惠而浦 (WHR) 2008 Q4 法說會逐字稿

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

Today's call is being recorded.

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

Please go ahead, sir.

Thank you, Kevin.

Good morning.

Welcome to the Whirlpool Corporation fourth quarter and year-end conference call.

Joining me 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 Corporation's future expectations.

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

During the call, we will be making comments on free cash flow, a non-GAAP measure.

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

Our remarks today 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 fourth quarter and full year results.

And now I'd like to take a few minutes to provide you with some perspective on the quarter of the year and I think very importantly the actions we're taking to address this very difficult economic environment that we see in 2009.

As you all know, the global economic slowdown accelerated during the fourth quarter and in fact has deteriorated rapidly over the last six months.

The negative volatility has created substantial challenges in our business in the following areas of demand, currency impacts, and cost.

Let me start with demand.

During the quarter we saw a steep drop in global unit demand, which made for very challenging sale and production environment.

This was primarily due to accelerated declines in our North America and European businesses during the quarter.

In response to these demand levels, we took aggressive measures to reduce our production rates to ensure inventories did not get out of line.

This did have, however a significant impact on our operating margins during the quarter.

The second area where we saw a lot of negative volatility is in currency.

During the fourth quarter, we saw significant and rapid movements in exchange rates.

In fact, the order of magnitude was 20% to 50% on some of our major currencies around the world.

This volatility had a very unfavorable impact on our results during the quarter, well beyond what we would consider to be normal and we'll talk more in detail about that in the moment.

And the third area was in cost.

We continued to face high material and oil related costs during the quarter.

Quarter-over-quarter material costs were $150 million higher due to the increases we had seen all year, but particularly due to the spikes that we saw in raw materials in the third quarter of the year.

And although we've seen our recent reduction in raw material trends, they did remain at elevated levels during the fourth quarter.

I would turn to Slide 2 to summarize our year where we did a number of things, one to address this environment.

First of all, we did implement structural cost reduction actions as I mentioned to align capacity with demand.

As part of this effort, we made a difficult decision which we announced in October to close five manufacturing facilities and to reduce approximately 5,000 positions globally by the end of this year.

These actions are in place and are now beginning to deliver strong operating efficiency and will structurally remove cost from our business.

In addition to this, we are implementing additional cost actions to further adjust our business to lower demand levels and I'll talk more about those in a moment.

Also during 2008, we executed cost base price increases in all markets around the world.

These increases were aimed at partially mitigating the record raw material and oil related inflation that we saw throughout the year.

These 2008 actions will have a positive carryover benefit to our margins in 2009.

As I mentioned, we reduced global production rates below demand to reduce our inventory levels and also we continued to invest in innovation.

Our innovation pipeline remains very strong.

Innovation not only attracts consumers to our brands, it drives an overall business mix improvement for our business that generates higher margins.

And as such, we're going to continue to make focused investments in innovation going forward in 2009.

And finally, despite this very volatile environment in really in all parts of the world, we were able to either maintain or grow our market position in all major markets around the world.

I'll now turn to Slide 5, where I outline the areas that we see most impacting our business in 2009.

On the positive side, we do expect to significantly reduce our total product costs, despite expecting higher material prices.

We'll be able to do this by taking aggressive actions in product redesign, commonization of components, productivity improvements which will positively impact conversion, improvements in quality, and the restructuring benefits from our previously announced activities which related to manufacturing footprint and job reduction.

The second area which will be positive to our business is the way we're aggressively attacking our non-product costs, primarily related to SG&A levels and logistics costs.

In these areas, we've taken actions in literally every part of our business by reducing headcount, freezing salaries, reducing some benefits, adhering strict reductions in all travel and all discretionary spending.

We've also reduced and redirected a portion of our consumer marketing spend to trademarking.

Given the current environment, we believe conversion at point-of-sale is the most effective use of these investments.

In the area of logistics, we'll benefit from a steep drop in oil.

And in low demand environment like we're seeing we see opportunities to realize lower tariff rates.

So in total, we expect SG&A and logistics costs to be substantially lower in 2009 than in 2008.

The third area we see benefiting our business is through improved price and mix.

Again, as I said, the actions that we've taken in 2008 will largely carry forward benefits to 2009.

We continue to see favorable mix opportunities with our new product innovation and in the area of energy efficiency.

Energy efficiency is a growing consumer preference in most markets around the world, and as you know, Whirlpool is the leader in offering the largest number of energy efficient products to the marketplace today.

We see in this tough demand environment value is a strong buying preference in that energy efficiency as opposed to just lower prices is increasingly seen as a great value offering.

Together these things are having a positive impact on our mix.

Globally this year, we expect to realize approximately 2 points of improvement to our price mix in 2008.

The last two areas where we expect to see positive benefits for cash generation are in working capital and capital spend.

For 2009, we expect working capital to be a significant source of cash generation.

From an overall perspective, lower revenues in unit production, although negative on our P&L, will have a positive impact on our working capital.

In addition, we're taking very significant actions to reduce inventory while still providing great product availability to our customers.

This is made possible due to the reduction of the five manufacturing facilities that I've previously discussed and also by having less buildup of inventory for major product changeovers.

Our capital spend will be 10% to 15% lower in 2009 than in 2008 and this will represent a $50 million to $100 million improvement in cash generation compared to last year.

We have significantly reduced all non-product spend, but -- and I'd emphasize -- we are continuing our investments in new product innovation.

The negative impacts on our business this year are demand, material prices, and currency.

Overall, globally we expect to see about an 8% decline in our global unit volumes during the year, and at current currency rates, we anticipate about a $1 billion revenue reduction just from currency translation alone.

Lower demand impacts are a result in two ways.

First there's simply lower gross margin dollars due to lower demand, and second is the negative effect of our fixed cost rates on lower units.

We are addressing this and rapidly reducing our fixed cost base to minimize and ultimately offset this impact.

Material costs in 2009 are expected to be up by about $200 million.

Clearly we've seen a very positive turn in oil, base metals, and steel in some markets compared to what we were seeing in mid year 2008.

The overall increase is due to increases in some component costs and the carryover effect of the significant mid year 2008 increases that we incurred.

As you all know, there's a lot of volatility in many of these costs and we anticipate that overall costs will continue to move in relation to overall demand levels.

The last area which will negatively impact us this year is the overall impact of foreign currency due to the significant moves which we saw in the fourth quarter in all our major currencies.

We see negative impact of these currency moves our P&L in three different areas.

First is simply the translation of our international profits to US dollars.

The second is the operating transaction effect between production markets and selling markets.

And third, we see it for a period of time in certain balance sheet adjustments.

In a relatively stable currency market, we normally have very little P&L impact due to our hedging approach and the natural balance of our business.

The rapid and significant moves we saw in the fourth quarter had a very unfavorable impact on our P&L, which you will see in the fourth quarter, but if today's currency levels remain intact for the full year, we do anticipate an unfavorable impact to our P&L in 2009 in the $100 million to $150 million range.

Let me sum this up by saying that we're clearly focused on generating cash and reducing cost in every part of the business to align ourselves in this highly volatile environment.

We have implemented significant actions to date in all parts of our business and will continue to do even more as we go throughout the year.

I'd move now to Slide 6 where we offer our earnings guidance.

This year we expect our earnings to be in the $3 to $4 EPS range for 2009.

For the full year, we expect to generate positive free cash flow in the $300 million to $400 million range.

I would emphasize we are basing these projections on the economic environment that we outline today and the business plans that are currently in place.

Clearly, there is a lot of volatility and uncertainty in the economic outlook, and our focus is firmly on taking all actions needed to ensure that we succeed during this difficult environment.

I'll stop here and turn it over to Mike Todman to update you on the North American business.

Thanks, Jeff, and good morning everyone.

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

As shown on Slide 8, our net sales declined 18% during the quarter to $2.5 billion, with US industry demand for T7 appliances declining approximately 10%.

Excluding the impact of foreign currency exchange, our sales decreased 16%.

While we had been experiencing lower demand in the US through the first nine months of the year, we had been having more favorable industry demand in Mexico and Canada on a relative basis.

During the fourth quarter, we saw these trends deviate significantly from the first nine months.

For the quarter, the US business was essentially in line with our previous outlook, while Mexico and Canada experienced declines that were greater than our previous expectations.

Overall, our year-over-year volume declined substantially during the fourth quarter.

As we had discussed with you on our third quarter call, after building strong market momentum during the first half of the year, we experienced lower volumes during the third quarter due to announced and implemented price increases.

While we experienced continued volume pressure during the fourth quarter, we did see a marked improvement in our share on a sequential basis.

As we have previously noted, we are seeing the most pressure with our value brands, which had the largest percentage increases in price.

During the quarter, we reported an operating loss of $20 million.

The decline in profit was due to significantly lower revenue, costs associated with adjusting our production to the demand environment, and higher material and oil related cost.

In addition, we had an unfavorable impact of $32 million due to a supplier related product recall.

These factors were partially offset by favorable price mix, ongoing cost reduction initiatives, and a $23 million gain related to the sale of an asset.

On Slide 9, we provide our industry outlook for 2009 and some background on the components of demand.

Our forecast calls for new housing demand to reduce industry growth by approximately 4 points in 2009, based on a 35% decline in new home completions.

In addition, we expect existing home sales to decline 9% during the year.

We expect discretionary spend to decline, given that low consumer confidence and high unemployment are expected to persist throughout most of 2009.

In addition, given the general consumer unease, we continue to expect to see some consumers delaying replacement purchases even for appliances that are beyond repair.

However, we should note that many of our products are considered basic necessities by consumers and any purchases that can be delayed ultimately will be replaced.

As a result, we believe that these buyers will return to the marketplace as some of the broader economic concerns subside.

Based on current estimates of these key economic variables, we believe the US industry demand will decline 10% in 2009 with continued high levels of uncertainty.

Slide 10 shows that 2009 will mark the fourth consecutive year of a US industry decline.

In addition, the magnitude of this downturn is now projected to be the worst on record, with the major appliance industry contracting by approximately 11 million units over a four year timeframe.

As this chart depicts, overall industry demand is forecast at its lowest level since 1998.

Finally, given this challenging demand environment, I would like to turn to our key priorities for North America in 2009 on Slide 11.

These priorities are to appropriately adjust our production levels and inventory to expected demand levels; manage all costs across our business, including manufacturing and supply chain costs, through focused lien activities, organization and SG&A cost, and all other costs that do not impact making selling and distributing our appliances.

We will also continue to execute the previously announced restructuring plans in the areas of reduced labor and production capacity.

And finally, to optimize our volume and price mix in the marketplace.

As you know, we have executed cost based price increases in 2008 and announced an additional [8% to 10%] price increase effective January 1, 2009.

While we continue to expect to realize favorable price mix during the year, we will balance this with optimizing volumes and ensuring that we provide consumers with great value.

Finally, with regard to our consumers and trade partners, we will continue to accelerate our disciplined and systematic approach to deliver the right product at the right value.

This is particularly evident in the area of providing consumers with the widest array of energy efficient products.

We have always believed that energy efficiency and consumer value go hand in hand and this has allowed us to provide the most energy efficient products to the marketplace for many years.

During 2008, as you may know, we received the Energy Star Sustained Excellence Award for the ninth time over the past 10 years.

We currently offer approximately 600 Energy Star qualified appliances, more than any other appliance manufacturer.

Today, these products offer consumers an outstanding value which provides substantial reduction in lifetime ownership cost.

All of our actions are focused on providing consumers with the greatest value by offering brands they can depend on with the most innovative features in the most cost efficient manner.

We are in a challenging period where we are facing low demand, but have urgently taken the steps necessary for our business to perform during this difficult economic time.

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

Let me turn to Slide 13 to discuss our international business.

Here too, in our global international markets we saw deterioration at different levels in terms of economic activity and the different markets in the regions.

Our results were once again unfavorably impacted by exchange rates on both sales and operating profit, but also from significantly lower demand levels particularly in Europe.

Our Latin America and Asian businesses delivered very good results even though the growth in these markets either slowed or declined.

I'd speak then on Slide 14 to Europe, where our European revenue decreased by 16% in dollars for the quarter and in local currency declined 7% from the previous year.

Industry shipments, however, declined approximately 10% year-over-year.

Our operating profit had a significant climb to $2 million positive in the fourth quarter.

Our results were heavily impacted by unfavorable fluctuations at currency, significantly higher material cost, and then of course these sharply lower production rates which were significantly lower than our sales decline.

Turning to Slide 15, our Latin America business, revenues in dollars decreased 26%.

Excluding the impact of currency, our sales were down about 14% but at that very differently indifferent parts of the business.

These results reflect a much lower demand in the Latin America market outside of Brazil.

Brazil was fairly steady.

And we also saw a large decline in our global compressor operations.

Operating profit in the period declined by about 30% to $110 million.

Our results here too were impacted by unfavorable currency, lower revenues, and higher material costs.

We were able to partially offset these negative impacts with favorable price mix and overall cost reductions.

On Slide 16, we reflect our Asia business.

Here, our sales in dollars declined 10%.

Excluding currency, our sales increased about 7% due to higher volumes and very favorable price mix.

We had a positive operating profit in the quarter of $3 million compared to the previous year loss, and again this year-over-year improvement in profit came from the higher volume, favorable productivity, and price mix.

Here too, we had negative material costs and favorable currency impact.

To provide you with a broad outlook at our international business on Slide 17, I would say based on what we currently see in terms of the economic conditions, we anticipate these markets too to remain somewhat challenging and expect that in Europe, for example, full year industry demand is expected to decline by about 8% from 2008.

We expect demand in Latin America in terms of shipments to be flat to down about 5%, and also the same in Asia, flat to down about 5%.

So with that I'll turn it back to Roy for the financial review.

Thanks, Jeff, and good morning, everyone.

Beginning on Slide 19, I'll walk you through a summary of our fourth quarter performance.

From a top line perspective, we saw significant weakness across most major markets during the fourth quarter.

Industry declines in our largest markets, North America and Europe, were the most severe during the fourth quarter.

In addition to the decline in global unit volume, we experienced a significant revenue decline as a result of unfavorable foreign currency exchange rates.

On the positive side of the ledger, we did see continued favorable gains from positive price mix during the fourth quarter.

From a margin perspective, we had positive impacts from our price mix and SG&A cost reduction actions.

More than offsetting these positive impacts were higher material and oil related costs, lower global unit volumes, and unfavorable foreign currency exchange.

Finally, we monetized $38 million of BPX tax credits during the quarter and recorded asset sales gains of $43 million.

From an expense standpoint, we recorded $77 million of restructuring expenses and $32 million of expenses related to a product recall.

Turning to the income statement on Slide 20, during the quarter, we reported revenues of $4.3 billion, down 19% from the previous year.

The unfavorable impact from foreign currency translation accounted for 6 points of the decline and was predominantly related to the appreciation of the dollar against the Brazilian real and Euro.

In addition to this weakness, however we had unfavorable effects across most of our major currencies.

Our gross margin contracted 4.7 points to 11% for the quarter.

Our gross margin was impacted by three main areas -- significantly lower unit production volumes, higher raw material and oil based cost, and unfavorable foreign currency exchange.

Material and oil related costs increased $165 million during the quarter.

These items were partially offset by favorable price mix, which was significantly positive during the quarter.

SG&A expenses decreased $105 million to $379 million in the quarter.

The variance was largely driven by lower SG&A expenses related to cost reduction initiatives and lower overall incentive compensation expense.

Foreign currency translation and asset sale proceeds accounted for approximately 40% of the dollar improvement.

During the quarter, we recorded $77 million of restructuring charges related to our previously announced programs, compared to $15 million in the previous year.

Our fourth quarter restructuring expense resulted in a 1.8 point reduction in our operating margin.

As a result of the items I just discussed, operating profit totaled $10 million compared with $332 million in the prior year.

The combination of higher restructuring cost, unfavorable foreign currency exchange movements, and higher material and oil related cost accounted for approximately 80% of the year-over-year reduction in operating income.

Turning to Slide 21, our other expense had an unfavorable impact of $23 million, mainly due to unfavorable foreign currency exchange during the quarter.

Moving to our tax rate, we reported an income tax benefit of $160 million during the quarter compared to an income tax expense of $39 million in the prior year.

The year-over-year benefit is predominantly related to the recognition of energy tax credits and lower North American income during the fourth quarter.

Slide 22 illustrates our working capital results for the quarter.

Our working capital balance improved during the fourth quarter when compared to the prior year.

Excluding the impact of foreign exchange, our working capital levels were roughly flat with the prior year.

Now I'd like to take a moment to discuss our free cash flow performance on Slide 23.

For the full year, we reported free cash flow usage of $101 million compared to free cash flow generation of $521 million in the prior year.

The unfavorable variance is largely attributable to lower cash earnings compared with the prior year and unfavorable variances in working capital.

Our 2009 capital spending is expected to be in the range of $450 million to $500 million.

Turning to Slide 24, I'd like to spend a moment on our liquidity position.

First, we had $247 million outstanding under our $2.2 billion revolving credit facility and we were in full compliance with our covenants.

This is a committed facility maturing in December 2010 and is comprised of a syndicate of 22 banks.

From a long term debt perspective, we have only one significant maturity during 2009, which is our $200 million variable rate note which is due on June 15th.

Now I'd like to expand upon a comment included in this morning's release.

We have initiated discussions with banks to seek additional flexibility within our capital structure.

We are proactively taking steps to assure our future financial flexibility, given the generally negative and highly volatile global economic environment.

Given that these discussions are ongoing, I will not be able to comment further on this matter.

Should anything change with respect to finalization of a decision on this topic, we will make a public announcement at the appropriate time.

Finally I'd like to turn to our outlook summary on Slide 25.

As Jeff mentioned, based upon current economic conditions and business plans, we expect to earn between $3 to $4 per share during 2009.

Slide 25 provides you with some direction on our key operational drivers.

We expect to experience significantly lower industry unit volumes during the year.

Jeff and Mike detailed our assumptions by region earlier, but we expect North America and Europe to remain the most challenging markets during the balance of the year.

From a currency standpoint, we anticipate a negative impact on our full year results based upon recent exchange rates.

Finally, we expect material costs will be unfavorable for the full year.

We are currently projecting a $200 million unfavorable impact for the full year 2009.

We expect productivity and price mix to be favorable factors during 2009.

Productivity is expected to be a significant positive during the year based upon the many factors that Jeff noted earlier.

We are currently executing our previously announced restructuring programs as well as a significant amount of additional actions which we expect will drive substantial savings during the year.

We also expect our global price mix results to be favorable in 2009 as a result of our previously announced pricing actions and ongoing product mix initiatives.

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

Now I'll turn the call back over to Jeff.

Thanks, Roy.

Let me take a minute to sum up our comments today.

Clearly, we are in a very difficult global economic environment.

We are not expecting this to change soon and we do expect to see a lot of volatility throughout this recession.

Our top priority is to take all of the necessary actions needed to maintain and ensure our financial strength and flexibility through this prolonged economic downturn.

To do this we're focusing all of our resources on doing three things very well.

The first as I've mentioned is to radically reduce our global cost structure and production capacity.

In essence, lowering our overall breakeven level significantly, which will enable us to deliver profitability even in this extreme demand environment that we see today.

The second area is to drive those actions across the business to generate cash, to ensure that we can appropriately invest in our business and at the same time reduce our overall debt levels.

And third, as we mentioned in a number of cases, we will effectively balance our volume, price, and mix equation to optimize our overall results.

We won't chase volume in a down market.

We also won't abdicate our market position.

We clearly have the right tools in the form of great brands and product innovation to achieve our fair share of the market and at the same time improve our margins with our price index actions.

Finally I would say that I do believe we understand the global dynamics of every part of our business and we are in the midst of a very negative economic period that again we're not expecting to change soon.

We will take, have taken, and will continue to take all necessary actions to insure we deliver the best possible results during this period.

But I think very importantly, we also are taking the right actions to ensure that we emerge from this economic period as an even stronger company that will have significant value creation upside when we return to a more stable demand environment.

The actions we're taking today will significantly lower our overall cost structure and breakeven point.

Our brands, our product innovation, and our overall business execution will only get better during this challenging period.

And I believe with these fundamentals in place we'll be in a great position when the global economy does recover to what we would consider to be more normal economic growth levels.

So let me end here and I would now like to open this up to questions.

Very good, sir.

(Operator Instructions).

We'll take our first question from the site of Sam Darkatsh from Raymond James.

Your line is open.

Good morning Jeff, Roy, Mike.

How are you?

Good morning, Sam.

Three questions if I might.

First off, I guess this would be 800 pound gorilla in the room.

Jeff, with demand falling off as it is and you're asking for pricing as much as others in the industry are, what have you seen thus far in terms of the stickiness of the pricing?

And help us with your expectations.

I know you're expecting 2 points for positive pricing and mix for the year but help us reconcile and on the one hand a very difficult business environment and on the other hand the need to get pricing and the likelihood of receiving that?

In fact, a large number of these actions have been in place for several months so we've got pretty good data in parts of the world whether it be Latin America, Asia, parts of Europe, parts of North America.

And we did in some markets early on lose some market share based on that.

Without exception, all of these markets to date are retaining this price mix and we are recovering systematically the market share through our other actions like new product innovation and our point-of-sales conversion work.

We have scaled down our expectations since October and September when we thought material costs were going to be dramatically higher than where we see them today.

We've taken some of this and reinvested it with the trade in terms of conversion, and trying to not only bring some consumers into shops but to convert them once we get in.

So I would say to date, we have a pretty good, some cases a month, some cases two to three months where we have a pretty good idea what the run rate is with all of this.

And I think that they are pretty much aligned with the expectations that we shared with you.

Sam, it's Roy.

Just to give you a little perspective to Jeff's comment on run rate -- for 2008, we ended the year with about 1.5 points of positive price mix.

We came out of the year though in Q4 with 2.7 points of positive price mix.

Basically 50/50 Sam, between price and mix, just to give you a little bit of perspective in terms of run rate.

Second question, and you just referred to this a little bit, Jeff, but in North America, it looks like the value brands, you might have lost some share, and then Latin America looks like it lost share again.

Was that a result of the increased pricing?

Or os that something fundamentally happening in the industry?

And at what point do you expect the share particularly in North America and Latin America to stabilize?

Well, let me talk about that.

Mike talked about the US.

First of all, as we talked about before in the US, we took a fairly substantial mid year price increase.

We had a very strong share position through Q1 and Q2 of last year.

We took a fairly strong price, a much needed but strong price increase in the mid year.

We lost share in the third quarter.

In the fourth quarter, we improved our share versus third quarter, but year-over-year was still down.

So the trends were going in the right direction.

I would say in the US and in terms of Latin America, we have not lost share.

In fact, for the year we actually increased share for the regions.

We did in any given month, I think in September and perhaps October we might have lost a little bit of share in Brazil, but by year-end it had largely come back and we're in a pretty good position there.

This is Mike.

Maybe just to add on to what Jeff said, as you know, we had a lot of momentum in the first half of the year.

But then as Jeff said we implemented the price increase in mid year.

We have seen sequentially in all our major brands improvement in share from the third quarter to the fourth quarter.

And frankly we're expecting those trends to continue in the first quarter of the year so that we get back to share levels that we're comfortable with.

They may be slightly below last year, but they certainly will be sequentially improved over even the fourth quarter.

And what we are doing with our pricing is selectively ensuring that we provide the right value to consumers, and that is driving appropriate price mix in the marketplace.

My last question and I suppose this would be to Roy -- trying to go through your cash, your free cash flow guidance, and trying to determine what working capital as a source of funds might be, you have $225 million to $300 million in net income, about $100 million in the lighter CapEx versus depreciation, you got $75 million in asset sales.

And I'm trying to -- there's going to be some takes to that, I'm guessing the pension contributions, the cash restructuring over the expense.

But I'm trying to figure out what the other line items in the cash flow statement might be so to give us a sense of how much of it is from [de cap] and how much of it is from operating?

Sure, Sam.

I'll start with your first question, and then I'll come back and touch upon pension and your question on restructuring cash as well.

First of all, you've got the big components right.

When you look at our cash earnings and you look at the delta between depreciation and amortization and CapEx, it's somewhere around $375 million of true cash earnings.

Sam, if you look at what we're committed to in the way of benefit funding, and I'll come back and specify that for you, but benefit funding -- you look at the hedge commitments we have outstanding and cash flows related to those and you look at our standard accruals for restructuring, warranty, et cetera -- you end up with about $50 million to $100 million of positive cash left over in terms of those commitments relative to the overall cash earnings.

And as we said in our release this morning, we'll have between $50 million and $100 million in asset sales, and then Sam, that leaves you with roughly $200 million of favorable cash coming out of working capital.

Jeff talked about this.

I talked about it in our scripts.

We plan to hold working capital at a minimum flat with the current year.

We ended Q4, Sam, with 10.0% working capital as a percent of sales.

What that means is we have to take tough actions -- and Jeff talked about this in his comments in terms of managing inventories down with lower demands.

But as we do that, obviously that's a natural source of cash generation for the company in 2009.

Now, your questions on pension specifically, Sam, our funding pension specific -- and again this is based on our own policy and the latest policy changes that we understand coming out of Washington -- would be $80 million of funding in 2009.

And from a restructuring commitment, Sam, we're looking at cash -- we ended up using $20 million in Q4.

As we indicated on our last call, we came in right at the $20 million.

We'll use about $65 million in 2009 and then the remaining $25 million in cash related to restructuring will happen in 2010.

So your free cash flow already includes the cash contribution that you're going to be making to the pension over and above the P&L impact?

It does, Sam, that's correct.

Okay, thank you.

You're welcome.

Another question?

We'll take our next question from the site of Eric Bosshard with Cleveland Research.

Your line is open.

Good morning.

Good morning, Eric.

Can you provide a little more color on Latin America?

I think the revenues were down sharply relative to what the trend has been there.

And I guess I'd like to understand a little more what's within that and your conviction on 2009?

And then also how the tax credits should play out in an environment where the revenues seem like perhaps they're contracting there?

Eric, let me give you a quick snapshot.

Think of our Latin America business as three different parts.

There's our global compressor operations in Morocco.

There's our Brazilian appliance business and then there's the 32 appliance markets outside of Brazil within Latin America.

In terms of fourth quarter and so on, I would say that the compressor operations had a significant decline in demand, which you would expect given that they sell to OEMs who if they were like us were rapidly reducing their inventories.

And I would say also the large international markets outside of Brazil had a fairly steep decline in demand.

Our Brazil business was actually fairly flat to solid if you will, and was least impacted during that period of time.

So those are the three components.

Going forward, I do think the first part of the year, as people to continue to adjust inventories and the general overall state of demand, that we will have decline in our compressor operations.

The Latin America markets outside of Brazil -- on one hand they are diverse so you have a lot of complementary nature to it.

On the other hand, they are volatile.

So I'd say that they will decline.

We don't give a forecast on exactly how much, but we see them declining.

Brazil we see as again fairly solid -- solid meaning no growth, if you will.

Roy can speak about the BPX, but in general the BPX is all driven off the Brazilian business and the exports and we are expecting lower exports, which is reflected in our BPX.

Eric, it's Roy, good morning.

Eric, a couple of comments with respect to BPX.

First, just a little bit of background perspective.

As you'll recall, we export about 70% of our compressors and 10% to 20% of the appliances we produce in Brazil.

The BPX credits are really an offset to a tax called the IPI tax, which in essence is very similar to a value-added tax which each of those taxes are based upon the type of product produced, with laundry having the most significant tax all the way down to microwave and air con which have no IPI tax associated with them.

As we look at 2009, we do and we have in this guidance forecasted lower overall BPX tax credits.

Now part of that, Eric, is simply due to foreign currency translation.

If you noted in my comments, we had $38 million of BPX credits this year relative to $49 million in Q4 last year.

So that $11 million delta -- the bulk of that delta, Eric, was currency driven versus demand or mix driven.

Great, and then secondly, on the working capital situation, with the volumes down as much as they are and you talk about maintaining I think inventories flat on a year-over-year basis, is there consideration that you should be doing more than having flat inventories and a sharply lower global unit environment?

Eric, actually, it's Mike.

You might have misunderstood what he said.

Roy said if we only cap our working capital as a percent to sales flat, we would yield X.

We clearly intend to yield cash out of working capital and reduce inventories both in absolute dollars but also in rates.

So our two big levers there are to your point lowering demand in revenues with the same percentage would yield a cash from working capital.

But in addition, we expect inventory rates to be better -- therefore, generate even more working capital than just percentage wise.

I think the other relevant comment, Eric, with respect to working capital -- as you transition from '08 to '09, you saw in our cash flow statement this morning.

You'll see more details I know when we file our 10-K, But obviously, our payables position at the end of 2008 was significantly lower than 2007 -- and frankly significantly lower than where it typically is because of the fact that we took down 20% of our production in both North America and Europe.

So that's another key item with respect to the rollover year-over-year on working capital.

Great.

Thank you.

Thank you.

We'll take our next question from the site of Michael Rehaut from JPMorgan Securities.

Your line is open.

Thanks, good morning everyone.

Good morning, Michael.

First question, I have a couple questions actually.

But the first question -- just was hoping if you could give us some more granularity on the cost actions in terms of the benefits you'd expect for '09?

And specifically how it would affect the different regions?

And what you've taken already that would benefit into '09 and what future actions that you might take if possible to give that into some degree on a regional basis?

Michael, this is Jeff.

Actually I'll give you the totals.

I'm not sure I can break it down sitting right here.

But what I did say was because -- I would say all these were proportional because we're doing aggressive things around the world -- is that if you remember in my remarks, I said we will significantly reduce our product costs.

That would imply that all these actions I outlined have to be greater than the $200 million of raw material cost increases we expect plus the volume impact of conversion, which is fairly substantial.

And what I talked about was product redesign -- in other words, products were coming out with -- are redesigned with less material content in them, commonization of components -- with every one of our new mega projects, they are developed on a global basis and we have a dramatic simplification of components in more global scale on those components.

We continue to aggressively deliver lean manufacturing initiatives in all of our global manufacturing facilities, which is a plus.

We expect the cost of quality to go down as our quality continues to get better.

And then we've got, and I don't have the exact number in front of me, but the overall restructuring benefits we talked about last fall, we will be delivering either in the form of product cost reduction if they are product related or in SG&A if they are SG&A related.

So in total, again, what I'm saying is they have to overcome the negatives, which are the $200 million raw materials and the volume.

On the SG&A and logistics side, again these are significant, and I don't have the breakout, but it's between $200 million and $300 million of lower costs in SG&A and logistics combined year-over-year.

So if you think about that -- and again, these are directionally the same in all regions, although I would say probably the biggest beneficiary of these is in North America.

Okay.

I appreciate that, Jeff.

Before I just hit on my next question, also, on some of the big pluses and minuses for next year, you were good enough to give your view on raw materials that are being net $200 million.

But I would assume that perhaps it might be a bigger net negative in the first half of the year and perhaps even a slight positive in the back half of the year?

I was wondering if you could give us a view on how you're thinking first half, second half, or even quarter by quarter?

Well, I think the important thing that you think about here is the significant runup -- and it was only July when oil was $147 a barrel, and spot steel prices were $1,100 to $1,200 a ton.

So parts of our business had significant mid year onward price increases.

So from that perspective, they actually will have -- they have a runup in Q3 and Q4, they will have declines versus Q4, declining costs.

But quarter-over-quarter, year-over-year, they will be substantially higher.

So a little bit how this plays out through the year, I would say generally speaking to your point, on a year-over-year basis, we'll have higher material -- the majority of it in the first half and very little in the second half.

Okay.

I was wondering also if you could give a little bit of breakdown on the tax rate -- what was going on there in the fourth quarter?

I believe you had guided to the full year being about -- and correct me if I'm wrong here, roughly like a 38% benefit.

And that on our numbers somewhere got us around the $130 million benefit and it came in for the full year of $200 million or so.

I was wondering if you could walk through the changes there and also what type of tax rate you're expecting in '09 and '10?

Sure.

Michael, it's Roy.

First of all, we guided to roughly a minus 40% tax rate for the year at the end of Q3 and we end up at minus 82%.

And Michael, that entire mist is almost entirely driven by the lower overall EBT that we had in the quarter relative to what we said we thought we would have when we did our guidance in October.

With respect to next year's tax rate, we estimate that rate between 5% and 10%.

And the key drivers as you think about the typical statutory rate of 35% -- you've got a 15 point reduction for the energy tax credits.

We've got about a 5 point reduction coming from the BPX that we're projecting for next year, and then about a 5 point reduction coming from tax planning initiatives that we have underway that will impact 2009.

And then the difference between the 5% and the 10%, Michael, will ultimately be determined upon the overall dispersion of our income.

Right now, we are projecting more dispersion to lower tax countries, which would give us a little bit of benefit with respect to our rate next year.

And do you think that 5% to 10% range may be closer to 10% if North America rebounds a little bit?

But that type of a number for 2010 as well?

Or would any of those other initiatives be energy or the tax planning initiatives fade in the out year?

Well, as we said on the last call, we think and we've estimated we'll earn about $100 million of tax credit in '08, '09, and '10, but beyond that Michael I can't really comment on the 2010 tax rate at this point.

Okay, one last one if I could.

Just a technical.

Where were the other gains on sale?

You had $43 million for the quarter overall.

There was I think you only broke it out in North America.

We had $23 million in gross margin and $20 million roughly in the other income and other expense, Michael.

Excuse me, in SG&A, I'm sorry.

Okay, but regionally though?

Europe and the US.

Okay, so the balance is in Europe.

Great, thank you.

We'll take our next question from the site of David MacGregor from Longbow Research.

Yes, good morning everyone.

Good morning, David.

You talked about your manufacturing being down about 20% on the quarter.

I was just wondering if you could quantify for us the impact on the P&L from the planned idlings and the curtailments?

Dave, I can't give you an exact number other than to say the simple thing is if you take our production over our fixed cost for manufacturing, the per unit rate was quite substantial.

It varies factory by factory place in the world in total, but it was a substantial number.

I can't quantify it for you.

How achievable is -- you talked earlier about getting your breakeven down significantly.

What's an achievable number?

Well, as I told you, think of it two ways.

All of our fixed cost in manufacturing are reflected in our product cost.

And we said that we would have significant product cost reduction, overcoming increases in raw materials and the volume effect of less manufacturing.

So I would say our product cost reductions are going to be a substantial number.

And if you just did the math and relate it to our earnings, you'd see they have to be over $500 million just on the product side.

And then I gave you the SG&A logistics number.

You've got to think of the large portion of SG&A as fixed cost base and a portion of logistic as fixed cost base.

And I'd say that would be near $300 million.

So it is a big number and we think that it's very achievable and appropriate for this environment.

You talked about the raw material costs being up $200 million year-over-year, raw material and energy related.

How much of that is yet to be negotiated?

How much of that is pretty much locked up at this point?

Well, I'd break it out a couple of ways.

In principle, North America and Europe generally have more locked in contracts, although there are very few contracts that even go a year anymore.

A lot of them are indexed to whatever their raw material element is.

But we have, I would say the large majority of those things in place, which mean there are some level, but within a band of variability, let's say on a quarterly basis.

Probably the two things out there that are more variable is outside of Europe and North America, largely in the emerging markets, steel is generally a daily, weekly, monthly negotiation, if you will and oil related.

As I just mentioned logistics obviously is adjusted a lot faster.

So I don't know a percentage, but I got to believe we've got probably 80% of our cost at least defined within a band today.

Okay, great, and just on the two covenants, can you give us an update?

I know we don't have full visibility on the elements of those covenant calculations.

David, it's Roy.

With respect to covenants, let me say a couple things.

One, we have $247 million out on our revolver at the end of the year.

We were in full compliance with our covenants.

David, as we looked at the volatility both in the global demand levels and particularly the volatility that we saw in the fourth quarter with respect to currency, we proactively initiated discussions with the banks to take steps to ensure we had more flexibility with respect to both our financial flexibility and liquidity.

I really can't say a whole lot more than that at this point in time, David, other than we had less cushion than we felt comfortable with given the volatility that we're seeing particularly in the last quarter of the year.

And so again, we proactively launched those discussions with the banks.

David, just let me add to that.

Look, what I said and we firmly believe, our number one priority is to ensure the financial strength and flexibility of this company during this prolonged downturn.

And to Roy's point, there's a lot of unknowns out there -- how long and how deep will this demand part of this recession last?

As you saw in the fourth quarter, currency swings at 20% to 50% within the quarter, the volatility and the material cost market -- all of those things combined just gave us the belief that anything we do to enhance our flexibility is good.

And that's to Roy's point -- that's why we really entered some of these discussions.

Right.

Now on your covenants, I realize you're in discussion with your bankers now and I don't want to press you on a point that will complicate those discussions, but your debt to EBITDA covenant was less than 3.0.

Your interest coverage greater than 2.0.

Did you end the quarter either through those covenants?

No.

We were in full compliance with those.

No, as I said in my comments, we were in full compliance with our covenants at the end of the year.

Thanks very much guys.

You're welcome, David.

Our next question is from the site of Jeff Sprague with Citigroup Investment Research.

Your line is open.

Thank you, good morning.

Hi, Jeff.

Just to follow up on that, Roy, can you tell us where you are on debt to EBITDA as it's defined by the credit agreement?

Well, Jeff, I'm not going to comment as I said to David -- given where we are, I'm not going to comment any further than what I've already said beyond we were in full compliance as of the end of the year.

As the credit agreement stands now, what is the consequence of a covenant break if you don't succeed in renegotiating?

Again, Jeff, I don't want to speculate on a covenant rate.

We are and have been in full compliance with our covenants.

And it isn't appropriate for me to comment on what might be actions going forward because again, we've been fully compliant with our covenants to date.

Okay, I understand.

Can you tell us where your pension deficit actually finished the year?

Sure, I can, Jeff.

We ended the year with a deficit of $1.3 billion.

As you'll remember, we came out of the year before at $500 million.

So our deficit grew by about $800 million, Jeff, in the year.

But that was driven off a negative asset return of about 20% and a lower discount rate in 2009.

And did you go through year-end exercise on Maytag?

Your market cap today is sitting near what you paid for Maytag.

I'd have to think there's some impairment discussion going on there.

I think someone asked me on the last call, Jeff, with respect to impairment.

And I said at that point in time we actually do impairment studies both on -- you're talking about the intangible assets and goodwill here.

We also do them relative of course through our deferred tax position as well.

We do those analyses, Jeff on a quarterly basis.

But of course at year end, we do a much more thorough analysis with respect to the value of our intangibles, goodwill, and our overall deferred tax positions.

And we did not have any issues or any impairment with respect to any of those assets at the end of the year, but we did complete a very thorough analysis in each of those areas.

Finally, the asset sales, what are the origin of these?

Are these just random facilities that have become available as you've shrunk the footprint or is there some certain complexion to what you're finding to divest in this period?

It is, Jeff.

In fact as you know, as we execute the GOP and Jeff talked about the five facilities and we look to streamline our G&A facilities as well and G&A assets, that's what's driving these numbers.

Now let me clarify because there may have been some confusion on Michael's question earlier.

Again there's $43 million total.

$23 million of those came through the margin and $20 million came through SG&A.

So the geography of those -- the $23 million that came through gross margin is a North America benefit and the $20 million again related to other corporate assets, that came through SG&A.

And you'll find that in Other Corporate, or Other & Eliminations, which is that last line on our key stack worksheet.

So it's not in a region per se.

It's in the corporate center.

Great, thank you.

You're welcome, Jeff.

We have one more question?

We could take one more question from the site of Laura Champine from Cowen and Company.

Your line is open.

Good morning guys.

I'll keep it brief.

I just wanted to confirm that I heard Roy say you expect pension contributions of $80 million and then had a question on your thoughts on continuing to pay the $1.72 dividends.

Laura, you are correct.

The pension contribution for this year '09 is estimated to be $80 million.

And Laura, this is Jeff.

Regarding the dividend, obviously our Board determines our dividend level.

We've made no changes to date.

Among all the things we look at all the time, we consider it, and again to date we've made no changes.

Thank you.

Well listen, everyone.

Again, we appreciate you dialing in today and look forward to talking to you next time.

Thank you.

This does conclude today's teleconference.

Have a great day.

You may disconnect your lines.