惠而浦 (WHR) 2005 Q1 法說會逐字稿

Good morning everyone and welcome to the Whirlpool Corporation first quarter 2005 earnings release conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Good morning.

I'd like to welcome you to our first quarter conference call.

Our opening remarks will refer to a slide presentation, which is available on our investor web page.

This call and the slide presentation will also be archived on our web page for your convenience.

During this call, we will be making forward-looking statements to assist you in the understanding of our company's future expectations.

Our actual results could differ materially from these statements due to many factors, which can be found in our latest 10-K.

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

Jeff?

Good morning, everyone and thank you for joining us this morning.

I think you saw is this morning we released our first quarter results where we reported that that our first quarter net earnings $86 million or $1.26 per diluted shared compared with the prior year earnings of $101 million or $1.43 per share.

Sales were at record first quarter levels increasing 6.7% to $3.2 billion.

If you exclude the impact of currency, sales grew by approximately 4%.

Overall, we saw global industry volume to have been modestly -- show modest growth throughout the world during the first quarter.

The results that we posted reflect the positive benefits of our previously announced price increases, which were initialed to offset significantly higher material and oil-related costs.

The results of the pricing actions over the first three months of the year, including product and brand mix were better than our expectations.

We're very pleased to see the progress that we made on several fronts during the first quarter.

Our first quarter operating margin improved versus fourth quarter levels and three of our four regional businesses registered year-over-year operating profit improvement despite significantly higher material costs during the quarter.

Which really reinforces the actions we believe that we've been taking to adjust to this global cost environment.

I'd like to spend just a few minutes to remind you about some of the comments that we had talked about in the past, regarding key factors which we think impacted our first quarter earnings performance.

First, we mentioned last year, that we saw commodity index reach 30-year highs and we've continued to see oil prices rise significantly.

Last year this resulted in the second half, in approximately $300 million in higher cost for items such as steel, resins, plastics, and freight.

And again, we saw the majority of these increases later in the second half of the year.

And also during the last conference call, we provided guidance that material and oil related costs would increase an additional 500 to $550 million during 2005.

Our first quarter operating results reflect approximately $190 million of higher material and oil related costs, and were in line with our expectations.

In February we discussed the key actions we're taking to mitigate these higher global costs and they included implementing global price increases, driving record levels of controllable productivity, leveraging our global operating flat form, and accelerating our rate of innovation to the marketplace.

And we said then that our price increases globally would average around six to 7% and that assumed approximate -- and then you should assume that approximately 60% of the price increase would flow to margin while 40% lost to negative model mix.

This for the year would yield about a 3.5 to 4% net pricing profit margin improvement which we expected to offset material costs in 2005 and we're pleased to say we are on track, during the first quarter, to achieving this.

During the quarter, we executed these price increases with great success in all markets around the world.

We are yielding very positive results in most of these key markets and the mix effect, which we talked about, is currently running somewhat better than we had originally estimated.

In addition to price increases our first quarter results also reflected the continued benefits of numerous productivity initiatives, cost controls and the overall benefits from leveraging our global operating platform as well as a lower effective tax rate.

As we look now, at the full year, we're still comfortable about our assumptions for material costs, about price realization, our productivity and cost reduction forecast and our overall industry consumer demand trends.

So we remain confident that these actions are -- that we're taking are appropriate to address this current operating environment.

And although the cost and environment does remain challenging, we continue to reaffirm our previous guidance of full-year earnings in the 590 to 610 per share range.

And free cash flow, after dividends, in the 250 to $300 million range.

I'm going to now, in your internet presentation, turn to slide five and I'll discussion the first quarter North America performance, which delivered a record first quarter revenue.

For the quarter, sales were approximately $2 billion and increased 4.5% from the prior year, and we did implemented the price increases ranging from five to 10% across all product lines, were implemented.

Overall, our price increases in the trade and the consumer level were consistent with our expectations.

Overall profit declined 14% to $182 million as our North America operations absorbed over $130 million of higher year-over-year increases in material and oil-related costs due to the higher prices that I previously stated.

These higher costs were partially offset by the benefits of these price increases, strong levels of productivity, and overall cost controls.

Also in North America, we continue to focus on accelerating our innovation to the market place during the first quarter.

Some of the products introduced during the quarter are shown on slide six through eight.

On slide six, we introduced a new line of Whirlpool built in cooking products which includes ovens, combination microwave, electric and gas cooktops - which feature a european design styling and advance technologies and speed cooking.

On slide seven the KitchenAid brand.

It continued to expand it's portfolio of innovative counter top appliances with the launch of two new products.

The first is a new seven-cup food processor and the second is a first KitchenAid, a new counter top oven which has bake, broil, toast, and warming functions.

And finally, very exciting for us, has been the addition on slide eight, our new Kenmore HE4T, front loading washer and dryer pair was launched.

This new version features not only new features and performance, but bold new colors, which has generated very strong consumer demand in the first quarter.

There has been some concerns and I think some confusion about U.S. demand trends in the -- over the last few quarters.

On slide nine, we would like to share with you our view of what is happening to industry demand in the U.S.

To begin, there are a number of different sources of data that people use to look at our market here in the U.S.

At Whirlpool we use all of these, as well as taking our direct information and insights that we have to trade sales, to consumers, as well as trade inventory data across all channels.

And we go through a process where we reconcile this data and verify trends in industry demand.

On this slide, we show our assessment of the differences in reported manufacturing shipments, and consumer demand trends.

And these differences between these numbers do vary from one year to the next, but do vary more frequently on a quarter-to-quarter basis.

So, you have to look at these over a period of time.

On this chart, we have listed items which we believe create differences between what we call sell in, which is manufacturer shipments versus sell out shipments, which are really consumer purchases or consumer demand.

And based on our assessment, we believe consumer purchases have approximated, over this period of time for the full year 2004, consumer demand was -- true consumer demand was in the five to 6% range.

In Q4, it was in the four to 5% range.

And in Q1 it's in the three to 4% range.

I think this really reconcile the difference between manufacturing shipments and demand purchases.

This assessment also supports our belief that we're seeing moderate but slower growth rates for consumer demand, which is why we're still forecasting a 2% overall demand growth in the U.S. for 2005 Next, I'll turn to Europe on slide 10, which also delivered a record first quarter in revenue.

Sales of $729 million increased 7.3% versus last year.

Excluding currency translation, sales were up approximately 2%.

In Europe too, we implemented price increases in the three to 5% range in all markets during the fourth quarter and continuing into the first quarter.

Despite flat industry growth during the quarter, our European business volume improved on the continued strength of our growth in the built-in segment and the overall performance of our Whirlpool brand.

Our operating profit grew by 7.6% to $33 million as price increases, strong product mix, and some favorable currency offset higher material costs.

And based on our current economic projections, we continue to expect full year industry unit shipments to increase by about 1%.

On slide 11 turn to Latin America, where our overall sales of $442 million increased by about 16% from the prior year and were driven by industry growth price increases and improved mix.

In this region, too, we implemented significant price increases on both appliances and pressures during the first quarter.

And excluding currency translation, sales increased by approximately 8%.

Industry unit shipments of appliances were estimated to be up modestly during the quarter.

Price increases, productivity improvements, and aggressive cost reaction actions, here too, help offset significantly higher material costs as well as freight costs associated our export products.

We also had unfavorable currency effect.

During the -- despite this challenging cost environment, we did grow our operating profit by 13% to $25 million.

And during April 2005, we are also implementing a previously announced additional 6% price increase to help mitigate these higher costs.

Mark economic conditions are expected to remain positive in the region.

And consumer interest rates in Brazil are expected to begin easing during the second half of the year.

As a result, we continue to expect industry shipments in 2005 to increase by four to 5%.

On slide 12, Asia, where sales of 94 million grew by 7.6% over last year.

Excluding currency translation here, sales were up by 5%.

Our operating profit improved by 44% versus last year, led by strong performance improvements in Indian and China.

These improvements were driven by good industry growth, market share gains and regional price increases, as well as new product introductions.

Based on our economic forecast here, we also continue to expect the region to have demand growth in the three to 5% range.

With that, I'm going to turn it over to Roy Templin, our CFO, to cover the financial results in more detail.

Thanks, Jeff, and good morning everyone.

As Jeff previously discussed, during our first quarter we earned $86 million or $1.23 per diluted share compared to prior year earnings of $101 million or $1.43 per diluted share.

As we've discussed, material and oil related costs had a significant impact on our $23 million decline in operating income.

As you will recall, we exited the fourth quarter on operating profit margin of 4.5%.

Our first quarter operating profit margin was 5.6%, which improved 1.1 points from the fourth quarter, largely to incremental price realization.

If you'll turn to slide 13, I'd like to give you the main drivers of our year-over-year operating profit margin performance.

In total, our year-over-year operating profit margin declined approximately 1.2 points.

Material and oil related costs increased about $190 million above 2004 levels, which reduced our operating profit percentage by 5.9 points.

This reduction was partially offset by the initial benefits of announced price increase, which contributed approximately $110 million or 2.8 points to gross margin, also improving our operating profit margin.

The price increase realization was in line with our pricing and model mix assumptions.

Incremental productivity and other cost reduction achievements improved operating profit percentage by approximately 1.9 points.

Non-freight SG&A costs were lower than the prior year on both an absolute dollar basis and as a percent of sales.

If you'll move to slide 14, I'll briefly comment on a couple of items below operating profit.

Interest in sundry was $6 million lower than last year.

The single largest year-over-year variance relates to higher losses on foreign currency balance sheet positions.

Our first quarter affective tax rate of 34% remains existent with our 2004 year end rate, but declined from last year's first quarter rate of 37%.

The decline reflects a dispersion of global income and the benefits of tax planning initiatives.

Based on our current estimates, we expect our affective tax rate to remain at the 34% level for 2005.

Changes in equity and affiliates reflects a prior year loss on the sale of an equity interest, while the change in minority interest reflects higher earnings in Latin America and India.

And lastly, our earnings per share benefited approximately $0.5 per share from lower sales outstanding due to last year's share repurchases.

Slide 15 summarizes our cash flow performance during the quarter.

For the quarter, free cash flow, after dividends, was a negative $382 million, versus a negative $206 million last year.

The Company's plans reflected a higher cash usage in the first quarter, largely due to planned increases in inventory levels.

As we discussed with you during our last all, we forecasted inventories to remain at elevated levels during the first half of 2005.

First quarter inventories increase the approximately $400 million above the prior year.

If you'll please turn to slide 16, I'll walk you through the key drivers of this increase.

First, overall material costs increases had the effect of increasing inventory levels by approximately $90 million.

Currency changes increased year-over-year inventory by approximately $70 million.

So in total, cost related items accounted for roughly 40% of the increase.

Planned increases to improve availability and meet projected demand, including side by side refrigeration, compressors and horizontal access laundry products, drove an approximately $160 million increase.

The remaining 20% of the increase primarily reflects a late quarter reduction in trade inventories, which left us with approximately two days of inventory above our plan.

We expect to eliminate these days as we move forward in the year.

We continue to project somewhat higher inventory levels in the second quarter, relative to the prior year, although we do expect a reduction from Q1 levels.

The reduction in accounts payable from the year end level is largely attributable to a lower level of, and the timing of purchase activity in the first quarter relative to our activity in the fourth quarter.

The remaining key change within our other operating accounts is driven largely by lower compensation payments.

During 2005 we continue to expect free cash flow after dividends to approximate 250 for $300 million.

We are comfortable with our overall debt levels.

Visibility to key 2005 variables related to pricing and material costs have improved since we provided the initial guidance.

While we did not repurchase any stock under the $500 million authorization during the first quarter, we do expect some level of purchases beginning this quarter and we continue to evaluate the appropriateness of our dividend policy.

Turning to slide 17, you'll note that our working capital as a percentage of sales has increased from -- excuse me, increased to to 14.1 from 12.7% on a year-over-year basis.

As previously discussed, this is primarily due to planned increases in inventory levels.

We expect our working capital performance to improve during the year as inventory level return to more normalized levels.

Our debt levels have increased from year end, consistent with historical seasonality associated with inventory builds for the refrigeration, air conditioning season.

Our balance sheet position remains strong and our debt remains a Triple B plus from S&P, BAA1 from Moody's and A minus from Fitch.

With that I'll turn the call back over to Jeff.

Thanks, Roy.

The challenging environment we expected in 2005 is evolving largely as we had planned.

Material costs continue to be somewhat volatile, particularly oil-related costs but in total, we believe are in line with the forecast we have for the year.

We are very encouraged by the results of the pricing that we're achieving and the mix of our brand of product sales.

This is confirming our strong belief that consumers will select and pay for the brands they prefer and for the products which offer the consumer relevant innovation.

We believe there is significant price elasticity with most consumers, and we're increasingly seeing their willingness to pay for our differentiated brands of products.

Additionally, we continue to be focused and are making strong gains in productivity in every part of our business.

So our focus and priorities in our business for the year really remains unchanged.

We will continue to execute global price increases and we're aggressively implementing plans to drive higher levels of controllable productivity, reducing and controlling our nonproduct related spending and accelerating the introduction of new products to the marketplace.

We will continue to focus the execution in our business everywhere in the world on these four priorities.

And based on our assessment of the current environment -- we continue to expect first half performance to be below 2004 levels, with year-over-year improvement during the second half of the year.

And as a result, as I mentioned earlier, we're reconfirming our whole year earnings per share guidance of 590 to 610 a share and our free cash flow after dividend guidance to 250 to $300 million.

I'll end here and we'll now open this up, be happy to take any questions that you may have.

Thank you, sir.

Today's question and answer session will be conducted electronically.

At this time, if you do have a question, you may signal by pressing the star key followed by the digit one on your touch-tone telephone.

Once again, if you do have a question, please press star one on your touch-tone telephone.

And we'll pause for just a moment to allow everyone a chance to signal.

We'll take our first question from Michael Rehaut, JP Morgan.

Good morning.

Good morning.

Good morning, Michael.

Just a couple of questions on North America.

Could you comment on, you know, there have been reports out there about pricing.

First, what you have accepted or I guess achieved in your price increases so far in terms of the five to 10%?

What -- I guess in particular number Q1 -- what -- the revenue growth was 4.5%, what did price represent out of that?

And also, there have been talks about a June price increase and I was wondering if you could colt on that and what's out there in the market right now?

Sure, Michael.

Well, fundamentally, we -- we executed exactly what we had earlier indicated in our price increase and it's gone very well.

In terms of revenue , you know, the conversion of this really does depends on the mix of your business and that sort of thing.

But, fundamentally the -- virtually all of our revenue growth came from additional price increases.

You know our unit growth in total, on the core basis, was down slightly.

But, with that revenue growth and with the mix improvements that generated the bulk of our overall revenues.

And as you convert that -- those average prices to margins, as I mentioned there was a mix effect, it was not as negative as we had expected.

So, so overall, I don't have the margin contribution number and perhaps you do, Roy -

Yeah,Jeff.

Michael it was 2.8 points of margin contribution coming off of price realization in the first quarter.

That was for companywide?

What about North America?

Hold on a second.

North America it's about 2.5 points of margin improvement.

Okay.

And that's from price net of mix?

Right.

That's right.

And so for the full year, you still expect -- you had talked about on the last call that the price -- you'd be able to get 60% of your price increases or that's what you hoped to get, net of mix.

Is that something that you still expect?

Right.

In, in the -- the numbers I think I gave the last time, we talked about price offsetting material costs, which, you know, we indicated that material costs we expect an increase between 500 to $550 million.

So, we expect globally, our net achieved price increases, that shows up in our margin for the year, will be in the $500 million range.

Now that's spread out between the different regions of the world.

But, primarily the biggest contributors of of that are North America and Latin America.

Which is also very big in that.

To a lesser degree, Europe, although, we certainly have positive pricing in Europe and based on the size of the business, small amount coming from Asia.

Regarding the, you know, the other question you have.

Michael, we really -- the only thing we comment on are things that we've already publicly executed or communicated in the trades so we -- I really can't talk about any future price increases.

Okay.

Great.

And just quick question on the tax rate.

You said 34% for the rest of the year, Roy?

Is that something that we can model in for '06 as well?

Yeah, Michael, you know, as we discussed, I think it was in August on the fourth quarter call.

We, you know, have our tax strategy and tax plan initiatives initiatives underway.

As we look forward, we see ourselves in this 34% rate going forward, so yeah, I think that's a safe rate to model.

Lastly one more question if I could.

The SG&A or the other component of reaching your guidance through the cost reductions, nonfreight, SG&A, can you just remind us again what type of number you're expect be in terms of savings will?

Michael, what we've said is,we -- you know, we've been running a trended rate SG&A as a percent to sales at about 15.8 or 15.9%.

If you go back over the last several years, and again, our plans and our goals are to bring the rate down and contribute in the current year probably around $50 million of benefit as a result of improved SG&A and SG&A leverage.

Michael I'd like to also clarify and add to the question you asked before.

The number we gave you for margin improvement from pricing in North America, was correct for Q1 over Q1.

But I think what you have to compare it is, versus where we ended Q4.

Cause that's the base.

So, based on where we ended Q4 was actually much higher.

That was probably closer to four points of margin based on the -- where we ended Q4 at, just to be clear.

Okay.

Thank you.

We'll go next for Sam Darkatsh, Raymond James & Associates.

Good morning, Jeff.

Good morning, Roy.

Hi, Sam.

Good morning, Sam.

First a clarification question.

I want to make sure I'm understanding this correctly.

Your units companywide were down 3/10 of a point.

It looks like -- like your currency impact on sales were about 2.7% or so.

So, that would imply that mix and pricing the impact on sales in Q1 was about 4.3%.

And the 2.8% pricing mix positive benefit on your margins would equate to 65% of that which is better than the 60% that you had originally guess -- guesstimated, is that how to look at this?

Sam, I'll tell you.

Let me help a little bit here if I may.

When we -- we're providing you with the 2.8% market impact, what we've done there is we've actually done a pure calculation on the effect of pricing on gross margin, so the trick is, Sam, the both the numerator and the denominator change.

So, if you run the computation, exclusive of price and inclusive of pricing -- what you'll find is it's about a 2.8 points difference in the terms of the price impact.

On sales it'd be higher, though.

On sales it will be higher, that's correct.

And so, I guess what I'm getting at, the 4.3 -- I mean, at least superficially, it looks like 4.3% of total sales were as a result of pricing and mix.

Do you expect that to ramp up as the year progresses because of timing issues in this quarter?

Or, is that what you're expecting on a go forward for basis?

I think we expect -- first of all I think your conclusion, I think, is right.

And we expect it to ramp up.

The only thing you have to -- as you look ahead, is take into account our norm -- our historical normal seasonality -- we do have a little bit of seasonality in different quarters, but, the trend is, we will realize even more of that based on what we've executed in the marketplace.

Gotcha.

Second question, Roy, can you help me with the change in allowance on the receivables?

It looks like it was down $6 million sequentially.

Sure.

Just help me, walk me through the accounting for that.

Sure.

I sure will.

Sam, let me start out with, we had $6 million of write-offs during the quarter.

Primarily in the Europe region and Latin America region.

And so, that is by far, the key driver of the reduction.

You have two other components though, Sam, in the quarter.

We -- we had about a $2 million drop in the allowance coming off of currency change.

But we had an increase as a result of higher provisions in our allowance of about $2 million.

So, those two net out and what you're left with and what you see on the balance sheet with the press release this morning is the $6 million reduction coming out of Q4.

Okay.

Last question.

I'll let others ask.

European pricing, Jeff, you said that your pricing, you enacted three to 5% price hikes.

Yesterday your primary competitor in Europe was noting that they raised prices but no one else seemed to follow.

Could you help reconcile or at least what you're seeing in terms of pricing in Europe?

Sam, the three to 5%.

We began and are free standing in the fourth quarter.

We implemented three to 5% on all built-in products which is primarily a different channel.

We did achieve net positive pricing in Europe in the first quarter.

You know, again, not only reversing the previous declines that they had seen in the market, but actually achieving positive pricing.

You know that the issue there is, you know, that there is -- every country has a slightly different set of dynamics that are going on.

There are some markets where we achieved much more pricing and there are others where we have a much smaller position, where we're not yet fully realizing the price increase we -- we put in place.

So, our expectation is based on the moderate amount of pricing we got in the first quarter, based on what we've already announce and implemented, we will realize a much larger portion than that as we go forward.

But clearly, if I compare to the U.S., for example, it is at a completely different level than what we saw in the U.S.

Thank you, gentlemen.

Thanks, Sam.

We'll go next for Eric Bosshard, Midwest Research.

Good morning.

Good morning, Eric.

A couple of questions.

First of all, in terms of market share, can you talk a little bit about what you see going on in North America, what you see going on specifically with the changes taking place at Best Buy and what your expectation is for market share through the year?

Sure, Eric.

You know, in the first quarter, our own branded sales we actually picked up some market share with -- even with the price increase.

We lost a little bit of volume, as Roy mentioned, late in the quarter, due to some -- on our Kenmore business due to some inventory reductions that they took in March.

Between those two, we were, I think, fairly on tray track to to where we expected to be.

We had indicated earlier, we expected a modest amount of market share improvement in our North America business this year and we still feel that that's going to happen.

And that's based on a number of things, particularly with our brands and with our new product innovation.

But from the retail distribution stand point, you know, we see a lot of positive things going on.

You know, first of all, the Sears K-Mart opportunity, we will begin in the second half of the year to see where they're now talking about 85 to 100 new stores rolling out, and we do know that, you know - obvi -- and we're involved in that.

Appliances will be an important part of that new store rollout.

Which, you know, already it's 85 to 100 this year, but it's 400 over the next three years.

We continue to improve our overall business with some of our other major trade partners like Lowe's and the our balance of sale there.

Best Buy we've talked about.

That we're expanding our lineup with them.

We're also some testing in some markets with with them and even expanding lineup which includes some of our KitchenAid brands.

So we look -- we think we'll see growth there.

And of course, we continue to grow on the contract channel.

So, all in all, in a market which we still think will be positive, as I said, around 2% for the year.

We feel pretty good about our overall brand and product opportunities for market share gains but also with our distribution coverage.

This appears to be a little bit of a change in market share from what we saw in 2004.

Is it just a bunch of these, sort of little hits that as up or is there anything bigger that is allowing you to do better in market share than what we saw last year?

No.

I mean I think it -- you know, for us it's really -- it's really focusing on new product innovation under our brands and winning more business at our existing distribution.

Okay.

I should add, there is, yeah, there is one other thing.

I mean, there is a -- you know, if you take the number of new stores, Best Buy's opening, the number of new stores Sears is opening, the number of new stores that Lowe's is opening, you know, combined, it's well over 300 new stores.

Okay.

Secondly, in terms of your guidance.

You indicated that -- that the first half earnings should still be down year-over-year and the second half should be up.

Can you help us understand the issues in 2Q, because is seems like the year-over-year gap was narrowed in 1Q and that it appeared that pricing should be much more positive in Q2 an Q1.

Are there other factors we should be considering that limit the Q2 year-over-year performance in light of what ought to be a significant incremental amount of pricing realized in the quarter?

The other dimension is, I would add is our productivity.

So if you think about it this way, and it's really not that much different than what we had talked about in February, you know, fundamentally our cost increases all happen in January.

So, we had all the additional costs.

We said we would implement pricing in the first quarter we did.

We're achieving that.

And, there will be more ramp up and realization of that.

But the biggest swing factor is our total cost productivity and timing, and frankly, in the first half of the year, it's negative and it flips over to growing strong positive in the second half of the year.

So, yeah, I think you're -- the elements you have got are right, but that's the one piece that you have to think about is where -- where there's going to be a real big or we expect a real big change on the year-over-year in our business.

I think, Eric, the only other comment I would make, as I know you know is, second quarter we still have a pretty hefty material cost increase as you do the year-over-year comparable.

So that's the other key component driving the more difficult comparison over the first half.

And maybe just another perspective.

And again, think of the timing of this year versus last year.

You know, about two thirds of our additional material cost increase, year-over-year, comes in the first half.

Versus the second half.

Because That's just how that works out in terms of timing.

And then my last question on the subject of a material costs.

Can you talk a little bit about what you're seeing?

You commented that, obviously, oil prices remain high but it appears that at the margin steel prices may be rolling over a bit.

Can you talk about what your contracts might mean for you in terms of an ability to realize any level of benefit from an erosion in steel costs that is beginning to take place?

You know, just maybe, just set the stage for you -- total steel prices seem to have stabilized and certainly on the spot market turned downward a little bit.

Oil which impacts in two areas, one in resins and other is in logistics costs.

That's still obviously a little bit of a wild card.

And then you've got other things like base metals and commodities and that sort of thing.

You know, in our plan, we'd indicated we expected oil to be around the $50 a barrel range.

And, you know, again, we've modeled to this for different scenarios and that sort of thing.

So, in total we still feel with a pluses and minus, we're pretty well balanced.

In addition to the, you know, the actions we're taking to help reduce costs as well.

So, in terms of contracts, again, they vary by area and by region but in general, in our big markets, North America and Europe, we have our steel contracts in place for the majority of our business.

In Asia and Brazil, and Brazil's a big steel purchaser, it's more of a monthly contracting type of process.

Resin prices, generally, are indexed even under contracts.

There is always a -- and this is not new, it's always been this way.

There is some variability in that.

So, we feel like we've got control of the bulk of these things and where it's variable, we're either hedged or working on actions to mitigate any future increases.

But in terms of seeing benefit from a rollover in spot steel in '05, is that some --

For parts of our business, there could be some.

Okay.

Great.

Very good.

Thank you.

We'll go next for David MacGregor, Longbow Research.

Good morning.

Good morning, David.

It seems like looking at the inventories for the moment.

You talked about the breakdown, which was really helpful, so thanks for including that in the slide show.

The $85 million was the other.

That was the Kenmore, push back, but, the 160 availability.

I know there's typically a seasonal build at this time of the year.

How does that 160 of availability compare with the availability number last year?

David, first of all, I think if you look at our company and you kind of walk, traditionally, you walk forward from the first quarter to the first quarter, we typically build seven to eight days of inventory coming out of Q4 into Q1.

This year we built nine.

And, again, that Delta is predominantly what we talked about earlier with respect to the trade partner reduction.

So net/net availability this year though, is a little higher.

It's coming from one side by side available and you many recall a year ago where we had some availability difficulties on side by sides so we did pre-build there to improve availability Compressors is a another key category.

Again, you might recall a year, first quarter, we had a shortage of on compressors and actually were air freighting some suppressors.

And then, another big piece embedded within this availability is the success of our horizontal access laundry products.

And as you look at, and we talked about this I know, on the last call, as you look at the tail on the inventory as it moves from Germany into the U.S., that's another significant piece of the year-over-year increase as you benchmark us to what you traditionally expect to see.

Okay.

I'm just -- can you give us some sense of how much of the productivity benefits you realized in the quarter may have been associated with the inventory build?

About two days.

Yeah, again, you know, we only had again, two excess days.

So it's certainly not material, David.

Okay.

The cost increases.

You're still talking about 500 to 550 for the year. 190 in the first quarter if I read the press release correctly.

Can we start putting some numbers on what you might expect in the second quarter, other than saying it will be tough?

Well, we said two thirds of the increase will be in the first half.

Yeah.

So, that hasn't changed ?

Yeah.

The second quarter will be a little better, David.

But we'll still be a stuff comparable year year.

It will be lower than what we experienced in the first quarter.

Okay.

A little -- just -- yeah.

But a little is the right word, David Okay.

I guess you've had some success with price increases in North America, which is tremendous.

What have you learns about the potential for success with further increases?

What have you learned about elasticity or just about the ability of the consumer or the retailer to support you on further increases?

David, I can't talk about future price increases.

Sure I'm just asking you to address it on a conceptual level, Jeff.

But, I -- but I can tell you why I, you know, I feel very good about what we have done.

By the way, not just North America, we've also had very good success in other markets.

And, you know, fundamentally as we talked about.

We began planning this for the entire business over six months ago and we went through a disciplined process really understanding where our prices were positioned, what based, you know, fundamentally in our brands, in our -- in our products.

We thought the elasticity was with consumers.

We worked through a complete by brand, by product lineup.

We reevaluated our advertising policies, our trade policies and that sort of thing.

And really spent a lot of time not only conceiving this, but deployment, but the most part, I think was, consistently deploying it with discipline.

And I think that, you know, given this environment, it's been well accepted.

I think that, we certainly see it in our results.

I think the retailers see it in their results, which is also very positive for them.

So I think I really just think it's part of a well-conceived marketing and deployment plan.

So, I mean you've done a lot of work on this.

It sounds like you've made yourself relatively comfortable with the underlying market.

I know the premium price points are red hot right now and that's an important part of your business under the KitchenAid brand.

I guess I'm just trying to think -- if there's some reason why you wouldn't go with the price increases.

Is it the inventory surplus that you're carrying into the -- into the next quarter or are there - just again on a conceptual level.

As the larger play in the world, in terms of appliance production, is there a reason why you wouldn't go along?

You know, again, David.

For the obvious reasons, I think you know.

We really can't talk about anything perform what we've communicated in the marketplace.

Okay.

Do you think the price increases will succeed in June if -- if you're not along?

You know, again, I can't speculate on what others are doing.

Okay.

Thanks very much, Jeff.

We'll go next for Laura Champine with Morgan Keegan

Good morning.

Good morning.

Could we talk about European operating margins?

There've been a string of quarters where you were showing nice year-over-year improvements.

This was the first quarter that that did not happen.

I wonder, I know that you're under raw material cost pressures, but, you have been for some time.

What's your outlook, now, for operating margin expansion in Europe this year and beyond?

Laura, you know, that's good point.

I guess I'd first say that,you know, we were pleased with European results.

Embedded in the first quarter, we overcame about $28 million of higher material costs.

So, you know, I think -- I think that's the first point.

In similar in Europe, we're going to see most of the material costs first half versus second half.

So, it's a very similar challenge.

So, you know, flat margins in the first and second quarter would not be -- would be in line with what we would expect.

The margin expansion which we do expect for the year in Europe, will come in the second half of the year for all of the same reasons I talked in about in North America.

So, yeah, we actua -- we, we expect, you know, fairly good margin expansion in Europe this year.

I'm sorry.

I think I said $28 million.

I think our first quarter material costs in Europe was $20 million, but that's the reason.

Can you give us what your expectation would be for operating margin in Europe over the longer term?

Well, we've said many times.

We certainly think this European business is going to operate in the 8% operating margin range structurally and we're building a path to get there.

And that's our expectation.

Thank you.

We'll go to Blair Brumley (sp) American Express Financial Advisers.

Good morning, all.

Good morning.

Good morning, Blair.

I don't want to beat this horse too badly but I do want to understand what's going on here.

You did talk about your net pricing in North America, sequentially up 4%.

Your list pricing conversation went from five to 10%.

Now obviously you're all over a pretty wide range there and there's lots of products involved.

But -- but can you reconcile why those two numbers are notably different, for me?

Well, the trade is also increasing their margins so they get a piece of that as well.

Okay.

The rate at which they're doing that is different, higher or lower than traditional?

I mean I can't really get into individual trade partners.

I'm just saying is that, again, we just try to provide some -- what we did was fundamentally move our recommended listed retail prices.

And you know based on that and you can see that in the market place, where they've moved to.

In general, I do think that, you know, we had talked about that we would see a gross in the six to perhaps even 7% range but with a mix effect from a margin standpoint, which is what we look at.

We expected to be in a 3.5 to four-point of margin improvement from pricing.

That is what hits financially and what we really measure.

ASVs, which are average selling values, can vary significantly, based on our overall product mix.

We're really talking about net price margin realization.

We still think, in fact, we were running slightly better than this 3.5 to four-point realization in some markets in the first quarter.

So that -- I, I -- I think those are the differences of whether we're talking list price versus realized margin.

Okay.

Fair enough.

Secondly, with respect to Latin America.

There is a market where you have announced that you'll put in a follow up price increase, 6% and above which you did at the beginning of the year.

Correct.

We've already publicly announced that.

Can you contrast and compare that market with North America for us?

What gives you the confidence to put in an additional increase there that may not be -- that may not be present in the North American market?

I mean there is not really any -- the only difference is we've announced that.

Okay.

And you did mention, with respect to Latin America, that you expected the second half of the year to get a benefit from interest rates in Brazil moving lower.

Let's assume for the moment that does not occur.

How much of a linchpin to your expectations for that market is that interest rate forecast?

The real thing, the bigger factor there is availability of credit.

And, you know, interest rates have been moving up.

I guess they're, based on economic views, is that they're stabilizing and that they have indicated that, that they could, perhaps, trend downward.

You know, I think in a relevant range, it really isn't a huge factor.

I think what we're seeing is available of credit, which is probably the critical driver for consumer demand there, being available and we continue to see that in the second half of the year.

So, as long as within a relevant range, up and down, we think that the growth is there.

Blair, from a Whirlpool perspective, we expect interest expense year-over-year to be about flat with where it was last year.

Our run rate, in the first quarter, was a little bit higher because we had some higher interest costs, Brazil's borrowings outstanding, but net/net, you ought to think about our interest costs relatively flat .

Thank you very much.

We'll go next for David Beard, Morgens Waterfall.

Hi, good morning.

I was hoping you could give us a little more information on your projection on free cash flow.

Just it seems to me that you need too increase other items of $575 million.

Can you just break down where that comes from in terms of inventories, payables, others?

Thank you.

David, first of all, if you kind of go back to what we talked about the in the fourth quarter.

The key driver in terms of kind of comparability year-over-year, certainly is working capital.

Then you take it down one level below that, inventories.

And we -- you know, we've said publicly that over the first half of this year, our inventory comparable would be up relative to year ago this time.

We still consider that to be an accurate forecast.

But then, as we go -- we do expect inventories to come down in the second quarter and then further be reduced in the third quarter of the year.

So our working capital percent as a percent of sales is elevated as it is typically in the first quarter for this company.

But, again, we expect to work off that higher working capital over the course of the year.

The other key component, of course, that will occur, David, is is you look at the second half of the year and you think about our comments earlier is, we will have improved earnings.

So, again, net/net that gives us improvement relative to the run rate in the first quarter.

Those are really the key variables.

Can you say what percent of the increase comes from inventories and where inventories may come down to?

Just that, you know, I look at 1.9 billion in inventories, you need 574 million in a delta in cash flow, including the net income depreciation, CapEx is back ended loaded, dividends in the next three quarters.

It's still -- in my calculations almost $600 million --

Our business has seasonality to it.

And it has a fair -- fairly clear historical pattern.

But it, yeah, inventories would come down-- I don't have the exact number in front of me but usually we're below 50 days of inventory by the end of the year.

That could -- that's about four -- $450 million in inventory reduction.

Okay.

So that would be the bulk?

A Normal pattern.

Okay.

No, I appreciate that.

Thank you.

We'll go to Jeffrey Sprague of Smith Barney.

Thanks, good morning.

Hi, Jeff.

Good morning, Jeff.

Can we just explore a little bit, kind of the mechanics of, you know, some of the pricing stuff.

Kind of maybe a little bit more clarification Blair's question.

You know, so the retailers actually capturing some of this price increase, which is kind of an interesting dynamic, given that they don't have the materials cost pressures that you do.

You know, is there a completely kind of separate set of negotiations around, you know, kind of the list price issue versus what you invoice them at?

Oh, I mean, there -- there always is.

I mean, we, we -- I wouldn't say negotiation.

We have -- I don't think this price increases changes any of the dynamics we had previous to this in terms of -- you know, we've always had the list price, suggested list price, the retailer, of course, decides what they're going to sell it at.

And then, you know, depending on other factors of the way you do business with the retailer, there can be differences and this hasn't really changed this other than you know, my comment was that I think, you know, many retailers take an opportunity to also improve their margins and certainly offset their cost increases from us as the manufacturer.

And then -- I don't know it's kind of tough to talk about what Sears is doing as being a major customer.

But, just conceptually, you know, you're thinking about rolling out more stores and everything.

Why would they be working through an inventory reduction if sell through looks okay and they've actually got more stores to fill over time?

Well, you know, again, first of all, the stores are coming into the second half of the year.

You know I just think as any business, they're managing very tightly their inventory and they decided to reduce that inventory.

And when we look at that sell through that -- I forget the slide 4% or whatever it was in the first quarter, could you characterize how that played out through the months?

Did sell through improve or decline over the balance of the quarter?

Jeff, I really don't -- I really don't have that data with me.

We just did this for the full quarter.

I, I -- so I can't give you really a good answer.

Then I was a little confused on the comment about productivity.

I'm not sure if you or Roy who aid productivity is negative in the first half and gets better.

Certainly in our total productivity calculation includes materials.

Oh, okay.

So your -- I mean, cause your -- on your margin lock, you show positive productivity --

If you take productivity outside of materials, it's positive all year, but even that is much more positive in the second half of the year than the first.

And just -- one or two more things.

On the positive mix dynamics that you're seeing.

And certainly some of that would be attributed to your fresh new products.

Is there something going on at the consumer level too?

In other words, is there a more adverse reaction to price at lower price points and so the mix is kind of mathematically skewing upwards, at least temporarily as the market digests this?

Yeah, I'm not sure I can say that that's the case.

From what we're seeing it's really two fold.

One is that, you know, we talked very simple terms Is the consumer buying the model and product or are they buying the price point?

And so far, they're more buying the model and the product as opposed to just being fixed by a price point.

I do think that is in part driven by the products we're offering in marketplace.

But I'd also add and I think this is a very important point, is we've worked very closely with our retail trade partners in helping with advertising, point of sales, with their salespeople training.

And I just think that the retail environment has done a good job of communicating the benefits of the product to the consumer and they're buying the product that best meets their needs and that product happens to cost more than it did last year.

I'm not sure the consumer has noticed that it costs more.

And, the comment earlier on inventory build is that it didn't have a material impact on absorption and margins in quarter?

That's correct.

Would have had some modest impact?

In theory it would, yes, Jeff.

And I guess, just my last thing.

Is there, you know, as we work through that digestion of these price increases, are there, I mean I think there's always kind of considerations about volume and kind of back end money and make goods and all kinds of various deals that get stuck with retailers around volume.

Is there anything particularly new, different exposures there as we think about the balance of the year against the backdrop, maybe, of slowing volumes?

None that I can think of.

Okay.

Thanks a lot.

Thank you.

Thank you.

We have time for one final question and that'll be from Wendy Nickerson, [inaudible] Asset Management.

Hi.

I just want to see if you could comment on what percent of your product you source versus manufacture in house and what future plans, if any, you have to increase?

We do both certainly.

But I don't have the percentage of the -- exact percentage.

But roughly speaking, we manufacture the large majority, probably close to 90% all products.

Yeah, 90, 95%.

And, we do OEM some major appliances from other manufactures.

Mostly we contract manufacturer part of our KitchenAid portable appliances with contract manufacturers, where we can control the design, the quality, et cetera.

So, it's more in that area that we don't manufacturer as opposed to major appliance.

Okay.

Do you expect that to remain the case over the next year or two or do you have any plans?

I don't see a big change in that, other than the growth rates of our business and, for example, our KitchenAid portable business continues to grow very well.

Great.

Thank you.

Thank you.

Well, listen, we're going to end here.

We appreciate your participation today and your questions and we look forward to talking to you next time.

Thank you very much.

That does conclude today's conference call.

Thank you for your participation.

You may disconnect at this time.