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Executives

Jeff Fettig - Chairman and Chief Executive Officer

Mike Todman - President

Roy Templin - Chief Financial Officer

Greg Fritz – Director of Investor Relations

Analysts

David Macgregor - Longbow Research

Sam Darkatsh - Raymond James

Eric Bosshard - Cleveland Research Company

Michael Rehaut - JP Morgan

Jeff Sprague - City Investment

Laura Champine - Morgan Keegan

Whirlpool Corporation (WHR) Q1 2008 Earnings Call April 24, 2008 10:00 AM ET

Operator

Good morning and welcome to Whirlpool Corporation first quarter 2008 earnings call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Greg Fritz. Please go ahead.

Greg Fritz

Thank you Kevin and good morning. Welcome to the Whirlpool Corporation first quarter conference call. Joining me today are Jeff Fettig, our Chairman and Chief Executive Officer; 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 expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K.

During the call we will be making comments on free cash flow, a non GAAP measure. Visitors are directed to slide 32 for additional disclosures regarding this item. Our remarks today track with the presentation available on the investors section of our website at whirlpoolcorp.com. With that let me turn the call over to Jeff.

Jeff Fettig

Good morning everyone and thank you for joining us today. As you saw earlier this morning we released our first quarter results and now we would like to provide you with some of the details of our earnings release.

For the first quarter we reported our net earnings decline by 24% versus last year. Net earnings from continued operations were $94 million and EPS was $1.22 per share versus $1.55 last year. Overall net sales for the quarter were up at $4.6 million which was 5% versus last year.

Overall I would summarize the quarter in the following ways. First of all our international businesses perform very well. Our international sales grew by 18%, our operating earnings grew by 42%. Overall this was a record operating performance by our combined international businesses.

The real operating challenges that we saw were most profound in the US market. We saw demand decline by 9.2%. This is down to the seventh consecutive quarter where demand has declined in the US market. In addition compared to the first quarter of 2006; in other words the two year average, US demand has declined by over 18% and now marks the most severe appliance recession that we have seen in over three decades.

Overall clients demand in the US and Europe were major challenges in the quarter, the most critical challenge that we are facing is the continuing surge in material and all related costs. This is the primary driver in the decline of our performance in Q1.

On slide four you will see a chart which shows our top material implied cost for steel, oil, diesel fuel and copper. Over the last four years these costs have increased anywhere from 200% to well over 300% and continue to rise. On a year-over-year basis April prices have now increased significantly compared with the average levels during the first quarter of 2007.

Year-over-year we have surge in oil of 80%, diesel fuel up 50% and the stock price for steel up 50%. When we last talked in February, I stated that we would have a very difficult first half of the year with strong recovery in the second half. This was based on the actions that we are taking within our global operations to overcome both declining demand and increasing costs.

Today we still believe this earning pattern for the year is accurate. The changes that we see are one weakened and expected demand in both US and the Western Europe and material oil related cost rising more rapidly than we previously expected. Of course the main drivers of oil which has hit a $118 per barrel, which negatively hits our cost operations and diesel fuel.

The other significant area of change has been in steel where the stock market has risen over 30% since the beginning of the year. Overall we are increasing our outlook for material and oil related cost for the year from $350 million to approximately $450 million to $500 million for the year.

These changes along with very week consumer spending particularly in the US and the continued volatility are the factors the factors which have caused us to lower our full year earnings guidance from $8.50 to $9 a share we previously guided to the card guidance of $7 and $7.50. At the same time we have lowered our pre cash flow estimate from $600 million to $650 million to $500 million -- to $550 million.

Within this guidance we continue to expect first half earnings for the week as we saw in the first quarter with strong recovery in the second half. The basis for the second half recovery is driven by first, very strong productivity, structural cost reduction in the new spending levels which as we previously discussed, traditionally ramp up through the course of the year and we expect to see that pattern this year and secondly cost based price increases which we have already announced or implemented in all of the major markets around the world.

Regarding these prices increases we have taken the position of the ongoing, significant material oil related inflation can no longer be offset purely by productivity or through further contractions in our operating margins and that these costs must be passed through the market place in order for us to continue to provide the high levels in innovation and value of service that our customer have come to expect.

We will continue to invest appropriately in new product innovation as we have been and consumer brand advertising in order to stimulate demand and bring consumers -- to bring consumer relevant innovation to the market place. These investments are a key value driver for our Company over the long term and it’s impairment that we maintain our core of innovation and continue to build our strong brand.

With these comments as background we are continuing to execute against the four business priorities in 2008 as we previously talked about. These are one implementing the previously announced cost based price increases, secondly delivering a record level of productivity, third adjusting cost structures and production capacities to the expected demand levels we see in the market place today and importantly continuing to outperform market growth by leveraging our very strong brands and innovation in order to prove our growth in revenues.

During the first quarter we also completed our share repurchase authorization by purchasing $97 million worth of our shares. Our board has authorized a new share repurchase of $500 million. This is in line with our investment priorities and reflects our view that our shares are undervalued. We will initiate this share repurchase during the second quarter and expect to fund this through our free cash flow. No specific time frame has been given to complete the share repurchase and the share repurchases are dependant on a rate of pre cash flow generation going forward.

I’m now going to turn the call over to Mike Todman to give you an update on the North American front.

Mike Todman

Thanks Jeff and good morning everyone. Let me start by giving my perspective on North America’s performance in the quarter.

Our net sale declined 3% during the quarter to just over $2.6 billion. US industry demand for T7 appliances declined around 9% during the quarter. We experienced strong growth in our Maytag brand as a result of bringing new product innovations into the market place. Both of our major brands posted year-over-year increase in market share. In addition our average selling values showed improvement relative to the prior year.

During the quarter we reduced our promotion spending and increased spending on brand investments and consumer advertising. Additionally during the quarter we had several new product launches including a new line of generic built in bottom up refrigerators and new French door product offerings for Maytag, Whirlpool and KitchenAid.

Now turning to operating profits, profit declined $115 million to $44 million in the first quarter. This decline is mainly attributable to three factors; one, increased material and oil based cost; two, lower US industry demand and three, increased brand investment and consumer advertising cost.

First we experienced significant raw material cost increases during the first quarter. We experienced substantial increase in metal based purchase components. In addition diesel fuel prices accelerated which resulted in substantial increase in our freight cost during the quarter.

Second, while our volume performance was above the industry performance level, during the quarter we did feel the effects of a challenging industry environment. As a part of our inventory management efforts we reduced our production days during the quarter which resulted in lower cost absorption which impacted our gross margin and operating profit margin.

Finally as we discussed during the previous call, we made some conscious SG&A investments during the quarter particularly in the area of advertising. While we feel we have seen near term benefits from our advertising initiatives these efforts give results and increase SG&A spending during the quarter.

Partially offsetting some of these unfavorable variances were productivity improvements. Slide nine provides an update on the status of the key indicators behind our 2008 US industry demand outlook. As you can see we have experienced deterioration in most of the key indicators affecting US industry demand. By way of a reminder approximately

30% of US industry demands is directly related to new home completions and existing home sales. Considering the current outlook for these components as well as sharply lower consumer confidence we now expect US demand to be down 5% to 6%.

On slide 10 I would like to discuss with you some of the key passions we have undertaken given our expectations the lower industry demand, higher material and oil related cost and our first quarter operating performance. We are focused on accelerating our productivity initiatives. Given our historical pattern of productivity improvement we would typically see our productivity ramp up quarter-to-quarter during the year.

As we discussed in our fourth quarter call, 2008 is a strong year for new product launches, specifically we are planning on 72 new product launches throughout the year. We will discuss the timing of these in a moment, but we believe these launches will provide us with strong new product in the market place particularly in the second half of the year. We have announced additional cost based price increases that will take effect at the end of the second quarter given the significant rise in raw material and oil related cost that have persisted for several years, we are taking some of these increases in cost to the market place and will continue to provide high levels of innovation and value to our consumers.

Finally we will build upon deposit of momentum that we established in the market place. Our go to market plans have gained strong traction and our increase in consumer advertising has been well received in the market place.

In summary our North American operating margins are unacceptable, but I am confident that we have taken the right action to address the macro economic challenges we are facing in the US market.

Turning to slide 11, I would now like to highlight some productivity initiatives we are undertaking to provide you with some additional background. One, we continue to evaluate our manufacturing facilities on an ongoing basis and we are undertaking several facility moves to improve our efficiency. Two we are extending our manufacturing lean initiatives to the enterprise level. While we have had strong lean manufacturing programs over the past decades we are extending this process to the entire enterprise, including the supply chain in order to improve our productivity.

Finally we are undertaking efforts and optimizing our global product architecture. We expect these efforts to result in lower component costs and higher manufacturing efficiency over time.

Turning to slide 12, I would like to highlight the expected phase of our new product launches in 2008. As we mentioned on the previous call we are launching 72 new products during the year. As you can see on this chart many of the launches are focused on the second half of the year. One of the more notable areas for new product launches is in the Maytag laundry category where we are replacing over three quarters of our existing SKU’s in 2008. Overall we believe that these new products will have a positive impact on our revenues and mix in the second half of the year.

Finally I would like to turn to the outlook for North America for the remainder of the year on slide 13. As I mentioned previously we currently expect US industry demand to decline in the 5% to 6% range in 2008. Raw material and oil based prices continue to increase in spite of the slower industry condition in the United States. We have detailed the breadth of productivity initiatives and have announced or implemented cost based pricing increases to off set these head wins in the second half of the year.

With that I will turn the call back over to Jeff for his comment on our international business.

Jeff Fettig

Thanks Mike. Our international offer ratios hosted record results during the first quarter. North America posted strong sales and operating profits, our European operations posted some of the results in what we would call the increasing, challenging market environment. Our Asia business improved operating profits as well as won very well during the quarter.

Overall we are pleased with our international performance and as we posted in every region of the world extended operating margins. If you would slide 16 you will see our European performance. Our European revenue increased 13% with $940 million in revenue for the quarter. In local currency revenues were down 2% versus the prior year.

You saw the industry shipments for the quarter in the regional decline by about 2% to 3% year-over-year. Our operating profits totaled $45 million in the first quarter which was up 17% versus last year.

The results reflected improved productivity in the effect of our new product innovation partially offsetting the improved operating profit performance or higher material cost. On slide 17 you will see our Latin America business which reported very strong first quarter results. Yearly revenues increased 24% to $932 million; excluding the impact of currency our sales increased by about 9%.

Our operating profit increased by 41% to $119 million during the quarter and our margin has expanded to 12.75% up from 11.1% last year. Increased unit shipments and strong productivity will cause the factors in our first quarter results and here too our results were negatively impacted by higher material cost.

On slide 18 we summarized our first quarter results in Asia. Sales moved very rapidly at 19% during the quarter, our results were led by very strong performance in our India business excluding currency our sales increased by about 9%. We did report an operating profit of $2 million which was up from last year and the results really reflected in the productivity and the price mix gains from our new product introductions.

On slide 19, we give you an outlook for what we see going forward in terms of demand of our international businesses. In Europe we currently expect our 2008 industry volumes to decline by 2% to 3%. This is down slightly from our previous outlook where we though it would be bad for the year.

The industry declines we saw in the first quarter were more acute than we had previously expected and here it’s really is a mixed bag where we have seen pockets of strength across the regions, we experienced significant demand declines in certain markets in Western Europe. The countries where we saw the most notable declines were Spain, Ireland, France and the UK. In contract the Eastern European countries continue to show good growth.

Turning to Latin America, based on the current economic outlook, our previous forecast for industry yield in unit volume growth in the range of 5% to 8% remain to be changed. The Latin America and economic indicators remain very positive and we continue to leverage our market position throughout the region.

In Asia both estimates are unchanged at growing at 5% to 10%. As I previously mentioned, higher material oil based cost continued to have a very unfavorable impact on our international operations. We will continue to address these cost increases across our international operations with more productivity initiatives and previously announced cost lease price increases.

Overall despite some what more challenging conditions in Europe we remain very well positioned to continue to deliver and improve results in our international businesses in 2008. So at this time I am going to turn it over to Roy Templin, our CFO for a financial update.

Roy Templin

Thanks Jeff and good morning everyone. Beginning on slide 21 and I’ll walk you through a summary of our first quarter performance. From a top line perspective we continue to experience string sales from our international operations. In addition foreign currency translation had a favorable impact on our net sales. Week US and European industry demand off set these favorable factors.

Turning to the income statement on slide 22, during the quarter we reported revenues of $4.6 billion up 5%. Escorting the impact of foreign currency translation, our sales declined 1%. We monetized $ 41 million of EPX tax growth during the quarter based on both sales and mix. Our gross margin contracted one point to 13.3% for the quarter.

The decline in gross margin is primarily the result of increased material and logistics cost. We absorbed approximately $130 million of increased material and logistics cost during the first quarter. These costs were partially off set by favorable productivity initiatives. Our gross margins expanded in each o our international regions during the quarter. On a consolidated basis the gross margin decline was attributable to our North American operations. Our North American operations were disproportionately impacted by higher material and logistics cost and lower manufacturing production absorption.

SG&A expenses increased $65 million to $440 million in the quarter. Just under 40% of this increase was the result of foreign exchange translation impact on our results. As we discussed in fourth quarter call we have increased our spending on consumer advertising which accounted for approximately 20% of the increase. As a result of the items I just discussed operating profit totaled $159 million compared with $226 million in the prior year.

Turning to slide 23, our other income expense was largely unchanged when compared with the prior year. Moving to our tax rate we reported an effective tax rate of 3% for the quarter which was well below the prior year’s rate of 24%. The decrease in rate compared with the prior year is mainly due to discrete items resulting from foreign currency tax planning initiatives and our lower income tax base. For the full year we now expect our tax rate to approximate to 20%.

Slide 24 discusses our working capital performance during the quarter. As you can see our working capital as a percentage of sales was largely unchanged compared with the year ago level. On a days outstanding basis our performance in receivables improved approximately two days from the year due to improved collection performance and terms in our international operations. This improvement was offset by increased inventory days as a result of higher levels of inventory in our international operations. Our team remains focused on continuing to improve working capital performance during 2008.

Now I would like to take a moment to discuss our free cash flow performance; you will find that slide 25. For the quarter we recorded a free cash flow use of $444 million compared with $250 million in the previous year. As you all are aware the first quarter tends to be our seasonally weakest quarter for free cash flow and has historically resulted in a use to free cash. With that said we experienced a significant unfavorable variance when compared with the prior year. This is largely due to our working capital performance during the quarter.

The most significant factor in our year-over-year free cash flow performance is related to unfavorable accounts payable variances due to lower production and ultimately lower procurement levels. Our other operating accounts include seasonal cash outflows related to employee incentive compensation and advertising and promotion programs. Our capital expenditures totaled $107 million in the first quarter which resulted and in $11 million year-over-year increase. We currently expect our full year capital spending to be in the range of $550 million to $575 million.

Turning to slide 26 we returned a $130 million to our share holders in the form of dividends and share repurchases during the first quarter. As Jeff mentioned earlier we completed our prior authorization by repurchasing $97 million of shares during the quarter. We are also pleased that our board has approved a new $500 million authorization.

Finally I would like to turn to our guidance summary on slide 27. Based on current economic and industry conditions, we anticipate full year 2008 EPS in the range of $7 to $7.50 per share. Within this estimate we continue to expect up to $100 million in restructuring charges with a significant portion approximately one half of our full year estimate to occur in the second quarter. In addition our tax rate has expected to increase in the remaining nine months and result in a full year rate of approximately 20%.

Additionally we do expect to convert these earnings into free cash flow in a range of $500 to $550 million. With that I will now turn the call back over Jeff.

Jeff Fettig

Thanks Roy. 2008 is clearly treating us to be a challenging year. To summarize we expected this to be a year where one U.S market is going through a more severe contraction in three decades. Our outlook now calls for an industry over -- since the ninth based on the 2006 days of 11% to 12% in this contraction. Secondly on global cost inflation continues to surge across most of our key input materials and third we continue to see emerging market demand in Latin America, India and China well into our levels.

So, in the business environment we have implemented some very aggressive actions on all costs lead us to say we are not at all happy with our current operating margin level which has been greatly squeezed by material inflation and demand decline. We expect as I said before to have a very weak first half operating result with a very significant improvement in the second half in year and that improvement really is driven from three years; first our cost productivity ramps up strongly throughout the year and will positively contribute to our margins in the second half of the year.

Secondly we expect our currently announced and implemented price increases along with positive product mix from our new product innovation will positively affect our second half operating margins and results and lastly a portion of our business is seasonable business which is today performing very well and historically we generated significantly higher profitability in the second half of the year and we are in fact to deliver this record level performance in this base of business.

These actions in total should enable us to gain strong earnings momentum in the back half of the year and allow us to deliver the rebellious gains that we announced earlier. That’s the end of our formal comments. I now like to open this up for question-and-answer.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) and we will go first to David Macgregor from Longbow Research; your line is open.

David Macgregor - Longbow Research

Yes, good morning everyone.

Jeff Fettig

Good morning David.

David Macgregor - Longbow Research

The second half price increases which you are pursuing in addition to the -- what you pursue the beginning of the year, is this going to be enough to cover your raw material cost inflation or just -- when do you actually get the sufficient pass through to offset this inflation?

Jeff Fettig

Well, David the different markets in the world we have announced and implemented in different times. The one most recently announced is the price increase in US market. We do have other prices increases going on in the world. Not breaking it up specifically we do believe the combination of our productivity ramp up and net realized price increases in the second half will have a substantial impact, positive impact over our margins even with this additional material cost increase that we are seeing.

David Macgregor - Longbow Research

You quantified the cost increases, you didn’t quantify the productivity benefits that we should expect; can you help us with that?

Jeff Fettig

David if you recall when we provided you with our original guidance in February we said we though we would have just over two points of productivity, now again that percentage and that’s a percentage of sales, so I want to be careful it’s not cost of goods sold but it’s a percentage of sales, so the real margin impact was just over two points. We have taken about two-tenths of a point out of that annual estimate David which we have now embedded in our guidance that we shared with you this morning and David that’s largely attributable to conversion productivity and it’s due to the volume take down that we are seeing here in North America and Europe that Jeff talked about.

David Macgregor - Longbow Research

I think you originally said that you are expecting record productivity and 2% would not be record productivity, so is that changed?

Jeff Fettig

2% has a rate on our total sales coming out of conversion and cost change take out; it is record productivity. The doubt that is the material cost increase.

Roy Templin

And David just again to be clear because I know there are a lot of moving parts here, keep in mind that that productivity number was distinct from the incremental Maytag efficiencies that we also talking about on the February call and that’s what led to the comment that you mentioned earlier in terms of the higher productivity year-over-year.

David Macgregor - Longbow Research

Can you give us an updated mix on your raw material costs? You have given it to us in the past; percentage, steel, plastics, base metal components and logistics.

Jeff Fettig

I don’t have that break up in front of me David, but the number one is steel, number two is oil and oil related and that means resins and then the logistics now is number three and then base metal.

David Macgregor - Longbow Research

Would you care to give us orders of magnitude on these?

Roy Templin

David its Roy. David when you look at quarter-over-quarter it’s going to be much like what we saw in the fourth quarter. Again the greatest proportion of our material cost increases that we are referencing or coming out of what we call components which includes motors, pumps and compressors as well as electronics and keep in mind David that this almost become circular in nature because you end up picking up the base metal increases which we have as a separate category but you also picked that up in this component category and that by far was the single greatest increase that we had year-over-year; much like it was in the fourth quarter David and full year last year.

David Macgregor - Longbow Research

Okay and finally just you took your long term debt up by $500 million, could you explain why?

Roy Templin

To being David we have watched our capital position carefully as you know it’s something that we monitor. Our policy is we would like to keep our debt to EBITDA somewhere in that one to one and a half range and given that current credits markets, etc and looking at our cash flow outlooks we felt that it was important to issue $500 million in notes and as you look at David our debt payment schedule over the next five year which is think you know pretty well, this actually -- this note will come do in 2013 which is the year we have absolutely no debt payments beyond this current note and so again it was all part of our capital structure planning which we do on a regular basis as part of our financial strategy.

David Macgregor - Longbow Research

Okay thanks very much.

Jeff Fettig

Thank you David.

Operator

Your next question comes from Sam Darkatsh with Raymond James. Your line is open.

Sam Darkatsh - Raymond James

Good morning Jeff, good morning Ray.

Roy Templin

Good morning.

Jeff Fettig

Good morning Sam

Sam Darkatsh - Raymond James

A Couple of questions here; first off the change in your guidance, the delta; I know your rank would be a sales person and the material difference material inflation and the productivity and pricing second. By my math I am coming up with may be two thirds of it, coming from the rationing down of sales expectation, maybe one third of it from materials; is that makes generally correct?

Roy Templin

Actually Sam no, that wouldn’t work in terms of the numbers that we are looking at, no you’re off on -- I think both those numbers are off.

Sam Darkatsh - Raymond James

Okay, well in terms of order of magnitude would the rationing down of sales be the primary?

Jeff Fettig

No, no. No material increase is primary given that’s a $100 million to $150 million and demand is roughly in the neighborhood of $50 million and the initial positive offsets to that.

Roy Templin

The other negative point Sam that I have mentioned to David was the productivity piece as a result of lower production.

Sam Darkatsh - Raymond James

Okay. I will accept by a couple of things, but okay I am with you. Second question, in the first quarter you did a wonderful job with market share in United Sales and that’s been a continuation of what was happening late last year. The margins were weak -- do you see -- and I certainly could say that perhaps they are giving the product away, that perhaps your net pricing was below that of the industry players, how would you answer that question as to the reasons behind gaining share and your expectations growing further share gains this year.

Mike Todman

Sam this is Mike Todman and let me address that. In fact we actually saw about flat pricing if we just look it on a trend basis from the fourth quarter to the first quarter, so we didn’t see any substantial reduction to market share gains. We are basically a continuation of gains in Maytag brand and the gains in our local brands. Now that we have had based on the product introductions again that we had throughout the fourth quarter and in terms of how we have managed this since we’ve gone to market, we actually saw our promotional spending flat, so these gains are on the basis of the products that we have in the market place. In addition what we saw was increases in our ASV year-over-year. So that would also suggest that the new innovations that we bring in to the market place in fact are paying off, so really largely the reduction in margins really is coming from the material and oil related costs there.

Sam Darkatsh - Raymond James

And you would suspect that Q2 pricing will be up sequentially versus Q1 because of both ASV and existing pricing actions taken and yet your market share should still -- should still be in an upward trajectory?

Mike Todman

In our assumption is that we will continue positive trends Sam that we have. The Q2 will be less because a lot of our new product introductions come in during the quarter. So we really expect it to ramp up over the course of the year.

Roy Templin

Sam it’s Roy, just a little bit of color to on the North American margins, you asked about the reduction. I have mentioned in my script Sam that this proportion that impact in terms of North America and just help you calibrate that, the impact of the material and logistic cost on North America year-over-year was minus 4.5 point on their margins.

Sam Darkatsh - Raymond James

Got you. Last question and I’ll referred to others. You are taking CapEx down lower than where are you looking at last quarter, what sort of projects are you either delaying or canceling when you are trying to right size your foot print?

Jeff Fettig

Sam, we are not delaying any project that I would say would have a significant impact this year or next year on our business. We are just managing very tightly, appropriately we believe looking at every expenditure limiting the one’s that in this environment you can’t do and -- but in terms of major product innovation investments we are not delaying anything.

Sam Darkatsh - Raymond James

So innovation spending is roughly the same now as the plan was last quarter?

Jeff Fettig

Absolutely.

Sam Darkatsh - Raymond James

Okay thank you.

Operator

Your next question from the side of Eric Bosshard from Cleveland Research; your line is opened.

Eric Bosshard - Cleveland Research Company

Good morning

Jeff Fettig

Hi Eric.

Roy Templin

Good morning Eric.

Eric Bosshard - Cleveland Research Company

On the Northern American margin issue I wanted to dig in just a little more there. I was surprised to see the profit performance in 4Q falls as far as it did in 1Q. I know there is a little bit of seasonality difference, but you can just help us understand how in a kind of similar revenue growth year-over-year decline and why the profits were $100 million plus worse in 1Q relative to 4Q or 1Q relative to 1Q a year ago?

Jeff Fettig

Eric, let me start over that if you don’t mind and I’ll let Mike jump in here. I will give you more the analytic side of it Eric. When you look 4Q to 1Q again the major story with respect to 4Q to 1Q margin is material logistics. Overall of the 2.7 point drop in operating profit performance in North America Q4, Q1 a 2.5 is attributable to material and logistics, so again much like to comment that Sam asked about earlier, that is by far the key story line in terms of North American margin impact.

Eric Bosshard - Cleveland Research Company

And, so as you look at that and you go through the year, I guess my second question looking at the your guidance and looking at that 1Q run rate of earnings that was obviously a huge step up and so there was -- I guess that is clear there is nothing that was unusual in 1Q. That’s just a state of the cost world today and you have to climb out of this with these price increases and I guess incremental productivity; is that the way to think about it?

Jeff Fettig

Eric I would say that obviously Q1 is very low for us. We expect quarter-by-quarter with this to improve, productivity will ramp up every quarter, we will have some price mix improvement in Q2, but the larger price increase goes into in fact the quarter so for the third quarter, but the way you all look at it is material cost increase were significantly more negative than the positive productivity actions in Q1 that will improve substantially in Q2 in term deposited contribution from productivity over materials in Q3 and then some price mix Q2 and then a fairly substantial price mix Q3 onward.

Roy Templin

Hi Eric it’s Roy again. I do want to clarify something, because I actually gave you the answer to your first part of your question and not the second part. The numbers that I gave you were the consolidated impact. The North America along which was the second part of your question, the Q4, Q1’s delta was four points of operating profits and again the exact same stories, I want to be clear on that, it was about -- four points was directly attributed to material and logistics. So same story line but I want to make sure I am clear on the actual consolidated numbers versus the North America specific I don’t want to be misleading in that.

Eric Bosshard - Cleveland Research Company

And then secondly in regards to the pricing efforts from what we have seen it appears that you have pushed the price kind of in April and again then in July and understanding that your competitors seem to have been pretty rational in what they are doing with pricing, why not movie earlier and faster with the price increases than in the time frames especially the July increase?

Jeff Fettig

Well I would say Eric there are a couple of things. When we implemented the April price increase, I think we talked about it on the last call. It was based of a couple of factors; one it was what we were seeing at the times in terms of cost based material inflation and so we executed price agreements, but two based on new product introductions that we had coming thought the year and so as I think you could appreciate as we are beginning to bring new products and its -- those are more difficult to “type pricing thought that.” So what we are doing now in the July price increase that we just announced is really it’s a well broader based increase that we think make sense and it just gives the right amount of time for us to be able to execute that price increase in the market place.

Eric Bosshard

Right and then the third question is, understanding that it’s a global market for all of these commodities. I guess I don’t understand why the material cost impact is so significant and apparent in North America and it doesn’t appear to have impact of the Latin American or European results.

Jeff Fettig

Eric two things; one the year over deltas in the U.S. are by far more profound and appreciating firms and countries and the delta is firm, so the base line is different. Secondly I would say in the case of Latin America we’ve been operating very well for a period of time in both productivity and pricing and balance has more than offset that. In Europe again in euro terms although materials went up we were able to offset them with productivity improvement. So the week dollar has had -- we take about the impact of the week dollar on an accounting point of view but if you look at it on an economic point of view, the U.S. is absolutely seeing more inflation by far than any part of the world due to currency.

Eric Bosshard

Thank you.

Operator

Your next question comes from Jeff Sprague with City Investment. Your line is open.

Jeff Sprague - City Investment

Thank you. Good Morning.

Jeff Fettig

Good morning Jeff.

Jeff Sprague - City Investment

Does the cost guidance for the year just assume that all these materials kind of stop in your tracks where they are at or is there a rise or decline backed in to be assumption?

Jeff Fettig

Jeff, what we’ve tried to do is -- you just take the month April and look at this. The changes in oil and the stock prices of steal, its obviously a volatile and what we have done over the last, really -- I mean we do this every month but over the last couple of weeks is really reassessed material-by-material, market-by-maker, supplier-by-supplier taking in this latest information and that way I would describe it is it’s obviously higher than what we expected before and it is based on our estimation that in terms of the -- every component and every material in our business, some are moving up more that others. We are not assuming a decline but this is based on what we think are best estimate -- there is some upside, there is some down side, just trying to be right in the middle of these estimates.

Jeff Sprague - City Investment

And I guess in that assessment you hadn’t looked at steel contract. I mean there is been some talk out there that steal suppliers are tarring up contracts exacta. Any light you can shed on your comfort factor in terms of actually being able to understand where you stand on steal over the balance of the year?

Jeff Fettig

That steal Jeff as is still a regional market-by-market, supplier-by-supplier so -- but we have different approaches with steal in every part of the world. The first quarter is down, we basically know our second quarter, so your really talking about second half and there are a lot of dynamics going on in steal. A part of our increase in material outlook is based on expectations steal prices are going up.

Jeff Sprague - City Investment

Okay and then just help us understand the share dynamic in North America. I don’t think you actually said what your volumes were in North America, could you give us that number?

Jeff Fettig

If your talking about U.S. share.

Jeff Sprague - City Investment

Yeah, your U.S. volume growth.

Jeff Fettig

T7 industry was down 9.2. I believe we were down 1.3.

Jeff Sprague - City Investment

Sorry 1.3.

Jeff Fettig

Yeah and Jeff total volume just as if your doing your reconciliation in all categories down 4.3% year-over-year.

Jeff Sprague - City Investment

That’s also a U.S number.

Jeff Fettig

No that’s Mexico, Canada, all the non Core points.

Jeff Sprague - City Investment

Okay. And then Roy just on the balance sheet, there is a few things moving around. I’m sure a lot of its currency but in particular I was just wondering on crude advertising came down a lot. I guess that’s a sad spend your taking about it in the quarter, but does that get rebuilt over the course of the year?

Roy Templin

That if you recall Jeff. We do pay out in the first quarter a significant amount of the promotional growth that accrue over the course of the proceeding year and so you are in fact seeing at that which is standard for us, that traditional pay out which occurs in the first quarter. The first part of your question though Jeff you are correct and as you look at our working capital components are really most components on our balance sheet given the appreciation that we saw with the euro and with the Real in particular. Your seeing hundreds of millions of dollars of swings from currency for example on receivables inventory and actually about 250 of currency on accounts payable. So it is distorting the other wise true cash positions of those accounts.

Jeff Sprague - City Investment

Is that also a part of that big swing and other current assets that happened in the quarter?

Roy Templin

I’ll tell you what Jeff, let me look at my notes here. I don’t recall the details of other current assets in particular, but I think the biggest part of that was our hedging programs and we had gains on those programs which we approved in other our current assets. That’s about a $100 million of that delta and again this is just simply the market to market work we do on a forward contract hedges that we have around our commodities and currencies.

Jeff Sprague - City Investment

Great, thanks a lot guys.

Jeff Fettig

Thank you.

Operator

Your next question comes from Michael Rehaut with J.P. Morgan, your line is open.

Michael Rehaut - J.P. Morgan

Hi Thanks. Good morning every one.

Jeff Fettig

Good morning Michael.

Michael Rehaut - J.P. Morgan

First question kind of following on Jeff in terms of the assumptions of steal. The steal prices ended March, roughly up 35% year to date and since then with future orders, contracts are up over another 20% so just want it to be clear with the new $450 million to $500 million of raw material ahead, where does that -- at what price does that back end steal in terms of either quarter end or some of the movement that we’ve seen in price since then?

Jeff Fettig

Michael once again I’m going to give you a general answer because it does vary in terms of how we buy in different markets round and even varies by suppliers but we did factor in the current steal dynamics around the world into this new material cost forecast, that’s the first point; second point there has been significant movement based on some of these ser-charges that are being talked about and so on and so forth. We are not factoring in those recently discussed surcharges, we are factoring increases where we negotiate monthly or quarterly based on the volume and current month of levels, so ours is kind of a blend of that based on where we think we are going to pay and where we are not going to pay.

Michael Rehaut - J.P. Morgan

That’s really helpful Jeff. Just on that -- the hedging that you kind of referred to and then in general we had been under the impression or I’d been under the impression that a lot of your steal contracts were hedged like one year out from the beginning of the year in North America and Europe and can you kind of explain how that relates to the fact that you are absorbing higher steal costs in North America, is that the hedges -- did the hedges just kind of roll of month by month and you have to kind of take it on a rolling basis or are parts of your North American spend in fact un-hedge or how does that dynamic play out?

Jeff Fettig

Michael there is a range because some markets we -- round the world we negotiate monthly for price and so we are on up or down with the stock price. All the markets have changed over the last four or five years, if I go back five years ago we have two or three year contracts on a lot of these things. That has changed completely over the last four years. I’m not aware of anything that we’ve got over a year contract on or anything steal or anything else and generally these things related to volatility are indexed so in some cases rolling off in for a month, in some cases directionally we are locked in for a year but you can go up or down quarterly based on other dynamics and in that way that would be steal or oil related products even in this global commodity inflation a lot of the stuff is indexed up or down. The only think we really hedge are hedge able items like currency and base metals. The rest are contract driven or open market negotiated depending on what part of the world we are in.

Michael Rehaut - J.P. Morgan

Okay, so then obviously those comments applied to North America in that -- the hedges there could be some adjustment throughout the year and that kind of reconciles.

Jeff Fettig

That’s correct.

Michael Rehaut - J.P. Morgan

Okay. Next question is just on promotional activity. I think it was mentioned that promotional spend was flat from 4Q at the same time you mention there was an increased advertising investment that might have been separate but just trying to get a sense for as the demand is week your confidence level for those price increases to be realized in July or if they are realized that they could be offset by higher levels of promotional activity in it. So how do you see that kind of playing off one and other.

Jeff Fettig

First of all regarding confidence of price increases and so on, our position is -- we know what we are doing with productivity which is very aggressive, very strong. You know where are margins are in the first quarter which are completely unacceptable. We are not chasing market share, our priority in this business is to fix our operating margins and so the other thing is everybody who produces appliances like steal, plastic, oil, ships with fuel, so I don’t think anybody were unique in this situation, but so our expectations -- we are going to recoup this significant cost inflation in the market place by in terms of the price increases we’ve already implemented or announced. Regarding the promotional spend Mike, I’ll ask you to answer that.

Michael Todman

Yeah, I’d say Mike both in a year-over-year basis frankly as well as Q4, we have not changed kind of how we go to market and how we essentially support, all our brands and the products in the market place and I can -- and so promotional activates is not anymore today’s and that it has been historically. I would tell you that the added -- if you will confidence that we have is as we bring those new products into the market place over the course the year as we just seen in the past, the fact of the mater is they are performing very well for us and so we expect to see those take hold if we will and get traction in the market.

Jeff Fettig

Yeah the last point Michael and it shouldn’t be taken likely is that the new product innovation will bring the market globally but particulate in North America is at the highest level ever. We are advertising this at levels we’ve -- at levels we’ve never advertised before. It is just having a positive impact on the market place. Overall there is no double, demand is down, but of those buying people wanting to buy the newest, best innovative appliances and that’s why we are continuing that potion of our investment.

Michael Rehaut - J.P. Morgan

And Mike and Jeff just in terms of that point and I appreciate that in terms of that success of that share gains continuing with the new products, can you give us a feel for -- you motioned that it was by Maytag brand, obviously steal continues to have its challenges. Can you give a sense in terms of end market or by some of your lager customers where you feel your gaining some chare or shelf space?

Jeff Fettig

Yeah, I won’t go at this specific one but the reality is we’ve essentially picked up share pretty much across the board. To be honest with you Michael and that would have to be the case given kind of some of the share gains that we’ve been able to still realize, so its been fairly broad based, pretty much across the board based on what we are bringing into the market place and the value of the products that we have in the market.

Roy Templin

And its in the branches -- I mean in the Maytag and whirlpool arena that everywhere we brought new product innovation to the market.

Michael Rehaut - J.P. Morgan

Okay but last one just an accounting issue. You mentioned before $41 million of BCX in the quarter, what does that bring your balance at quarter end on the balance sheet?

Jeff Fettig

Yeah, Michael we have about $840 million of BCX credits remaining to be monetized and you’ll see that in our 10Q that we will file later today.

Michael Rehaut - J.P. Morgan

Okay and just the balance remaining where its been roughly speaking for the last three quarters now despite recognizing a solid number each quarter, that again has to do with currency translation or could you just remind us about that dynamics.

Jeff Fettig

Michael your exactly right. I mean the driver of the fact that the balance is held relatively constant despite the fact we have been able to monetize credits has been predominately driven by currency and your exactly right.

Michael Rehaut - J.P. Morgan

Okay. Appreciate it.

Jeff Fettig

Your welcome.

Operator

Your next question comes from Laura Champine with Morgan, Keegan; your line is opened.

Laura Champine - Morgan, Keegan

Good morning.

Jeff Fettig

Hi Laura.

Roy Templin

Good morning Laura.

Laura Champine - Morgan, Keegan

In the $7 to $7.50 guidance, what kind of incremental share buy back does that assume Roy?

Roy Templin

Laura again I’m going to have to go back to Jeff’s comments that he made on the last call and that was really embedded in the script. We really don’t comment on forward-looking share re-purchases and I really need to leave it at that.

Laura Champine - Morgan, Keegan

Back to the raw materials costs for you then I’m actually surprised by how little you have to adjust that given the kind of inflation we are seeing this year and -- I’m guessing that raw materials or logistics costs are upwards of 70% of your total costs right now. Why are you not seeing the big double digit increases that we are seeing reflected in steal and old prices in your expectations?

Jeff Fettig

Well Laura first of all we also fell they are very large increases and the simple -- what I guess I’m making is that first quarter is over, we are pretty much locked in now on the second quarter, so we are talking these rate increases for the year so once you annualize them they are obviously much bigger, would be the simple point. The second is just the make up of this. It is more profound in the U.S due to currency than it is although it is true everywhere in the world, but I think the simple thing is that we pretty much -- this increase is largely a six months not annualized, so if you think on an annualized basis it would be even larger.

Roy Templin

Laura your estimate on the impact on costs its roughly about 65% of our costs in the quarter.

Laura Champine - Morgan, Keegan

Can that account be – the fuel charges that you incurred in the logistics business.

Roy Templin

That’s right, it does Laura.

Laura Champine - Morgan, Keegan

Thank you.

Roy Templin

Your welcome.

Operator

And we have no further questions at this time, I’ll turn it back to our speakers for any closing remarks.

Jeff Fettig

Thank you for joining us today. We appreciate your questions and we look forward to talking to you next time.

Operator

And this does conclude today’s teleconference. Thank you for your participation, have a great day and you may disconnect at any time.

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Source: Whirlpool Corporation Q1 2008 Earnings Call Transcript
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