惠而浦 (WHR) 2008 Q1 法說會逐字稿

Good morning, and welcome to Whirlpool Corporation's first quarter 2008 earnings call.

Today's call is being recorded.

For opening remarks and introductions, I'd like to turn the call over to the Director of Investor Relations, Greg Fritz.

Please go ahead.

Thank you, Kevin, and good morning.

Welcome to the Whirlpool Corporation first quarter conference call.

Joining me today are Jeff Fettig, our Chairman and Chief Executive Office, Mike Toman, President of Whirlpool North America, and Roy Templin, our Chief Financial Officer.

Before we begin, let me remind you that as we conduct this call, we'll be making forward-looking statements to assist you in understanding Whirlpool's future expectation.

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

During the call we'll be making comments on free cash flow on non-GAAP measure.

Listeners for directed to slide 32 for additional disclosures regarding this item.

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

With that, let me turn the call over to Jeff.

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

As you saw earlier this morning, we released our first quarter results.

Now we'd like to provide you some details of our earnings release.

For the first quarter we reported that our net earnings declined by 24% versus last year.

Net earnings from continued operations were $94 million and EPS was $1.22 per share versus $1.55 last year.

Overall net sales for the quarter were up at $4.6 million[sic-see press release] which was the 5% versus last year.

Overall, I'd summarize the quarter in the following way.

First of all, our international businesses performed very well.

Our international sales grew by 18%.

Our operating earnings grew by 34%.

Overall, this was a record operating performance by our combined international businesses.

The real operating challenges that we saw were most profound in the U.S.

market where we saw demand decline by 9.2%.

This is now the seventh consecutive quarter where demand has declined in the U.S.

market.

In addition, compared to the first quarter of 2006, in other words, a two-year average, U.S.

demand has declined by over 18%.

It now marks the most severe appliance recession that we've seen in over three decades.

Although appliance demand in the U.S.

and Europe were major challenges in the quarter, the most critical challenge we're facing is the continuing surge of material in oil-related costs.

This is the primary driver in the decline of our performance in Q1.

On slide four you'll see a chart which shows our top material input cost for steel, oil, diesel fuel, resins and copper.

Over the last four years these costs have been increased anywhere from 200 to well over 300% and continue to rise.

On a year-over-year basis, April prices have now increased significantly compared to the average levels during the first quarter of 2007.

Year over year we've seen a surge in oil up 80%, diesel fuel up 50%, and the spot prices feel like 50%.

When we last talked in February, I stated we would have a very difficult first half of the year with strong recovery in the second half.

This was based on the actions that we're taking within our global operations to overcome both declining demand and increasing costs.

Today we still believe this earning pattern for the year is accurate.

The changes that we see are, one, weaker than expected consumer demand in both the U.S.

and western Europe and material and oil related costs rising more rapidly than we previously expected.

Of course, the main drivers are oil, which has hit $118 per barrel which negatively hits our cost of resins and in diesel fuel.

The other significant area of change has been in steel where the spot market has risen over 30% since the beginning of the year.

Overall, we are increasing our outlook for material and oil-related costs for the year from $350 million increase to approximately $450 million to $500 million for the year.

These changes along with very weak consumer sentiment, particularly in the U.S., and continued currency volatility are the factors which have caused us to lower our full year earnings guidance from $8.50 to $9.00 a share we previously guided to to the current guidance of $7 and $7.50.

At the same time, we've lowered our free cash flow estimate from 600 to 650 to 500 to $550 million.

Within this guidance, we continue to expect first-half earnings to be weak as we saw in the first quarter with strong recovery in the second half.

The basis support the second half recovery is driven by, first, very strong productivity, structural cost reductions and reduced spending levels which, as we previously discussed, traditionally ramp up through the course of the year and we expect to see that pattern this year.

And, secondly, cost-based price increases which we've already announced or implemented in all of the major markets all over the world.

Regarding these price increases we've taken the position that the ongoing significant material and oil-related inflation can no longer be offset purely by productivity or through further contractions in our operating markets and that these costs must be passed through the marketplace in order for us to continue to provide the high level of innovation, value and service that our customers have come to expect.

We will continue to best appropriately new product innovation as we have been and consumer brand advertising in order to stimulate demand and bring consumers -- to bring consumer relevant information to the marketplace.

These investments are key value drivers for our company over the long term and it's imperative we maintain our innovation, continue to build our strong brands.

With these comments as background, we're continuing to execute against the four business priorities we previously talked about.

These are, one, implementing the previously announced cost-base price increases globally.

Secondly, delivering a record level of productivity.

Third, adjusting cost structures and production capacities to the expected demand levels we see in the marketplace today.

And, importantly, continuing to outperform market growth by leveraging our very strong brands and innovation in order to improve our growth and revenues.

During the first quarter we also completed our share purchase authorization by purchasing $97 million worth of our shares.

Our board has authorized a new share repurchase of $500 million.

This is in line with our investment priorities and reflects our view that our shares are undervalued.

We will initiate the share repurchase during the second quarter and expect to fund this through our free cash flow.

No specific timeframe has been given to complete the share repurchase.

And the share repurchases are dependent on a rate of free cash flow generation going forward.

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

Thanks, Jeff, and good morning, everyone.

Let me start by giving my perspective on North American's performance in the quarter.

Our net sales declined 3% during the quarter to just over 2.6 billion.

U.S.

industry demand for T7 appliances declined around 9% during the quarter.

We experienced strong growth in our Maytag brand as a result of bringing new product innovation into the marketplace.

Both of our major brands posted year-over-year increases in market share.

In addition, our average selling values showed improvement relative to the prior year.

During the quarter we reduced our promotion spending and increased spending on brand investments and consumer advertising.

Additionally, during the quarter we had several new product launches, including a new line of Jenn-Air built-in bottom-mount refrigerators and new french door product offerings for Maytag, Whirlpool, KitchenAid.

Turning to operating profit.

Profit declined $115 million to $44 million in the first quarter.

This decline is mainly attributable to three factors.

One, increased material and oil-based costs.

Two, lower U.S.

industry demands and, three, increased brand investments and consumer advertising costs.

First, we experienced significant raw material cost increases during the first quarter.

We experienced substantial increase in metal-based purchase components.

In addition, diesel fuel prices accelerated which resulted in substantial increase in our freight costs during the quarter.

Second, while our volume performance was above the industry performance level during the quarter, we did feel the effects of a challenging industry environment.

As part of our inventory management efforts we reduced our production days during the quarter which resulted in lower costs absorption which impacted our gross margin and operating profit margins.

Finally, as we discussed during the previous call, we made some conscious SG&A investments during the quarter, particularly in the area of advertising.

While we feel we are seeing near-term benefits from our advertising initiatives, these efforts did result in increased SG&A spending during the quarter.

Partially offsetting some of these unfavorable variances were productivity improvements.

Slide 9 provides an update on the status of the key indicators behind our 2008 industry demand outlook.

As you can see, we have experienced deterioration in most of the key indicators affecting U.S.

industry demand.

By way of a reminder, approximately 30% of U.S.

industry demand is directly related to new home completions and existing home sales.

Considering the current outlook for these components as well as sharply lower consumer confidence, we now expect U.S.

demand to be down 5 to 6%.

On slide 10 I would like to discuss with you some of the key actions we are undertaking giving our expectations to lower industry demands, higher material and oil-related costs and our first quarter operating performance.

We are focused on accelerating our productivity initiatives.

Given our historical pattern of productivity improvement, we would typically see our productivity ramp up quarter to quarter during the year.

As we discussed in our fourth quarter call, 2008 is a strong year for new product launches.

Specifically, we are planning on 72 new product launches throughout the year.

We will discuss the timing of these in a moment, but we believe these launches will provide us with strong new products in the marketplace, particularly in the second half of the year.

We have announced additional cost-base price increases that will take affect at the end of the second quarter.

Given the significant rise in raw material in oil-related costs that have persisted for several years, we are taking some of these increases in cost to the marketplace and will continue to provide high levels of invasion and value to our consumers.

Finally, we will build upon the positive momentum that we established in the marketplace.

Our go-to-market plans have gained strong traction and our increase in consumer advertising has been well-received in the marketplace.

In summary, our North American operating margins are unacceptable, but I'm confident that we have taken the right action to address the macroeconomic challenges we are facing in the U.S.

market.

Turning to slide 11, I would now like to highlight some productivity initiatives we are undertaking to provide you with some additional background.

One, we continue to evaluate our manufacturing facilities on an ongoing basis.

We are undertaking several facility moves to improve our efficiency.

Two, we are extending our manufacturing lien initiatives to the enterprise level.

While we have had strong lien manufacturing programs over the past decade, we are extending this process to the entire enterprise, including the supply chain, in order to improve our productivity.

Finally, we are undertaking efforts aimed at optimizing our global product architecture.

We expect these efforts to result in lower component costs and higher manufacturing efficiency over time.

Turning to slide 12, I would like to highlight the expected pace of our new product launches in 2008.

As we mentioned on the previous call, we are launching 72 new products during the year.

As you can see on this chart, many of the launches are focused on the second half of the year.

One of the more notable areas for new product launches is in the Maytag laundry category where we are replacing over three-quarters of our existing SKUs in 2008.

Overall, we believe that these new products will have a positive impact on our revenues and mix in the second half of the year.

Finally, I would like to turn to the outlook for North America for the remainder of the year on slide 13.

As I mentioned previously, we are currently expect U.S.

industry demand to decline in the 5% to 6% range in 2008.

Raw material and oil-based prices continue to increase in spite of the slower industry conditions in the United States.

We have detailed aggressive productivity initiatives and have announced or implemented cost-based pricing increases to offset these headwinds in the second half of the year.

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

Thanks, Mike.

Our international operations posted record results during the first quarter.

Latin America posted strong sales and operating profits.

Our European operations posted solid results in what we would call an increasing challenging market environment.

Our Asia business improved operating profit as well as going very well during the quarter.

Overall, we're pleased with our international performance as we posted in every region of the world expanded operating margins.

If you'd turn to slide 16 you'll see our European performance.

Our European revenue increased 13% to $940 million in revenue for the quarter.

Local currency revenues were down 2% versus the prior year.

We saw industry shipments for the quarter in the region decline by about 2 to 3% year-over-year.

Our operating profit totaled $45 million in the first quarter which was 17% versus last year.

The results reflected improved productivity in the effect of our new product innovation.

Partially offsetting the improved operating profit performance were higher material costs.

On slide 17 you'll see our Latin America business which reported very strong first quarter results.

Here revenues increased 24% to $932 million.

Excluding the impact of currency our sale increased by about 9%.

Our operating profit increased by 41% to $119 million during the quarter and our margins expanded to 12.7% up from 11.1% last year.

Increased unit shipments, strong productivity were positive factors in our first-quarter results.

Here, too, our results were negatively impacted by higher material costs.

On slide 18 we summarized our first quarter results in Asia.

Sales grew very rapidly at 19% during the quarter.

Our results were led by a very strong performance in our India business.

Excluding currency, our sales increased by about 9%.

We did report an operating profit of $2 million which was up from last year.

The results really reflected the productivity and the price mix gains from our new product introductions.

On slide 19 we'll give you an outlook for what we see going forward in terms of demand of our international businesses.

In Europe we currently expect our 2008 industry volumes to decline by 2 to 3%.

This is down slightly from our previous outlook where we thought it was flat for the year.

The industry declines we saw in the first quarter were more acute than we had previously expected.

Here it really is a mixed bag.

Where we've seen pockets of strength across the region, we experienced significant demand declines in certain markets in western Europe.

The countries where we saw the most notable declines were Spain, Ireland, France, the U.K.

In contrast, the eastern European countries continued to show good growth.

Turning to Latin America, based on the current economic outlook, our previous forecasts for industry unit volume growth in the range of 5% to 8% remains unchanged.

The Latin America economic indicators remain very positive and we continue to leverage or market-leading position throughout the region.

In Asia our growth estimates are unchanged at growing at 5 to 10%.

As I previously mentioned, higher material and oil-based costs continue to have an unfavorable impact on our international operations.

We will continue to address these cost increases across our international operations with both productivity initiatives and previously announced cost base price increases.

Overall, despite somewhat more challenging conditions in Europe, we remain very well-positioned to continue to deliver improved results in our international businesses in 2008.

So at this time I'm going to turn it over to Roy Templin, our CFO, for a financial update.

Thanks, Jeff, and good morning to everyone.

Beginning on slide 21 I'll walk you through a summary of our first quarter performance.

From a top line perspective we continue to experience strong sales from our international operations.

In addition, foreign currency translation had a favorable impact on our net sales.

Weak U.S.

and European industry demands offset these favorable factors.

Turning to the income statement on slide 22, during the quarter we reported revenues of 4.6 billion, up 5%.

Excluding the impact of foreign currency translation, our sales declined 1%.

We monetized $41 million of EPS tax credits during the quarter based on both sales and mix.

Our gross margin contracted 1 point to 13.3% for the quarter.

The decline in gross margin is primarily the result of increased material and logistics costs.

We absorbed approximately $130 million of increased material and logistics costs during the first quarter.

These costs were partially offset by favorable productivity initiatives.

Our gross margins expanded in each of our international regions during the quarter.

On a consolidated basis the gross margin decline was attributable to our North American operations.

Our North American operations were disproportionately impacted by higher material and logistics costs and lower manufacturing production absorption.

SG&A expenses increased $65 million to $440 million in the quarter.

Just under 40% of this increase was the result of foreign exchange translation impact on our results.

As we discussed in our fourth quarter call, we have increased our spending on consumer advertising which accounted for approximately 20% of the increase.

As a result of the items I just discussed, operating profit totaled $159 million compared with $226 million in the prior year.

Turning to slide 23, our other income expense was largely unchanged when compared with the prior year.

Moving to our tax rate.

We reported an effective tax rate of 3% for the quarter which was well below the prior year's rate of 24%.

The decrease in rate compared with the prior year is mainly due to discrete items resulting from foreign currency tax planning initiatives and our lower income tax base.

For the full year we now expect our tax rate to approximate 20%.

Slide 24 discusses our working capital performance during the quarter.

As you can see, our working capital as a percentage of sales was largely unchanged compared with the year-ago level.

On a day's outstanding basis our performance and receivables improved approximately two days from the previous year due to improved collection performance and terms in our international operations.

This improvement was offset by increased inventory days as a result of higher levels of inventory in our international operations.

Our team remains focused on continuing to improve working capital performance during 2008.

Now, I'd like it take a moment to discuss our free cash flow performance.

You'll find that on slide 25.

For the quarter, we reported a free cash flow use of 444 million compared with 250 million in the previous year.

As you were all aware, the first quarter tends to be our seasonally weakest quarter for free cash flow and has historically resulted in use of free cash.

That said, we experienced a significant unfavorable variance when compared with the prior year.

This is largely due to our working capital performance during the quarter.

The most significant factor in our year-over-year free cash flow performance is related to unfavorable accounts payable variances due to lower production and ultimately lower procurement levels.

Our other operating account includes seasonal cash outflows related to employee incentive compensation and advertising and promotion programs.

Our capital expenditures totaled $107 million in the first quarter which resulted in an $11 million year-over-year increase.

We currently expect our full-year capital spending to be in the range of 550 to 575 million.

Turning to slide 26, we returned $130 million to our shareholders in the form of dividends and share repurchases during the first quarter.

As Jeff mentioned earlier, we completed our prior authorization by repurchasing $97 million of shares during the quarter.

We are also pleased that our board has approved a new $500 million authorization.

Finally, I would like to turn to our guidance summary on slide 27.

Based on current economic and industry conditions, we anticipate full year 2008 EPS in the range of $7 to $7.50 per share.

Within this estimate, we continue to expect up to $100 million in restructuring charges with a significant portion of approximately one half of our full-year estimate to occur in the second quarter.

In addition, our tax rate is expected to increase in the remaining nine months and result in a full year rate of approximately 20%.

Additionally, we do expect to convert these earnings into free cash flow in the range of $500 to $550 million.

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

Thanks, Roy.

2008 is clearly achieving us to be a challenging year.

To summarize, we expect this to be a year where, one, U.S.

market is going through its most severe contraction in three decades.

Our outlook now calls for industry decline based on the 2006 base of 11, 12% in this contraction.

Secondly, our global cost inflation continues to surge across most of our key input materials.

Third, we continue to see emerging market demand in Latin America, India and China growing to record levels.

Within this environment we've implemented some very aggressive actions on all fronts.

Needless to say, we're not at all happy with our current operating margin level which has been greatly squeezed by material inflation and demand declines.

We expect, as I said before, to have a very weak first half operating result with a fairly significant improvement in the second half of the year.

That improvement, really, is driven from three areas.

First, our cost productivity ramps up strongly throughout the year.

It will positively contribute to our margins in the second half of the year.

Secondly, we expect our currently announced and implemented price increases along with positive product mix from our new product innovations will positively affect our second half operating margins and results.

And lastly, a portion of our business is seasonal business which is, today, performing very well.

And historically we generated significantly higher profitability in the second half of the year and we are on track to deliver this record-level performance in this base of business.

These actions in total should enable us to gain strong earnings momentum back half of the year and allow us to deliver revised guidance that we announced today.

That's the end of our formal comments.

I'd now like to open this up for question and answer.

(OPERATOR INSTRUCTIONS) We'll go first the site of David MacGregor from Longbow Research.

Your line is open.

Good morning, everyone.

Good morning, David.

The second half price increases that you're pursuing in addition to what you pursued at the beginning of the year, is this going to be enough to cover your raw material cost inflation?

When do you actually get sufficient pass-through to offset this inflation?

Well, David, it's different markets in the world we've announced being implemented at different times.

The one most recently announced is the price increase in the U.S.

market.

We do have other prices, increases going on in the world.

Not breaking it out specifically, we do believe the combination of our productivity ramp-up and net realized price increases in the second half will have a substantial impact, positive impact, over our margins even with this additional material cost increase we're seeing.

You quantified the cost increases.

You didn't quantify the productivity benefits that we should expect.

Can you help us with that?

David, if you recall when we provided you with our original guidance in february, we said we thought we would have just over two points in productivity.

Again, that percentage is as a percentage of sales.

I want to be careful.

It's a cost of goods sold but is a percentage of sales.

The real margin impact was over two points.

We've taken two-tenths of a point out of that annual estimate, David, which we now embedded in our guidance and we share with you this morning.

David, that's largely attributable to conversion productivity and it's due to the volume takedown we're seeing here in North America and Europe that Jeff talked about.

I think you said you were expecting record productivity.

And 2% would not be record productivity.

So has that changed?

2% as it relates on our total sales coming out of conversion and cost change takeout.

It is record productivity.

The delta is the material cost increase.

And David, just again, to be clear because I know there are a lot of moving parts here, keep in mind that productivity number was distinct from the incremental Maytag sufficiencies we talked about on the February call.

And that's what led to the comment that you mentioned earlier in terms of the higher productivity year over year.

Can you give us an updated mix on your raw material costs?

You've given it to us in the past, percent of steel, plastics, base metals, components, and logistics.

I don't have that break out in front of me, David.

The number one is steel.

Number two is oil and oil-related.

That means resins.

And the logistics is number three and base metal.

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

David, it's Roy.

David, when you look at quarter over quarter, it's going to be much like what we saw in the fourth quarter.

Again, the greatest proportion of our material cost increases that we're referencing are coming out of what we call components which includes motor, pumps, compressors as well as electronics.

Keep in mind, David, this almost becomes circular in nature because you end up picking up the base metal increases which we have as a separate category, but you also pick that up in this component category and that, by far, was single greatest increase that we had year over year.

Much like it was in the fourth quarter, David, and the full year last year.

Okay.

Finally, you took your long-term debt up by 500 million.

Could you explain why?

Again, David, we have watched our capital position carefully.

As you know, it's something that we monitor.

Our policy is we'd like to keep our debt to EBITDA somewhere in that 1 to 1.5 range.

Given the current credit markets and looking at our cash flow outlook, we felt it was prudent to issue 500 million in notes.

As you look at, David, our debt payment schedule over the next five years, which I think you know pretty well, this actually -- this note will come due in 2013 which is the year we have absolutely no debt payments beyond this current note.

Again, it was all part of our capital structure planning which we do on a regular basis as part of our financial strategy.

Okay.

Thank you very much.

Thank you, David.

Our next question from the site of Sam Darkatsh with Raymond James.

Your line is open.

Good morning Jeff.

Good morning, Roy.

Couple questions here.

First off, the change in your guidance, the delta, I know you ranked would be of sales first and then the material difference between material inflation and the productivity and pricing second.

By my math I'm coming up with maybe two-thirds of it coming from the ratcheting down of sales expectation and maybe one-third of it from materials.

Is that math generally correct?

Actually, Sam, no.

That math wouldn't work in terms of the numbers that we're looking at.

No, you're off on -- I think both those numbers are off.

Okay.

In terms of order of magnitude, would the ratcheting down of sales be the primary --

No.

No.

Material increase is primary.

Again, that's $100 to $150 million.

And demand is roughly in the neighborhood of $50 million.

And then there's some positive offsets to that.

Yes.

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

But -- okay.

Offset by a couple things.

Okay.

I'm with you.

Second question.

In the first quarter you did a wonderful job with market share in the United States.

And that's been a continuation of what was happening late last year.

The margins were weak.

Do you see -- I mean a cynic could say that perhaps they're giving the product away, perhaps your net pricing was below that of the industry players.

How would you answer that question as to the reasons behind gaining share and your expectations for further share gains this year?

Yes.

Sam, this is Mike Todman.

Let me address that.

In fact, we actually saw flat pricing if you look at it on a trend basis from the fourth quarter to the first quarter.

So we didn't see any substantial reduction.

The market share gains were basically a continuation of gains in the Maytag brand and the gains in our Whirlpool brands that we've had based on the product introductions again that we had throughout the fourth quarter.

And in terms of how we've managed this since we've gone to market, we actually saw our promotional spending flat.

These gains are on the basis of the products that we have in the marketplace.

In addition, what we saw was increases in our ASB year over year.

So that would also suggest that the new invasions that we're bringing to the marketplace in fact are paying off.

So really, largely, the reduction in margin is really coming from the material in oil-related costs, Sam.

You would expect that Q2 pricing would be up sequentially versus Q1 because both ASV and existing pricing actions taken?

And yet, your market share should still be in an upward trajectory?

Our assumption is we'll continue positive trends, Sam, that we have.

The Q2 will be less because a lot of our new product introductions come in during the quarter.

We really expect it to ramp up over the course of the year.

Sam, it's Roy.

Just a little bit of color, too, on the North American margins.

You asked about the reduction.

I mentioned in my script, Sam, disproportionate impact, in terms of North America.

Just to help you calibrate that, the impact of the material and logistic costs on North America year over year was minus 4.5 points on their margins.

Got it.

The last question and I'll defer to others.

You're taking CapEx down lower than where you were looking at last quarter.

What sort of projects are you either delaying or canceling when you're trying to right-size your footprint?

Sam, we're not delaying any project I would say would have a significant impact this year or next year on our business.

We're just managing very tightly, appropriately, we believe, looking at every expenditure, eliminating the ones that in this environment you can't do.

But in terms of major product innovation investments, we're not delaying anything.

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

Absolutely.

Okay.

Thank you.

Next question from the site of Eric Bosshard from Cleveland Research.

Your line is open.

Good morning.

On the North American margin issue I wanted to dig in a little more.

I was, I guess, surprised to see the profit performance in 4Q fall as far as it did in 1Q.

I know there's a little bit of seasonality difference.

Can you help us understand how in a similar revenue growth year over year decline why the profits were 100 million plus worse in 1Q relative to 4Q or 1Q relative to 1Q a year ago?

Eric, let me start with that if you don't mind and let Mike jump in here.

I'll give you more of the analytic side of it, Eric.

When you look 4Q to 1Q, again, the major story with respect to 4Q to 1Q margin is material logistics.

Overall, of the 2.7 point drop in operating profit performance in north america, 2-1/2 is attributable to material and logistics.

Again, much like the comment Sam asked about earlier, that is by far the key story line in terms of North America margin impact.

So as you look at that and you go through the year, I guess my second question, looking at your guidance and looking at your 1Q run rate of earnings, there's obviously a huge step up.

So there was, I guess to be clear, there was nothing unusual in 1Q.

That's the state of the cost world today and you have to climb out of this with these price increases and I guess incremental productivity.

Is that the way to think about it it?

Yes.

Eric, I would say that obviously Q1 is very low for us.

We expect quarter by quarter for this to improve.

Productivity will ramp up every quarter.

We will have some price mix improvement in Q2.

But the larger price increase goes into effect the end of the quarter, so for the third quarter.

But the way you ought to look at that time is material for cost increase were significantly more negative than the positive productivity actions in Q1.

That will improve substantially in Q2 and turn positive contribution for productivity over material in Q3.

And then some price mix in Q2 and then a fairly substantial price mix in Q3 onward.

Hey, Eric, it's Roy again.

I do want to clarify something because I actually gave you the answer to the first part of your question and not the second part.

The numbers I gave you were the consolidated impact.

The North America alone, which was really the second part of your question, the Q4-Q1 delta was four points of operating profit.

Again, the exact same story, I want to be clear on that, it was four points was directly attributed to material and logistics.

Same storyline.

I want to make sure I'm clear on the actual consolidated numbers versus the North America specific.

I don't want to be misleading there.

Secondly, in regards to the pricing effort, from what we've seen it appears you've pushed the price kind of in April and then again in July.

Understanding your competitors seem to have been pretty rationale what they're doing with pricing, why not move earlier and faster with price increases then in the timeframes, especially the July increase?

I'd say, Eric, a couple of things.

When we implemented the April price increase, I think we talked about it on the last call.

It was based on a couple of factors.

One was what we were seeing at the time in terms of cost-base material inflation.

So we executed price increases.

Two, based on new product introductions that we had coming throughout the year.

And so as I think you can appreciate as we're beginning to bring new products in, it is more difficult to "take price through that." So what we are doing now in the July price increase we just announced is really is a far broader-based increase that we think makes sense.

It just gives the right amount of time for us to be able to execute that price increase in the marketplace.

All right.

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

Eric, two things.

One, the year-over-year deltas in the U.S.

are by far more profound in appreciating currency companies, and the delta is currency.

So the baseline is different.

Secondly, I would say in the case of Latin America we've been operating very well for a period of time in both productivity and pricing and balance has more than offset that.

In Europe, again, in Euro terms, although materials went up, we were able to offset them with productivity and improved mix.

The weak dollar has had -- we talk about the impact the weak dollar on an accounting point of view.

But if you look at that time on an economic point of view, the U.S.

is absolutely absorbing more inflation by far more than any other part of the world due to currency.

Thank you.

We'll go next to site of Jeff Sprague with Citi.

Your line is open.

Good morning.

Good morning, Jeff.

Does the cost guidance for the year just assume that all these materials kind of stop in their tracks where they're at or is there riser decline baked into the assumption?

Jeff, what we've tried to do, if you just take the month of april, the changes in oil and the spot price of steel, it's obviously a volatile environment.

And what we have done over the last really, I mean we do this every month, but over the last couple weeks is really assess material-by-material, market-by-market, supplier-by-supplier taking in this latest information.

The way I would describe it is obviously higher than what we expected before and it's based on our estimation that in terms of every component and every material in our business, some are going up more than others.

We're not assuming a decline.

But this is based on what we think our best estimate -- there is some upside.

There is some downside to this.

We tried to be right in the middle of these estimates.

I guess in that assessment you had looked at steel contracts.

There's been some talk out there that steel suppliers are tearing up contracts.

Any light you can shed on your comfort factor in terms of actually being able to understand where you stand on steel over the balance of the year?

That steel, Jeff, as you know, is still a regional market-by-market, supplier-by-supplier.

When we have different approaches on steel in every part of the world.

First quarter's down, we basically know our second quarter so you're really talking about second half.

And there are a lot of dynamics going on in steel.

Part of our increase in material outlook is based on expectations.

Steel prices prices are going up.

Okay.

And then just help us understand the share dynamic in North America.

I don't think you actually said what your volumes were in North America.

Could you give us that number?

If you're talking about the U.S.

share

Yes, your U.S.

volume growth.

T 7 industry was down 9.2.

I believe we were down 1.3.

1.3?

Jeff, total volume, if you're doing your reconciliation, in all categories down 4.3% year over year.

That's also a U.S.

number?

No, that's mexico, Canada and all the non-core appliance businesses.

Okay.

And then, Roy, just on the balance sheet, there's a few things moving around.

I'm sure a lot of it is currency.

In particular, I was just wondering on crude advertising came down a lot.

I guess that's the ad spend you're talking about in the quarter.

Does that get rebuilt over the course of the year?

If you recall, Jeff, we do pay out in the first quarter a significant amount of the promotional accruals that accrue over the course of the preceding year.

You are, in fact, seeing that which is standard for us.

That traditional pay out which occurs in the first quarter.

The first part of your question, Jeff, you are correct in that as you look at our working capital components, really most components on our balance sheet, given the appreciation we saw with the Euro and with [REI] in particular, you're seeing hundreds of millions of dollars of swings from currency, for example, on receivables inventory and actually about 250 of currency on accounts payable.

So it is distorting the otherwise true cash positions of those accounts.

Would that also apply to that big swing in other current assets that happened in the quarter?

Let me -- I'll tell you what, Jeff.

Let me look at my notes here.

I don't recall the details of other current assets in particular.

I think the biggest part of that was our hedging programs.

And we had gains on those programs which we accrued in other current assets.

That's about $100 million of that delta.

And, again, this is just simply the mark-to-market work we do on our forward contract hedges that we have around commodities and currencies.

Great.

Thanks a lot, guys.

You're welcome.

Next question from the site of Michael Rehaut from J.P.

Morgan.

Your line is open.

Thanks.

Good morning, everyone.

First question, kind of following on Jeff in terms of the assumptions of steel.

The steel prices ended at March roughly up 35% year-to-date and since then with future orders, contracts, they're up over another 20%.

So just wanted to be clear with the new 450 to 500 million of raw material hit, where does that -- at what price does that bake in steel in terms of quarter end or some of the movement we've seen in price since then?

Michael, once again, I'm going to -- I'll give you a general answer because it does vary in terms of how we buy in different markets around the world and even varies by supplier.

But we did factor in the current steel dynamics around the world into this new material cost forecast.

That's first point.

Second point, there has been significant movement based on some of these surcharges that are being talked about, so on and so forth.

We are not factoring in those recently discussed surcharges.

We are factoring in increases where we negotiate monthly or quarterly based on volume in current market levels.

So ours is kind of a blend of that based on where we think we're going to pay and where we're not going to pay.

That's really helpful, Jeff.

Just on that, the hedging that you kind of referred to and, in general, we had been under the impression or I had been under the impression that a lot of your steel contracts were hedged like one year out from the beginning of the year in North America and Europe.

Can you kind of explain how that relates to the fact that you are absorbing higher steel costs in North America?

Do the hedges just kind of roll off month by month and you have to kind of take it on a rolling basis?

Or are parts of your North American spend on hedge or how does that dynamic play out?

Michael, again, there's a range because some markets around the world we negotiate monthly for price.

So we're going up or down with the spot prices.

All the markets have changed over the last four or five years.

If I go back five years ago, we'd have two, three-year contracts on a lot of these things.

That has changed completely over the last four years.

I'm not aware of anything we've got over a year contract on for anything, steel or anything else.

And generally these things related to volatility are indexed.

So, in some cases rolling off for a month.

In some cases directionally will lock in for a year, but you can go up or down quarterly based on other dynamics.

Whether that's steel or oil-related products, again in this global commodity inflation a lot of this stuff is indexed up or down.

The only thing we really hedge are hedgable items like currency and base metals.

The rest are contract-driven or open market negotiated depend on what part of the world we're in.

Okay.

So then obviously those comments apply to North America in that the hedges there could be some adjustments throughout the year and that kind of reconciles --

That's correct.

Okay.

Next question is just on promotional activity.

I think it was mentioned that promotional spend was flat from 4Q.

At the same time you mentioned there was an increased advertising investment that might have been separate.

Just trying to get a sense for as the demand is weak your confidence level for those price increases to be realized in July or if they are realized that they could be offset by higher levels of promotional activity.

How do you see that kind of playing off one another?

Let me answer part of it and then I'd ask Mike Todman to answer the rest.

First of all, regarding confidence of price increases and so on our position is we know what we're doing with productivity which is very aggressive, very strong.

You know where our margins are in the first quarter, which are completely unacceptable.

We're not chasing market share.

Our priority in this business is to fix our operating margins, and the other thing is everybody produces appliances by steel, plastic, oil, ships with fuel.

I don't think anybody -- we're unique in this situation.

Our expectation is we're going to recoup this significant cost inflation in the marketplace by -- in terms of the price increases we've already implemented or announced.

Regarding the promotionals, Mike, I'd ask you to answer that.

I'd state both on a year-over-year basis as well as Q4 we have not changed how we go to market and how we essentially support all brands and products in the marketplace.

And so promotional activity is not any more today than it has been historically.

I would tell you the added, if you will, confidence we have as we bring these new products into the marketplace over the course of the year, as we have seen in the past, fact of the matter is they are performing very well for us.

And so we expect to see those take hold, if you will, and get traction in the marketplace.

The last point, Michael, it shouldn't be taken lightly, the new product invasion we're bringing to market globally, but particularly North America, is at the highest level ever.

We're advertising this at levels we've never advertised before.

It is having a positive impact on the marketplace.

Overall, there's no doubt demand is down.

But of those buying, people are wanting to buy the newest, best innovative appliances.

That's why we're continuing that portion of our investment.

Mike and Jeff, just in terms of that point, and I appreciate that in terms of the success of the share gains continuing with the new products, can you give us a feel for -- you had mentioned it was by Maytag brand and Whirlpool brand.

Obviously Sears continues to have its challenges.

Can you give us a sense in terms of end markets or by some of your larger customers where you feel you're gaining some share or shelf space?

Yes.

I won't go into specific ones.

The reality is we've essentially picked up shares pretty much across the board to be honest with you, Michael.

That would have to be the case given some of the share gains we've been able to realize.

It's been fairly broad-based pretty much across the board based on what we're bringing to the marketplace and the value of the products we have in the market.

And it's in the brand.

In Maytag, in Whirlpool, Amanna, everywhere we've brought new product innovation to the market.

Last one, just an accounting issue.

You mentioned before 41 million of [BVX] in the quarter.

What does that bring your balance at quarter end on the balance sheet?

Michael, we have about $840 million of [BVX] credits remaining to be monetized.

You'll see that in our 10-Q that we'll file later today.

Okay.

Just the balance remaining where it's been, roughly speaking, for the last three quarters now despite recognizing a solid number each quarter that, again, has to do with currency translation or could you just remind us of that dynamic?

Michael, you're exactly right.

The driver of the fact that the balance is held relatively constant despite the fact we're able to monetize credits has been predominately driven by currency.

You're exactly right.

Appreciate it.

You're welcome.

Let's go next to site of Laura Champine with Morgan Keegan.

Your line is open.

Good morning.

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

Laura, again, I'm going to have to go back to Jeff's comments that he made on the last call and it was really embedded in his scripts.

We really don't comment on forward-looking share repurchases and I need to leave at that.

Back to the raw material costs then, I'm actually surprised by how little you had to adjust that given the kind of inflation we're seeing this year.

I'm guessing that raw materials plus logistics costs are upwards of 70% of your total costs right now.

Why are you not seeing the big double-digit increases that we're seeing reflected in steel and oil prices in your expectations?

Well, Laura, first of all, we also feel they are very large increases.

The simple point I guess I make is first quarter is over.

We're pretty much locked in now the second quarter.

We're talking these rate increases are for the year.

So if you annualize them, they're obviously much bigger would be the simple point.

The second is just the makeup of this.

It is more profound in the U.S.

due to currency than it is, although it's true everywhere in the world.

But I think the simple thing is we pretty much -- this increase is largely a six-month annualized.

So if you think on an annualized basis, it would be even larger.

Laura, your estimate on the impact on cogs, it's roughly 65% of our cogs in a quarter.

That counts the fuel charges that you incur in your logistics business?

That's right.

It does, Laura.

Thank you.

You're welcome.

And we have no further questions.

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