惠而浦 (WHR) 2008 Q2 法說會逐字稿

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

Today's call is being recorded.

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

Thank you, Kevin, and good morning.

Welcome to the Whirlpool Corporation second quarter conference call.

Joining me on today are Jeff Fettig our Chairman and CEO, Mike Todman, President of Whirlpool North America and Roy Templin, our Chief Financial Officer.

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

Our actual results could differ materially from these statements due to the 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.

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

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

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

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

Now we would like to provide with you some perspective on the state of our business and review our second quarter results.

Let me start with the quarter where we reported that net earnings from continued operations were $117 million and our EPS was $1.53 per share and that's versus $2 a share last year.

For the quarter, net sales were up at $5.1 billion which represents about a 5% increase versus last year.

Overall, I would summarize the quarter as follows.

First of all, our Latin American region produced another quarter of very strong results with sales growing by 22% and our operating profit increasing by 40% on a year-over-year basis.

Secondly, as we've seen in previous quarters weakness in the U.S.

market persisted with demand declining by 8% during the quarter.

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

marketplace.

And third, we continue to face surging material and oil-related cost increases.

To combat these unprecedented cost increases, we've implemented very strong cost reduction actions across the business and price initiatives which I will discuss more in a moment.

And lastly, I'd like to point out that in late April we did sign a joint venture with Hisense Kelon Electrical Holdings in China, one of the leading electronic and home appliance companies in China.

As part of the JV, we will benefit from sharing research, technology, procurement, and development resources for producing refrigerators and washing machines in that marketplace.

Overall, we believe this joint venture will allow us to accelerate our growth in this very important Chinese market.

I now turn to slide 4 and talk a little bit about the balance of the year where we expect U.S.

demand to be down a little bit more than we previously said and now forecasting that to be in the 6 to 7% range.

Europe we've seen some slowing in that market and we now are projecting the year in Europe for demand to be down 2 to 3%.

These markets continue to face very challenging macroeconomic conditions that we see are stressing consumers and therefore purchases.

At this point, we don't see this trend abating in the near term, and we are managing our businesses there accordingly.

We are maintaining our full year outlook for emerging markets, but we see some indications of slower growth in these markets as cost inflation also impacts the ability for consumers to purchase.

We do expect now our 2008 material and oil-related costs to increase by $600 million to $650 million, which was higher than our previous estimate.

As you've all seen we've seen a substantial increase in key commodities such as steel and oil and oil-related inputs.

Given these factors along with very weak consumer sentiment in a lot of key mature markets, as well as continued currency volatility, we are very focused on positioning our company and our business to address these macroeconomic challenges.

As shown on slide 5 our business priorities for 2008 are first to implement our previously announced cost-based price increases globally.

In light of the continued inflationary trends, we've taken multiple cost-based price increases in many markets around the world.

Most recently North America we have implemented a July price increase which ranged from 6 to 10% on the effected products.

In Latin America we also recently announced and are implementing price increases in the 4 to 5 % range.

In Asia we've implemented price increases of all of our major markets of up to 13% with most markets implementing price increases in the mid- to high-single digits.

And finally in Europe, we have announced in our executing low single price digit increases in most markets across Europe.

So overall, we have as we mentioned before, absorbed significant unfavorable material and oil-related costs.

Now, to go back to really when this trend started mid-2004, well over $2 billion over the last four years.

It is critical that we pass some of these costs through to our customers.

Secondly, one of our critical priorities we set for 2008 was increasing our new product innovation and focusing on improving our marketplace execution.

We've done that in all parts of the world.

As Mike Todman will touch on in a moment, we continue to perform very well in the marketplace relative to the overall industry.

The industry declined in North America.

We are experiencing similar positive performance trends in most of our international markets.

With our global new product launches we're very focused on bringing innovative new products to consumers in every part of the world.

The third area which is critical to us is productivity where we're seeing very good progress on our [inner price wide cost] initiatives.

Roy Templin will touch on this in more detail in a moment, but we're having very good success on the productivity part.

Finally, in terms of adjusting our costs and capacity structure, we continue to take the very difficult steps of optimizing our manufacturing footprint, particularly in this type of environment.

So far in 2008, we have announced the closure of four facilities in North America to better align our cost structure and capacity with the current industry environment.

At this point in time, I'd like to turn it over to Mike Todman to give you an update on North America performance.

Thanks, Jeff.

Good morning, everyone.

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

As shown on slide 7, our net sales declined 4% during the quarter to $2.9 billion with U..

industry demand for T7 appliances declining approximately 8%.

Our brand and share growth is being fueled by the many new innovative product launches that we have discussed on previous calls.

Turning to operating profit.

Profit declined $78 million to $101 million in the second quarter.

This decline is mainly attributable to three factors.

One, lower U.S.

industry demand.

Two, higher material and oil-based costs.

And three, increased brand investment.

There are four key take-aways that I would like to highlight around our second-quarter results.

First, despite the lower U.S.

industry demand, our volume performance exceeded overall industry performance during the quarter.

This improvement was driven by our Whirlpool owned brand product portfolio outpacing the industry.

Second, we experienced substantial material increases in metal and oil-based purchased components.

In addition, diesel fuel prices continued to accelerate, resulting in substantial increases in our freight costs during the quarter.

And third, we continue to invest in our brands particularly related to advertising.

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

Finally, I would like to touch upon our inventory during the quarter.

Given the challenging market environment, we are very focused on aligning our product inventory with demand levels.

Our team has worked very diligently in this area, and we actually increased our inventory turnover during the quarter.

Slide 8 provides an update on the status of the key indicators behind our 2008 US industry demand outlook.

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

demand is slightly below our previous guidance.

We now expect the U.S.

industry demand to be down 6 to 7%.

And as you can see, significant factors behind this change are related to consumer confidence and new housing completions, which we now expect to decline approximately 28% from the approximately 20% previously expected.

On slide 9, I would like to review the key initiatives underway given our expectations for lower industry demand and higher material and oil-related costs.

One, as we discussed on the last call, a 6 to 10% cost-based price increase on selected models took effect at the end of the second quarter.

Given the significant rise in raw material and all the related costs that have persisted for several years, it has been necessary for us to take these increases to the marketplace.

Two, we are accelerating our productivity initiatives and cost changes.

As Jeff referenced earlier, we continue to take the difficult steps to align our capacity with demand.

We have now announced the closure of four manufacturing facilities in North America.

These steps will improve our capacity utilization in the region and improve our cost structure.

Three, the record number of new product launches this year is providing us with strong new product in the marketplace.

Our new products are being received very positively in the market and will allow us to build upon a strong momentum.

Four, our increased consumer advertising during the quarter has been effective in the marketplace.

And we will continue to make similar brand investments as we see the appropriate value from these investments.

In summary, our organization remains well-on-track in executing the key initiatives we have previously articulated to you.

While the macroeconomic environment remains very challenging, we are very focused on the key levers that we control that will enable us to successfully manage through this environment.

Turning to slide 10, you will find the summary of the second product in this trend.

This chart depicts our year to-year unit volume change for T7 appliances.

As you can see, we have continued volume growth in our business with higher average selling prices.

While we certainly are monitoring mixed trends on an ongoing basis, to date, we have not in our business seen a significant shift toward mixing down from higher priced point products.

Finally, I would like to turn to the outlook for North America for the remainder of the year on slide 11.

As I mentioned previously, we now expect U.S.

demand to decline in the 6 to 7% range for the remainder of 2008.

We expect to see continued weak conditions in the third quarter with some moderate improvement in the fourth quarter.

We do expect, however, to see negative industry year-over-year comparisons in both quarters.

We have implemented cost-based price increases to offset the macroeconomic headwinds and given the persistent rise in material and oil-related costs, our cost-based pricing adjustments were critical to ensure that our product prices reflect the value we bring to the consumer.

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

Our international operations continue to perform well despite what we see as an increasing challenging market environment.

Latin America continues to build upon its strong performance trend during the quarter.

Our European operations posted stable results in an increasingly challenged market environment.

And our Asian operations show good growth and improved profit during the quarter.

Overall, we are pleased with our international performance as they continue to perform well in an even more challenging environment.

I'll turn to slide 14 and review our European business.

For the quarter, European revenues increased 17% to $1.1 billion during the quarter.

In local currency, our sales were up 2% from the prior year.

Industry unit shipments for the region declined by approximately 2% year-over-year.

Our operating profit decreased 1% to $50 million in the second quarter.

Our results were unfavorably impacted by higher material and all related costs, and we were able to substantially offset many of these costs through productivity and positive price mix.

Turning to slide 15.

Our Latin America business once again reported very strong second-quarter results.

Our revenue increased 22% to $1 billion for the quarter.

Excluding the impact of currency, sales increased by approximately 7%.

Our operating profit increased 40% to $133 million during the quarter.

Our margins expanded to 13.3%, up from 11.6% a year ago.

Overall, increased unit shipments, very strong productivity, and cost controls were all positive factors in our second quarter results.

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

Slide 16 summarizes our second quarter results in the Asia region.

Net sales increased 9% during the quarter.

Our results were led by very strong performance in India.

Excluding the impact of currency, sales increased about 8%.

The region reported an operating profit of $5 million in the quarter, up from last year's levels.

Our improved results reflected improvements in productivity, product mix, and price.

These favorable factors here too were once again partially offset by higher material costs.

Turning to slide 17.

To give you an outlook going forward.

In Europe, we currently expect 2008 industry volumes to decline in the minus 2 to 3% range.

We saw industry softness in the first half of the year, and we expect this to continue for the balance of 2008.

The market remains split between positive growth in eastern Europe and negative demand in western Europe.

In Latin America based on our current economic outlook, our previous expectation and industry unit demand in the range of 5 to 8% remains unchanged.

While the first half of the year was well above this rate, we are seeing some signs of slowing in Latin America in total, but given the expected trend we are comfortable with our estimate for the year.

In Asia 2008 units growth estimates also remained unchanged in the 5 to 10% range.

Again, we're seeing a similar pattern of growth in Asia where the first half results were very strong in terms of market demand.

We are seeing more moderate growth rates in the second half of the year.

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

We have and will continue to address these pressures across our business with productivity initiatives and implementing our announced base cost price increases.

Overall, despite more challenging positions in Western Europe, we remain well-positioned to deliver results in our international businesses for 2008.

So at this point in time I'd like to turn it over to Roy Templin for the financial review.

Thanks, Jeff and good morning to everyone.

Beginning on slide 19, I'll walk you through a summary of our second-quarter performance.

From a top line perspective our recent trends in performance remain largely in tact.

We continue to experience strong sales from international operations particularly in Latin America and the Asia-Pacific regions.

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

Weak U.S.

and European industry demand, offset these favorable factors during the quarter.

Turning to the income statement on slide 20, during the quarter we reported revenues of $5.1 billion up 5%.

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

The Euro and Brazillian real fluctuations accounted for the majority of the favorable currency exchange impact on our results.

We monetized $47 million of [DPX] tax credits during the quarter based upon both increased sales and the mix of those sales.

Our gross margin contracted 30 basis points to 14.8% for the quarter.

The decline in gross margin is primarily the result of increased material and oil-related costs.

We absorbed approximately $130 million of increased material and oil-related costs during the second quarter.

These costs were partially offset by favorable productivity initiatives and a positive price mix trend.

Compared with the first quarter level our gross margins increased 1.5 points.

This sequential improvement was driven by favorable price mix and productivity initiatives.

SG&A expenses increased $39 million to $502 million in the quarter.

Approximately two-thirds of this increase was the result of foreign exchange translation impact on our results.

As we discussed in our previous calls, we are also making brand investments such as increasing our consumer advertising which accounted for the balance of the increase.

As we discussed last quarter, we executed a significant amount of our expected full year restructuring costs during the second quarter.

We incurred $40 million of restructuring expenses during the quarter, which corresponds to a $24 million increase when compared with the prior year.

The increase in restructuring expense accounted for a half a point of unfavorable margin impact when compared with both the prior year and the prior quarter.

As a result of the items I just discussed, operating profit totalled $203 million compared with $247 million in the prior year.

If you look at our tax credits in Latin America, they provided an incremental $20 million benefit during the quarter.

This amount was more than offset by our increased restructuring expense of $24 million.

And some of the operating income impact of these two items was slightly unfavorable.

Turning to slide 21, our other income expense had an unfavorable impact of approximately $26 million when compared with the prior year.

The two main items are related to legal settlements during the quarter and unfavorable foreign exchange movements on balance sheet positions.

Moving to our tax rate.

We reported an effective tax rate of 1.5% for the quarter which was well-below the prior year's rate of 14.5%.

The decrease in rate compared with the prior year is mainly due to to discrete items in the second quarter resulting from foreign audit settlements and international tax planning initiatives which improved the level of tax credits available to the company.

Slide 22 illustrates our working capital results for the quarter.

Our working capital performance improved during the second quarter on both a sequential and year-over-year basis.

We improved our total working capital as a percentage of sales on a year-over-year basis as a result of improved accounts receivable days and accounts payable days.

As Mike mentioned earlier, we improved our inventory turn over in North America during the quarter.

However, our overall inventory turnover was slightly unfavorable as a result of higher levels of inventory in our international operations.

Now I'd like to take a moment to discuss our free cash flow performance and that's on slide 23.

For the quarter, we reported free cash flow generation of $262 million compared with $62 million in the previous year.

The improvement was primarily the result of favorable working capital variances compared with the second quarter of 2007.

Specifically, we saw notable year to-year improvement in accounts receivable and inventory during the quarter.

Through the first six months, our free cash flow was approximately equal to the prior year.

Similar to the second quarter results, improvements in working capital, primarily in the areas of accounts receivable and inventory, offset lower income levels.

Our capital expenditures totalled $124 million in the second quarter which resulted in an $18 million year-over-year increase.

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

Turning to slide 24 we returned $86 million to our shareholders in the form of dividends and share repurchases during the quarter.

We now have $446 million remaining on our current share repurchase authorization.

Finally, I would like to turn to our guidance summary on slide 25.

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

As Jeff mentioned earlier, we now expect material and oil-related cost increases of between $600 and $650 million for the full year.

We expect to offset this increased amount with productivity initiatives, previously announced cost-based price increases and a lower full year effective tax rate.

For the full year, we now expect our tax rate will be in the mid-teens.

Within this estimate we continue to expect up to $100 million in restructuring charges.

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

At this point I will turn the call back over to Jeff.

Thanks, Roy.

Let me sum this up and just repeat what I think is obvious.

The global economic environment remains very challenging on all fronts.

We see commodity inflation really evident in all parts of the economy, and this weighs heavily on consumers' ability to purchase goods of all types.

We see this inflation is now negatively impacting demand levels in most parts of the world.

We are preparing our businesses to successfully operate in what we see as a much slower growth environment.

To do this we will execute on the things with which we can control and are critically important to succeed in an inflationary slow growth environment.

To be in -- we talked about this before -- we will continue to drive cost productivity in every part of our business.

We will, as we have, adjust our capacity to lower -- to deal with lower demand levels.

We will continue to invest in our brands and bring on an ongoing continuous stream of innovation to the marketplace.

Finally, we will continue all of our efforts to have the marketplace absorb more of the impact of this inflation.

In total, although we see a very challenging marketplace around the world, we believe we can address this environment and create significant value for our shareholders.

At this time, I'd like to open it up for Q&A , and I'll turn it back to you,

Thank you, sir.

(OPERATOR INSTRUCTIONS) We'll take our first question from the site of David MacGregor with Longbow Research.

Yes, good morning, everyone.

North America revenue is down 4%, industry shipments down 8% [implies] 4% improvement in price and share gains.

Is there any way you can help us understand how much was priced and how much was share gain?

David, let me try to answer that question initially.

I would say that on the price mix side, we saw good improvement, but in fact we were able to offset much of the, if you will, of that margin through shared gains.

So a greater portion was through share gains and then a slight improvement in price mix.

David, it is Roy.

Just to sort of give you if you will the traditional components.

As you know we don't bifurcate U.S.

from others; you're talking about U.S., I know.

If you look at North America in total, currency was about 0.8 of a point positive in terms of their total [delta] in sales.

Price mix was favorable by about 0.5 point.

Then you've got an overall North America volume reduction of about 5.3%.

And that puts down to the overall 4.1 total for North America.

Okay.

And then just shifting to the raw material cost inflation.

Can you just kind of walk through the four segments and talk about where you're seeing the greatest amount?

In terms of the incremental guidance you provided how much of that is North America versus Europe versus Latin America?

David, this is Jeff.

It's up everywhere.

Oil and steel are the biggest deltas in our April guidance.

I think at the time, oil was at $110 or $115 a barrel.

We get from oil in two big areas.

One is resin and plastics, which go into our products.

And everywhere you get it in diesel fuel or other fuel used for shipment.

So that's proportionately around the world.

The steel market is a little bit different as you all know around the world.

Contractually.

Some are on indexes, some are on monthly.

Generally, our international businesses are more bearable and so the other I would say steel has been largely an international.

Do you have any major hedges rolling off in the second half or at the end of the year that we should know about?

No, nothing that's unusual, David, that would cause a distortion in trends.

You know the timing of this is all depending on hedges rolling over and new hedges coming on, as well as length of contracts, but there is nothing unusual in the trends as we look forward.

Okay.

Congratulations on a good quarter in a tough environment.

Thank you.

Our next question.

This one from the site of Sam Darkatsh from Raymond James.

Your line is open.

Good morning, Jeff, Roy, Mike.

How are you?

Good morning, Sam.

Roy, I guess this question is for you.

I'm trying to reconcile the forward guidance vis-a-vis where it was last quarter because you are keeping it the same although incrementally you've got maybe $150 million of higher material costs.

You've got some tax benefit this quarter but at least if my math holds you're still asking us to assume low 20% range for tax rate in Q3 and Q4.

And so -- and pricing is the same as where it was in Q1 and volume is down a little bit from where it was in Q1.

So where are you making up the difference between the $150 million in raw material inflation and the lower volume versus where you were last quarter?

I'm just trying to reconcile how you're keeping your guidance the same?

I think -- let me start with, first of all, I will confirm your assumption on the tax rate in the back half of the year is correct, and that's how you're going to foot down to the roughly 15% rate.

So start with that.

Sam, here are the pieces in terms of what's happening with respect to our guidance from what we shared with you in April.

There are two negatives, and Jeff touched upon those, and I know Mike touched upon one.

The first one you talked about is materials.

Obviously we are looking at $150 million increase in material costs.

Then we have obviously adjusted our demand in North America from 5 to 6 to 6 to 7.

Offsetting those two negative items are three components, Sam The first one is pricing.

And you talked about pricing being the same.

However, that's not quite right because we have now implemented back half of the year price increases in our international operations, which will take overall price mix for the year up from what we had when we shared it with you in April.

The second area, Sam, is in the area of productivity.

And again, we continue to see favorable productivity trends as you would expect.

We continue to initiate incremental productivity given the demand environment that we are seeing across the globe.

So that number again net from April is favorable as well.

Then the third component which you touched upon and I touched upon in my script is the lower effective tax rate by about 5 points for the full year estimate.

Those are the components, Sam.

Got you.

Second question.

The 600 to 650 as it stands right now -- of course that's a moving target; unfortunately right now it's moving higher, but how does that look right now for 2009 directionally based on when your contracts roll over and hedges roll over?

This is a follow-up question to David's question last round.

Sam, we have not provided a 2009 forecast of any type, but I guess I would say the drivers are out there.

It depends on what assumptions people take on oil, steel and really the base metals.

I guess right now given the trends we think a lot of this inflation in 2008 will carry over into 2009.

And until we see changes in those market trends that is what our planning assumption is.

As I mentioned earlier, our views -- we have the environment we are positioning the business in is for an environment which continues to have this cost inflation.

And as a result in essence choking off demand and slowing growth patterns and that's how we are planning the business I would say for the foreseeable future.

Last question and I will get back in queue.

You cited the industry growth rates in North America and Europe.

You did not cite it for Latin America.

Are you maintaining -- obviously you've got a large market share down there.

But are you maintaining share?

Are you losing share?

What are the competitive dynamics in the Latin Americas market since it's now such a large part of your business?

I would say we modestly outperform the market in Latin America and the parts of Asia that we're participating in were either equal our slightly ahead.

Thanks much.

Next question from the site of Jeff Sprague with Citi investment.

The line is open.

Thank you.

Good morning, everyone.

Good morning, Jeff.

Just one more on the cost side.

We've danced around it a little bit here.

But when we look at the $600 to $650 million of pressure this year, that is, in fact, your full P&L impact net of hedges and other actions you've taken to mitigate raw materials costs; is that correct?

That's correct, Jeff.

So like Jeff says, we'll have to make our own assumptions but conceivably things roll off and that would imply you are not actually feeling the full brunt of raw math as they stand today because you have got hedges and various actions in place.

That's a fair assumption, Jeff.

That's correct.

Can you also just help us understand the mechanism by which you try to get price -- I'll be oversimplistic, but if you take the North American price of 6 to 10, 6% alone, obviously on an $11 billion sales base in North America, $6 a share in price on an annualized basis.

So clearly there's catalog increases and then there's a mechanism you go to market and there's push back from retailers and any number of things that probably happen.

But maybe you could give us a little bit of a perspective on the last time you went in to get prices of this magnitude how it played out and what would really be a reasonable expectation for what could stick?

Yes.

I would maybe take that, Jeff.

First maybe go back to 2005 when we took a large price increase and were able to actually take it through.

In our July price increase, and we said it both at the time and in my script that it was on selected models because as I had talked about we had a number of new product innovation coming out through the year.

So we didn't take it across the board.

In addition, our business is segmented between the contract channel and the retail channel so a lot of the price increases will go directly into the retail channel but the contract channel has contracts that are out for a longer period of time.

So it really is on selected models but what we do experience and will experience is a total increase in total price across the marketplace.

That kind of gives you a perspective of how we took this last price increase, and therefore, what we expect.

Jeff, globally I would say there are a lot of levers in trying to offset these costs whether it be through product mix or brand mix, so on, and new models and innovation.

We will continue to do that.

I think that the point is is that the inflation is at a point where what we would call [like for like] pricing are largely the increases we are now announcing.

We are moving our mats to the marketplace, we are repositioning our line structure and basically increasing like for like pricing to deal with this unprecedented inflation that we continue to see.

And the announced increases we have to date don't come anywhere near offsetting in the calendar year the kind of cost increases we had this year.

I guess, Jeff, maybe you could pick that up too on the productivity side.

I mean it is a tough concept for us on the outside looking in to really get our arms around.

I mean, obviously you guys are doing a very good job in the plans to squeeze out productivity when you've got these type of volume pressures, but how do we kind of get comfortable or get our arms around what you can do next?

What's left to do the next area of improvement?

Is it more capacity?

Is there more left in Maytag?

Is it purchasing?

Is it this Chinese joint venture?

What are the levers you have there?

You're hitting on the right one.

We have an enterprise-wide cost initiative across all parts of the business, and we have a very defined approach.

Given material by itself is such a big part of our cost base, you're absolutely right if materials are going up at the particular degree they are now, your opportunity space is more limited in doing so.

So the approach we've taken is really dissecting our entire value chain and putting in place and we began this well over a year ago but it's starting to pay off with higher levels of what I would call controllable productivity than we have ever had.

It begins with products and product designs.

Designing our products more efficiently.

Using less material content.

Less labor.

It does have to do with procurement.

I mean, we are -- we continue to find big opportunities to, I would say, commonize parts around the world returning in essence our volume into scale which makes it much more efficient for us and our suppliers.

We have significant efforts in all 43 factories around the world, through lean manufacturing and other continuous improvements to drive higher conversion rates.

Our freight costs which have given, as you would expect, with the size of the fuel, have become a larger portion of our total value chain, if you will.

So really finding efficiencies along the way we ship products.

The minimum order sizes and that sort of thing.

Driving of course manufacturing footprint is a part of this.

You've saw where we have taken -- it was a difficult challenge, we have taken four facilities offline just in North America.

We will continue to look at making sure that we are in the best possible locations for that.

Yes, there is continued what I would call optimization.

Basically-- have all the Maytag stuff integrated but there is still optimization opportunities.

Then we get into our SG&A and our infrastructure.

This is a very serious bear economic environment, and we are aggressively trying to manage every part of our business to ensure on the one hand we stay very productive, but on the other we are able to justify passing some of this inflation into the marketplace.

I guess just one last one for Roy.

I guess you never give up on tax trying to find benefits and things like that, but what should we really think about kind of for a normalized tax rate?

Some year out there 2010 or whatever when kind of things stabilize I know it would partly be a function of geographic mix but can you give us any direction there at all?

Jeff, let me make just a couple of comments because I think it is probably worthy of me making a comment or two on the tax rate.

A couple of things.

One, as you know, I had forecasted and predicted we would be in the roughly 20% range for the year on the last call, and obviously we have taken that down five points from 90 days ago.

Really, two things happen, David.

Under the accounting rules -- I know you already know this, but it is probably worth emphasizing.

Two things happened in the quarter.

One was we had a favorable audit settlement, one of international operations that was more favorable than we anticipated, and under the accounting rules that what they call discrete items so we take the entire benefit in the quarter.

The second item was we actually worked pretty hard in a different international location to be able to optimize some tax credits under a law change that happened about a year ago, and we finished that tax in the quarter which again gave us a benefit which is discrete in nature so you recognize the full benefit of all prior year impact in the current quarter.

So those two items are what drove the rate from what you probably modeled in the low 20s which is what I would have modeled down to the 1.5.

As we look forward for the rest of the year, Jeff, those two items are also the two items impacting the rate taking it down from roughly 20 to roughly 15%.

As you go beyond that I would still go back to the guidance I have given you guys before which is somewhere in that mid-20s is probably where we would expect our rate to be given our international dispersion of earnings and the units we have in front of us.

Great.

Thanks a lot.

You're welcome.

Take the next question from the site of Michael Rehaut with JP Morgan.

Line is open.

Thanks.

Good morning, everyone.

Good morning.

First question just with regards to the raw material assumptions.

Obviously they have continued -- steel and oil have continued to rise throughout the year and we are seeing steel contracts up in July and August and further.

So just want to understand with the 600, 650 roughly speaking either at what point -- what price assumptions are you using there or are you just looking at -- at what point throughout the year are you looking at how much steel has gone up?

Are you looking at June end or August end or September end in terms of forward contracts or how are you integrating the continued increase in that area?

Michael, the forecasts we have I would say represent our best estimate of what we will pay for these goods throughout the -- what we will incur and what we will pay throughout the end of the year as it relates to steel.

Again, every market is a little bit different on the way steel is purchased.

And again, some is a monthly negotiation, some is indexed.

Some is relatively fixed or within a range.

And so we are sitting here in mid-July.

I guess our comfort with our -- we were obviously wrong at the beginning of the year, we were obviously wrong in April being low.

But I think now we pretty much know what the third quarter is going to be.

So the amount bearable is shrinking, and I would say oil -- oil is probably the biggest variable left on the material cost base so we are reasonably comfortable unless there is some explosion in oil that this forecast is within the relevant range for the balance of this year.

Okay.

I guess the second question is just on the other eliminations line which I guess has a lot of different components to it year-to-year and includes corporate overhead and such.

You were at $86 million in the quarter and just wanted to try to get a sense.

That I assume includes the higher restructuring costs, and if you could give us an idea of perhaps how those costs are perhaps -- some of those restructuring I assume are related to North America versus Europe.

If you could give us a little more granular detail of what's going on there?

Michael, first of all, I will answer the first part of your question.

That line -- first of all, you are correct.

That line does include our restructuring expenses and so if you were to bifurcate the key components that are within that line what you would find is $24 million more restructuring obviously negative year-over-year trend being offset by corporate G&A costs, which are down $18 million year-over-year.

So those two together are what net you out to your $6 million change that you referenced in the first part of your question.

In the second part of your question, Michael, we really had restructuring costs incurred in every part of the world.

Each region had their share of restructuring costs.

The greatest component, biggest component was restructuring we did in Germany where we took down one shift of our production in Germany.

That was by far the single greatest cost contributor to the cost of $40 million in the quarter.

Thanks, Roy.

Just also on the interest and sundries.

You said there was an unfavorable foreign exchange and legal settlements.

If you could also give us a little more granularity there?

Sure.

There--in terms of waiting, the foreign exchange is a little more than a legal settlement.

Foreign exchange is a negative 13, Michael.

Again, with this being another income and expense what this is is it's the currency.

We actually had currency gains a year ago on our balance sheet positions.

Again, as you know under the accounting rules, any balance sheet position you have in a currency other than that location's functional currency we basically adjust for currency.

A year ago those were gains.

This year they were losses.

Again, it's spread amongst a number of positions around the world but you had a $6 million gain a year ago, $7 million loss this year which gets to your 13.

The litigation, again, was a nonrecurring item in North America.

It was roughly $10 million negative.

Okay.

Thank you.

One more if I could.

Just on the [BPX] credits.

Do you have a sense of where you're going to be for the full year?

You said of it 47 in the quarter.

That's correct, Michael.

Again, let me just give you a little bit of reminder here.

BPX is dependent upon two things.

The reason we don't forecast BPX is dependent upon the level of sales we have which in turn determines how much industrialized product tax we pay, so as sales go up those taxes go up and we are entitled to more credit.

The second piece, Michael, is a mixed piece, and for example in the second quarter laundry picked up 5% in terms of balance sales of mix.

Laundry has the greatest proportion of IPI taxes which in turn brings with it a higher BPX credit and so it is primarily mixed as well as volume driven and we just, again, because of the variability particularly on the mix side, we just don't forecast that going forward.

Okay.

But perhaps you could also just give where your balance is at this point at 2Q end?

I think we file a Q later today, it will be $875 million Michael.

Great.

Thank you.

We have time for one last question.

We can go to that final question that one from Laura Champine from Morgan Keegan.

Your line is open.

I know we have hit this ad nauseum.

But can you give us a percentage of your total material and oil-related cost increase that you expect to offset with price increases this year, and also on that point can you just give us a little more clarity into what specific productivity improvements are incremental to the productivity guidance that you gave us back in April?

Laura, first of all with respect to productivity, it is really all the things that Jeff referenced are the components of what the difference is from what we gave you back in April.

Net-net, Laura, again, big part of this coming out of conversion productivity and that is two things.

It is what we have done in the way of the traditional activity plus cost reduction action being taken not only in North America but in all of our markets around the world.

We've also got in there to Jeff 's point SG&A actions that we've undertaken.

So it's the net of all those components which give us the increase relative to where we were in April.

Laura, in simple terms, this takes us back to roughly the productivity levels that we thought we would achieve at the beginning of the year in our February guidance, but as you know we lost a little bit of traction when we updated our guidance in April, and we are really back to that starting point where we were back in February to make it simple.

So the incremental change that helps you offset those cost increases is the price action that you're taking?

It is both price and productivity, Laura.

Again, you are walking the delta forward from April.

Actually, they are about equal in terms of their impact and ability to offset materials.

They are roughly the same in ability to offset.

Thank you.

You're welcome.

Again, thank you everyone for joining us today.

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

This does conclude today's teleconference.

Thank you for your participation.

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