarter. And for the full year, our shipments exceeded industry growth.

Operating profit increased 73% to the all-time quarterly record of $156 million during the quarter and margins expanded to almost 15% from the 11.2% reported last year.

Increased unit shipment, improved pricing, strong productivity and an asset sell gain of $50 million were all positive factors during the quarter. Results were mainly affected by higher material costs.

Our results in Latin America do reflect the strong market conditions throughout the region, but also importantly our very strong consumer brand position, which has been supported by innovation and a very advantageous cost structure. Latin America, as we've communicated in the past, has been the fastest growing appliance region worldwide during the last five years, averaging about 13% annual growth. These strong economic fundamentals, combined with low appliance penetration in many of our key product categories within Latin America, bode well for what we expect to be strong future growth.

As we know, we hold by far the number one consumer position throughout the region, particularly in Brazil and Argentina. We are rapidly growing our positions throughout all 32 Latin American markets. Today Brazil represents 60% of our Latin American revenues, with the rest of the market also growing very rapidly, which provides us with very balanced portfolio of markets, throughout the region.

Our Asia region, which is shown on slide 25, reported quarterly sales of $155 million, which were up 26% from the previous year. Excluding currency, sales increased by approximately 13%. And this was driven by our successful new innovation launches and improved mix within India, which is our fastest growing market in the region. We reported a $4 million operating loss during the quarter, as we continue to make significant growth investments particularly in India and China. Overall our presence in Asia continues to grow. We are leader among western brands in China. We hold a very strong number two position in India.

In 2008, we expect also to see a record level international innovation in the market place. As you can see, just a sampling of this on the slide 26, throughout the international market, we'll launch 174 new products under our leading consumer preferred brand names. The global leverage from our innovation pipeline continues to accelerate our ability, to bring great new product innovations to all of our global consumers, faster, better and with less overall investment.

Now for the outlook, let me turn to slide 27. In Europe, we expect industry volume levels to be flat with 2007. We are seeing some industry softness within Western Europe markets, as a result of declining consumer comp. However, emerging Eastern European market, continues to remain positive and should somewhat mitigate negative industry trends in the more mature market. And as we've have seen in North America the near term conditions appear to be more challenging, as such we do expect to see declines in the first part of the year, offset by moderate improvement later in the year.

Turning to Latin America. Based on our current economic outlooks, we anticipate for the entire region, industry volume growth in the range of 5% to 8%. The Latin American economies remain strong and our position in the market is very balanced and strong throughout.

In Asia, we anticipate continued growth in the 5% to 10% ranges. As our India and China operations continue to extend our reach and product offerings. We do expect for all of our international businesses to have higher material and oil cost during 2008. And here too we've implemented cost based price increases in selective markets. We expect cost productivity and the impact of new innovative product offerings to offset these higher input costs.

Overall, I think it we are very well positioned to continue to deliver improved results in our international businesses in 2008. And at this time I'm going to turn it over to Roy Templin.

Roy Templin

Thank you, Jeff, and good morning everyone. And for those who know me I apologize I am fighting a cold, so I am going to try real hard to project as well as I can over the phone this morning. Before I begin, and as a reminder during the first quarter of 2007 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 40. Beginning on slides 29 and 30, I will walk you through a summary of our fourth quarter performance. During the quarter, we reported revenues of $5.3 billion, up 7% from the prior year, primarily driven by strong international performance and favorable exchange rates.

Our fourth quarter result also reflects strong operating profit margin improvement, compared with the prior year. Our gross margin expanded 1.7 points to 15.7% for the quarter. The improvement in gross margin primarily resulted from strong productivity and Maytag efficiency gains, which combined added 3.5 points to our margin improvements. While positive price mix contributed just south of 0.5 point.

Partially offsetting these gains were increased material and oil-related cost, which resulted in approximately $130 million or about 2.5 points in margin reduction.

We also improved SG&A as a percentage of sales by over a 0.5 point during the quarter, primarily due to Maytag efficiency realization and cost control. As a result of the items I just discussed, operating profit increased 74% during the quarter and the corresponding margin expanded 2.4 points to 6.2%.

This operating profit margin marked the highest level post Maytag acquisition in the face of significant US macro economic challenges, as well as significant material and oil-related cost inflation.

As for Maytag, as you'll recall our original goal was to achieve $400 million in acquisition related efficiencies by 2008. We have both exceeded that goal and completed the integration ahead of plan. We realized $180 million in efficiencies in the fourth quarter and $460 million for the full year 2007. With the integration now behind us we will no longer breakout Maytag's specific efficiencies. Further optimization of the remaining Maytag infrastructure will be included in our normal productivity initiatives.

Turning back to our fourth quarter results, I would like to highlight two discreet items included within our financials. First, we sold an idle International facility, which resulted in a pre-tax gain of approximately $15 million. This gain is included within our Latin America operating profit. As part of our global operating platform optimization, we continuously evaluate our existing asset base.

We have migrated production over time to what we do refer to as best cost locations and as a result some facilities have become idle and eventually monetized. As you know, each year we incur structuring expenditures and monetizing idle facilities has helped to offset a portion of these cost.

You will note on slide 31, that we experienced a larger year-over-year increase within interest and sundry expense during the quarter. The main component of our higher expense reflects an increase for legal reserves of approximately $17 million. We also incurred higher non-income based taxes during the quarter.

Moving to our tax rate, we have reported an effective tax rate of 16% for the quarter, which was well above the prior year's rate of a 2% credit. The increase in rate compared with the prior year is mainly due to two discreet items recorded in the prior year pertaining to global audit settlements and legislative changes.

Our full year effective tax rate was 14.5% and was better than our previous expectations due primarily to the recognition of certain tax planning benefits that were triggered by foreign legislative changes and regulatory approvals.

In addition, given the market trends in the quarter, the rate benefited from higher earnings in foreign operations, which have a lower overall effective tax rate relative to our domestic operations. Going forward into 2008, we expect our effective tax rate to be in the mid 20% range.

Finally, we incurred operating losses from an equity investment of approximately $8 million after tax during the quarter. We do not anticipate recording further equity losses in 2008.

Slide 32, highlights our working capital performance during the quarter. As you can see, we have made strong progress in all areas of our working capital management, as working capital declined to 10.4% of sales, compared to both the 13.2% reported in the third quarter and the prior year amount of 11.0%.

We have made strong progress in reducing inventory from third quarter levels, although not to the extent of the original plan, due primarily to weaker than expected industry demand within the US. Our team remains focused on continuing to improve working capital performance during 2008.

Now, I would like to take a moment to discuss our 2007 free cash flow performance on Slide 33. For the year, we generated $521 million in free cash flow, well below our previous expectations, free cash flow improve to 22% from 2006 on a strength of higher earnings, improved overall working capital and lower global tax payments.

Cash flow was negatively impacted by current year payments associated with the Maytag product recall announced last year. Our capital expenditures totaled $536 million in 2007, down $40 million from the previous year, driven by continued global capital efficiency initiatives and lower acquisition integrations spending during the current year.

We continue to improve our capital efficiency as demonstrated by our fixed asset turns, which have improved approximately 28% over the past five years ending 2007 at 6.0 turns. We expect 2008 capital expenditures to be approximately $600 million.

Turning to slide 34, we summarized cash return to our shareholders during 2007. As you can see we returned more than 500 million to shareholders in the form of dividends and share repurchases. At the end of the year, we had $97 million remaining under our current share repurchase authorization.

I will end my comments with our 2008 guidance, which has shown on slide 35. Based on current economic and industry conditions, we anticipate full year 2008 EPS in the range of $8.50 to $9 per share. Within this estimate, we expect up to a $100 million in re-structuring charges. Additionally, we expect to convert these earnings into free cash flow in the range of $600 million to $650 million.

I will now turn the call back over to Jeff.

Jeff Fettig

Thanks, Roy. Once again I would say that overall we are pleased with our 2007 performance in a challenging economic environment, we delivered record results. We believe this performance highlights the strength of our global business model. We have a strong portfolio of consumer preferred brands around the world. We have great teams of innovation and a very strong global operating platform that we leverage each drive resulting in all of our businesses around the world.

Today, our global position is number one in the global market place. We are leveraging our leading consumer brands for growth. We continue to effectively translate our innovation in the profitable growth and we will continue to utilize our global operating platform to drive very strong level productivity worldwide.

With this I believe that our company is never been better position to succeed. We have a strong platform for this today, which is why we expect to deliver a record year performance in the challenging business environment 2008.

I am going to end here and I will now open this up for questions. Operator lets proceed with the Q&A portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Sam Darkatsh. Your line is now open.

Sam Darkatsh - Raymond James

Good Morning Jeff, Roy, Mike. How are you?

Jeff Fettig

Good morning, Sam.

Roy Templin

Good morning, Sam.

Mike Todman

Good morning, Sam.

Sam Darkatsh - Raymond James

If just little more clarification can be reached on the earnings per share walk from '07 to '08; I know you don't have much left under your existing share repurchase authorization Should I then assume that the share count would remain flat in our assumption from Q4 levels in fiscal year 2008. So, any share purchase activity would by definition and be incremental?

Roy Templin

That's correct Sam. I know because of the averaging that goes on in the diluted earning per share calculation. It's tough to track the share buyback versus the shares issued, but if you were to look at the basic absolute levels of shares. We came out of the year at about 78 million shares outstanding. So, if that helps you with your model, but again I understand with all the averaging going on, it's hard to see those numbers.

Sam Darkatsh - Raymond James

Great, and then I understand that you're not going to be breaking out efficiency cost from Maytag's perspective, but what were the integration costs in fiscal year 2007? And I'm guessing that the vast majority of that will not repeat in 2008. Could you remind us what that was in '07?

Roy Templin

Yes, I can, Sam. The one-time costs in the current year were $37 million versus the $89 million we had a year ago.

Sam Darkatsh - Raymond James

And that will not repeat in '08?

Roy Templin

Well, if you remember, Sam, the chart that we published May 23rd and we've actually published going forward. We always estimated that, there will be a small amount of P&L charge in 2008. I think the estimates $5 million of P&L we got, but again nothing significant.

Sam Darkatsh - Raymond James

Okay. And then productivity expectations, Jeff in '08, normally it's about 2% to 3% of COGS; is that within the realm of expectations? Or with the lower volume, would productivity come off a little bit or how should we look at that?

Jeff Fettig

Sam, in terms of with breaking all the parts, I'd say, we expect to drive, compared to historical standards, a very strong level of productivity. Two points I'd make, one we have factored in the lower demand in that estimate in the US. Secondly, to Roy's point, any residual benefit from Maytag is included now in that productivity number. But I'd say that it would be at the higher end of your historical range.

Sam Darkatsh - Raymond James

And then, final question that I'll defer to others, I noticed that there wasn't a whole lot of share repurchase activity in Q4, despite the fact that it was a fairly fact that it was a free cash flow generating quarter. Keeping dry powder perhaps for acquisitions or could you help us to why you might be a little reticent right now, in terms of buying the stock back at current levels.

Jeff Fettig

Sam, this is Jeff, I'll answer that. First of all, we are very consistent I think throughout the year, second quarter, third quarter, fourth quarter and in terms of our purchases all over $100 million in purchases. As we said, share repurchase has been, as we talked about last April, and remains a very high priority for us. We do have $70 million or $97 million of authorizations still available to us and you should expect that continues to be a high priority for us.

Regarding use of cash, our priorities, if we look at on an ongoing basis, are the same. First is to fund the business to deliver to operating results and cash. We've given you those numbers, so there is nothing abnormal there and we feel that’s fully included in our guidance.

Second is, as we talked about in the past, we paid debt and our pension obligations, we've got our debt levels down, basically here our cost are pretty Maytag type levels, so we did a good job and in that, we are year ahead of our plans in terms of the debt reduction and when we fully fund our pensions and any additional pension contributions are included in our forecast.

Third, returning to shareholders, which is share repurchase and dividends. That remains a very high priority particularly given current share valuation levels.

And then fourth, is looking at strategic opportunities, again I would say that as we've talked about in the past, we were always looking to three to four or five these around world, some of them paying out, some of them don't. So we will look at those on a one on one basis, but we don't see that as a huge transaction with these or more of things that fit into our global operating structure.

So that's pretty much how we see it, how we prioritize and again those things I mentioned already are built into our guidance.

Sam Darkatsh - Raymond James

Thank you so much, keep it up.

Operator

Our next question comes from David McGregor. Your line is now open.

David McGregor - Longbow Research

Yes, Good Morning everyone. Jeff, you mentioned price initiatives, I think, Mike mentioned price initiatives as well. I was just wondering if you could give us a sense of where you are so far in the year; do you see competition following along? Where around the world are you pursuing pricing initiatives and does a negative volume expectation for the year temper your expectations on these price initiatives?

Jeff Fettig

Dave, let me talk about international markets, that’s in my comment I just talked about. Internationally, I kind of break it down into three regions, Latin America, I think, we’ve been doing all along a very good job, of both driving strong productivity and our ability to appropriately pass through cost-based price adjustments. We continue to do that and I think that’s one of the reason why our ability to do that in those markets is going pretty well.

In Europe, it’s a little bit of a mixed picture depending on market transitions. I would say, as you exit 2007, probably more, that the price declines that we see in that for many years had lessened and I think there are some markets where price increases and certainly positive mix improvements are taking place. And we expect to do both in 2008, based on what we’ve announced.

In Asia, it’s a market by market situation, India is a big market for us. There we are, again we look both at price increases announce and improvement mix. China is more an improvement in mix as we basically overhauled our whole product line to that market place.

So, there’s a number of ways to improve margins, cost-based price increase are just one of many but that’s the picture internationally, and I feel very good about where we are today, in terms of pursuing, implementing and achieving those and I’m sure, let me turn over to Mike Todman, I’m sure what he was ever seeing in the U.S market.

Mike Todman

Yeah, David, let me start getting to the perspectives on the price - cost-based price increases. First of all, we have announced cost-based price increases and we clearly expect that they will hold in the market. What we have done and what we continue to do is just make sure that our brand carries the right value.

But secondly, the way we get prices is through new product introductions and innovations. And as I mentioned in my opening remarks, we have got 72 product launches that we scheduled throughout the year. For both those factors, we feel pretty confident that we'll be able to realize the cost-based price increases that we have taken to the market place.

Jeff Fettig

And David, the last thing I would point out here is, again I go back to globally witnessing over $2 billion of input cost for the last three and half years. It will increase another $350 million or so this year. We have seen adjustments being made through the whole supply chain. A big part of our material cost increase in this year is components, as we have suppliers who no longer absorb these increases and frankly, in some cases, we risk losing a supply base that we need to continue the business.

So, the same as it moves from the supply chain is true at being the main factor in market development. It’s obvious that's where we are. Margins are very low compared to where they were four years ago. We have done a good job with productivity and in other activities and offset about three-fourths of this. But we are coming to the point with this continued [commodity] inflation in our view and that, we communicated publicly, as we expect to pass these through to the market place in order for us to continue to invest in innovation and the things that consumers really want in our business.

David McGregor - Longbow Research

Did you sense that your competition is of a similar mind?

Jeff Fettig

I can't really comment on your actions David, I will just say everybody likes materials, so everybody probably got a problem.

David McGregor - Longbow Research

Yeah, I am just wondering if you can guide for your sales and marketing organization that your competitors have also pursued pricing initiatives.

Jeff Fettig

It varies per market and to me, the best way to look and see what are MSRP selling at and just sell from retail data. I don't think you take much stock and day-to-day rumblings in the market place.

David McGregor - Longbow Research

Okay, great. Thanks very much gentleman.

Operator

Our next question comes from Michael Rehaut. Your line is now open.

Michael Rehaut - JPMorgan Securities

Thanks. Good morning everyone.

Jeff Fettig

Hi Mike, good morning.

Michael Rehaut - JPMorgan Securities

Just a question on the raw materials. You had mentioned that you are expecting $350 million for '08. I was wondering if you could kind of break that down; if possible by steel, energy and maybe plastic or resins?

Jeff Fettig

Michael, in our business gadget go in order of site, of purchase steel was like our number one, oil and resins was number two, base metals number three and this strategic components bake up then in number four. I will say we are going to modest increases in steel.

Concerning base metals; if you look at the second half average, we basically hedge base metals, so we are always kind of in the middle of the market, but clearly year-over-year first half will continue that, but nothing like we saw last year But we are expecting the increase there. Oil, we are assuming $90 barrel oil for the year and that drives resins, and also hits our freight and warehousing.

But probably, and again it's been a little bit different every year depending on which things take off, but this year the biggest impact is what I mentioned is the component value change where our suppliers; which is copper and steel and so on and so forth, also have been squeezed to the point where we've had to Maytag the [kick pricing] and we needed the supply and so we're seeing readjustment in that part of our value chain. So that's probably actually the biggest crunch this year.

Michael Rehaut - JPMorgan Securities

Also just taking a bigger picture and looking at, certainly you had seen success in past couple of years with cost-based price increases, at the same time the demand side has weakened pretty consistently over the last 18 months. And as you noted in your outlook '08, there doesn't seem to be a change in that trend.

I was wondering if you could kind of comment on the level of promotional activity that's out there. I think you kind of commented at that in the third quarter this was maybe an area of surprise or a negative impact, and how you see some of the competitors that are out there gaining share or trying to gain share, rather affecting that balance as perhaps demand continues to fall?

Jeff Fettig

Mike, one thing I want to comment on, I'll ask Mike to make his comments as well. But in terms of the US market, which I think you're primarily referring to, is we did really see some substantial pick up in the fourth quarter; certainly versus the third quarter and everything for us moved in the right direction.

There has also been some discussion about increased promotions in a challenging marketplace. I guess there is a lot of noise out there in terms of our level of promotions and so on. There is nothing abnormal in the fourth quarter. As we go into the 2008, frankly, we have shifted the significant part of our focus to the product innovation launches that Mike just talked about, which are substantial, number one.

And number two, shifted a lot of promotion to consumer raw advertising to really make innovations well known and frankly create demand in the market place. Given where we are, given Maytag integration is over, given our innovation across all of our brands, this is the right time for us to do that. So, we expect to win market share and compete by having the best brands, the best products and making sure consumers know about them as apposed to price promoting in the market place. Mike is there any?

Mike Todman

No. Michael, I think Jeff really said it, we didn't have any abnormal activity in the fourth quarter and as we've come into the year, we really have shifted a lot to be consumer directed, if you will, advertising to draw them into the market place. And if you look at our results, we actually had a very positive price mix in the fourth quarter, while we recovered and had significant improvement in our market share from the third quarter to the fourth quarter. So, we feel pretty good about that and we think that we can continue that trend as we go through 2008.

Roy Templin

Michael, its Roy. Michael, just a sort of build on Mike's point, I think if you look at the company, I talked about the favorable price mix in the fourth quarter globally. Mike is correct, he got about a half a point within North America and if you step back to see more of the macro picture, as a company for 2007, we had just a little lower half point of favorable price mix as well. Just to help you calibrate the success we had in 2007.

Michael Rehaut - JPMorgan Securities

Last question, if I could, now with the Maytag cost saving cycle essentially achieved, I think you had said that you're kind of going back to general productivity expectations and that you're not going to actually break-up Maytag, apart from your overall productivity gains. Also, kind of conceptually, you are now with that much of a bigger footprint and market share. Is there still, where are you are in terms of product gains? Historically you said an even 3% to 5% per year productivity gains. It might be a little repetitive of Sam's question, but net-to-net, do you still feel that there is a bigger platform from which to get productivity gains or how do you see that?

Jeff Fettig

I'll answer that. The answer is yes. Particularly compared to pre Maytag, I'll go down at number dimensions; one, our larger size of scale provides a bigger platform. Two, although we need a tremendous number of changes during the Maytag integration, it's still far from optimized and as you think about every new product we bring out is now completely on a Whirlpool cost, structure versus the Maytag cost structure, and that will continue for sometime until a 100% of the product line is completely get over.

We do have some facilities and you saw one Reynosa in Mexico, which was not included in kind of the first ground of integration that's subsequent to that and when you have some continued manufacturing optimization to do. And then on top of that, I'd say stronger than ever is the global common standardization, commonnization of some of our product designs and component parts and that sort of things.

So, I think there are a certain number of enhanced opportunities we have because of the size scale and scope of Maytag. The other side is still the globalization level, which still has a lot that we think we can benefit from. And then the third area is our ongoing relentless improvement on things like [clean] manufacturing and in our internal skills, in order to drive and also add in the whole trait and warehousing the logistic change.

We are finding new ways to drive productivity, so yeah, my expectation actually would be that we have more opportunity today then certainly we did pre-Maytag to drive productivity.

Michael Rehaut - JPMorgan Securities

Okay, thank you.

Operator

Our next question comes from Eric Bosshard. Your line is now open.

Eric Bosshard - Cleveland Research

Good morning.

Jeff Fettig

Good morning Eric.

Roy Templin

Good morning.

Eric Bosshard - Cleveland Research

A couple of things, first of all can you give me a sense that $8.50 to $9 of guidance up, there are obviously head winds from the tax rate and from last asset gains, I'm assuming those numbers, but can you give me what gives you the conviction of that improvement in the face of the demand head winds and some of these other factors?

Jeff Fettig

Sure, Eric. Let me give you a little bit of color. And I'll break it up on the three parts. One is revenue and if you take the demand in the US and what we expect we can do a products and brand, in market trend and so on and a kind of put all pieces in the world together. We do expect moderate positive revenue growth globally for the year.

Secondly, is the negative hit to margins, as I said our material cost, restructuring, and the increased brand investments, although a lot of that brand investment were funding from other infrastructure cost changes. So, there is a decline against an increase. But overall, that's a little over two points of negative to hit the margins, the flip side and how we expect to offset it.

The other things that I mentioned; number one is, very strong productivity. I believe net of raw materials this will be the strongest productivity we have been ever had for all the reasons I've just mentioned. Number two, to both costs-based pricing and product mix. We do expect to recoup and improve our margins; at least the levels that we have done better this year and that's true around the world.

And then third, I'd say it continued, although perhaps a little bit slower, but still very positive international growth. Those things we think will more than offset that would over 2 point of negative hit and there are a lot of other things in our income statement. Let me give it to Roy a kind of give you -- kind of a little bit more granularity.

Roy Templin

Eric, first of all, you're correct in terms of conviction if you take a things, let me start with the low operating profit. You touched upon tax rate, where we think we go to the mid 20s. Second item as you notice is other income, other expenses was a little high this year. So, we've normalized that back to our typical run rate.

So, you really come back to the operating profit and if you normalize the operating profit you take out the two asset gains that we talked about this year. And then you step back from this, you really have two things that are going on within our operating profit. One is what Jeff talked about his script. He had the negative 2.1 points coming off materials, restructuring in SG&A.

And then that the second side, Eric, is the positive side and which embedded in our guidance, is in essence three points of improvement from productivity, price mix and the incremental run rate on Maytag efficiencies for those efficiencies that we actually realized over the course of 2007.

Now a little bit of baseline Eric, in terms of what gives you conviction, which was the first part of your question. Productivity in 2007 for the company was two points of productivity as what we achieved in 2007. Price mix I mentioned earlier with, Michael was 0.5 point.

The Maytag is a little trickier because again as you know we've had strong year-over-year efficiency realization obviously, we wouldn't repeat that, but we do have, imbedded in our guidance, some incremental benefit from those Maytag efficiency. Those three combined are totaling three points, which gets you to our operating profit walk forward. That enables you to get to the mid-point of our guidance.

Jeff Fettig

The last perhaps perspective, I'd put on is, if you look at 2007 and 2008, they have a lot of similar characteristics in the guidance that we gave in the beginning year and frankly, for most of you. We had two big changes in our assumptions, which drove our guidance and that was, we earlier in the year, we really tough to choose one these are $400 million range, they were in the $600 million range. That's $200 million; that's full one point of operating margin.

In the second pass we had, we call the first part of the year right on industry demand in US been down about 5% and it goes down 5.1%. What we missed was the impact of the financial credit crunch in prices; originally we thought the second half will be up 1 to 2% and the reality was down almost 6%.

And so that big swing in demand coupled with the $200 million cost increases is what challenged us in this back half of the year. Having said that, we've made adjustments throughout the year to deal that still. Still largely delivered within the guidance that we gave in, and I think 2008, its similar, we kind a laid out what our assumptions are, those are our planning assumptions they can change.

But we also made it into our business and tried to take the actions throughout the course of the year and also made sure that we are changing along inline with the environment still delivering our guidance. So, I guess from that perspective, I think we have got a number of things that we are continuing to work on, that if these environmental assumptions do in fact, three months or six months down the road, change, that we are working on enough things to adapt our business fairly quickly and try to deal with it.

Eric Bosshard - Cleveland Research

Can you give us any quantification of how much Maytag cost save carry over the risk going into '08? What you have not annualized to this point?

Mike Todman

Eric I would estimate it to $50 million to $100 million.

Eric Bosshard - Cleveland Research

Okay. And then the other question is, you talked a lot in '07 about the cash flow 6 to 6.50 and it ended up it looked like from cash from operations 200 million short in 4Q and seemed like the inventories may explain some of that, but can you explain a bit the 200 million deviation from your guidance in cash flow from operations in the fourth quarter?

Mike Todman

I am sure I followed your question Eric, in terms of the delta from our guidance.

Eric Bosshard - Cleveland Research

I think you had been [guiding of] cash from operations for the year and the reported number ended up being 927? That's what I was trying to figure, what explains that deviation in the fourth quarter relative to the guidance?

Mike Todman

I am thinking, Eric, we were 100 million off of what we had guided in terms of cash from operations and that was primarily driven by inventories and again for the most part that was inventory share in the U.S. where we did take a number of down-days, but as the market shrank over the course of the quarter, we just ended up with about 2 excess days of inventory on hand, that we had not planned. And then one day of the inventory that we consciously built to support our global footprint transitions.

Jeff Fettig

And I would add that it was really the early shortfall of that we saw late November, December. By then, it was really too late to make any more adjustments in our inventory. So, that really was frankly the entire mess.

Mike Todman

That was a mess.

Eric Bosshard - Cleveland Research

Right Thank you.

Jeff Fettig

Are there questions?

Operator

Yes, our next question comes from Laura Champine. Your line is now open.

Laura Champine– Morgan, Keegan & Company

Good Morning, Jeff

Jeff Fettig

Hi Laura

Laura Champine– Morgan, Keegan & Company

I noted from your boiler plate, that, if I’m doing my math right, your business will see this decline to about 8%, though your business in North America was up a percentage point for the year. If you can, can you draw into how you gained share in the fourth quarter despite a pretty widely publicized decline and continued share loss of your biggest customer, and then as a follow on, what will you do in 2008 to try to become more channel neutral and diversify away from that weak link in retail environment?

Mike Todman

Okay Laura, this is Mike Todman, and maybe just let me give you a look at our overall business. And I think we have said throughout the year, and really as we executed in the fourth quarter, that we wanted to make sure that our brands won work at the distribution where our consumers shop, and that we don’t specifically pick where consumers shop and so if we are there and we have the right product, the right innovation, then we will enjoy the market share that --- what I would say, therefore in the fourth quarter is, we saw a fairly good increase in our branded market share. So, outside of Sears in particular, and that’s just based on kind of the product launches that I talked about in the third quarter call that we executed in the fourth quarter.

The other aspect of it, as we continue to go forward, what we again have said all along is, if you look at all these product launches that we are taking to all of our brands, our intent is just to have the right product, the right value, the right innovation in our brands where every consumer shops. And so at Sears with [M-mart] we will have the right product offering there. If it is outside of Sears in any of the other distribution points, we may consider that we have the right product offering in our brands in those environments, and that's what we intend to continue to do as we go throughout the year.

Laura Champine– Morgan, Keegan & Company

Can you comment on Q4, whether your share gains were weighted more towards the Whirlpool brand or the Maytag brand, and also how are your client brands doing relative to those core market brands?

Mike Todman

Laura it was both Whirlpool and Maytag, and I will tell you we had very strong performance in our [Iron] brand, and as we introduced that new product Kitchen Aid that I mentioned here, we saw that consumers were buying those brands. Frankly, we had it across the board at all of our brands.

Laura Champine– Morgan, Keegan & Company

Thank you.

Jeff Fettig

Thank you.

Operator

And we have time for one more question from Jeff Sprague. Your line is now open.

Jeff Sprague - Citigroup Investment Research

Thank you, good morning.

Jeff Fettig

Good morning Jeff.

Jeff Sprague - Citigroup Investment Research

Roy, you had a couple of comments about the price and mix. I think that was about operating profit, not revenue. Just so, I have it, we all have it square, can you just, the revenue composition in North America in Q4. How it shakes out for Whirlpool volume price mix?

Roy Templin

Okay, you are right. I am going to reconciled revenue for you. Okay, you could hear earlier, I was talking about the margin impacting in my discussions with Eric and Michael.

If you look at, I will start with Consolidated, Jeff, Consolidated Whirlpool sales were up 7%. If you look at currency, the currency impact of that foreign currency was 6.5 points improvement. We had about 0.5 favorability of price mix and then we had minus 0.5 for volume and that gets you to the 7.5 for Consolidated. For North America specifically, we had about 3.5 points of favorable price mix in the fourth quarter, about 0.5 of rate and volume was about 5.5 negative to get you just at minus 0.5.

Jeff Sprague - Citigroup Investment Research

Great. And then could you just walk us through the mechanics of why tax rate would go back up? It would seem like some of the geographic forces that drove it down in '07 would still be in place in '08?

Roy Templin

Yeah Jeff, that's a good question. Let me talk a little bit about that. And it's sort of a loaded question. I am going to give you little bit of perspective, and then I will come back to your direct question. I think it's important to [propose] with two points, Jeff. One is that we've talked about, I guess now, over the last couple of years, that we have been implementing a tax strategy plan to get our tax base globally more efficient with respect to our operations.

The second propose point is that, as you know, under the current accounting rules there are really two impact,s Jeff, typically when you execute a tax strategy. And that is that under the accounting rules for those things that involve the current period operations or future operations, you recognize the benefit of those strategies over period of times as part of your operating tax rate.

The second important distinction now, Jeff, is when you execute tax strategies for those pieces or components that relate to prior periods. Let me give you an example of what specifics to [work over]. If you execute a tax strategy that now enables you to utilize NOLs that were previously not able to be utilized, the component of that that relates to prior periods is run through the rate in the quarter that you execute the tax strategies. So, you get this much largest impact on the individual quarters then you would get over a blended period of time.

For Whirlpool Corporation, if you look at our normalized tax rate taking into effect our rates around the world, we have a normalized rate, Jeff , of about 30%. If you look at the rate versus this year, we had about 15 points of benefit coming off of the tax strategy things that we did, that related to prior period positions that we now had the information on and therefore lowered our rates. So, that's the delta between our normalized rate of 30 and a roughly 40.50.

Now let's walk it forward to your specific question. If you look at the things that we've executed on our strategy and if you look at the benefit that it will have on the rates going into 2008, we get about 5 points of benefit that we expect to achieve in 2008. And that take you from this normalized rate back to the mid-20s. Another point I'd make, Jeff, with respect to taxes, I think it's an important distinction that, these things that we've executed are real from a tax cash perspective, these are not just book accounting entries, these are truly a lowering of our cash taxes that we pay around the globe.

Jeff Sprague - Citigroup Investment Research

Actually, that was going to be a second part of my question. Actually, if you could give us a sense of what cash taxes did in '07, and what you would expect in '08? You do have a pretty substantial, call it 25% operating cash flow improvement bake in for '08. I am wondering if you could kind of give us some color, is it cash taxes or is it working capital or what it is that would actually drive that strong of an improvement?

Roy Templin

Well, Jeff the simple answer is, we did have lower cash taxes paid in 2007. Part of that was from our tax strategy, part of that was related to refunds that we had on global scale. We don't expect significant change in that going in to 2008.

Jeff Sprague - Citigroup Investment Research

Okay. So, the cash flow improvement in '08 is more of a function of working capital?

Roy Templin

Yeah, it's really coming off of a few components, Jeff. One is working capital, which is the single greatest component. And again, if you think about my comments with respect to inventory and where we ended the year that's a big driver there. It’s a little bit on higher earnings, a third piece that's very important is the Maytag recall. We did expand $72 million of cash in 2007 related to that recall. You will recall, Jeff, that we estimated $82 million in total, so obviously a lot less cash coming out next year. And then final point that Jeff referenced is, we do expect $25 million more in pension contribution next year than we had in 2007.

Jeff Sprague - Citigroup Investment Research

And then, just one final one, if I could. I think a prior questioner assumed that there wouldn't be asset sales gains that worked as potential offsets to restructuring. Would you in fact, as you are selling some of these facilities you are closing, in fact have some offset?

Roy Templin

Well Jeff, if you look at the chart in the back of the press release, you will note that we have $50 million to $100 million assumed in terms of proceeds from assets sales, that's related to your point. In terms of again on asset sales, again we don't forecast those gains, but if you look at our run rate over the last three years, you will find that we have about $50 million, its the typical run rate of gains on assets sales.

Jeff Sprague - Citigroup Investment Research

Great. Thanks a lot.

Roy Templin

You are welcome.

Jeff Fettig

Well thank you. And everyone thank you for joining us today and we look forward to talking to you in the future. Thank you very much.

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Source: Whirlpool Corp Q4 2007 Earnings Call Transcript
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