惠而浦 (WHR) 2009 Q2 法說會逐字稿

Good morning and welcome to the Whirlpool Corporation second-quarter 2009 earnings call.

Today's call is being recorded.

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

Please go ahead.

Thank you, Chris, and good morning.

Welcome to the Whirlpool Corporation's second-quarter 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 that you 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 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 31 for additional disclosures regarding this item.

Our remarks today track with a presentation available on the Investor section of our website at Whirlpoolcorp.com.

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

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

As you saw earlier this morning, we did release our second-quarter financial results, which I will now take a few minutes to summarize.

Overall, net sales for the quarter were $4.2 billion, down 18% from prior period year.

The decline was driven by unfavorable foreign currency translation and sharply lower unit sales volumes in both our North America and European regions.

Excluding the impact of foreign exchange, revenues declined by approximately 10% for the quarter.

Our EPS came in at $1.04 per share compared to $1.53 that we reported last year.

We saw strong year-over-year improvements in our North America and Asia businesses, where our operating margins also improved.

Operating margins remain strong in Latin America and declined in Europe.

For the quarter, we delivered free cash flow of $174 million despite sharply lower production volumes.

That takes our year-to-date free cash flow to minus $197 million, which is in line with our expectations at this point in time at midyear.

I want to turn now to slide four, which summarizes and provides an update on the key factors that we have been referencing throughout the course of this year on our business.

On the positive side, we continue to make very significant progress on our total cost reduction targets.

When we assessed the economy late last year, we took aggressive actions to counteract what we saw a as potential for significant demand reductions, high foreign currency volatility, and severe changes in the financial markets.

We eliminated substantial costs across the enterprise, and these improvements to date have helped us to impact the double-digit revenue decline.

In addition to the cost area, we have successfully executed our plans to improve our price mix.

This has done through selecting price adjustments and very strong mix driven by our new product innovation.

During the second quarter, our margins were favorably impacted by 2.3 points of positive price mix management.

As we indicated on our previous call, we expect price mix to remain a positive factor for our full-year results.

However, given the fact we are now comping against significant increases in the second half of last year, we expect the effect to be less positive in the second half than the first half.

We do continue to see demand, material prices, and currency having a negative impact on our business for the balance of year.

We are, however, seeing some positive trends in certain material costs since our last call.

To sum it up, I would say the factors affecting our business in the first half of the year will continue throughout 2009.

We will continue to focus on cash generation and cost reduction efforts across all parts of the business in order to minimize these factors having an adverse effect on our business.

At the same time, we will continue as we have in the first half to appropriately invest in new product innovation and continue the cadence of bringing new consumer relevant innovation to the marketplace around the world.

Now I'd like to spend a moment on regional unit demand outlook for the year, which you can see on slide five.

In the US, we continue to see signs that demand is somewhat stabilizing at much lower levels.

Our expected industry-to-volume decline forecast remains at between minus 10% and minus 12%.

In Europe, we have updated our projections and we now expect volume to decline by about 13% versus our previous estimate of 10%.

During the quarter we saw weakness throughout the entire region, with Eastern Europe remaining especially weak.

Turning to Latin America, we now expect the Brazilian appliance industry unit volume of 10% growth versus our previous expectation of flat to down by 5%.

Much of this growth in the second quarter was primarily due to the sales tax reductions on appliance purchases.

As we discussed in our last call, the Brazilian government initiated a program in April aimed at stimulating appliance demand by reducing the sales tax levied on products.

We are seeing the positive effect of this demand as a result as a result of the program throughout the second quarter.

Across the Latin American region, we continue to see sharp appliance demand declines in our other Latin American markets outside Brazil and in our global compressor business.

As such, overall for the regions, while these trends will largely offset the strength of Brazil, we do expect demand to be approximately equal to last year.

In Asia, we expect our 2009 industry unit growth to be flat to up 5% versus our previous estimate of flat to down 5%.

The growth we saw in the second quarter is primarily due to improving macroeconomic environment and our relatively strong performance across the region.

I will now turn to slide six.

While we continue to face a very challenging and very volatile economic environment, we have taken very aggressive actions over the last several quarters to restructure our business.

We continue to align our capacity and resources to lower demand levels.

We are beginning to see the positive impact from those actions as we continue to aggressively execute our plan to ensure that we succeed and deliver in this very difficult environment.

We have updated our earnings forecast.

We now expect earnings to be in the range of $3.50 to $4 per share this year versus our previous guidance of $3 to $4 per share.

Our free cash flow guidance remains the same at $300 million to $400 million and that, again, remains unchanged.

In a moment Roy will go into more detail on our free cash flow.

At this point in time, I will turn it over to Mike Todman to give you an update on our North American performance.

Thanks, Jeff, and good morning everyone.

I will begin by reviewing North America's performance in the second quarter.

As shown on slide eight, our net sales declined 17% during the quarter to $2.4 billion, with the US industry demand for T7 appliances declining approximately 14%.

Excluding the impact of foreign currency exchange, our sales decreased 14%.

During the quarter, we realized an operating profit of $120 million compared to $101 million reported in the prior year.

The improvement in profit was due to favorable product price mix in our ongoing cost reduction initiatives.

Results were partially offset by significantly lower production levels and unfavorable foreign currency fluctuations.

We realized strong margin improvement during the quarter, despite the substantial sales decline.

Our operating margin for the quarter expanded to 5% compared with 3.5% in the prior year.

Turning to slide nine, I would like to take a moment to dive a little deeper into the progress we have made on our cost reduction initiatives.

As Jeff mentioned, we have reduced product costs and achieved savings in nonproduct areas as well.

A good example of this is the work we have done on the SG&A side.

Here you can see the SG&A reduction in North America during the first half of the year.

In this quarter alone, we achieved a 27% SG&A cost reduction, and we will, of course, continue to take aggressive action for the balance of the year.

Turning to slide 10, we outlined our full-year industry forecast assumptions.

Our outlook for new home completions is essentially unchanged at a 40% decline.

We now expect existing home sales to be down 5% versus our previous forecast of a 9% decline.

The favorable impact of this improvement on the full-year industry demand is approximately 0.5 point.

Offsetting this slight improvement, we continue to expect discretionary spending to have a negative impact on overall results, as high unemployment levels and low consumer confidence persists.

I would say that on balance, the discretionary component of demand has been more challenging than our previous outlook suggested.

As for replacement purchases, we continue to see some consumers delaying replacement purchases even for appliances that are beyond repair due to the economic uncertainty.

We have not witnessed a major change in the replacement markets since our last update and believe that any delayed purchases will ultimately be replaced.

We continue to believe it is just a matter of time before these buyers return to the marketplace.

And despite the economic situation, consumers continue to look for value that goes beyond price.

They are making careful purchasing decisions and demanding high-quality and as well as innovation with focus on energy and water efficiency.

We continue to offer those compelling products in the marketplace that provide the value consumers seek, and this will continue to have a positive impact on the mix of products that we sell.

Turning to slide 11, this chart depicts how the US market has performed since 2005.

The shaded areas are the 2009 contributions to this change.

As you can see, we have faced the most difficult comparisons versus 2005 during the first half since the industry peak.

As we progress, comparisons will become less difficult, and we expect the year-over-year percentage decline will decrease at a lesser rate.

Of course, this effect will be more pronounced in the fourth quarter as we compare with a 29% reduction since the fourth quarter of 2005.

As you may recall, we had a very strong July last year, and expect this will make the third-quarter comparisons more difficult than the fourth quarter.

Based on what we are seeing in the marketplace today, we are leaving our outlook unchanged and continue to expect the US market will decline between 10% and 12% in 2009.

In summary, we are executing the priorities that we previously outlined and are making good progress in the areas of cost control, balancing our volume and price mix, and continuing to provide our consumers with innovative new products.

While there is clearly still more work to do, our performance reflects the progress we have made in these areas, and we will build upon this momentum going forward.

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

Thanks, Mike.

I will now turn to slide 13 and talk about our international business.

You will see our international operations continue to have somewhat mixed performance during the second quarter.

The results were unfavorably impacted by exchange rates, but we did benefit, like in all parts of the world, from the significant cost reduction efforts we have implemented.

During the quarter, we saw significantly lower demand levels in Europe, while both Asia and our Brazil businesses delivered solid results during the quarter.

In fact, our Asia business delivered the highest level of sales and operating profit in our history during the second quarter.

Turning to slide 14, I will talk about Europe, where our total European revenue decrease by 25% in the quarter.

In local currency terms, it's only by 13% versus last year in a market we estimate was down approximately 12%.

We reported an operating loss of $12 million compared to profit of $50 million in the previous year.

Our results were very unfavorably impacted by currency fluctuations, lower sales, and significantly lower production volumes.

Our ongoing cost reduction efforts and favorable product price mix partially offset these results.

We expect these results to improve as we see production levels more matching sales for the balance of the year.

Turning to slide 15, our Latin American business, we saw revenue decline by 16% during the quarter.

Excluding the impact of currency, sales increased by approximately 1%.

Our clients' results reflected much stronger results from our Brazilian operations, primarily what I mentioned before -- the Brazilian government's appliance incentive offerings.

We did experience weak demand for our appliances in Latin American countries outside of Brazil as well as lower volumes in our global compressor business.

I will note that our Brazilian appliance business saw its revenues increase by 28% in local currency terms, and we continue to expand our leadership position in the marketplace where our brands and products remain the most preferred by consumers.

Operating profit for the region totaled $75 million compared to $133 million last year.

Our results were negatively impacted by foreign exchange, significantly lower monetization of tax credits, and higher material costs.

Partially offsetting these results were our cost reduction initiatives and refundable energy credit.

Our ability to monetize tax credits was impacted by the Brazilian program aimed at stimulating appliance demand.

That program originally scheduled to end in July has now been extended through the end of October.

We feel that this action by the Brazilian government has been a strong program that has substantial positive impact on demand.

And we continue to believe that Brazil is one of the strongest economies that we see in the world.

However, this will unfavorably impact our ability to monetize tax credits largely for the balance of 2009.

Our second-quarter results in Asia are shown on slide 16.

Here we show net sales increasing by 3%.

If you exclude currency impact, sales increased 19% compared to last year.

Our operating profit during the quarter was $11 million compared to $5 million last year, and this year-over-year increase in operating profit is due to higher volumes and continued cost reductions, partially offset by an unfavorable country price mix.

I would also like to point out a significant event that we had in our China business last week.

You can see on slide 17.

Here you will see a picture of the joint venture manufacturing facility that we opened last week with Hisense in China.

The facility will produce both washing machines and refrigerators for the Chinese market and for export.

This new manufacturing center is significant for us because it provides us with increased manufacturing scale for us and adds refrigeration to our Chinese product portfolio.

It also represents an important component of a global offering platform and solidifies our presence in markets with strong growth potential like we are seeing in China.

At this point in time, I will turn it over to Roy Templin.

Thanks, Jeff.

Good morning, everyone.

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

From a net sales standpoint, we continue to see significant weakness in North America and Europe.

Our appliance unit volumes actually increased in Brazil and Asia during the second quarter.

As was the case in the previous two quarters, we continue to see a substantial unfavorable impact from foreign currency translation in the quarter as FX accounted for eight percentage points of year to date revenue decline.

From a margin perspective, the key positive factors in our margin performance remained largely unchanged, with price mix and cost reduction initiatives continuing as favorable items.

Material and ore related costs moved to a neutral year-over-year impact on our results.

This marked the first time in many years where we did not experience an unfavorable variance from material cost.

Unfavorable variances were related to the double-digit decline in global volumes, unfavorable foreign exchange rates, and lower Befiex modernization due to the consumer tax incentives legislated in Brazil.

As we mentioned to you on the last call, we projected lower Befiex in the quarter, and in fact we recognized $9 million of Befiex credits in Q2, well below the prior year level of $47 million.

Finally, we had one notable item related to an $11 million energy refund from a Brazilian utility supplier.

Turning to the income statement on slide 20, during the quarter we reported revenues of $4.2 billion, down 18% from the previous year.

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

Our gross margin declined 1.5 points to 13.3% for the quarter.

Our gross margin was negatively impacted by foreign exchange transaction losses, which accounted for 0.8 points in margin decline.

Lower Befiex accounted for another 1.0 point of margin decline, and lower net from reduced volume levels had a unfavorable impact on our margins as well.

On the positive side, we realized 2.3 points of price mix contribution to our gross margin during the quarter and continue to see savings from our previously announced cost reduction programs.

SG&A continued be to be a good story at Whirlpool as we reported SG&A $112 million below the prior year level.

Approximately 25% of the dollar decline was due to the effects of foreign currency translation, while the balance of the improvement was related to cost reduction initiatives and business activity.

Notably, our SG&A improved as a percentage of sales to 9.3% from 9.9% in the previous year despite the significant drop in revenues underscoring our progress in cost reductions.

During the quarter, we recorded $23 million of restructuring charges compared to $40 million in the previous year.

The most significant restructuring program during the second quarter related to the closure of our Shanghai facility and the start-up of our new joint venture that Jeff touched upon earlier.

Operating profit totaled $134 million compared to $203 million in the previous year.

Unfavorable foreign currency exchange rates resulted in a negative impact of $71 million on our operating income during the quarter.

Considering this impact as well as double-digit unit declines and a substantial reduction in Befiex credits which we monetized, we feel good about our operating results.

Specifically we made strong progress in the areas of price mix and cost reduction to mitigate substantial negative macroeconomic effects.

Turning to slide 21, we recorded $58 million of interest expense compared with $49 million in the prior year.

This increase in interest cost predominantly reflects higher average borrowing costs and overall higher debt levels.

Offsetting this unfavorable impact was a $12 million reduction in our interest and sundry expense in 2008.

As you may recall, we reported cost related to legal settlement in the second quarter of 2008.

This favorable impact was largely offset by legal costs related to an ongoing antitrust investigation.

The year-over-year improvement was made of several small items that provided a net benefit when compared with the prior year.

Moving to our tax rate.

We reported an income tax benefit of $22 million during the quarter compared to an income tax expense of $2 million in the prior year's second quarter.

The year-over-year benefit is predominantly related to lower year-over-year pretax income levels and the corresponding impact of various tax credits.

Slide 22 summarizes our key working capital balances for the quarter.

Our working capital balance improved during the second quarter compared to the prior year on a total dollar basis.

As a percentage of sales, however, it increased 2.4 points as sales declined substantially relative to the prior year.

Our inventory balance was down on both a sequential and year-over-year basis during the quarter as we continued to make progress toward our full-year inventory reduction targets.

The most significant unfavorable variance was largely driven by accounts payable.

As you know, we continue to run production levels below demand levels during the second quarter and this has equated to reduced purchases.

We did see some sequential improvement in payables and expect this to continue as the year progresses.

Now we would like to take a moment to discuss our free cash flow performance on slide 23.

For the quarter, we reported free cash flow of $174 million compared to $262 million in the prior year.

The year-to-year reduction in free cash flow is largely attributable to two main areas, lower overall cash earnings and higher cash restructuring payments when compared to the prior year.

Mitigating these somewhat were an increase in cash flow from working capital, lower capital expenditures, and increase in proceeds from asset sales.

For the full year, we continue to expect capital spending in the range of $450 million to $500 million.

Turning to slide 24, I wanted to update you on our liquidity position given our recent note offering and second-quarter free cash flow performance.

Overall, our net liquidity improved substantially in the second quarter as we completely repaid our revolving credit facility and grew cash on our balance sheet to $247 million.

Given our successful issues of $500 million of five-year notes and $350 million in three-year notes, we were not able to only refinance our $200 million note that matured in June, but we effectively termed out our revolving credit balance.

On slide 25, we depict our term debt maturities and highlight our recent note offerings in green.

As you know, when we entered this year, increasing our financial flexibility was a key initiative, and we have increased our flexibility substantially with our recent note offerings.

This offering, coupled with our expectation to generate $300 million to $400 million of free cash flow for the full year, provides us with substantial flexibility to execute our restructuring initiatives and fund our new product innovation pipeline.

Finally, I would like to turn to our outlook summary on slide 26.

As Jeff mentioned, based upon current economic conditions and our business plans, we expect to earn $3.50 to $4 per share during 2009.

This change is largely driven by our year to date performance.

Given the dynamic nature of the marketplace, we have seen some movement in many of our assumptions for for the second half.

Most notable is the Brazilian legislative decision to extend the tax reduction incentive program through October 31.

While we expect this to have a positive impact on demand in Brazil, our full-year global volume outlook is largely unchanged given the weakness we are experiencing in Europe and countries outside of Brazil in Latin America, which continue to see substantial declines in demand.

As was the case in the second quarter, this tax incentive will only allow us to monetize a nominal amount of Befiex tax credits.

This will result in a substantial reduction in contribution to our second half results versus our previous outlook.

In addition, we see slightly lower price mix for the full year.

While we continue to see a very positive price mix effect for the year, we do expect this to abate as we have a very difficult price mix comparison in the second half of the year.

Offsetting this impact will be a positive contribution from material and ore related costs.

Our full-year outlook is for an unfavorable $40 million for the full year compared to our prior outlook of approximately negative $150 million.

On balance, when we look at all of our key operational drivers, we now expect earnings per share in the range $3.50 to $4 for the full year.

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

Thanks, Roy.

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

Overall, we have seen the second quarter -- and really the first half of the year largely play out in line with our expectations.

This clearly continues to be a very volatile global economic period.

Today our largest markets, North America and Europe, have been most impacted as seen by the double-digit declines in demand.

Our big emerging markets in Brazil, India, and China seem at this point in time to have recovered and today we are seeing very strong growth.

Through midyear, we have -- as we have said we would in February -- we remain very focused on three things.

First is driving significant cost reductions across every part of our business.

Second, executing well in all parts, in all markets and driving the right economic balance between volume and margins.

And third and importantly, ensuring our financial strength by driving improvement in our cash generation and successfully placing our $850 million in three and five-year debt.

To date, although very challenging environment, we are very much on track to deliver our annual plans and guidance, and I am very pleased with how our organization has responded to these severe economic challenges.

We don't expect these challenges or the volatility to change soon.

Our overall review remains the same.

We do believe that the second half demand levels will improve, although they will still remain negative, but at a lesser rate.

We will continue to remain focused on our strong actions required to significantly reduce costs, lower our break-even levels, invest in winning consumer innovation, and generate cash.

Our success in executing these priorities will further improve our financial strength, and I believe position us very well for value creation as we will see demand levels normalize over time.

So I am going to wrap up here now and open it up for questions.

Thank you, sir.

(Operator Instructions).

Our first question comes from David McGregor at Longbow Research.

Good morning, everyone.

Good morning, David.

You seem to be doing a nice job in terms of managing your cost during this downturn.

Congratulations on that point.

Jeff, I wonder if I will get you to address a point you didn't address in your call, and that is the Sears relationship and what happens with Kenmore in 2010.

Probably the issue on most investors' minds these days.

Can you give us a sense of magnitude with respect to earnings and revenue impact?

Within some parameters, I will be happy to give you some color.

Actually, I will let Mike do it -- Mike manages that business.

Yes, David.

First of all, I tell that you our relationship with Sears is strong.

And I think we both feel very good about our business.

And just to point out -- we still have a contract in place for 2009, and we do expect that we won't see any significant change in volumes from that this year.

As we talked about earlier, we said we expected to see some small volume decline in our OEM businesses as we went into 2010, but I can tell you both we and Sears evaluate all of our business based on the value that we can create.

And so we are comfortable that we will be able to offset any potential declines in that OEM business with our brands, and that we can do that because we feel good about strong pipeline of innovation that we have coming, and the fact that we are pretty comfortable with our position and the rest of distribution.

The other thing you ought to note is that this business that we have with them, we evaluate on an ongoing basis.

It's not at any point in time fixed, so we feel good about our position in 2010.

I guess two follow-up questions.

Number one, how long or what period of time would it take to you make up what you would expect to lose in Kenmore through your branded business?

Is that a couple of years?

Maybe you can quantify that for us.

And -- well, maybe just address that for us, please.

Just to be clear.

When I say we can make it up, I am thinking about we won't see any substantial changes at all in our business.

So it would [stay] on an immediate basis and over time, clearly we expect our business to grow.

Okay.

And then is it definitive that the point, or still the volume of the impact still up in the air.

I mean to what extent is there still some uncertainty around this?

Well, there is always ongoing discussions and always ongoing evaluations of the business and the opportunities that are available.

And so -- and both companies evaluate that based on our abilities to create value and that will continue to happen.

As you lose Kenmore volume, you make that back with a greater share of the Sears floor?

We are -- our branded business at Sears continues to be very strong.

And so we feel very good about the progression of that branded business on Sears' floor, but I will tell you our branded business with the brands that we have are also doing well in the rest of distribution.

And so on both counts, we feel very good about that.

The second question if I may, on the replacement demand.

You addressed that on the call.

Will you quantify the extent to which you believe we have pent-up demand here and what would be your expectation with respect to your ability to realize that over -- let's say the next six quarters?

I will tell you, I wish I have a crystal ball in telling you how the market will change next year.

I think there is a fair amount of pent-up demand, but to quantify that will be very difficult.

We are not expecting and I am certainly not expecting to see a significant drive up in terms of demand, but it will improve.

David, you hear that from certain retailers.

We see it in longer-term service parts where the run rate increases and where somebody may have been fixing something they wouldn't have done.

There is no hard data on that, but there's a lot of signs this is going on.

Okay.

Just quickly one final question on Europe.

What are the prospects for return to profitabilities in the second half?

I fully expect them to do that.

Okay.

Thank you very much, guys.

Yes.

We will take our next question from Jeff Sprague at Citigroup Investment Research.

Yes.

Sorry, thank you very much.

Can you address, Roy, what was going on with the LIFO adjustments in the quarter?

I assume that went through the P&L, and will there be more of that in the back half of the year?

Yes, I sure can, Jeff.

First of all, from a LIFO perspective -- every quarter, we estimate what we think the annual impact will be for LIFO.

And couple of areas that impacted the second quarter -- first of all, to your question, with respect to where did it come through, we did see a $10 million favorable adjustment that is recorded in our cost of goods sold.

And, Jeff, that reflects about half of our annual estimated change in a LIFO reserve.

So why?

The why comes from -- we saw a couple of areas.

We saw deflation in material costs relative to our prior estimates.

And we had some deflation in some purchase product areas.

As you know with LIFO, you have to look at it LIFO pool by LIFO pool.

When you netted those two together, we estimated at midyear that we would have about a $20 million benefit as a result of that deflation.

In essence, what we did, Jeff, in very simple terms -- LIFO means you run your most current costs through the P&L.

And in that vein we in essence had to book a reduction in our LIFO reserve or $10 million reduction in our cost to reflect the latest costs that we are actually seeing right now through our product production.

So if materials to continue to reverse to the downside though, we could -- I guess presumably expect to see some pretty big benefits later in the year and into next year?

You could expect to see further reductions.

Again, as I said, this is our estimate at midyear with the numbers we have now, but you are right.

We could have more favorable impact if in fact we continue to experience deflation that is greater than what we estimated here at the midyear.

That is correct, Jeff.

You characterize price mix in terms of its margin impact.

Can you give us some color on the top line components of price and mix?

I can.

On the -- from a top-line perspective for the company, when you look at our consolidated change, basically, we were down 17.9% year-over-year.

10.2% of that is volume related.

8% is currency.

Just over 100 basis points is price mix.

It's about 1.1%.

And we had 0.8% negative as a result of lower Befiex, which as you know is reported on the sales line.

The price mix is a little bit less than what you would intuitively expect to see when you think about margins, and that's coming from the mix of business we had year-over-year.

The ASVs in the North American businesses are much higher than what they are in international businesses, and we saw about -- Jeff, about a 4 point shift in terms of more international relative to our total sales base, which skews this price mix number on the top line.

And you commented about price mix as it relates -- or getting more difficult as it relates to the comp on a year-over-year basis.

But you actually see absolute price mix eroding in the second half relative to what you had in Q2?

We actually -- in our guidance, Jeff, we have assumed about 0.2% to 0.3% of a reduction in our overall price mix relative to where we are today.

That's correct.

Finally for me, I just wonder the staying power of the incentives in Brazil.

Maybe it's still early days, but is it a big front-end pop and then a waning influence?

Or just steady state strong across the last few months?

Yes, Jeff, that is a great question.

It has been a big pop and stayed there to date.

Extending it through October, will it stay there through October, I doubt it.

I do think this stim has gotten a lot of publicity.

It stimulated a lot.

We think it will have a positive impact, but I personally don't expect it to have the staying power through October.

Great, thank you.

Sam Darkatsh at Raymond James, your line is open.

Good morning, Jeff.

Good morning, Roy.

Good morning, Sam.

Three questions.

First off, the raw materials being a benefit to your prior expectations as of -- at tail end of April.

Specifically where are you seeing that?

The spot or market prices for most materials have actually inflated since the end of April.

I am just curious as to whether it was a specific contract that may have triggered something or what have you.

Where specifically are you seeing the benefits from a raw materials standpoint?

Yes.

This is Jeff.

The way I was describing -- first of all, comparing year-over-year.

So in the first half of last year, remember we had a huge run-up in the second half of the year across steel, oil, base metals, et cetera.

And many of those things turned.

So as we look at it now and the change in our estimates, steel -- somewhat stable I would say, but certainly down for the second half of last year.

But the full year, I would say it's roughly flat.

Oil related are lower.

And again, we know a year ago we had nearly $150 a barrel oil.

Came down late in the year, and that now -- it's going back up.

So oil is still a wild card in this.

Base metals came way down.

We were above the line because of our hedges.

Now they are going back up.

So we'll crossover at some point in time during the year.

And then total, strategic components are up.

So we kind of assess it based on the usage.

There's not been major contract changes, I would say.

So as we have estimated this -- that is where Roy talked about $40 million to $50 million.

I would say at any given time, [even with the US] probably $50 million plus or minus to it right now, depending on what happens to base metals and what happens to oil.

The $10 million delta, from where you were looking at it two or three months ago primarily came from where?

You were looking at $150 million and now $40 million?

I would stay our average for -- our average estimate for steel is down.

Our average for the year estimate for oil related is down.

And I would say given that we are hedged at higher prices in the first half of the year on base metals, I would say our net average base metals would be a little bit down.

Got you.

Second question.

I think you have a pretty significant initiative underway to commonize if that's a word a great many of your platforms and gain a lot of efficiencies that way.

How -- where are you in that process, and how would that whole initiative likely manifest itself from a P&L standpoint in 2010?

You will have better productivity, perhaps better share gains.

Might be some higher CapEx.

How does that initiative affect things as we look at it?

Sam, there are really a couple parts to that.

One is our global product redesigns, where is we are more and more moving to global platforms that we use in multiple regions and multiple manufacturing sites.

That by definition will drive commonization of design parts.

Generally with these major platform changes, they are designed more efficiently with less material.

So that -- as you see the new product launches that Mike and others have talked about, a large number of those are coming out.

And this will continue because we have continued our investment pattern on that.

We have some very major impacted launches early to mid next year which will continue that.

With that, and also independently, we are very aggressively commonizing components globally.

And I would say it has a substantial impact on our ability to reduce cost.

We are very much -- we are tracking very well on it this year, and we will continue to have sizable gains from that next year.

So we should anticipate the productivity will be up next year, all else equal because of this, or will it take a year or two to take hold?

I am not forecasting anything for next year yet.

I would just say that our focus on cost initiatives and productivity, I don't anticipate will lighten up at all.

Last question if I might.

Could you give some color as to the unit performance by region?

Yes.

Sam, why don't I take that.

From a North American perspective again, again, units will be down 16.8% year-over-year.

In our Europe business, units are down 13.6%.

Latin America broadly is up 6.1%.

And in Asia, Q2 over Q2 is up 17.6% year-over-year.

Thanks much.

You are welcome.

Our next question comes from Laura Champine at Cowen and Company.

Good morning.

Just a couple of questions about share outside of North America.

Can you comment on the trend in Europe and what may be impacting your share there and the direction?

And also the unit numbers you just gave for Latin America implies pretty horrid results outside of Brazil.

Can you comment on that and what your thinking is on volatility in Latin America outside of Brazil as we move through the rest of the year?

Yes, Laura.

This is Jeff.

I will do that.

Let me start with Latin America.

First of all, in Brazil, we had a terrific quarter.

Good run rates.

We are performing well in the market.

I don't have the exact share numbers, but I would say we are gaining some share in the Latin American market given our position.

Let me next talk about our compressor business.

Our compressor business really mirrors the global refrigeration business, which was significantly down for two reasons.

One is demand, and the other is inventory adjustments.

We are seeing -- so our business was down more than demand, if you will.

Just like when we are taking inventories down.

We are seeing that crossover point appears to be taking place now at midyear, where I think compressor declines will mirror the global marketplace.

So I see that lessening.

In fact, we saw in June and we expect to see for the balance of the year.

The 31 markets outside of Brazil, which account for about 50% of Latin America are down significantly.

And it is hard to give you a good picture there, because there are so many different examples, Venezuela versus Colombia versus Chile and Argentina, but that business is down.

And I guess I would just say that it is a little more unpredictable, a little less structural business, and more subject to big changes in both directions.

It is a very profitable business for us in that when we continue to have that profitability, but the demand is a little bit more volatile.

And then in Europe, Jeff, if you can comment on share -- ?

Europe, through midyear, based on external data, we're roughly holding share or picked up a 0.1 or so.

I mean it is basically flat.

Got it.

Thank you.

We will go next to Eric Bosshard at Cleveland Research.

Good morning.

Good morning, Eric.

Couple of things.

First of all, the unit dynamics in Europe and North America are pretty similar, but the margins in North America are expanding pretty meaningfully and you are losing money in Europe.

Can you explain what the difference is?

Yes, Eric.

This is Jeff.

Basically -- the US -- or the whole North America market is now the fourth year in decline, if you will.

And the way I would describe it is our actions have caught up, and are now exceeding the negative impacts of external effects, and we are moving across all fronts.

We are radically reducing cost and managing price mix very well, and those positives have now -- are net outweighing the negative.

Europe started much later.

We sought fall-off in decline beginning last September, so it started later.

It was much more from profound than we thought and I would say through the first half of this year, our actions have not yet caught up with the negative effects.

I think that will happen in the second half the year.

The other structural issue in Europe is just fixed costs are high.

They are expensive and they are slow to remove, but that does not deter us from taking the actions we need to take to get this business back on track.

So does that mean that Europe -- like this should be the worst year-over-year in absolute profit performance out of Europe?

If our beliefs about demand and other things are true, I would say yes.

But my only caveat is there is so much volatility on every part.

I would never say never.

But it is as bad as we have seen, and I hope it is as bad as I expect to see.

Second question.

In terms of the Brazilian situation, I know in the past you have insisted about the sustainability of recognizing Befiex tax credits.

Do you still have that conviction, or is the Brazilian government looking at things differently with regards to what has happened in the last quarter?

Does that make you feel any different about this?

Not at all.

This is simply the vehicle for monetization and suspending that vehicle and stimulating the economy was purely an independent action and those credits now instead of being used and continue to grow based on interest and currency and so on.

So that we simply will have a bigger -- assuming today's currency and everything, will simply have a bigger credit in the end of the year.

So when the IPI is reinstated, we start monetizing again the way we have before.

Yes, Eric.

It is Roy.

Jeff is precisely right.

Again, we are not saying that we won't monetize any Befiex tax credits, it's just that we'll monetize a much lesser amount.

Because as you know, Eric, when you buy raw materials, there is an IPI tax on the material purchase which ends up being a receivable and, of course, when you sell product, you have this IPI tax payable.

What is happening -- the dynamics in our business right now are such that we just have much less of an overall payable for which to monetize the Befiex credits.

It in no way has changed our ability to monetize them going forward.

We will file our Q this afternoon, Eric, and you will see in the Q the balance of Befiex is about $623 million.

The increase from the end of the year is almost attributable to the appreciation in the Brazilian real from 12/31, plus a little interest accretion, but we still anticipate being able to monetize those over time.

Thank you.

Our next question comes from Michael Rehaut at JPMorgan Securities.

Thanks.

Good morning, everyone.

Good morning, Michael.

First question on the guidance, I was wondering if we could just drill down in a few areas.

First off, any commentary -- you raised the low end of the EPS guidance, but didn't do so for the free cash flow guidance.

If you can walk through the delta there?

Well, Michael, I will start at a high level.

Given our first-half performance, we are on track with our plans.

There are a lot of moving parts, but we felt given what we have been able to deliver thus far, even with the uncertainty looking ahead that we felt comfortable raising the bottom end of our guidance to $3.50 per share.

There still are uncertainties.

We are very confident now about what we are doing.

We are less confident about some of the demand and currency and even material factors out there.

And that's why we left the upper end where it is.

On the cash I will say that -- there are a number other factors into play there such as production levels, which is the big one for us.

You saw midyear.

Our biggest delta was payables.

The reason it was because we took so much production down.

When that flips, and it is flipping in parts of the world, we will see a very sizable positive change in our free cash flow.

But there is just more things that impact that that we felt comfortable keeping the same range that we had then.

Okay.

And just a couple of other questions on the guidance.

If you could review with us the tax rate assumptions, I believe last quarter you raised the tax rate guide guidance or it went from a tax rate of 5% to 10% to a 15% to 25% benefit.

I understand a lot of it is driven by a lower pretax number and some other incentives, but is there any change to that 15% to 25% benefit as you have adjusted your EPS?

Michael, it is Roy.

A couple of things, Michael.

First of all, your assumption is correct in terms of the impact of lower EBT.

In fact, to put that in perspective, if you took the composition of the components of what income tax a year ago second quarter, and you simply overlaid this year's EBT of $64 million versus last year's of $130 million, what would you find is the rate would be minus 35%, which was the same as what we experienced in the second quarter of this year.

So your assumption, first of all, is correct.

Secondly, from an overall guidance perspective which goes back to the second part of your question, at this point in time, I would expect the rate to be 25% to 35% benefit.

So, in other words, that is a 10 point improvement from where we were on the last call.

Again, I am a little bit cautious here, Michael, because at these EBT levels, changes in Befiex credits, changes in energy credits, and any delta in our EBT -- they all have dramatic effect on the overall rate on a relative basis.

But at this point in time, we would estimate the full year at minus 25% to minus 35%, and we would anticipate the third-quarter rate would be similar to what we had in the second quarter.

As you know, we had minus 27% and minus 35%, so at midyear we're at minus 31% on a blended rate perspective, and I don't expect the third quarter to be significantly different from that with what we know today.

The driver of that more being Befiex, or are there other tax planning initiatives that have come through or -- ?

Yes, is your question, Michael, in terms of the improvement in our rate for the year?

Right.

Yes, the improvement in the rate from the year comes -- you are right, two areas.

One, we are now assuming higher energy tax credits that will be earned here in the US based upon the mix of business that we are seeing in North America.

And you are also correct in that we are assuming lower Befiex tax credits, which of course has an impact on the rate going the other way.

Those are -- you are right.

Those are the principal drivers of that delta.

Okay.

And I am sorry to keep drilling down on this, but what -- any change in terms of your thinking for 2010?

I believe we still had in our model the midpoint of a 5% to 10% rate.

Given the changes this year, any update to that thinking?

At this point, Michael, I am not ready to project the rate next year.

Again, though, I will say, and as a reminder that we do anticipate earning the energy tax credits next year and obviously that will have a reduction in what would otherwise be the intuitive statutory rate here in the US in specific.

Okay.

One last one and I will jump back in queue.

The price mix, which was hit on before.

You are expecting a sequential decline of 20 to 30 bips.

If you could just perhaps to the extent possible give us color of what is driving that, if that's North America or other regions?

And also on an overall basis, I think you said that in terms of guidance, last call, slightly less than a positive 2% impact.

Current guidance, is that closer to 1% now?

You said slightly lower than before.

Just some color there.

Yes.

Let me -- first of all -- the biggest issue is we are comping against quarters where we had price increases.

That is one, and --

And Jeff, if I may.

Just to quantify that, Michael.

Q3 a year ago, we have 2.5 points favorite price mix, Q4 2.7 points of favorable price mix as a result of the pricing actions we took in the back half of the year.

Sorry to interrupt.

So it is not necessarily it is a big decline, it's just the comp is different.

For the full year, I didn't give guidance -- perhaps you weren't clear, but for the full year we talked about around 2%.

Now we are looking at about 1.5% for the full year.

Any driver to that change that you can break out?

I mean, there is just -- there are a lot of -- I mean -- 0.5 point on the full-year for us, Michael, is -- simply a lot of [mix] business.

North America is less and Asia is more and so on and so forth.

So in our total global country brand product mix, that's not a big change for us.

Okay.

Thank you.

And that's all the time we have for questions today.

This does conclude today's conference call.

We do appreciate your participation.

Have a great day.

Thank you, everyone.