惠而浦 (WHR) 2008 Q3 法說會逐字稿

Good morning and welcome to the Whirlpool Corporation third quarter 2008 earnings call.

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

Thank you Jill, and good morning.

Welcome to the Whirlpool Corporation third quarter conference call.

Joining me today are Jeff Fettig, our Chairman and CEO, Mike Todman, President of Whirlpool North America, and Roy Templin, 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 Corporation's future expectations.

Our actual results could differ materially from these statements due to the many factors discussed in our 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 34 for additional disclosures regarding this item.

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

With that let me turn the call over to Jeff.

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

Earlier this morning as you've seen we've released our third quarter results, and now I'd like to provide with you perspective on the quarter and the actions that we're taking to address the changes that we see in this economic environment.

For the quarter, net sales increased 1% to $4.9 billion, net earnings were $163 million, down 7% from last year.

EPS was $2.15 a share versus $2.20 per share.

Weaker demand continued, high material prices, significant currency movements and additional restructuring plans have caused to us lower our full year earnings guidance from the previous $7.00 to $7.50, to $5.75 to $6.00 per share, and $500 to $550 in free cash flow to $0 to $50 million in free cash flow.

I would like you to turn to slide 4 where I would like to summarize the quarter, starting with first; the very challenging and volatile economic environment which resulted in a decline in industry demand during the quarter as the global credit crisis intensified.

General economic indicators became decidedly more negative during the quarter.

As you know, declining home values and rising unemployment have continued to impact consumer sentiment, and we saw consumer confidence at levels drop to the lowest levels we've seen in decades.

Secondly, we saw a significant drop in demand in both North America and Europe as the third quarter progressed.

We do expect negative demand to persistent in these regions through the middle of 2009.

The third area we focused on is, we continue to see high material and oil related costs, and although we've seen a recent reduction in some raw material price trends, they remain at elevated levels and continue to have a significant negative impact on results despite the successful implementation of cost-based price increases in our ongoing productivity activities.

Lastly, we have also seen very significant volatility in currency exchange rates, which impacted our business.

On slide 5, I have outlined our business priorities and how we're addressing this environment.

First of all, we're significantly reducing our cost structure to meet these demand levels.

We're taking immediate action to align our cost structure with expected future industry demand level.

And I will provide you with additional details on how we're doing this in a moment.

Secondly, one of our key priorities continues to be the implementation of cost-based price increases in all major regions around the world.

We must continue to pass on some of our costs to the market to enable to us overcome continuing high material costs.

Third, we will continue to provide outstanding consumer relevant innovation to the market, with our focus on new global product launches we will continue to offer the most innovative new products to consumers in every region of the world.

Finally, we will manage all of our aspects of our business to enhance our already strong liquidity position.

We're very focused on aggressively managing capital expenditures and working capital, especially inventories.

We have suspended our current share repurchase program to ensure that we are maximizing our liquidity and funding our top priority capital investment items.

Roy Templin will talk about in this more detail in a moment.

If you would turn to slide 6, as you may recall earlier this year we announced the closure of four manufacturing facilities in North America and the elimination of a European production shift.

These actions are beginning to deliver strong operating efficiencies and will structurally remove costs from our business.

However, we determined additional actions are needed to further adjust our business to lower demand levels that we now anticipate for the next one to two years.

Earlier this morning we announced the closure of our Jackson, Tennessee facility; as well as the global reduction in hourly, salary and contractor positions.

Production from our Jackson facility will be transferred to our Findlay, Ohio location.

These actions will result in the reduction of approximately 5,000 positions by the end of 2009.

The reduction includes both reductions that have already been announced through plant closures, along with new reductions take place now and through the end of next year.

While the decision to eliminate jobs and close a facilities is very difficult, they are necessary to ensure our cost effective business structure.

We are proactively taking the necessary steps now to adjust our cost structure and production capacity to lower expected demand levels.

On slide 7, you will see that we expect our actions will results in the 2008 restructuring charge in total of $170 million, which is $70 million higher than our previous forecast.

These actions will produce savings of approximately $275 million on an annualized basis.

Again, these actions will be completed between now and the end of 2009.

On slide 8, we note some of the cost based price actions that have been announced.

These actions are in addition to the previously announced actions we shared with you during our second quarter call.

In North America, we have announced and are now implementing an 8% to 10% price increase beginning in January.

In Europe we are taking a 5% to 7% price increase beginning November through January.

Finally, in Latin America we are increasing prices 4% to 5% across the region.

These actions are required to partially offset the record level cost inflation that we have seen over the last several years.

And although some commodities have dropped significant over the last few weeks we still have cost levels of historical highs which warrant these additional price increases.

Before I turn the call over to Mike I want to note has given the volatility in today's global economic environment we will not be providing any 2009 forecast today.

We will provide guidance for 2009 in late January or early February, per our normal update cycle.

We will not address any specifics regarding our 2009 outlook at this time.

So now I would like to turn the call over to Mike Todman to update you our North American performance.

Thanks and good morning.

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

As shown on slide 10, our net sales declined 7% during the quarter to $2.7 billion with US industry demand for T7 appliances declining approximately 11%, our North American unit volumes declined approximately 11% during the quarter.

On a year-over-year basis we did experience unit volume decline that were below the overall industry decline while our branded business outpaced overall industry demand levels.

Our operating profit declined to $74 million in the third quarter.

This decline is mainly attributable to significantly higher material and oil related costs and lower industry demand.

Our material and oil based costs posted the most notable increases in our metal-based components and in diesel fuel costs.

These factors were partially offset by favorable price mix and ongoing productivity initiatives.

On slide 11, you will see 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, we are reducing our outlook for the US industry demand.

We now expect US industry demand to be down 10% from the 6% to 7% previously expected.

I would like to take a moment to discuss the major drivers of demand as we see them.

First, the trend in new home completions continued to weaken during the quarter.

We are now expecting new home completions to decline approximately 30% for 2008.

Existing home sales continue to trend towards a 13% decline for 2008, as the monthly seasonally adjusted rate has remained near 5 million since the beginning of the year.

The discretionary component of demand continued to weaken from even previously low levels as the global credit crisis has intensified and asset values have continued to erode in the housing and equity markets.

In addition, unemployment rates have continued to trend upward with many forecasters raising the peak unemployment rate expected in this economic downturn.

Finally, we have started to see some consumers delaying replacement purchases for appliances that are beyond repair.

While we expect to continue to see some of this in the near term, we believe consumers will ultimately replace these items for which they are delaying purchases today as we have seen historically.

Many of our products are considered basic necessities by consumers and any purchases that can be delayed ultimately will need to be replaced.

As Jeff noted in his opening remarks, all of these factors will likely prolong a negative demand environment at least through the middle of 2009 in the United States.

The issues in the global financial markets are also affecting industry demand in Canada and Mexico.

On slide 12, I would like to provide some historical perspective on this tough economic environment.

This is now the 9th consecutive quarter where demand has declined.

As this chart depicts, industry demand is at its lowest level since 2001.

It also now marks the severe appliance recession that we have seen in three decades.

From a decline perspective, we have been in an appliance recession for much greater time than our general economy in the US, and the replacement cycle will continue to become a greater proportion for demand in the near term.

We continue to launch new product innovations.

Slide 13 shows some of the product launches in our North American region during the quarter.

We have seen strong consumer and trade interest in our new Maytag laundry product and feel these product are good examples of where we want to position the Maytag brand.

The Maytag brand continues to perform well and has increased share for four consecutive quarters.

I'll highlight a couple of the brand launches in North America during the quarter.

We launched the new Maytag brand Bravos, the first top-load washer to offer a CEE tier three energy rating, the highest efficiency level in the industry.

The washing machine delivers 70% water, a 67% energy savings over washing machines manufactured before 2004.

We also launched the Whirlpool brand eco-friendly Steam Clean Innovation on Whirlpool brand electric ranges.

The range self-cleans light spills in the oven in just 20 minutes and reduces the need for chemicals and the resulting strong odors.

Finally, I would like to turn to the outlook for North America for the balance of the year on slide 14.

For the remainder of 2008 we expect industry demand to decline 10%.

In light of the continued inflationary trends we have announced a cost based price increase effective in January.

We are implementing 8% to 10% increase across the majority of our product line to mitigate the continued increase in material and oil-based costs.

While we are encouraged by recent price trends, material and oil related costs remain elevated and given the significant reduction in demand levels, it is necessary for us to take these cost-based price increases to ensure that we are adequately funding our innovation to bring consumers and our trade partners the highest quality and most preferred products in the industry.

Our focus during this period will be, to accelerate our productivity to reduce costs and bring our production in line with weaker demand.

Two, to execute our cost-based material price increases, and three, to continue to invest in consumer relevant innovation.

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

Yes, if you would turn to slide 16, our international operations produced solid results during the quarter despite also there too an increasing volatile and challenging operating environment.

Our European region was impacted by weak and demand during the quarter.

Latin America and Asian businesses continued to build upon their strong performance trends posting strong growth and profit improvements during the quarter.

Overall our results were impacted by substantial currency exchange fluctuations through the quarter.

As I mentioned earlier in light of the continued inflationary trends we have taken a number of cost-based price increases globally.

These increases had a very favorable impact on our results and offset some of the material cost inflation we experienced during the quarter.

On slide 17 you will see our European business where our European revenues increased by 9% to $1.1 billion, in local currencies they were about equal to last year.

Industry unit demands declined by about 4% year-over-year.

Operating profit decreased $32 million to $52 million during the quarter.

Lower gains on asset sales accounted for $23 million of this decline.

Other unfavorable impacts during the quarter were higher material and oil related costs, lower unit volumes, lower production volumes.

These costs were substantially offset by very favorable product price mix during the quarter.

Turning to slide 18, our Latin America business reported very strong third quarter results.

Revenue increased 22% to $1 billion in the quarter.

Excluding the impact of currency sales, we're up about 11%.

Operating profit increased 13% to $116 million during the quarter.

We had increased unit shipments, regional tax incentives, favorable price mix and productivity drove this positive performance.

The results were negatively impacted by higher material costs, and the non reoccurrence of a non income based tax credit.

On slide 19, you see the third quarter results for Asia, sales increased 11% during the quarter, if you exclude currency they were actually up 16% largely due to improved unit volume shipments.

Operating profit during the quarter was a break-even.

This was significant year-over-year increase in operating profit which resulted from higher volume and favorable trends of productivity and price mix.

Again, these favorable items were partially offset by higher material costs.

I would like to now turn to our outlook for the international on slide 21.

In Europe, the decline and industry demand was significant as the quarter progressed.

And became much more challenging and we expect this demand level to remain challenging during the fourth quarter.

In Latin America we continued to see continued strong demand throughout the quarter.

We do expect to see positive demand in the fourth quarter but at a slower rate as the global financial crisis impacts many of the economies throughout Latin America.

In Asia, very similar to Latin America, we experienced favorable demand in the third quarter but also expect there positive growth rates will continue in the fourth quarter but at a slower rate.

So at this time I'm going to turn it the over to Roy Templin.

Thanks Jeff and good morning to everyone.

On slide 23, I will walk you through a summary of our third quarter performance.

From a top-line perspective we saw an acceleration of the industry decline in North America and Europe which were significantly unfavorable during the quarter.

Positives were, emerging market demand and favorable foreign exchange translation which I will detail in a moment.

From a margin perspective, we had positive impact from our price mix and cost productivity initiatives.

More than off setting these positive impacts, were higher material and oil related costs, lower unit volumes in the US and Europe and lower asset sale gains compared with prior year.

We recorded $43 million of BEFIEX tax credits during the third quarter, based upon both sales and the mix of those sales.

Turning to the income statement on slide 24, during the quarter we reported revenues of $4.9 billion, up 1%.

Excluding the impact of foreign currency translation, our sales declined approximately 2.3%.

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

Our gross margin contracted 30 basis points to 14.0% for the quarter.

During the previous year, we recorded $34 million of asset sale gains in Europe and North America.

This amount declined to $10 million, primarily due to a European asset sale gain during the third quarter of the current year.

Lower asset sale gains resulted in a 50 basis point reduction in our gross margin compared to the prior year.

We also continued to feel the impact of increased material and oil related costs.

We absorbed approximately $165 million of increased material and oil related costs during the third quarter.

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

SG&A expenses increased $63 million to $477 million in the quarter.

During the third quarter of 2007, we recorded a VAT tax benefit of $12 million.

The remaining variance is predominantly due to unfavorable foreign exchange translation and increased brand investment.

During the quarter we recorded $24 million of restructuring charges related to our previously announced restructuring initiatives bringing our year to date total to $72 million.

The additional restructuring charges lower our operating earnings by $11 million during the third quarter when compared to the prior year third quarter.

As a result of the items I just discussed, operating profit totaled $177 million compared with $258 million in the prior year.

If you look at our tax credits in Latin America, they provided an incremental $18 million benefit during the quarter.

This amount was more than offset by increased restructuring expenses, lower asset sale gains, and the non recurrence of the VAT tax benefit which, when combined, total approximately $50 million in unfavorable year-over-year variances.

Translation of foreign currencies resulted in a net unfavorable impact of $13 million in the quarter.

Turning to slide 25, our other income expense had a favorable impact of $14 million, mainly due to higher interest income during the quarter.

From a, below the operating profit line perspective, this impact was partially offset by the non-recurrence of a $7 million gain on the sale of shares in our Indian subsidiary in the previous year.

Moving to our tax rate, we reported an effective tax rate of negative 38% compared with 4% in the prior year.

The decrease in rate compared with our previous outlook and the prior year is predominantly related to a decline in expected profitability.

Under US GAAP accounting, we recognized both a third quarter as well as the year to date impact of our reduced outlook in our third quarter effective tax rate results.

Slide 26 illustrates our working capital results for the quarter.

Our working capital performance improved during the third quarter compared to the prior year.

The improvement was largely the result of lower accounts receivable days outstanding which was predominantly related to lower sales volume and a reduction in past-due accounts.

On a sequential basis, working capital increased to 12.2% from 11.5% at the end of the second quarter.

The increase was predominantly attributable to higher inventory and lower payable balances.

These unfavorable effects were partially offset by lower accounts receivable days outstanding.

Now I would like to take a moment to discuss our free cash flow performance on slide 27.

For the quarter, we reported a free cash flow usage of $167 million compared with a $105 million of positive free cash flow in the previous year.

The unfavorable variance is attributable to negative variances in working capital, lower cash earnings, and lower proceeds from non Maytag asset sales.

Through the nine months ended September 30, our free cash flow was a usage of $349 million compared with a usage of $83 million in the prior year.

The principal drivers of the increased usage of cash were, lower cash earnings, higher capital expenditures as the Company accelerated cost reduction initiatives and higher absolute levels of working capital.

We will continue to tightly manage our capital spending through the remainder of the year and expect our full-year capital spending to be in the range of $535 million to $550 million.

Turning to slide 28, I would like to spend a moment on our liquidity position.

First, we have full availability of our $2.2 billion revolving credit facility.

This is a committed facility maturing in December 2010, and is comprised of a syndicate of highly rated banks from.

A long-term debt perspective, we have only one significant maturity in the next 15 months.

Our $200 million variable rate note is due June 15, 2009.

We have suspended our current share repurchase program to ensure we are maximizing our liquidity and funding strong capital investment programs.

We did repurchase $96 million of shares during the third quarter and have $350 million remaining under our current authorization.

Finally, as I mentioned earlier, we are tightly managing our capital spending levels to ensure we are funding critical and high return programs.

This is another step we are taking to continue to build upon our liquidity position.

Lastly, to illustrate our position at the end of September, our $2.2 billion undrawn committed lines were supporting $710 million of commercial paper.

In addition, we had $425 million of cash at the end of the third quarter.

Finally, I would like to turn to our guidance summary on slide 29.

Based on current economic and industry conditions and expected additional restructuring expenses, we are reducing our full-year guidance to $5.75 to $6.00 per share from the previous range of $7.00 to $7.50 per share.

We currently expect to incur $170 million of restructuring expenses during 2008, including additional actions we announced this morning.

Lower expected unit volumes around the world also had an unfavorable impact on our outlook.

In fact, during the third quarter our North American operations produced roughly 10% fewer units than the prior year quarter and we are forecasting roughly 20% reductions in units produced in the fourth quarter in both the North American and European operations.

From a tax rate standpoint we are now projecting our full-year tax rate will approximate our third quarter rate of a 38% benefit.

This is largely related to lower earnings before tax, the impact of tax credits and earnings dispersion.

Additionally, we now expect to convert these earnings into free cash flow in the range of $0 to $50 million for the full year.

The most significant driver of the decline is related to our lower cash earnings and unfavorable expected working capital variances.

Finally, I would like to note that we are in a highly volatile global economy and are providing you with our best available view, given the information available at this time.

With that I will turn the call back to Jeff.

To close my remarks today I would like to comment on the macroeconomic environment and reinforce what we're doing to respond to these conditions at Whirlpool.

These are very challenging and volatile times economically around the world.

We are facing one of the most challenging economic periods that he we have seen in many decades.

Demand levels are changing by large amounts around the world.

In the US, as Mike pointed out, the current outlook is for the lowest level of unit volume seven years.

The length and now depth is already the largest and deepest US appliance recession that we've ever seen from.

From a cost standpoint we continue to experience significant cost inflation across many of our key input costs.

Despite encouraging trends in some commodities, we still have yet to see declines to bring these costs back to levels of even only one year ago.

From a currency standpoint, we've seen severe and swift moves in most of our key global currencies.

This will continue to be a challenge we are manage in the near term until these currencies find new equilibrium levels for currencies worldwide.

So at this backdrop, we are clearly focusing our priorities the basics of our business very well, these include the aggressive cost reduction actions that we previously discussed.

But in addition to those actions, we are very focused on driving increased efficiency and productivity gains beyond the structural and capacity cost reductions that we previously discussed.

We have been successfully implementing price increases, and we have another round of cost-based price increases going on around the globe.

These increases are necessary to ensure we're sustaining the level of innovation and outstanding new products that our consumers and trade partners expect from Whirlpool.

A key part of this innovation has been our efforts in terms of building the highest quality and most energy efficient products on the market today.

We view these as core product attributes and differentiators for consumers in this environment where consumers are seeking good value.

Finally, as Roy mentioned, we're taking clear steps to build upon our already strong liquidity position to ensure we continue to be well positioned going forward.

We will carefully manage all of our spending plans and focus these investments in our business on the ones that create the highest value for shareholders and for our customers.

In summary, these are very challenging economic times, but I believe we have the right pieces, in place in terms of actions, products, people, and our overall focus to manage well in this downturn and equally important, to emerge as an even stronger enterprise going forward.

With that, I would like to end here and open up to questions.

(OPERATOR INSTRUCTIONS) Our first question will come from David Mcgregor with Longbow Research.

Hey Jeff, Roy, Mike.

Good morning David.

The price increases, can you just talk about what percentage of your total revenues will actually be impacted by the price increases and as opposed to what percentage won't receive any increases?

David, globally I think if you consider price increases that were already taken this year, which will have a carry-over effect on next year, plus the things we pointed out will go into effect between now and January 1st, I would say virtually all of our revenues worldwide will be impacted by pricing.

The second question, just with respect to raw material costs.

Seems like there's still quite a bit of cost inflation pressure there.

Have you got hedged prices for 2009 that are above current spot market prices?

Is that part of the cash flow story here with respect to working capital?

Well, David, just speaking of raw materials, if you think of the big elements of our materials, you start with steel, and steel, as you well know, is still a question mark about what 2009 steel prices are.

There's -- if you look at today's demand levels and today's spot prices, there seems to be a disconnect there now, but we don't have a prediction yet for next year.

Oil for us which affects fuel and resins has obviously gone down.

That's a variable.

Goes up and down with some lang in timing with oil.

Metals we do hedge, and as we said in the past, we are always six months out for approximately 50% of our needs.

So when metals are going up, we're always -- the direction is the same but we're under the curve.

When metals are going down, we go down, but we -- given the hedge position, there's a time that effect we may be over the curve.

So given this environment, given where metals are today, we expect that to be a positive next year.

Of course components, the value chain, our supply base has the same challenges margin wise as we do so we don't -- some of those things that are indexed to specific metals may go down, others, we've got price increases that are in effect.

In total, our view is that on the material inflation world isn't as positive as some of the recent headlines about oil and metal.

Okay.

Thanks for that.

Last question on the balance sheet.

What's the risk of goodwill impairment charges at year end and maybe talk about what percentage of your pension assets were in equities.

David, it's Roy.

As you know we've got goodwill about $1.7 billion which again we look at that quarterly.

We also, of course, do detailed impairment tests as part of our annual year end closing cycle which I think most companies do.

The biggest component of goodwill is $1.6 billion in Maytag goodwill, then we have some other smaller amounts of goodwill, and so again, we had no impairment at the end of this quarter but it is something obviously, David that we monitor on a quarterly basis but do a very detailed projections as part of our annual closing cycle.

With respect to your question on pension, our targeted ratio is 60% in equities and 40% in terms of fixed instruments.

Great.

Thanks very much.

Good luck, guys.

Thanks, David.

Our next question comes from the site of Eric Bosshard with Cleveland Research.

Please go ahead.

Good morning.

Good morning, Eric.

On the pension subject, while it's open.

Can you give us some guidance of what that might mean considering what's gone on in regards to the income statement and also the cash contribution needs for that in 2009 and how that would relate to 2008?

Sure.

Roy, if would you answer that please.

Eric, at this point, I'm not going to -- I kind of go back to Jeff's opening comments in his script.

We are not going to talk about 2009 with any type of specificity.

But just a couple comments to help you get some guidance here.

First of all, David asked what's the targeted ratio between equity and fixed instruments, and I answered that.

You know that we have, in fact, frozen our defined benefit plans.

If you look at our funded status position at the end of last year, Eric, we had about $3.6 billion in liabilities and about $3.1 billion in assets.

From a PPA perspective we were just under 90% funded in terms of the total plans, with the highest funded plan being the big Whirlpool plan.

Now, as you look at the current market trends, obviously I would expect that gap to increase in terms of our funded status position, but again, Eric, we are not going to get into the details with respect to what we think that's going to be or try to project that at this point in time.

I think the key variables, as you know, we will specify at year end, will be what discount rate, what the final asset returns are, we're also watching as are most companies, whether there may or may not be any legislative changes with respect to the PPA, and, of course, anything else that we do internally with respect to the competitiveness of the Whirlpool plan.

So there are still a number of moving components, but net-net I wanted to give you those fact.

But I can't go into 2009 specifically.

What was the cash -- did you to have make a cash contribution into the pension in 2008?

2008 was $85 million for the US plans, Eric.

Okay.

The tax rate, can you saying a gain what the tax rate is implied for 4Q within the guidance?

Let me take a crack at that, Eric.

First of all, let me start with, when we set our tax rate, I'll talk about Q3, and I'll walk you forward, Eric, if that's okay.

There two are really key components with respect to our tax rate.

The first thing we do is we always estimate what the annual operating effective tax rate will be, and we look at two things.

We look at our estimate for operating earnings, and, of course, we look at our estimate with respect to the various items within the tax line that are coming off of our operations.

We obviously, with the drop in guidance, we had a significant reduction in terms of our annual outlook for earnings, and again, under the US GAAP rules, what that requires to us do, in the third quarter we took a big catch-up adjustment, to get our year to date right and aligned with the line of sight we now have for annual earnings and the taxes on those earnings.

To put that in perspective that was a 50-point drop in what would have been probably a rate you would have been expecting in the low 20s based upon our last guidance to where we finally ended up at this minus 38%.

For the year, I said in my script we expect annual benefit to be the same, about 40%.

In terms of benefit, not expense.

And there's one very key item with respect to the Q4 in this annual guidance to make this math work, and that is that, as part of the economic recovery act there was a provision in there for credits on energy efficient appliances.

As you know, we have for years invested hundreds of millions of dollars in order to be in a position to supply the market with high energy efficient appliances.

These credits are for products produced in the US only.

They must be in excess of a rolling two-year baseline, and there are some limitations to those base lines, but we do anticipate, as a results of the investment we've made thus far Eric to be in position to capitalize on credits both in 2008, 2009 and 2010 here in the US.

And so if you take those credits, plus R&D credit and some of the other credits we have internationally, we think that will be about a 37-point reduction to what would have otherwise been our annualized effective tax rate.

And so that, to go to the end, the four-year expected is a tax benefit, not a tax expense, of roughly 40%.

That's correct.

And Eric I did say 37.

It's actually 27 points reduction with all the credit.

Sorry about that.

And that is included within that full year 40% benefit ?

Eric that is included within that benefit, correct.

Okay.

Which leads me to my next question.

That is, the 4Q guidance, now understanding the magnitude of the tax benefit within the 4Q guidance, it appears that there's a pretty significant step down in operating profit within the business.

Is that all North America and Europe and what drives significant step-down that is going to be taken from 3Q to 4Q?

Eric, there are probably three elements to the operating step-down for 3Q to 4Q.

The first one is productivity.

And I don't know whether you caught in this my script or not, but Mike and his team actually took out 10%, when you look at units produced year-over-year, in the third quarter, and both in North America and in Europe we are now estimating we'll take out just under 20% of the volume when compared to units produced in 4Q and year ago.

So as you would anticipate, Eric, we have much lower productivity, in particular, conversion productivity, than we had had in Q4 a year ago, or frankly, Eric, than we would have in a traditional 4th quarter trended rate.

The second area is the restructuring, of course that Jeff talked about.

Will have about a $70 million charge that will come through in the fourth quarter.

The third area, Eric, this was also embedded into Jeff's script, is currency.

And again, currency, given, you heard the positive impact of currency in our Q3 results, but, of course, those rates have all changed significantly, and we now expect a fairly significant reduction in terms of the fourth quarter impact from currency.

Great.

Thank you very much.

Our next question comes from Jeff Sprague with Citigroup Investment Research.

Please go ahead.

Thanks.

One more on the tax before I get to some other things.

I guess I am still a little bit confused, if the negative 38 was all about catching up, your year to date tax rate is negative 11 so you are going to take the full year to negative 38 based on Q4 being a negative 100% tax rate?

Actually, it will be negative almost 300% when you look at the tax rate by itself in the fourth quarter.

Because again, keep in mind, Jeff, you've got very little EBT, then you have these tax credits, so you end up getting this multiple, in terms of what would be an ETR in the 4Q.

What are the cash consequences of these?

Are you actually going to get cash reimbursement this when can you actually use these from a cash flow standpoint?

First of all, the answer is are you going to get cash reimbursement, are these really cash credit.

The answer is yes they are.

All of that's are cash credits.

The energy tax credit that I spoke of earlier, which is by far, of course, the biggest component in this 4Q line, call it 300% rate, again I'm rounding there Jeff, they have a 20-year life on the credits.

Which we fully expect to utilize these within that 20 year life, we would expect to be able to utilize them over next five years, in terms of being able to utilize all the credits and actually receive the cash with respect to this credit.

I know you want to avoid the 2009 guidance but your comment about stirring all this together equals a 27 point reduction, is that -- does that apply going forward also, regardless of what the tax rate is, we should think of the number 27 points lower than that as a go forward basis?

Well, it's a good question, and, of course, I mentioned to Eric that we do anticipate earning these energy tax credits in both 2009 and 2010, so your assumption would be from a normalized run rate with those credits would you get a tax rate somewhere around 10%.

Okay.

And then just also a little unclear on FX.

FX was a positive on revenues in the quarter but you described it as a negative from a P&L standpoint.

Can you just elaborate on that?

Obviously, currency will -- I won't say obvious, but certainly looks like currency will be a big negative on the top line in Q4.

What insight from the way it converted in Q3 can we take into Q4?

Yeah, I will start.

With respect to Q3, if you think about the impact on currency for Whirlpool Corporation, Jeff, it comes from -- there are two large buckets.

The first bucket is the currency impact as a result of foreign currency transactions that we have embedded in our business, and the largest impacts from those transactions in the third quarter were both in Europe and in Latin America, and, Jeff, what's happened there is in Europe, first of all, we have Euro denominated contracts, particularly in Slovakia and Poland, where we've have had appreciation in the currencies in the production countries relative to the Euro, and so our top line, in essence, has been held rather constant while our cost to compute have increased and squeezed our margins.

That was just under $10 million of margin in Q3.

With respect to the largest component we have, Latin America, where as you know we export roughly 70% of the compressors that we produce in Latin America, somewhere in the neighborhood of 10$ to 20% of the appliances.

Those are dollar-denominated contracts, and so again, as the Brazil Reai has appreciated the costs to produce have appreciated but our top line has been constant in US dollars, there we had just under a $20 million impact in Q3 with respect to the transactions.

In the North America business we had just under 5 million of positive which was the net of the Euro versus Canada and Mexico.

So the two bucket for Q3, $10 million positive on the translation, and $23 million negative on transaction costs around the world.

Now, the second part of your question is how do you step that forward.

Given the rapid volatility in currencies, we are now estimating, in 4Q there will be an impact on sales as well as operating profit.

As I said earlier, that's a key component with respect to this Q3 to Q4 walk in terms of operating profit.

There's a lot of stuff moving around but is there a rule of thumb about how we can think about currency dropping through at kind of a margin conversion rate of some to sort or some rough rule of thumb so people can frame this?

We used to have a rule of thumb, absent volatility that we were neutral.

But with this type of volatility, even when you overlay our hedge positions that we have I just don't after good rule of thumb to give you there, Jeff, with respect to that.

Finally from me, I guess there was a comment that you are seeing replacement delayed beyond repair -- or appliances being delayed even beyond the point of repair.

I wonder if that's anecdotal evidence, or you have some good measure of that, and what does that really imply?

I would guess you probably replace your refrigerator, but I would guess in laundry or dishwasher or something like that you are just seeing people go without?

Yeah, Jeff this is Mike Todman.

What we have seen, and we can pretty well measure the impact of the housing has on appliance sales, what we've seen certainly over the last quarter, and we expect to see over the course of probably the next couple quarters, is that consumers are now making decisions on where to spend their discretionary income, and if at all possible, to delay a purchase, right now we're seeing that happen what.

We clearly expect, though, is that that bubble is going to burst at some point in time, that, in fact, there will be demand of consumers that have delayed purchases over a period of time, and that, they eventually will replace, as you suggested, it may be a washer, or it may be a dishwasher, which they can say, I can put off buying that for a short period of time.

One last quick one for Roy.

Cash costs of the restructuring action?

Yeah.

Again, just so I'm clear, we'll have incremental restructuring of $70 million as a result of what we said today.

Total restructuring in the fourth quarter will be $100 million.

So I'll set the baseline.

Now.

$70 million in the fourth quarter, $138 million in total costs once we completely execute these initiatives.

Of that, about $115 million will be impacted on the cash flow statement, or cash charges, Jeff, and we'll have just under $20 million of cash charges in the fourth quarter this year.

Thank you very much.

You are welcome.

We'll take our next question from Laura Champine of Cowen and Company.

Just wanted to understand your unit expectation.

I did here in Q4 looking for down 20% North America and Europe, but I thought that in Mike's earlier comments I heard him say that US industry units were expected to be down 10 in Q4.

If that is right, what would drive the much steeper declines in your own business in North America.

There's two different sets of numbers.

One is the guidance we gave on demand for both North America and Europe was basically the same level that we saw in Q3, which in the case of North America was down 11%.

In the case of Europe it was down 4% to 5%.

The minus 20% is a production number.

We are rapidly taking down inventories to adapt to this environment that will negatively impact our productivity -- we will see a -- we should see a profound change in our inventory by year end so one was demand, the other production.

We only obviously have one big gross number for inventories.

It's tough to tell but it doesn't look incredibly stretched.

Does that mean that you would expect year end inventories to be substantially lower, or do you expect to lose share relative to that down 11% industry action?

We would expect to be both in dollars and days substantially lower by year end without constricting available.

So, no, we don't expect to lose share but we do expect, both dollars and days, to be substantially lower than where we finished in the third quarter.

Again, if you look at the trend data, the rapid decline almost on a weekly basis from late August through September, was pretty profound.

So we did finish third quarter higher then where we wanted to be, at the same time, adjusted down our forecast for demand and total for fourth quarter, so we're adapting production to deal with all that.

And then just lastly from me on the North American demand, it looks like the primary issue other than macro is the OEM business.

Is there anything you can do to benefit the OEM business or see improvements out of that, that business line?

Yeah, Laura this is Mike.

As you know, it's both branded and OEM, and year-over-year we did see a decline in the OEM business, but we continue to support that with all new product innovations, so we keep launching products for the Kenmore brand for Sears but we also continue and we've launched product, our own branded product what.

We expected, continue to see growth in our brand and we will continue to support the OEM business.

Thank you.

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

Hi, good morning everyone, sorry to beat a dead horse.

Just want to make sure I have the numbers right, because a lot were thrown around.

With the tax rate for 2008, it is going to results in an effective 38% benefit for the full year?

Yeah, I think I said roughly the same as Q3, but that's correct, Michael.

Thank you.

Also, the 200 -- the $275 million benefiting cost savings, you said those actions would be done mostly -- started in the fourth quarter and then into 2009.

I was just trying to get an idea of, that $275 million, how much of that due realize in 2009?

We would estimate that in 2009 it would be roughly just under $200 million of benefit.

nd that's just on those actions, in addition, of course, we'll have significant productivity initiatives and other actions so we do intend to aggressively improve our structural cost positions.

Okay.

Understood.

Also, the commercial paper borrowings, how would you describe your ability to continue to access the CP market?

We've obviously heard in the papers about how at different points that market has seized up.

Yeah, Michael, it's Roy.

I would answer it with that, we've been able to consistently borrow in the C P market.

We've had new issue maturities that have averaged somewhere between 7 and 45 days with an average maturity of about 14.

In terms of the ability to continue, we continue to borrow in the CP market today but I really can't comment with respect to any future actions with respect to our availability other than to say we've been able to consistently borrow to date.

Okay.

Also, the free cash flow guidance reduction, you had mentioned that it was primarily driven by the lower cash earnings and the unfavorable working capital shifts.

I was wondering if you could maybe put some further clarity, if possible, in terms of the $500 million drop, how much was from one versus the other and if there are any other negative impacts.

Yeah, there are other puts and takes, Michael, but the two big items are cash earnings and working capital in terms of our guidance change.

And it sort of goes back to Jeff's question earlier.

But cash earnings is about $350 million reduction.

Now, when you look at our cash flow statement, Michael, will you have to go down into the tax line again to add back the variance with respect to tax, because Jeff asked me earlier when do you expect to get the cash as a result of these credits that you have earned, and I set would be in future years, and so again, I am taking you back to pure cash earnings.

That's about $350 million, and then the other $250 million, the big bucket, is working capital versus where we thought we would be at midyear.

And there are other puts and takes Michael, but those are by far the biggest items.

Okay.

Last question, I guess, just if you have it, the current US dollar balance on the BEFIEX tax credits that are remaining.

We'll file our Q this afternoon and we have about $790 million remaining, and you will see that I know our Q later today, Michael.

And the recent currency devaluation didn't have too much of an impact there?

You will see, again, keep in mind, that $790 million is as of the end of September.

Right.

So its currency change is through September.

Fair enough.

Thank you very much.

You are welcome.

We'll take our last question from John O'Brien with Ragen MacKenzie.

Please go ahead.

Thanks, Jeff, Roy.

Just wanted to ask two questions.

First, one on the debt covenants.

$2 billion in debt.

What's the closest debt covenant that the Company is -- right now?

We, again --

Given the reduction in cash flow.

John, we don't disclose specificity with respect to numbers on covenants.

We have two principal covenants as a Company.

One is debt to EBITDA, which needs to be under three, and we were at about 2.4 at the end of the quarter.

And we have an interest cover covenant John, which we need to be greater than two, and we were just under four at the end of the quarter.

The other question had to do with just looking at that time commodity costs, since 2004, been following, the Company's declared commodity costs have increased $2.2 billion, which, given your shares outstanding, would be about $29 a share.

How long is kind of the lag here?

We're seeing some of the commodities come down to levels last seen in 2005.

I understand that there is going to be some contract lag, but typically that lag doesn't seem to be more than about -- anywhere between three to nine months, depending on the actual commodity and how you are hedged.

So I was just kind of curious on, you have given a pretty discouraging outlook near term, but it kind of looks like next year to meat least, that by midyear you should be getting a lot of benefit from all these commodity price decreases.

So could you comment on that at all?

Yeah, John.

I think your thinking is sound.

Couple comments.

One, given the volatility, the fed, of course, is where is the price of oil going to where is the price of metals, so on and so forth.

But that aside, the real issue is steel, and steel -- there seems to be a huge disconnect today between the spot market for steel and demand.

But until we see that radically change, that is the single largest component that we purchase, and it is at really elevated levels.

So we're not making any forecasts yet on 2009.

Got a lot of work to do to solidify what our input costs are going to be, so on and so forth.

But I think in terms of your thinking, you are right with the exception of one thing, or depending on what your position is on steel.

But clearly with demand levels trending they're trending, one would think that commodity would go down.

Listen, thank you very much for joining us today.

As I mentioned, we are in a really challenging economic environment.

We are very focused on aggressively reducing our costs.

We are implementing price increases in all major markets around the world.

And very, very focused on improving our working capital and generating cash.

So we look forward to updating you next tame.

Thank you for joining us.

This does conclude today's teleconference.

Thank you, and have a great day.