惠而浦 (WHR) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the Whirlpool Corporation first-quarter 2006 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 and Corporate Controller, Mr. Larry Venturelli.

Please go ahead, sir.

Thank you.

Good morning and welcome to our first-quarter earnings conference call.

Our opening remarks will refer to the slide presentation which is available on our investor webpage.

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

Our actual results could differ materially from these statements, due to many factors discussed in our latest 10-K and 10-Q.

During our call today, we will not be commenting on Maytag's first-quarter results.

The Company is currently completing the necessary purchase accounting adjustments to consolidate the Whirlpool and Maytag balance sheets.

As a result, we are unable to discuss unconsolidated balance sheet items, because they would be considered non-GAAP in nature.

We will be hosting a separate call on May 23rd to update our guidance and to discuss the status of the Maytag merger.

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

Jeff?

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

Before we begin to discuss our first-quarter performance, once again I would like to point out that our earnings reported today do not include the operating results of Maytag in the first quarter.

We will begin reporting operating results for the combined company during the second quarter, which we would then release in July.

I would like to note, however, that our statement of cash flows does include the cash acquisition costs of Maytag, as well as repayment of a portion of Maytag long-term debt.

And we will provide you additional information on these items later on in our presentation.

As you probably have all noted by now, this morning we released our record first-quarter results of $1.70 per share, compared with $1.26 per share last year.

Our net earnings of $118 million increased 37% during the quarter, which reflected strong trade and consumer demand for our company's innovative products that we have been introducing around the world.

Revenues increased by 10% to 3.5 billion, which also was a record first quarter for us.

And these results reflect the 19th straight quarter of year-over-year sales improvements, which in part have been driven by the success of our innovation efforts.

Revenue during the quarter from product innovation contributed about $250 million of revenues.

We have seen around the world that consumer demand remains strong, and is trending slightly ahead of our expectations for the year.

Our overall results reflect solid global performance from all regions around the world.

The strong earnings momentum that we saw in the second half of last year accelerated during the first quarter.

We had record unit shipments, sales growth, positive product mix combined with productivity improvements, which drove and increase in operating profit of 12%.

I would note that our results do include $13 million of Maytag integration costs, $5 million of higher restructuring expense as well as higher material prices, increased costs to support brand investment in our new product innovation.

We are including for the first-time stock option expensing, and we have a higher share count than we did a year ago.

And finally, our global operations delivered $57 million in free cash flow, which, again, we now report before dividends in comparison to last year.

Our business is clearly on track, with the forecast assumptions which we discussed with you in early February, which included the expectation that we would see unit demand growth globally of between 2 to 3% that we expect, and material prices could increase up to $100 million this year, which is on top of the $850 million of increases we have seen over the last year and a half, and that we would see major currencies relatively stable, which we have.

Industry demand remains positive, and we continue to maintain our outlook on the strength of the economic environment, despite very volatile commodity prices.

Our priorities and focus for the balance of the year are, first, to efficiently and effectively integrate the Maytag business into Whirlpool.

We will accelerate new product innovation to the marketplace to help drive revenue growth and margin expansion.

Third, we will continue to drive positive total cost productivity by further leveraging our global operating platform.

Next, we will continue to control spending by reducing overhead and infrastructure while increasing investments in consumer activities.

And lastly, we will continue to manage our overall ix of business to improve our margins.

Our new product pipeline is growing, and we are in the process of executing the most impactful innovation to the market in our company's history.

We expect sales generated from innovation this year will account for over $1 billion in revenue growth, as shown on slide number four.

As you all know, we completed the acquisition and the closing of Maytag on March 31st.

And as I mentioned before, we will begin reporting results of the combined company in the second quarter.

The consolidated balance sheet reflecting the required purchase accounting adjustments will be available in our 10-Q filing in May.

The integration of Maytag is progressing well and according to our plan.

We are very encouraged with the progress that we have made over the last three weeks, and we are looking forward to sharing these plants with you.

And, as Larry Venturelli mentioned, we will be hosting a conference call on May 23rd to discuss the acquisition in more detail and provide you with some broad guidance for 2006 and 2007, based on the combined Whirlpool and Maytag businesses.

Overall, we are very pleased with our global operating performance in the first quarter, and we believe we're well-positioned to continue this momentum throughout the year, despite ongoing material cost increases.

Joining me today on the call are Dave Swift, President of our North America business;

Mike Todman, President of our International businesses; and Roy Templin, our Chief Financial Officer.

I'm going to now turn this over to Dave Swift for comments about our North America business.

Thanks, Jeff, and good morning, everyone.

As you will note on slide seven, our North America operations delivered record results during the first quarter.

Record revenue of $2.2 billion increased about 12%, exceeding unit volume growth, led by strong Whirlpool and KitchenAid brand performance.

Sales at Sears' Kenmore business showed marked improvement and posted improved year-over-year results.

For the quarter, our US unit shipments of major appliances exceeded industry levels, which were up 6%.

Our strong North America business performance translated into a 19% improvement in operating profit during the quarter, and operating margins improved 0.6 points to 9.8%.

These record results are attributable to continued strong consumer demand for our portfolio of brands, favorable product mix and strong productivity improvements.

We also increased our investment during the quarter to support our new product innovation launches.

We are ramping up for the largest new product launch in Whirlpool history, with the introduction of an entirely new laundry line during the second quarter.

This launch builds upon our long-successful Duet laundry pair and provides new innovative fabric care solutions.

You may remember, as shown on slide mine, the launch of our Duet laundry pair in 2001.

The Duet and Kenmore HE4t remain the largest selling and most popular front-loading laundry products in the North America market.

Not long after we introduced Duet, we also developed innovative ergonomic storage pedestals for beneath the Duet, which had been a strongly demanded option for consumers.

If you'll turn to slide ten, you'll see how we are continuing our laundry product evolution.

Let me tell you a little bit about the products that make up this exciting new line, which launches in the second quarter.

Whirlpool brand Duet Sport and Duet Sport HT models are smaller versions of the popular Duet front-load pair, with a six-point suspension to reduce vibration and noise.

Like the Duet pair, they use less than half the water and energy of traditional top loaders.

The Whirlpool brand's new revolutionary Cabrio washer and dryer design on slide 11 offers a 4.5 cubic foot capacity in a top-load design, handling the equivalent of three 18-pound laundry baskets in a single load, and significantly reducing drive time through a combination of the washer's ultrafast spin speed and the dryer's AccelerCare system.

On slide 12, Whirlpool brand's Classic top-load washer and dryer has been designed with new technology to simplify cycle selections, ensure optimal wash temperature and built-in sensors to monitor wash water.

The dryer's AccelerCare system dries clothes as fast as the washer cleans them.

But our innovative fabric care evolution goes beyond washers and dryers.

On slide 13, you'll see the Whirlpool fabric freshener.

Taking customer insights from the Personal Valet system we launched in 2000, we developed a more portable device that has proven to be popular with consumers since its launch late last year.

Later this year, we continue to expand the fabric care space by introducing new vertical storage systems that match the Duet, Duet Sport, Cabrio and Classic laundry pairs, as well as the new workspace platform for our front-load laundry pairs.

Fabric care continues to be a great innovation space, and we are focused on continually delivering new fabric care innovations that delight customers and meet their diverse lifestyle needs.

While we are very excited about fabric care, I also want to tell you about some of the other exciting products we are providing to consumers.

On slide 15, you see another one of our newly launched product innovations, the KitchenAid built-in French door bottom freezer refrigerator.

This is the industry's first built-in French door freezer refrigerator, and has the widest uninterrupted storage space.

On slide 16 is our KitchenAid single-drawer dishwasher, which has five cycles and the Whisper Quiet Ultima Sound insulation system.

Another great innovation for cooks is on slide 17, the KitchenAid clear coat for stainless steel cooktops, which helps to keep stainless steel looking newer longer by improving durability and making stainless steel cooktops easier to clean.

Within the bread, depth and pace of all of our innovation, you can see why greater than 60% of the products that we will be selling at the end of 2006 did not exist in 2005.

Based on first-quarter trends and our outlook for the balance of the year, we continue to expect industry demand to improve by approximately 2 to 3% for the entire year.

Now, I would like to turn the call over to Mike Todman, President of Whirlpool International.

Thanks, Dave.

If you'll turn to slide 18, I'll start by providing my comments on our European business performance.

Europe revenue in local currency increased approximately 6% during the quarter, due to a weaker euro during the first quarter of 2006.

Sales in US dollars declined 3%.

Our unit volume in Europe continued to exceed industry growth, which we estimated to have grown 1 to 2% during the quarter.

That is primarily due to strong consumer demand for the Whirlpool brand and continued strong performance of our product innovations.

Operating profit of $35 million improved 6%, and margins expanded to approximately 5%.

Results were positively impacted by strong demand for the Company's product offerings, exceptionally strong productivity and reductions in administrative costs.

Examples of new product innovation for the European market are shown on slides 19 through 21, and includes the Bauknecht brand's new washing machine, which offers the Hygiene+ cycle, which heats laundry to a temperature of more than 149 degrees Fahrenheit for 10 minutes, effectively destroying bacteria and removing allergens, addressing growing consumer health concerns.

We continue to offer Europeans larger laundry capacity, as seen on slide 20.

Whirlpool recently introduced Dreamspace 9kg, the largest capacity front-load washing machine in Europe, which is designed to hold approximately 20 pounds of laundry in a single load and which, with our innovative Sixth Sense technology, provides optimal performance while saving up to 30% of time, energy and water.

In addition, by leveraging our global footprint, we introduced a European version of the North American fabric freshener.

Based on current economic conditions, we continue to expect industry unit shipments to increase approximately 1 to 2% for the year.

Turning to Latin America on slide 21, sales of 531 million increased 20% from the prior-year period.

Excluding currency translations, sales increased approximately 11%.

Industry unit shipments of appliances are estimated to have increased approximately 13% during the quarter.

Operating profit improved 17% to $29 million during the quarter, as productivity improvements and aggressive cost reductions more than offset increased brand investment.

Examples of new product innovation in Brazil are included on slides 22 and 23.

The introduction of a new selection of Brastemp brand's Pla mini-refrigerators, with three new detachable front panels designed by popular Brazilian stylists, and we also introduced the Brastemp Viva!, the first double-door refrigerator with a pure water dispenser.

Macroeconomic conditions within Brazil are expected to remain positive, as inflation remains under control and consumer interest rates continue to decline.

The Company now expects industry shipments in 2006 to increase 8 to 10%.

On slide 24, Whirlpool Asia's first-quarter sales of $97 million increased 2% from last year's results.

Excluding currency translations, sales increased approximately 5%.

Operating profit improved 62% over last year's levels, led by improved performance in India.

This improvement was driven by productivity improvements and improved product mix and successful new product innovations.

In Asia, we launched two new innovations, beginning on slide 25.

Whirlpool Australia is launching a build-in product renewal that features more than four new products including induction cooktops, build-in microwaves and advanced dishwashers.

And Whirlpool China launched the Jupiter washing machine, with fully integrated electronics, best-in-class wash performance and new superior aesthetics and ease-of-use features supporting our brand positioning in China.

Based on current economic conditions, full-year 2006 industry unit shipments are expected to increase 5 to 7%.

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

Good morning, everyone.

As Jeff previously discussed, during the first quarter of 2006, we delivered record unit shipments, sales and net earnings.

Our results reflect solid financial and operating performance around the world, and continue the positive earnings momentum which began during the second half of last year.

Before we discuss the final two slides in our presentation this morning, I would like to make a few comments regarding the financial statements we released today.

It is important to note that our first-quarter statement of operations does not include the operating results of Maytag.

As you know, we acquired Maytag Corporation on the last day of the quarter, and the few hours of business on that day were deemed immaterial to our overall first-quarter results.

However, we will include the required pro forma information in our Form 10-Q filing that we plan to file in mid-May.

You will begin seeing a combined statement of operations when we release our second-quarter earnings.

I am sure you also noticed we have not included the balance sheet with our financial release this morning.

As you know, the accounting rules and resulting adjustments to combine two independent balance sheets are quite complex and challenging.

Our March 31st closing date, which was required under the merger agreement, compressed the period of time between the closing date and the date we are required to first disclose a combined balance sheet.

We are in the process of compiling the necessary purchase accounting adjustments to combine the two balance sheets.

We will complete this work and provide a combined balance sheet, reflecting our preliminary purchase price allocations, with our Form 10-Q filing in mid-May.

Turning to the statement of cash flows, let me first point out that the operating activities section of this statement does not include any Maytag transaction activity.

However, as you know, our statement of cash flows reconciles our cash activities through the end of the quarter.

Therefore, you will note cash acquisition costs for Maytag of $848 million, less Maytag's cash on hand at the date of the acquisition, is included within the investing activities section of the statement.

In addition, within the financing section of the statement is $185 million of Maytag debt which matured and was repaid by Whirlpool on the date of the acquisition.

One other point regarding our financial statements -- as we communicated during our last conference call, effective with the first quarter of this year, all freight and warehousing is now being recorded within cost of goods sold.

For comparison purposes, we have reclassified $204 million of last year's freight and warehousing expense from SG&A to cost of goods sold.

If you'll turn to slide 28, I would like to provide some additional comments on our financial performance.

Operating profit of $201 million increased 12% and represented a first-quarter record.

Our operating profit did reflect approximately $13 million of integration costs related to the Maytag acquisition, which are included within selling, general and administrative expenses.

Turning to the categories between operating profit and net earnings, you will note that interest income and sundry expense improved $5 million from last year's reported results.

The improvement is primarily due to lower foreign currency losses on balance sheet positions and higher interest income.

Interest expense declined $6 million, reflecting lower international debt levels during the current year, primarily in the Latin America and Europe regions.

Consistent with 2005, our effective tax rate for the first quarter was 28.5% in comparison to 34% last year.

The decrease is due to the overall global dispersion of income, results from global audit settlements and tax reserve adjustments, increased tax credits and global tax planning actions.

If you'll turn to slide 29, I will briefly comment on our cash flow performance.

Cash used in operating activities improved $83 million or 29% from last year, primarily due to improved receivable collections, reduced inventory and improved payables.

The cash flows associated with changes in working capital that are included in the statement of cash flows are based upon changes in working capital balances prior to the acquisition of Maytag.

With respect to these balances, net working capital totaled $1.6 billion, and was $254 million or 14% lower than the year-ago level.

On a relative basis, working capital days of 47 days were 13 days or 22% below Q1 2005 levels, and working capital as a percent of sales of 11.0% was 3.1 points below prior year.

Remaining purchase accounting adjustments to working capital balances will be non-cash in nature, and therefore have no impact on our first-quarter statement of cash flows.

Improvements in working capital were partially offset by higher advertising and promotional spending and higher incentive compensation payments during the current year.

Capital spending of $98 million was higher than last year, primarily to support our product innovation efforts in laundry and expansion of our global operating platform in Mexico.

Overall, free cash flow before dividends improved $57 million or 16%.

In closing, our operations delivered strong performance during the first quarter, and we are well prepared strategically, operationally and financially for the future.

I will now turn the call back over to Jeff.

Thank you, Roy.

Our business continues to gain momentum from the innovative product offerings that we've been bringing to the marketplace at a rapid pace, is performing very well against the expectations that we set at the beginning of this year.

With the acquisition of Maytag, we enter a new and, I think, exciting chapter in our company's history.

Our organization remains very focused on executing our core strategies and operations, and is well prepared for both an efficient and an effective integration of these businesses.

The combination of our two companies will translate into significant efficiencies, provide additional growth opportunities and enhance consumer and shareholder value and further solidify our position as a global leader in major home appliances.

We do believe this acquisition will create significant value for our shareholders.

The only input that I'm going to provide you today about Maytag's first-quarter results is some indication of the revenue performance during the quarter.

The major core appliance business, which we define as everything except floor care and our commercial businesses, was up 8% during the first quarter, roughly in line with the industry performance.

We are pleased to see this performance, and we're looking forward to providing you with more additional detailed information regarding the merger on May 23rd.

I'm going to stop here, and I would like to now open this up to questions.

Operator, let's proceed with the Q&A portion of the call.

(OPERATOR INSTRUCTIONS).

Sam Darkatsh, Raymond James.

Your demand expectations in the US are held static, even though it looks like Q1 probably came in a little bit higher than you were looking for.

Is that being conservative, or are you beginning to see order rates begin to tail off maybe in the builder channel?

If you could help with your thinking in terms of industry for the rest of the year?

Yes.

In February, we talked about what we thought would be the demand patterns in the US for the year, and that they would be higher in the first half of the year and lower in the second half.

Q1 was a little bit higher than we expected, coming in at 6%.

We think Q2 will be a good quarter from a demand standpoint.

What this 2 to 3 assumption implies is that we would have roughly a flat second half of the year.

I would say -- I'm not saying that's a conservative estimate, but it does fit with our pattern of being up in the first half and [much slower] in the second half.

There could be some upside to that number.

Your unit sales were up 7.7% globally.

Do you have a sense of what unit production was up?

I'm not sure if Roy or Jeff, which one of you may have that.

But I'm just trying to get a sense of production versus sales.

I would say unit production, again, was roughly flat, if you look year over year.

Unit production was flat with the sales growth, meaning it was up 8%?

Or it was literally flat on a year-over-year basis?

Let me clarify it.

It was roughly flat.

As you look at where we were in the fourth quarter -- again, I'm responding sort of with respect to the change in payables and cash flow perspective here.

But if you look at production volumes coming out of fourth quarter and coming into the end of the first quarter, they were roughly flat.

And there were probably up slightly, if you look year over year, first quarter to first quarter.

There was nothing abnormal about our production pattern.

As we said, working capital was much more in the last year.

We are in good shape in inventories.

So there's nothing unusual on the production side.

It looks like currency was a mild negative impact on sales.

Roy, do you have the percent impact on total sales that currency represented?

It's a very minor impact.

It's less than 1% for the quarter.

Other income for the year?

Did you give a sense of what we should -- I know there's some hedging transactions and such.

But what would you feel comfortable the Street's expectations are for that line?

We're going to talk in specific about other income projections on May 23rd.

I have to be a little bit careful now, because we're in the process of integrating Maytag.

I will tell you with respect to the first quarter, as you can see, there's not a whole lot of unusual activity in this account -- you're right.

The key drivers on the year-over-year change, one, were currency gains on balance sheet positions around the globe, which was a couple of million dollars.

And then, we had a little bit higher interest income.

So no unusual activity in there, but I do have to wait to comment on the full year on May 23rd.

David MacGregor, Longbow Research.

Great quarter.

First of all, just on the whole idea of volume growth, I think you said that North America, your volume growth was greater than the industry, which you had indicated was 6%.

But if you said it, I missed it -- what was your volume growth in the North America market?

We didn't comment specifically on that.

Our revenue growth was up 12%, so hopefully from that, you get a sense of how that triangulates in terms of our business.

We did grow our share.

Again, we don't disclose share data, but we did grow our share, had very good performance with Whirlpool and KitchenAid.

And we saw our OEM sales to Sears stabilize, and so from that perspective, it was a very strong performance.

You had talked about accelerating new product innovation in the press release.

And you had talked about the fact that there were about 250 million of revenues in the quarter associated with innovation, that you thought you could get to 1 billion for the year.

We presume that there's a much better margin on those revenue dollars.

As we do the arithmetic, the sick, is there any subtraction?

Is there any cannibalization that we should apply to that arithmetic?

I would kind of break it into two parts.

One is absolutely new-to-the-world type of innovation, which is 100% additive.

And again, we would have to look at the projects to define which are which.

Some are products that in spirit, I would say replaced existing products.

But, because of their innovation, they generally have a much different revenue model and larger model to them.

So not all of that is incremental, but I would say between the additional average selling prices we get for what I would call the replacement innovation and the others, you probably ought to think in terms of well more than half of that is incremental.

And, as a whole, it carries better margins than [our line] average.

Raw materials headwinds for 2006 -- what are your thoughts there?

Can you talk a little bit about your steed exposure, specifically?

Well, in terms of headwinds, if you go down the factors that we had talked about that affect our business, certainly top of the list is material cost.

And the commodity market has been extremely volatile and at historical highs.

The big ones for us are oil, resins and base metals -- all very negatively in terms of increases being up.

Steel has been somewhat stable relative to last year, although at obviously a very different cost level than it was about 18 months ago.

Our steel exposures, depending around the world, as we have discussed in previous calls -- this is really a regional business, and depending on what region determines whether we have fixed contracts or more shorter-term contracts.

So we have a mixture of exposures there, but I would say steel has been relatively stable.

But we have a big exposure to commodities, which we're offsetting, as we said, with the actions that we have taken, whether it be in productivity or our new product innovations and a number of other actions.

We are still comfortable with the guidance that we gave in February about having up to $100 million in additional increases in material costs.

That's what I was about to ask.

There's no change to that 100 million?

Not at this time.

You mentioned that you didn't want to talk about the Maytag financials.

Is it fair to ask any Maytag sort of conceptual questions at this point?

Go ahead and ask the question.

I'll let you know if we can answer it.

I guess I'm trying to get a sense of brand positioning here, and what the brand positioning strategy is going to be.

We will talk about that on the 23rd.

And then, just for David Swift, can you talk a little bit about the retail environment in terms of competition right now?

There seems to be a growing presence of foreign brands working their way into the market.

Can you talk a little bit about the progress that you see them making?

And then, just final question is the second-quarter launch activity -- can you talk a little bit about the launch costs and what we should be modeling in terms of incremental costs?

On the second one, I don't think we're in a position to talk about specific dollars on launch costs.

We build that into how we run our business every day, and that's the way we operate.

As it relates to the environment that we operate in, as I said, we felt very good about our share performance in Q1.

We think that consumers absolutely are responding to our innovation, and we think the trade recognizes that innovation sells.

And we think that's why across the board, we were able to grow our business, whether whirlpool, KitchenAid or with Kenmore.

And we fully expect that that is going to continue, because as we said, the richest lineup of innovation we have ever had as a company.

I think the competitors that are out there in other spaces -- they are going to do what they can, I think, to try to compete with us, and we look at that as a compliment.

Another Maytag question, if you can answer it, is are you able to talk at all about retailer reaction to this deal, now that the deal has closed?

I think part of the reason why we received such strong support from retailers, as we were going through the antitrust clearance process, is I think there was a lot of perception on the part of, certainly, our trade and consumers that the Maytag family of brands has a lot of awareness for consumers.

But the brand had not received the kind of richness of innovation they needed to have, nor the cost structure, to be competitive.

And I think retailers see that with the new company going forward that we're going to be able to not only have a better cost structure to perform, but also a significant pipeline of innovation, and we can accelerate that to consumers.

And they're excited about that.

Gentlemen, congratulations on all the progress.

Laura Champine, Morgan Keegan.

I'm not sure you disclosed this, and it sounds as if perhaps you're not looking to disclose it at this time.

But historically, you've given us unit growth by geographic segment.

Is that something you can give out today for Q1?

It's not something that we plan to give out today.

We will provide that in our 10-K; we do that annually.

And I think that might be what you're referencing in your comment, maybe.

I've got unit numbers by segment historically on a quarterly basis.

I don't have that -- we don't have that right now.

But I would say, and I believe we'll check this as we go forward, but I think in every region of the world, our revenues grew faster than our units.

But I think you will see in our total P&L the difference between units and sales.

And we will get the total percent for you in a few minutes.

I'm calculating a price mix impact of positive 3.5% for the total business.

Is that accurate?

And if so, do you think that's more weighted towards price or mix?

Let us hold that out, and we'll come back to that question in a moment, Laura.

This may be more of a follow-on to other things that have been asked, but does combining with Maytag change your strategy for distributing the Whirlpool brand?

Does that open new channels for growth?

And of course, I'm thinking about North America for the Whirlpool brand itself.

We will talk more about that, again, in our May 23rd meeting, in terms of the overall position of the brands and distribution strategies.

But I would just say, overall, what I have said before is we do believe that the combined portfolio will allow us to reach was a much broader set of consumers -- and I would also say trade partners -- than we have ever been able to do before.

And we still believe that.

We will share some more details about that on the 23rd.

Laura, are you still on?

I am.

Let me respond to a couple of questions you had.

I was actually looking up your unit question, and I'll come back and also respond to your question on the margins as well.

Overall, total units on a global scale were up about 8%, Q1 to Q1.

So just give you some feel there with respect to the total.

Now, your other question that you asked, with respect to margin change -- let me sort of talk you through the 0.6 point change we had in the quarter, along the same lines as the graphs we have been using with you for the last several quarters.

And if you would, think of it this way.

Jeff talked earlier about the higher commodity costs that we faced in the first quarter.

That was just under 0.5 points of negative impact on our gross margins year over year, Q1.

Now, offsetting that was positive appliance price mix, which basically negated the negative impact from higher commodity costs.

And then, what you are left with, then, is really a productivity improvement and a productivity-driven 0.6 point margin improvement.

And that productivity strength came not only in cost engineering change, but also on the conversion side.

And we saw strong productivity around the globe.

Eric Bosshard, FTN Midwest.

First of all, the incremental margin in North America -- two quarters in a row you have had 12% revenue growth in North America, and the incremental margin has been kind of mid-teens.

Is that what the incremental margin is, in the North American business?

Or is there something impacting that?

I guess I would have thought that we would have had greater profit flow-through with the magnitude of revenue growth that you have seen out of North America.

As we go through, we are -- first of all, I'll tell you we're pleased with the overall leverage between the revenue growth and profit growth in North America.

Embedded in that -- and again, we didn't break out the details.

But we are ramping up investment in North America.

It does somewhat, I would say -- compared to a steady-state period, it does dampen a little bit the earnings growth, the money we're spending in additional R&D expense to support the product innovation, the increase in brand investment and, very specifically this year, I would say, fairly substantial product launch costs.

All three combined, I would say, a little bit tempered the growth of earnings versus revenues.

But we are getting the leverage.

These are investments we have chosen to make, and we are trying to build the capacity up in our earnings capacity to be able to do that.

So overall, leverage-wise, we are pleased and it's enabling us to fund strategically some of the things that historically we had not been able to fund. (Multiple speakers) -- wondering, too, the question, if there's any confusion about what we may be now reporting in terms of the margin.

Secondly, the Maytag revenue number, major appliance revenue number, up 8%, suggesting that they held, if not gained a bit of share.

In the fourth quarter, I know that they had gained share.

But now that you own this business, I guess my assumption, what we have seen in the market, seems like they have seen market share pressure.

You have gained share and Electrolux has gained share, and I don't think everybody can gain share at the same time.

Is there some channel fill that's gone on with the Maytag business, or can you opine a little bit of what went on to contribute to that magnitude of revenue growth for that company in the quarter?

First of all, we don't think Electrolux has gained share.

The [Stevenson] data that has just come out would not indicate that, and our view is that we gained share, and that the data supports that.

And from our perspective, Maytag had a flat share performance, which is in line with what we expected to see.

And so at this point, we feel we're off to a good start.

Do you feel that the channel is relatively clean, in terms of that business, relative to what happened before you took control of the business?

I'm sorry, could you repeat the question?

To say it more clearly, have you seen anything that would suggest that prior to you completing the purchase of the Company, that there was any excess channel filled, that they filled the channel additionally (multiple speakers)?

No, we have not.

-- other than [completing the sale] of the company to you?

Was the answer no?

I said no, we did not.

I'm sorry;

I didn't hear it.

And then, lastly, in terms of the market assumption you have for growth -- and I guess, implied, you mentioned that when you give the guidance for Maytag it will be somewhat broad guidance.

I guess, two questions -- one, I am assuming in that that the breadth of that is related a little bit to where market growth goes.

And then, related to that, could you then give some sense of do you expect this 2 to 3% growth this year with a bit of a flat second half?

It sounds like -- do you have any inkling, or can you give us some guidance of what 2007 might look like for the industry, what you're considering at this point in time?

Not at this point in time, but on the 23rd we will give you very prelimary background of what -- along with the broad guidance that we give you.

In terms of a consideration for what '07 might be?

Right.

We will do that on May 23rd.

Mike Rehaut, JPMorgan.

I don't know if I could give the five to ten questions of the last few speakers, but in terms of the innovation sales, there is some great detail there.

And just turning back to one of the first slides, where I think you said that you have 1.2 billion estimated sales for '06, and that is on top of -- is that incremental to the 750 in '05?

Or does that 750 go to 1.2?

I'm just trying to reconcile if that is like a 450 million delta, how that might reconcile to the $1 billion number that you were talking about?

No, we look at that as additional revenue growth.

The 1.2?

The 1.2.

So that's separate or incremental relative to the 750?

So when you're talking about the $1 billion number, you're just kind of rounding down a little bit?

I'm sorry, could you repeat that last --?

Well, you have 1.2 billion on slide four, and you're talking about a $1 billion number?

Yes.

The 1.2 on slide for -- the way we do this is that we basically list every innovation project that we launch, and we track the specific revenues for them continuously, every year.

And we basically, our guidelines -- and I think we've mentioned it in one of the previous sessions -- is that we count this as new innovation revenue for three years.

So it's always a moving average, but some of that 750, which -- some of the projects included in that 750 also make up the 1.2 billion.

And again, we would have to go in much greater detail; if they are ramping up, in most cases, they are much larger than they were.

But overall, this is always a combination of projects we track every year that have, at most, a three-year life to them.

So some projects dropped off, some new ones came on.

That's how we get the 1.2.

So there's a delta.

I can't give you exactly what that is until we go through and break it down project by project.

But I would say, overall, that we believe that innovation, as I said, I believe, in February, is providing at least a 3% lift to our revenue growth rate annually, due solely to innovation.

And that, I guess, 1.2 or 1 billion -- how would you break that down on a geographic segment basis?

Could we think of it more equal proportions by segment?

Or is there more weighted to one area?

Roughly speaking, I would say it's close to what the revenue split is, but I would say right now, North America is a little higher than their total average because they were earlier in the process, some of the major launches.

But in general, we're seeing contributions from every part of the world.

And with the 250 million in the first quarter, I guess you already said that the productivity provided most of the margin expansion.

Are you able to kind of identify what the positive margin impact has been in the first quarter, or what you expect it to be on a full-year basis from the new products?

We have not communicated that, but what we have said, and this does -- we do track these by project and what their margins are.

But across the line, the margins generated off those projects are higher than our line average.

So it is included in our mix number, our positive mix number.

That's right.

You can think of it -- the appliance price mix effect in Q1, year over year, was positive by just under 0.5 points, positive improvement on our gross margin year over year, just to sort of calibrate that.

On the Asia line, you guys came pretty close to breakeven this quarter.

What is your outlook going forward, in terms of what you need to do to get into the positive side?

And maybe you could talk about a timeline in terms of achieving that?

Yes.

Let me just focus a little bit on 2006.

And what we are expecting is to continue the positive momentum that we had in the first quarter through the remainder of this year, so we are looking this year at achieving a breakeven level.

And we think we will continue to build upon that.

Two key drivers -- our business in India is really showing some great progress, in terms of both driving good product mix and productivity, and our business in China is also picking up with the introductions of some new products into that marketplace.

So do you see this as a one or two-quarter type of timeframe that you think you could swing to positive?

Or how would you think about that?

By the fourth quarter, we will be in the positive area.

Jeffrey Sprague, Citigroup.

Actually, my first one is administrative.

I haven't been able to get on the EPG website here while we were talking, but your conference call conflicts with the conference.

And I'm wondering, if you guys are down there, are you doing it in conjunction with that?

A lot of people who care about what you have to say are going to be down there.

No, we are not part of that conference.

[Attempt] to do that conference call in the afternoon, then, so it doesn't conflict with the morning sessions of those of us who are down there?

Jeff, we will look at the time and try to pick a time that's most accommodating, so that the most people can participate.

Thanks.

I guess, first, I know we're just tap dancing around Maytag, and your saving your thunder for later.

But I'm just wondering, in thinking about this huge laundry launch that you have got going on, was that kind of fully in the pipeline before you began moving down the Maytag path?

And if so, did Maytag in any way influence the direction of that launch?

And is there anything we can glean from the magnitude of that launch vis-a-vis how you feel about the Maytag laundry business?

First of all, the plans for the new laundry line, they have been in the work now for a couple of years, and this is the culmination of the biggest investment we have ever made, and was not at all related to Maytag.

So this was in the pipeline, and all of a sudden Maytag comes across the transom.

Is there any type of midcourse correction, change in strategy or anything in that product as a result of Maytag?

Or this thing pretty much had its own momentum, and it would go forward in its current form either way?

In terms of the innovation we're bringing to the marketplace, as Dave said, these have been major investment projects that we have announced over the last couple of years, and now are coming to the marketer.

There is more innovation in the pipeline, and we're going through a very thoughtful process of what innovation, what's the right innovation to bring to the Maytag brands of laundry?

How do we do that in an efficient and effective way?

And how do we provide unique brand differentiation in the marketplace that's relevant to those brand consumers?

And again, we will share some of those insights in May with you, but that all just now has become part of our brand management process, which we align with our product strategies.

But we do feel very confident we have sufficient innovation in our pipeline to fully differentiate these brands.

And then, just a question on the innovation chart, back to slide four that we were talking about a little bit.

Probably still early days, but how accurate have your estimates of innovation been?

In other words, we look at '03, we had 1 billion 3 in the pipeline.

I don't know if that's all in the market yet, but that 1 billion 3 doesn't really flip to the 1 billion 2, in a sense, because we've got some of the '04 and the '05 probably coming into play.

Do you have enough history yet to actually know how well you measure the opportunity when you're thinking about launching these products?

That's a good question.

In that pipeline, that includes everything from initial concept evaluation to prototyping to our experiments to prototyping and so on.

So the mix of this is all in various stages.

I would say, given in '03 was when we put the hard metrics in place, I would say probably importantly, the output line, which is the revenue line, is what you're trying to correlate the predictability to.

And all I can say is that in the first three years -- '03, '04, '05 -- we significantly exceeded our revenue forecast for the year.

We think we're getting better at this.

As the pipeline has gotten larger, as we have improved our management processes around this, I think we feel really good about the 1.2 billion forecast that we have offered up for this year.

So I would say our predictability is getting better and better all the time.

And then, just two quick follow-up cash flow questions for Roy, I guess.

Can you just address the other line in operating cash flow?

I'm guessing maybe it's some of the comp stuff you referenced.

And just as a follow-up, working capital improvements have been notable.

What kind of sustainability or room for even further improvement might that have?

Let me address your first question.

You are right -- the two key drivers with respect to the other line were, one, higher incentive compensation payments in the first quarter this year relative to last year.

And the second area is higher payments with respect to promotional and advertising spending in Q1 this year versus Q1 last year.

And most of these are annual incentives, and so it's based upon, one, the level of incentive that's earned and, two, the timing of the cash payment.

The bottom line is we had higher payments cash-wise in Q1 this year than last.

From a working capital perspective, we shared the overall Whirlpool guidance early on in terms that we plan to make some slight improvement with respect to our working capital as a percent of sales, relive to where we were at the end of last year.

Again, Jeff, I have to be a little careful now commenting on forward-looking working capital guidance, because I don't have a Maytag balance sheet yet from which to comment overall.

However, on May 23rd, we will talk specifically about the combined working capital levels and where they are going to go over the course of this year and next.

And just to follow-up on this promotional answer, so we should think of that as you're accruing a certain level of promotion that was through your SG&A in '05.

But you have got some true-up, if that's the right term, or if I can use that term here in the quarter to kind of reconcile -- I guess it's not a P&L reconciliation.

It's just kind of catching up on what you accrued for the year?

Is that --?

Jeff, think of it this way.

You are right, first of all -- we accrue those costs as they are earned.

But what we are talking about now, of course, is the actual cash payments relating to those accruals.

And so there is no P&L effect from this; it's purely cash flow.

How much cash did you pay relative to those costs this year in the first quarter versus how much cash did you pay relative to those costs last year?

And again, what you would find is year over year, the cash payments are higher -- no P&L effect.

Basically, though, promotional activity was higher in '05 than it was in '04?

No, I think it's really the fact that our sales were larger, and they are more proportionate to sales.

David MacGregor, Longbow Research.

Can you talk a little bit about your capacity utilization worldwide, and how much excess manufacturing capacity you may currently have, prior to Maytag?

That really does vary a lot, depending on what markets, what products and that sort of thing.

I would just say, as I said before when we were talking about the Maytag acquisition, that our basic position for any factory around the world is that our criteria is the same everywhere for every factory.

It has to be in the best cost, best quality location for the products that we produce for the markets we serve.

And that's the same criteria that we will continue going forward.

Having said that -- and again, I would defer this to our May 23rd meeting, where we will talk more specifically about those items that are relative to Maytag.

We continue to make great progress in our global operating platform.

We have a three, five and seven-year plan for our manufacturing locations.

And now what we have been doing, but obviously since we closed we're doing in great detail, is really understanding the competitiveness of all of our factories, comparing them to one another.

And really, we will be adjusting, where appropriate, those plans as we go forward.

And we will be able to share any new thinking on that on the 23rd.

I guess this gets back to the whole idea of asking conceptual questions on Maytag, but can you talk about the floor care, the commercial businesses?

Do you intend to remain in those businesses, or do you intend to exit those business areas?

There is nothing new to say there, other than that we are continuing the strategic evaluation of those businesses.

We certainly spent a lot of time understanding them in detail, in terms of their capabilities and their performance and strategy.

At the same time, we are evaluating other options, and at this point in time we have made no decisions on that.

Well, again, everyone, we appreciate you joining us today.

And we look forward to speaking with you and sharing the details of many of the questions today about Maytag on May 23rd.

Thank you very much.

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