惠而浦 (WHR) 2006 Q3 法說會逐字稿

Good day, everyone.

Welcome to the Whirlpool Corporation third quarter 2006 earnings release conference call.

Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the Corporate Vice President and Controller, Mr. Larry Venturelli.

Please go ahead, sir.

Thank you.

Good morning and welcome to our third quarter earning conference call.

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

During the call, we will be making forward-looking statements to assist you in the understanding of 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 the call, we will be making comments on free cash flow, a non-GAAP measure.

Listeners are directed to slide 30 for additional disclosures regarding this item.

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

Jeff?

Well good morning, everyone and thank you, again for joining us today.

As you know, earlier this morning we announced third quarter earnings from continuing operations of $134 million.

This is up18% from last year's reported results of $114 million.

Earnings per diluted share from continuing operations, which includes the operating results, integration costs and purchase accounting impact from the Maytag acquisition, came in at $1.68 which also exceeded prior year performance.

As you all know, we reported a record third-quarter sales of $4.8 billion during the period.

This increased approximately 35% over last year and reflects both the acquisition of Maytag and continued strong demand for our innovative products around the world.

If you exclude the acquisition, sales increased by over 8% and global unit volume grew by about 5.5%.

Our sales growth continues to reflect a very strong customer response to our new product innovation around the globe, as we continue to execute the largest number of new product launches in our company's history.

I would like to make a couple comments regarding the businesses that we're in the process of divesting coming from the Maytag acquisition and how they've impacted our financials during the quarter.

First, during the third quarter, we sold the Amana commercial microwave business and yesterday, we completed and announced the sale of Dixie-Narco.

Combined, the proceeds from these sales was approximately $100 million.

These transactions impact purchase accounting and as a result, there's no gain or loss recorded from these sales.

As we previously discussed, we're also in the process of selling the Hoover floor care business and the Jade commercial appliance business.

Buyer interest for these businesses remains very high and we intend to complete the sale of these businesses by the end of this year.

The financial results for Dixie-Narco, Hoover and Jade are included in discontinued operations.

Total net earnings for the third quarter including discontinued operations came in at $117 million, or $1.47 per diluted share.

Year-to-date cash provided from continuing operation was $296 million and was up very strongly -- up and increasing from last year's level.

Our financial results also reflect four items which we'll address later on in the call.

These include a gain on the sale of assets, a product warranty settlement benefit, a pension curtailment charge, and settlement expense for non-income based taxes.

During the third quarter, our international businesses continued their very strong earnings performance with each of these international businesses reporting higher sales, double-digit operating profit improvement and increased margins.

Our innovation pipeline remains very strong and we continue to introduce a rapid cadence of new products into the marketplace.

Our North America business reported record sales during the quarter and the integration of Maytag continues to progress very well at an accelerated pace.

To date, we've announced all phases of business integration necessary to realize our previously communicated efficiencies.

The efficiency realization is tracking ahead of our internal plans and we remain confident in generating the three-year efficiencies we previously discussed with you and for your reference, those are shown on slide 6.

We continue to estimate that total efficiencies will exceed $400 million in 2008, and the associated integration costs, which are also indicated on slide 7, also remain on track.

Overall, global industry demand during the quarter was in line with our previous guidance and is evolving as expected.

Industry growth in Latin America remains very strong and it's exceeding our previous estimates.

Europe is tracking towards the higher end of our guidance, while North America is tracking towards the lower end of the range.

On balance, we expect moderate industry unit growth for the second half of the year.

And as we have seen over the last couple of years, the global material cost environment remains at very heightened levels.

When we last spoke in July, we estimated that year-over-year material costs would increase by up to $150 million in 2006.

Based on our current outlook for material costs we now expect that cost increases may exceed prior-year levels by up to 200 million and this change is primarily attributable to higher cost for base metals and component parts.

Overall, we're very pleased with our performance to date in our business.

We continue to execute well in a challenging environment and our operations remain on track to deliver our previous earnings guidance of $6.00 to $6.25 per share from continuing operations and generating free cash flow of 200 to 300 million for this year.

Joining me today is Mike Todman, President of our International Business;

Dave Swift, President of North America and Roy Templin, our Chief Financial Officer.

At this point in time, I am going to turn it over to Dave Swift for his comments on North America.

Thanks, Jeff and good morning.

Turning to slide 8, our North America operations delivered record third quarter unit shipments and revenue.

Sales of $3.3 billion increased 45% compared to last year reflecting the revenue contribution from the acquisition of Maytag, new innovative product introductions and continued strong consumer preference for the company's product offering.

Excluding the acquisition impact, sales increased by approximately 4%.

Industry unit shipments of major appliances declined just under 1% during the quarter.

Based on our analysis, we believe retail sell-through during the third quarter was up modestly and that third-quarter shipment trends reflected some retail inventory adjustments.

Year-to-date, T7 industry growth remains positive and is up about 1.3 points from the prior year.

Based on recent projections, we expect that total year T7 2006 industry volume growth will be around 1%.

Our third quarter North America operating profit was $195 million.

While our results did benefit from cost base price adjustments implemented mid-quarter and our acquisition efficiencies offset integration and purchase accounting expense, the combination of significant material and oil related costs, a pension curtailment charge, product launch costs and the addition of a lower-margin Maytag business negatively impacted our margins.

We anticipate margin improvement subsequent to the migration of our laundry production from Maytag facilities to existing Whirlpool locations, completion of the administrative reductions previously announced, and realization of the full benefit of previously-announced price increases.

In the third quarter, our innovation continued with the introduction and launch of several new products in North America.

In September, we launched the Maytag brand Epic frontload washer and dryer pair as seen on slide 9.

This launch reinforces the heritage of quality, dependability, durability and performance the Maytag brand is known for.

Over the next year, we will introduce new Maytag product innovation which will enhance the competitiveness of the brand and more distinctly convey the features that for generations has conveyed a sense of dependability.

The Whirlpool brand laundry launch, the largest new product launch in the company's history, continued in the third quarter with a full launch of the Cabrio and the Duet Sport HT.

The Cabrio washer and dryer pair, shown on slide 10, can handle the equivalent of three laundry baskets in a single load and significantly reduce dry time.

The Cabrio also saves more than half the energy and water used by conventional top-load washers.

The Whirlpool brand Duet Sport HT, seen on slide 11, is a smaller version of the popular Duet front-load pair with a suspension system to reduce vibration and noise.

Like the traditional Duet pair, it also saves more than half the water and energy of conventional top-loaders.

As you'll see on slide 12, KitchenAid brand launched a new Architect II series, a new generation of the KitchenAid premium flagship appliance line with enhancements inspired by cooks, culinary professionals and design experts.

We mentioned to you last quarter that our knowledge of our customers' needs and wants is enabling us to share and tailor innovations around the globe.

One more example of this can be found on slide 13.

The Sabor range from Whirlpool brand is designed specifically for the Hispanic consumer and is similar to the Acros range that is produced and sold in Mexico.

The Sabor range in the only range in the U.S. that features controls in Spanish first and English second.

It also has an interchangeable Mexican-style grill.

Turning to Maytag, I'd like to make a few comments regarding our integration efforts.

As Jeff mentioned, we remain on track to capture efficiencies of greater than $400 million on an annualized basis.

The introduction of the Maytag Epic was done in record time and in initial response to this new product offering has been exceptional.

We have allocated significant resources to Maytag's product revitalization and we are happy with the progress we are making in product design and engineering to support future growth through innovation and product differentiation.

All of our key integration decisions have already been communicated and during the fourth quarter, we remain on track to ramp down production the both the Maytag Searcy, Arkansas and Herrin, Illinois laundry facilities.

Simultaneously, we continue to ready our Clyde and Marion, Ohio, laundry facilities, the largest and most efficient in the world to begin absorbing all of Maytag's top-load laundry production.

We will complete this with modest capital investment and begin production in record time following the acquisition.

In summary, we continue to execute well across all aspects of our integration plan.

The integration is on schedule, on budget, and we are on track to realize significant shareholder value from the acquisition.

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

Mike?

Thanks, Dave.

Our overall international business had a very strong third quarter with each business reporting higher sales, double digit operating profit improvement and margin expansion.

If you'll turn to slide 14, I will begin my comments with our European business which reported record third quarter unit shipments, revenue and operating profit.

Revenue of $887 million increased 9% from the prior year period driven by strong Whirlpool brand performance, strong results from our built-in business segment and continued strong demand for the company's new product offering.

Excluding currency translations, sales increased approximately 4%.

During the quarter, year-over-year, company units shipment growth of approximately 6% exceeded industry demand which is estimated to have increased 2 to 3% during the quarter.

Operating profit of 60 million was a third quarter record, improving by 26% over last year's reported results led by strong productivity, cost control and an asset sale gain.

Europe's regional operating profit margins of 6.8% expanded from the 5.9% reported in the previous year.

Innovation introduced to the region during the third quarter includes the Vitesse microwave oven which is shown on slide 15, but the Vitesse offers the ability to cook, fry and bake at microwave speeds.

It also has a steam function that allows consumers to cook frozen ready-made meals at one touch.

The Bauknecht brand introduced two new built-in appliance lines.

The pure line and design line.

Both of which integrate several different global design trends.

The built-in lines, an example of which is shown on slide 16, offer features like scratch resistant surfaces that make cleaning even easier and SmartCook, an intelligent system control with text display that offers perfect cooking results.

A high- performance, fully-automated coffee machine will be offered as part of the of one of the newly-designed lines.

We are very pleased with the progress of our European operations have made over the past several quarters and we expect this to continue.

Based on current economic conditions, the company expects full-year industry unit shipments in 2006 to increase approximately 2%.

Turning to our Latin-American operations on slide 17, you'll note strong financial performance during the quarter.

Sales of $590 million improved 32% from the previous year and represented a third-quarter record.

This performance reflects continued strong demand for appliances in Brazil.

Excluding currency translations, sales increased approximately 29%.

Industry unit shipments of appliances are estimated to have increased approximately 34% during the quarter.

Record operating profit of $51 million, which included the impact of currency increased significantly over the $15 million reported last year.

Operating profit margins increased to 8.6% compared to previous year results of 3.3%.

Strong underlying demand for the company's market leading brands, continued improvements in productivity and regional incentives more than offset settlement expense for non-income based taxes and higher brand investment during the quarter.

In Latin America, we launched new products under the Brastemp and Console brands and a new line of Whirlpool brand refrigerators ins Argentina.

As seen on slide 18,the console brand launched a new refrigeration model with water dispensers which is an aspirational feature in the Brazilian market at the entry-level segment.

In Argentina, through leveraging our global product portfolio, the Whirlpool brand launched a new line of 6th Sense side-by-side refrigerators with the exclusive micro brand technology that improves refrigerator content freshness.

Shown on slide 19, the refrigerator's 6th Sense technology automatically adjusts the temperature each time the door is opened recovering the cold temperature five times faster.

We also launched the Brastemp brand microwave 6th Sense show on slide 20, the 31-liter microwave senses the perfect heating time for different types of foods automatically.

Our Latin-American operations have consistently delivered improved sales, operating profit margin expansion and higher free cash flow during 2006.

Based on the current economic environment in Brazil, the company now expects full-year shipments in 2006 to increase 10 to 15%.

Turning to Asia on slide 21, sales of 104 million were up10% from last year.

Year-over-year operating income improved $4 million reflecting the combination of strong performance in India, successful new product launches, productivity improvement and a favorable product mix.

Whirlpool Asia launched two new washing machines in India during the quarter as seen on slides 22 and 23.

The Whirlpool Sensation is a front-loading washing machine that offers the best wash performance with 20% lower water consumption and one that removes 10 stubborn stains.

The Whirlpool Sparkle is a fully-loaded semi-automatic washing machine with superior aesthetic and unique features like aqua wash and one-two, one-two hand wash.

The Aqua Shower features enable water and detergent to be poured into the center of the wash load increasing the concentration and resulting in better washing capability.

On slide 24, you'll see the Genius XL direct cool refrigerator models from Whirlpool India.

The Genius XL has features like the 6th Sense door, open alarm, utility drawer and lemon and onion holder.

Based on current economic conditions, the company continues to expect full-year industry unit shipments to increase 5 to 7%.

In conclusion, we are pleased with our international performance during the quarter and expect to continue this strong performance during the fourth quarter and in to next year.

Now, I'd like to turn the call over to Roy Templin with a financial review

Thanks, Mike and good morning, everyone.

As Jeff mentioned in his opening comments, we earned $134 million, or $1.68 per share, from continuing operations in the third quarter.

Included in our third-quarter results are four items I would like to highlight which on a net basis favorably impacted earnings from continuing operations by a total of $0.16 per share.

Pre-tax earnings from continuing operations were positively impacted by, one, approximately $40 million, or $0.37 per share in asset gains primarily attributable to a $30 million sale of an equity investment during the quarter.

And also positively impacted by a $15 million or $0.14 per share benefit from a warranty settlement.

Partially offsetting this favorable impact was, one, settlement expense of $22 million, or $0.21 per share related to non-income based taxes and a $15 million, or $0.14 per share, pension curtailment charge related to a change in benefit plans.

Of the total $0.16 per share impact from these four items, a net of approximately $0.01 per share benefited operating income while the remainder of the net benefit of $0.15 per share improved line items below operating profit.

The net benefit below operating profit consisted of improvement in interest income and sundry expense, somewhat offset by higher interest expense.

Other items of note on slide 25 include additional interest expense in comparison to last year due to incremental and assumed debt associated with the Maytag acquisition as well as a lower overall effective tax rate.

Our effective tax rate for the third quarter was 25.2% in comparison to 32.5% last year.

The decrease in rate is driven largely by our favorable tax strategy and tax credit recognition and a favorable global dispersion of income.

Year-to-date, our effective tax rate is 26.4%, which represents our current estimate for the year.

The rate is down slightly from the 27.1% annual rate we discussed with you at the end of the second quarter.

If you'll turn to slide 26, I'd like to provide an update on three elements of the Maytag acquisition which we previously discussed with you that have impacted our third quarter earnings per share.

First, as you'll recall, the Maytag acquisition was 50% cash and 50% stock.

The stock portion of the transaction resulted in the issuance of additional shares for which the associated dilution reduced our third quarter earnings by approximately $0.24 per share.

Because the cash portion of the transaction was financed, and we also assume Maytag's existing debt, we incurred $0.24 per share of higher interest expense in the quarter due to the acquisition.

Secondly, and as we've also previously discussed with you, the preliminary allocation of purchase price and adjustments at Maytag's assets and liabilities to their fair value for accounting purposes triggered prospective changes in depreciation, amortization and expense recognition.

These adjustments lowered earnings by $0.09 per share during the quarter.

Finally, one-time integration costs in the third quarter were $0.27 per share and efficiencies recognized in the third quarter improved results by approximately $0.37 per share.

In total, these costs were approximately $0.47 per share.

If you'll turn to slide 27, I'll briefly comment on our cash flow performance.

Cash provided by continuing operating activities of $296 million, which included 64 million of acquisition integration cash outflow, improved 27 million from last year, primarily due to improved receivables and payables.

Overall, working capital as a percent of sales was flat with last year at 12.4%.

Receivable days outstanding improved over five days and as a percentage of sales was 14.2% versus 14.9% last year.

Payables remained at normalized levels consistent with the last quarter and slightly better in days and as a percentage of sales when compared to last year.

As for inventory, we finished the quarter with 58 days compared to 54 days last year.

We had indicated at the end of the second quarter that we were holding roughly two extra days in our inventory.

While we took down days early in the quarter to reduced inventory levels, a number of factors including, lower than expected demand during the last half of the quarter, caused our inventory levels in dollars and days to end the quarter consistent with Q2 levels.

Overall, we ended Q3 with roughly three extra days in our inventory.

We expect to reduce our inventory from Q3 levels by the end of Q4 while at the same time managing the levels of inventory necessary to facilitate the closure of the Herrin and Searcy Plants.

Capital spending of $360 million was $65 million higher than last year primarily due to the Maytag integration, expansion of our global operating platform in Mexico, and new product innovation.

Free cash flow before dividends, inclusive of the $91 million in net cash integration costs, decreased $47 million due primarily to integration costs and increased capital spend.

In closing, we continue to successfully integrate the Maytag operations while effectively navigating the heightened costs and moderating global industry growth environment.

The integration of Maytag is proceeding well from a strategic, operational and financial perspective and we are increasingly operating as one combined company.

As a result and as previously communicated, we will not be discussing our businesses separately.

With that, I will turn the call back over to Jeff.

Okay, thanks, Roy.

Let me sum up, there's obviously in our kind of business the concern over demand, material costs and a number of moving parts within our industry, but I would just say from our view, overall, the factors which impact industry demand still remain consistent with our previous guidance, and we continue to address this heightened material cost environment by doing a number of things, including accelerating the introduction of new, innovative products to the marketplace.

We are driving productivity throughout our global operations and getting global leverage from these activities.

We continue to control our spending by reducing overhead and infrastructure.

We are very carefully managing the overall mix of our business.

In the many markets around the world, we have implemented cost base price adjustments.

We believe with this is as a background, we remain very well positioned to achieve our estimated acquisition efficiencies heading into 2007 with the continued very positive execution of our Maytag integration plans.

As we mentioned, we'll begin ramping down Maytag laundry production at the two acquired facilities during the fourth quarter and at the same time, beginning to transfer production to our Clyde and Marion, Ohio washer and dryer facilities there.

We're very pleased with our integration plans.

They are on track and we fully expect to deliver the efficiencies in line with our previous guidance of generating more than $400 million in efficiencies in 2008 and again, I would repeat what I said earlier based on our current assessment, we do expect our full-year, 2006 earnings per diluted share from continuing operations to be in the 6 to 6.25 range, free cash flow to be in the 200 to 300 million range.

We also continue to expect our 2007 full-year earnings as previously communicated to be approximately $9 per diluted share.

At this point in time, I will open this up to take your questions.

So operator, if you would proceed with the Q&A portion of the call

[OPERATOR INSTRUCTIONS].

We do have some questions in the queue.

We'll go first to Sam Darktash at Raymond James.

Please go ahead.

Good morning, gentlemen.

Hi, Sam.

A few questions here.

First off, a little housekeeping.

The $40 million asset gain, that was not with -- that was not accounted for within the European segment.

Roy, that was a separate asset sale that you were referring to?

Sam, let me provide some clarity on that. $7 million of the gain was reflected in Europe.

And about $0.30 was reflected in Latin America.

Okay.

So $0.30 of the asset gain?

Okay Sam, let me try this again here.

First of all, OIOE and we talk the difference OIOE and operating profit.

If you recall in my script, I said of all these items one penny affected operating profit and a net of $0.15 affected items below operating profit, okay.

So there were $0.07 of gain in Europe which affected operating profit, okay.

And there was about $0.30 of gain in Latin America which is included in our other income, other expense category.

Below the operating profit line.

Okay, but that would be in the sundry line not necessarily in the Latin-American segment line, correct?

That's correct, Sam.

Okay.

I got you.

Next question, Jeff, if you could help look at your 2007 number and I'm not really looking so much as your $9 number as I'm looking at what macro assumptions you're using to base this on with respect to housing starts - existing home sales, GDP that sort of thing, if you could help with us that.

Yes, Sam.

Let me give you a little bit of insight there.

If you will, I will go back to our late May call where when we first because of all the moving parts with Maytag, we offered this guidance, what, for us is relatively early, and the basis for this was we said there was two underlying sets of assumptions that we're supporting this with.

One is that we believed-- we anticipated global industry demand from next year to be in the 1 to 2% range.

And secondly, we said that material costs would be roughly equal to where they were at the middle of the year.

I would say today, and we're not ready to offer a full detail behind all these assumptions yet, but our current thinking is that the global industry growth of 1 to 2% is still realistic from what we see, and that the material costs, although higher than we had expected at the time, we also have as a positive benefits of our business as we mentioned earlier, our efficiencies are being realized faster.

We're managing it with very effective one-time costs so we have a couple of offsets there, but you know, given that we're still in October, we'll give the full detail background in February when we normally do, but I would say that we're still comfortable with approximately $9 per share and those are kind of the two key assumptions.

Okay, but in terms of more macro, Jeff, if you could help us with what you see in the overall, particularly North American since that's where most analysts at least would focus on, I would imagine.

What is the more broad-based economic assumptions might be that go into the global--?

There would be really three, which I think at different times given updates on.

I would say, you know, our primary U.S. drivers and again, we're not ready to offer an official forecast, but we're looking at I would say flat to modestly up range right now in the U.S.

But that would be based on double-digit declines in new housing completions, mid-single digit declines in existing home sales and a GDP between 2.5 and 3.0 right now is where we're basing these assumptions on.

Okay, very helpful, thank you.

Now, if we take a look at where oil prices have trended over the past few months and cold roll sheet steel prices have trended over the past few months, even though on a year-on-year basis at least with steel it's up, but on a sequential basis, they're down.

Help reconcile that with the material cost inflation that you're seeing and then at what point do we begin to see those types of recent downward moves begin translating through the P & L?

Sam, let me talk about the materials.

The biggest change from the $150 million estimate we had mid-year versus the 200 now has not been in those two areas.

It's been base metals, copper, nickel, zinc, et cetera, et cetera which have gone up dramatically and although they have rebounded a little bit off their highs, they're still significantly higher than what they were earlier in the year and that's something that, you know, given the way we purchased those kinds of commodities, we expect even with a modest decline that those costs based on our year-over-year costs will still increase by the balance of the year and likely into next year unless there's a major decline.

The second area is those are the same feed stocks which drive many of our strategic components and you know, as we have seen in our value chain and the need to pass through cost-based price increases, we've seen that in some critical components for the same reasons that their material costs have gone up.

So those are the two sectors, which I would say have had the most profound impact.

Regarding oil, you're right.

It's down from -- 23% from the high.

We have not yet seen a corresponding decline on things like resins which that generates although, there generally over time, those would go in the same direction.

The other area is steel.

We have different contracts around the world we have not completed our 2007 steel negotiations so it's premature for me to talk about steel.

Last question, if I could, and then I will defer to others.

I know you mentioned that you don't want to talk about or parse out the Maytag business with the Whirlpool business, but if you could talk about some of the dynamics that were occurring during the quarter in North America with respect to market share.

Obviously, General Electric put out a real healthy growth number in the quarter and organically, you're up 4% which suggests perhaps Maytag was down.

If you could just talk directionally about the direction of sharing and what sorts of dynamics may have occurred, that would be helpful.

Yes.

I think, Sam, this is Dave Swift.

First of all, on the Whirlpool brands, I mean, we think our share was essentially flat year-over-year on the Maytag side as we expected.

There was some slight share loss, and I think, you know, a couple things that were going on in the marketplace that we were pro-actively try to work.

Number one, there were some products particularly in the case of frontload laundry.

I know we have an OEM relationship that Maytag had that we felt was not delivering against consumer and trade expectations and as I said in my presentation, we since have replaced that product with the Epic washer and dryer and it's been very well received by the trade and by consumers.

We think that's going to continue on a very nice trajectory for us and of course, the product area that has been a big challenge for Maytag over the last couple of years, they're top-load laundry segment, that's the part of the business that as both Jeff and I said we're addressing with the conversion to our Ohio plants in this quarter, the fourth quarter and into next year.

So where we did have some share challenges with Maytag that were expected and we think the actions we're taking are getting us on the right trajectory going forward.

Has Maytag ex laundry pretty much just maintained share?

I'm sorry, Sam.

Maytag ex laundry pretty much maintained share then is what you're referring to?

Yes.

Sam, I would only add to that as we go through these transitions and as you have seen in some of our product lines over the last year, the Maytag brand or the Maytag heritage brands will be seeing a similar renewal product lines over the next 12 months so it was important that we start this process.

It was important as we manage these transitions that we were able to supply, you know, guarantee supply to our trade partners without disruption.

So it was not a surprise to us to, I would say have some moderate declines in share during this point in time.

We're very excited and I would say the trade has seen many of the new Maytag products coming and we're very excited about Maytag being a growth story once we get this product renewal process into the marketplace.

Thank you very much.

We'll go next to Laura Champine at Morgan Keegan.

Good morning.

Hello, Laura

Just to clarify where things are showing up on your P & L, the restructuring charges related to the Maytag acquisition, are those folded into cost of goods sold and SG&A expense?

They are, Laura.

If you recall, well, all the way back to our May 23rd call, we talked about really two aspects of costs.

First of all, the cost that hit the P&L and again, we said those were primarily, it was $115 million just as a reminder and we said the three key areas of those costs were consulting, technology costs and manufacturing start-up.

And so, as you can tell, two of-- really, all of those end up partially in cost of goods sold and partially in SG&A.

And then we have the restructuring side of the equation we ended up accruing, and as you know in our form 8K that we filed, Laura, we said there would be 230 million to 260 million in total costs of restructuring for the manufacturing facilities.

We have accrued about $245 million of that to date.

About 75% of those costs would be severance related which will be reflected in our accruals, but again, those were done in parts of purchasing accounting.

So the restructuring line that you see, Laura, on our P&L, to be clear, is legacy Whirlpool restructuring only.

The other restructuring would be a part of purchase accounting

When we started the year, I think we were talking about Whirlpool specific restructuring ending the year at about $100 million.

Has that outlook changed?

Well actually, Laura, at this point, we would say we expect to come in a little under 100 million now.

As you can see, we've incurred $40 million to date through the end of the third quarter.

The interesting thing about restructuring is that there's very finite rules from an accounting perspective in terms of when you recognize costs and so we literally end up on a project-by-project basis dependent upon the status of where we are at on that particular restructuring item recognize the cost at that point, but net-net, Laura, yes, we now anticipate coming in lower than the 100 million.

One last thing.

On the inventory build, at the end of the quarter, can you quantify how much was related to North American demand and whether or not any was actually related to an inventory adjustment at your customers?

Laura, a fair amount of the inventory increase year-over-year ex-Maytag was, in fact, in North America first of all the answer to the first part of your question.

If you look at the year-over-year increase in inventories, Laura, Q3 to Q3, we're up about $825 million, about a little over $500 million of that is Maytag related.

You've got about $50 million in there related to simply translation, and then, Laura, we've got a little over $50 million between, 50 and 75 million, that is inventory that we've consciously built with respect to product transitions and Dave alluded to that in his script, and then you've probably got about $60 million that would be pegged to volume, ex-the two days we plan to takeout and the remainder would be the three extra days that I referenced in my script.

So it's about 60 million related to volume?

Yes, to the incremental build, that's correct and 60 to volume.

Got it.

Great.

Thank you.

You're welcome.

And we'll go next to David MacGregor at Longbow Research.

Yes, good morning, gentlemen.

In North America, it sounds as though your volume may have been down slightly.

I was wondering if you could just break out for us volume versus ASP gains.

This is Dave.

For the traditional business, our volume was up about, in units, was up about 2%.

Our revenue was up 4%.

Okay, so you're saying your ASP gains were about 2%?

Net-net.

Okay.

Can you talk a little bit about the pricing initiatives that you were pursuing in the quarter and the extent to which you got traction.

I guess I'm trying to get a sense of that price increase, how much of that was mix and how much of it was the result of your pricing initiatives?

As we've said, we started our pricing initiatives in the middle of the quarter and we, based on the material costs increases that Jeff talked about, we continue to fully execute that, and you know, as we go forward into Q4, we fully expect to receive a full-quarter benefit from that.

David this is Roy.

If you look at, and it's tough to answer your question in terms of bifurcating it because of the innovation side of the equation and the pricing that goes with that, but net-net, if you look at our price mix in the quarter, it improved our margins by about a half point on a global scale.

On a global scale?

That's correct.

I guess I'm trying to get a sense of, and I appreciate that new product innovations are going to have a higher price point on them versus products that maybe weren't innovative introductions but were existing products where you had pursued a price increase.

And then maybe if you kind of exhausted or taken that as far as you possibly, can maybe you could talk a little bit about the expected impact on fourth quarter.

If we haven't got much traction in 3Q what do we get in 4Q?

David, I will start with this and Dave, if you want to build on it from a market perspective.

From the financial side of the equation, David, we would expect to roughly double what we had in the third quarter with respect to our pricing actions simply because, as you know, we started taking the actions in the first part of August, so we end up net-net getting about half of the benefit from a quarterly perspective in the third quarter and then we would anticipate getting the full benefit or full quarter's worth in the fourth quarter, which is part of the North American run rate story in the fourth quarter

Right.

I think when you originally pursued those price increases you talked about 6 to 12%.

Can we talk about your expectations for the fourth quarter in those terms?

David, we're not going to talk in those particular terms.

Again, remember the 6 to 12% was on selected products and so, again, it's important that it wasn't on the overall base, and really, all we're prepared to say today or really discuss today is the overall impact from a total perspective.

Okay.

Retailer inventories, you had talked about some adjustment there.

To what extent are the retailer inventory adjustments going to extend into the fourth quarter?

Our sense-- this is Dave.

Our sense at this point, David, is that the retailers made their adjustment and that we saw sell-through, as I said up modestly with the shipments in and down about 1%.

So we think that they've already had probably in the neighborhood of about a 2% adjustment in terms of their inventories and we think based on what we see happening for the balance of the year, that's certainly adequate.

Going much below that, they run the risk of stockouts and clearly, they don't want to do it.

Just to build a little bit on Roy's comments earlier that you asked about, David, on margins, I mean, we are going to, as we said, continue to see the efficiencies from what we've been able to achieve with Maytag continuing to ramp up.

We also, as you know have, a historically higher mix of our business in Q4.

We expect that to continue, and the full benefit of innovation, the new products that we launched, the Epic product as well as the other innovative products, we'll have a full-quarter benefit, where as I said in my script, we launched those things in Q3.

So there are a number of drivers that we have that are going to help us to ramp up our rate.

Okay, thanks for that, David.

Roy, last question.

On slide 26 where you break out the efficiencies and the one-time costs, your efficiencies were $0.37 a share versus $0.14 last quarter.

Nice pickup there, but what should we look for in the fourth quarter, and then also for the one-time costs, 27 versus 23 last quarter, what should we look for in the fourth quarter?

David, let me answer your question this way.

You know, on May 23rd, when you looked at this total group of cost, we estimated about $2.25 --

Right

-- were the total cost in terms of the transaction related EPS effect.

We had $0.75 cents in the second quarter of impact and to your point about $0.47 this quarter.

What we're saying publicly, David, that we anticipate we will not ---we will not recognize the full $2.25 at this point in time.

We estimate that the number will becoming in under that.

Part of that being one-time costs.

We think it will be pretty much on track.

As you'll recall, my comments from the second quarter, David, again, a couple pieces of this, the technology piece of one-time costs and the manufacturing start-up piece of the one-time costs are more Q4 related and so there's obviously more of an impact in the fourth quarter.

But we do, in fact, effect-- impact, you know-- excuse me, we do expect our efficiencies to be greater than what we had originally projected and that 75 to 100.

If you struck the mid-point there, we obviously now anticipate being higher than that a mid-point.

Thanks very much, gentlemen.

Thank you.

Next question will go to Michael Rehaut at JP Morgan.

Thanks very much.

Good morning.

Good morning, Michael.

Just on the Maytag integration progress, you had talked about what you plan to do in terms of laundry.

I was wondering if you could just kind of review that and by the end of the fourth quarter, what's left to do and what would be the timing of that?

That's the first question.

Yes, Michael, this is Dave.

First of all as we've already said on the front loader side, we have our Epic product out, which is Whirlpool manufactured washer and dryer replacing what had an OEMP.

That's done.

That's in the marketplace.

We'll get the full benefit of that for all of Q4.

As it relates to the top-load piece, as we speak, we are moving production from the two Maytag plants to our Ohio plants.

We'll start doing the early production runs this quarter with products being shipped to the market, to customers in the first quarter and that's moving well on track.

No issues that we've been able to achieve.

In fact, we're moving ahead of our schedule.

So at this point in time, the laundry transitions are going well.

As it relates to other product categories, We, I think shared with you a fact during the summer what we're doing across the entire brand portfolio ensuring that we have great differentiation with our innovation.

We have enough innovation to do that, so we're now in the process of also taking that innovation to all of the other categories within the Maytag brands, and that's part of what we talked about before with our bottom-out refrigerator and some of the other spaces we're in.

So in 2007, you will see not only in laundry, but in other our other product categories a total revitalization of Maytag and its brands and that's what the story is all about.

Thanks, Dave and in terms from the cost side, I believe you just mentioned before regarding some of the technology costs will be 4Q weighted but in terms of the, R&D and some of the other duplicative functions, have most of those actions been taken in terms of eliminating overlap?

Yes.

All of the announcements that we needed to make in terms of staff reductions whether it's in the traditional corporate kid of staff functions or R&D, all of those communications have taken place.

The majority of those people will have exited by the end of this year.

There will be some things that continue into 2007 as we work through the transition of the final Newton facility, but all of those communications have been taken place at this point, Michael.

And in terms of the continuing shifting, retail environment with K-mart and Sears, in particular, I was wondering if you noticed any changes, any growth with Kenmore and how you're approaching Home Depot, or if there are any changes with Home Depot with Maytag's prior relationship with them?

A couple things.

First, I think as it relates to Sears, we have seen that business stabilize.

We have seen a couple of key drivers of that.

There's more innovation on their floor, which is, I think, helping their business move.

They've been more active in the marketplace in terms of how they talk about their business in terms of promotional advertising, and we have seen that stabilize.

So from that perspective, that's been a change, I think, from what we have seen in years past.

As it relates to Home Depot, ultimately, we have to earn the business with every one of our trade partners and as we've talked before, there have been some issues clearly with Maytag's portfolio in the past.

We have made the first big adjustment with Epic.

They have that product.

I think they're very satisfied with having that on their floor, and we're going to have to continue to bring innovations in other areas which we're doing.

The new laundry line, clearly, but they represent an opportunity and we're working hard to build that relationship, and it's not just with the products.

It's also how we work to support their business and we're also in the process of totally connecting the Maytag and Whirlpool infrastructure through our SAP systems so that we can have one system serve all, and that's taking place this month as well.

So does this--I mean, because prior to Maytag, Whirlpool hadn't been in Depot, so with this - with Maytag coming on and their existing relationship, is this something where you would see potentially a growth opportunity for your Whirlpool products into this channel?

Well, first of all, Whirlpool does have the relationship with Home Depot and today, we sell them successfully in Mexico, Home Expo here in the U.S., and we've always had very good dialogue with Home Depot.

At this point, our number one priority is to ensure that we have Maytag fully revitalized and where we go beyond that is to be determined and we believe that is a big growth opportunity at Home Depot and everyone else in the marketplace that carries the Maytag brand.

Great.

Thank you, and just last a couple of housekeeping questions.

What should we model for a normalized tax rate and regarding the other charges of the 15, 22 and 15, the 22 tax [down] and the $15 million benefits and charges, I was wondering if you could just confirm if those were also largely in the sundry expense or if there were any remaining charts of those numbers in the operating profit line items by region?

Michael, let me start out with your question on tax rate.

Again as I said in my script, our current estimate of our annualized rate is 26.3%.

I said to you earlier this year, we were assuming a tax rate somewhere around 27%, but as we roll up all the individual components of our overall rate, the rate is more like 26.5 right now as we speak.

That should be for '07, too, as well, Roy?

Well, Michael, we're real really not providing '07 guidance.

I think we have said that absent anything else, we do not see our tax rate changing significantly from the 27% as we go into '07, but we're really not prepared to give a specific rate today.

But we'll talk about that on the next call, however.

Okay.

And then the second part of your question, again, Michael, just to be clear on these items, one penny affected operating profit, okay, and that's important.

And in there, you had the pension curtailment which you referenced and that shows up in North America and that's in cost of goods sold.

Part of the tax settlement in Latin America, about $0.06 also in cost of goods sold because that frankly was where the benefit was a few years ago and obviously the warranty settlement of $0.14 was in cost of goods sold as well.

I referenced with Sam earlier the asset gain in Europe.

That what was in SG&A of $0.06 and those are the key components in operating profit.

The warranty settlement, was that also in North America?

That was also in North America.

That's correct, Michael.

Okay, thank you.

You're welcome.

And we'll go next to Eric Bosshard at Cleveland Research.

Good morning.

Hi, Eric.

Three questions.

First of all, Maytag, can you give us a sense I guess as I look through the numbers, the revenues were down in 3Q versus 2Q by 4 or 5%.

Can you just talk about and I think in 2Q, you said that business was flat year-over-year.

Can you just talk about the share experience in 3Q and anything that you are taking away from that?

Eric, this is Dave.

The only thing I would say is that we had planned that there was going to be some share loss as we took the OEMs, front loader for example, out of the market and replaced it with ours so that is one of the things that we had anticipated.

Again, we knew that we were going to have to earn the business with our trade partners that just having us take ownership wasn't going to be enough to win that, and that's what we're doing with the revitalization of the product.

So there wasn't anything that I'd say was a learning from a surprise point of view.

I think the key is that it's reaffirming to us that we need to revitalize the brand.

That's what we're doing and that's what we're executing.

The Epic shipped in the third quarter, is that correct?

Pardon.

The Epic did ship into the channel into the third quarter?

Just began.

Okay.

Secondly, in terms of the promotional environment, I know you commented that you thought you would get 2X the price in 4Q that you accomplished in 3Q.

Can you comment on what's going on from a promotional standpoint and how it's influencing your ability to get price or to net out price relative to that gross price increase?

We haven't seen anything yet, Eric, that's any different from what we would normally see in terms of what we call trade partner investment that we would have to do to drive price.

So nothing out of the ordinary in that regard.

I think you commented that in the back half of the quarter, you saw slower volumes that contributed to higher inventories.

Have the retailers looked at that and has that continued into October and has that changed their thinking, or do you believe that might change their thinking about promotions?

No.

I think what we saw happen at the end of the quarter was some retail inventory adjustment.

As I mentioned, Eric, we saw sell-through at a modest pace even though that the quarter shipments in were down one, so I think the inventory correction that they needed to make looking forward for the rest of the industry in terms of demand, they have already done.

Okay last.

In terms of the core North America and I'm still trying to sift through where the pluses and minuses were in terms of the warranty and these other factors, but it appears that the core Whirlpool North American profit was down year-over-year.

Is that correct?

Excluding the impact of Maytag?

Well, again, Eric, we're not - as I said in my script, we're not going to talk about the business as separate.

We can talk about North America in total, but we're really not going to talk about Maytag separate from core North America or the legacy North America.

Okay.

Having said that, I guess the question is that with the volumes up 4%, the overall consolidated profit improvement was softer than in 2Q and the Maytag contribution which you broke out for us separately was better than 2Q, but I guess I'm trying to figure out what was the moving part within North America that resulted in the overall profit performance being down in 3Q versus where it was in 2Q and considering it?

Eric, it's material costs.

We had higher material costs in Q3 and that exceeded the pricing we achieved.

The material cost increased in 3Q relative to the price you achieved?

That's correct.

Eric, I would say two other items that are worth noting in the run rate, you're going Q2 to Q3 and one would be forget about the launch costs that we incurred and in addition, this pension curtailment charge of $15 million was all in North America margins.

That was offset somewhat by the warranty, the favorable warranty as well.

Okay.

Perfect.

Thank you.

Thank you.

And our final question will go to Jeff Sprague at Citigroup.

Please go ahead.

Thanks, good morning.

I guess, first, if we could just focus on the macro guidance.

You know, if I look at kind of North America, the outlook for next year flat to up modestly sounds very similar to the kind of up 1% we expect this year, but next year, we get slower GDP growth, new housing down and existing home sales down, so I'm just wondering what it is in your model that would give you confidence that volumes this year would look like - I mean, volumes next year would look like volumes this year?

Yes, Jeff.

I think it really gets down to what assumptions and what impact housing has on the appliance demand.

And basically our model works like this.

Is that although it's been declining every year for the last two decades, today, new construction accounts for about is 18% of appliance demand in the U.S.

Existing home sales accounts for about 18% of appliance demand in the U.S.

The same amount.

So if it's combined they're about 36%.

We are in the new construction a little bit underweighted to the industry, so we will have a little bit less of an impact, but in essence, if new construction is down 6%, you lose one point of demand in the appliance business and it's the same with the existing home sales.

The balance, the 65%, which is pure replacement, is growing about 2%.

So, as we model this, we look at all of these factors.

We look at completions, existing home sales, GDP, mortgage rates, employment, consumer confidence and that's what we model.

And, again, I think where there's probably disconnects is what people are assuming the housing market's going to have on industry demand.

Basically, I gave earlier our assumptions were that completions would be down double-digits and existing home sales would be down low single-- mid-single digits.

That's how we, right now, are looking at the flat to plus 1% next year.

So, I guess if there's questions about some of those underlying assumptions, I don't know if we can answer them any better than that right now.

Okay.

That's fair.

Jeff, the only thing I would say is somewhat from what we're seeing now, you have got to look at this monthly or quarterly.

We're right now ramping against huge increases versus last year.

So the declines are a little bit more profound when you're ramping against a huge growth period the year before.

So sitting here today, I would expect next year to look growth patterns would be somewhat of a reverse of this year where we have big growth you'll probably have bigger declines and where you had declining growth, you'll probably have the gain.

That's pretty much how we're seeing which is lower first half, higher second half.

I was wondering also Roy, if you could elaborate on the legacy Whirlpool restructuring.

You said it would be below the 100 million but can you get us in the ballpark on what we should expect there?

Jeff, at this point, all we're going to say is that we're going to be below the 100 million and the trick we have quite frankly is again we have very rigid accounting with respect to these projects so it really is going to be dependent upon the status of where we're at with each of these projects in terms of how we recognize the expense from the accounting perspective.

So we're only prepared to say that we will be below the 100.

And just backing out from the prior conversation about margins.

It sounds like if price didn't totally compensate for costs in the quarter then price was around 1%, the mix was around 1% on the revenue.

Is that the right ballpark to think about the difference between 4% revenue growth and 2% volume growth? 50/50 mix between price and mix?

It's in the ballpark, Jeff.

And then just finally, I was just wondering if you could give us any early color on October if in fact this inventory correction you saw at the end of the quarter if you have in fact seen kind of things pick back up and normalize?

Jeff, it's really is too early in terms of industry data as you know lags about two weeks and we're not far enough into the quarter to really give you any color on how the month has playing out.

All right.

Thanks a lot.

Thank you.

And Mr. Fettig, this does conclude our question and answer session.

I'd like to turn the call back to you for any closing comments, sir.

Well again, thank you, everyone for joining us today.

We're looking forward to the beginning of the year giving you an update for the full year and we appreciate your attendance today.

Thank you.

Thank you.

That does conclude the call.

We do appreciate your participation.

At this time, you may disconnect.

Thank you.