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Operator
Good morning and welcome to Whirlpool Corporation's fourth quarter and year end 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.
Go ahead, sir.
Greg Fritz - IR
Thank you, Chris, and good morning.
Welcome to the Whirlpool fourth quarter conference call.
Joining me today are Jeff Fettig, our Chairman and CEO, Mike Todman, President of Whirlpool International, Marc Bitzer, President of Whirlpool, North America and Roy Templin, our Chief Financial Officer.
Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Whirlpool's future expectations.
Our actual results could differ materially from these statements due to the many factors discussed in our latest 10-K and 10-Q.
During the call, we will be making comments on free cash flow, a non-GAAP measure.
Listeners are directed to slide 31 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.
Jeff Fettig - CEO
Good morning, everyone and, again, thank you for joining us this morning.
Before I begin, I do want to briefly discuss the leadership changes we announced in mid-December that Greg just referred to in the opening comments.
First of all, Mike Todman who was previously President in North America is now serving as President of Whirlpool International.
In his new role he will be responsible for Europe, Latin America and major regions, as well as our global information systems.
Mike is also accountable for several key global strategic areas, including our innovation and global energy efficiency initiatives.
Marc Bitzer who was previously President of our US Operations, has moved into the role of President, North America.
Both Mike and Marc are two highly capable leaders, I'm very confident will do a great job in their new assignments and they'll be representing their respective regions on this call.
Turning to the release, as you all know, earlier this morning we released our financial results for the fourth quarter and for the full year.
You can see these results on slide two.
As we outlined for you last year at this time, we faced a very challenging macro economic environment on a number of fronts.
All major markets were in decline at that time and we felt that we were likely facing the year with significant revenue decline, higher cost and volatile currencies.
For the full year, this proved to be accurate as our revenues declined by 10% versus 2008 levels.
We also at that time outlined the key drivers of our business and separated them into two categories.
On one hand, we talked about areas that would positively impact our business and things that would negatively impact our business.
The negative impacts were significantly lower demand levels, the impact of foreign currency and very volatile material costs.
The positive impacts on our business related to our swift, aggressive actions to address this challenging environment, which -- particularly regarding our costs and working capital initiatives.
These actions helped to improve our operating margins by 1.1 points to 4% during the year despite a substantial decline in sales.
In addition, we reported for the year a record level of free cash flow of $1.1 billion during 2009, which has significantly strengthened our Company's financial position.
If you turn to slide three, we highlight our execution against the key operating priorities that we established for last year.
From a cost standpoint, we had a very strong year.
We were able to significantly lower our break even point through a structural cost reduction across our global organization.
We also continue to build the foundation, a very strong global product platform design and the supporting component commonization initiatives that go along with them.
These actions lowered our costs, improved our quality and increased our speed to market from design to market launch.
Overall, I'm very pleased with the progress we've made in these areas of the business which will continue to benefit us this year.
Moving on to cash, again, we had the best year ever in terms of generating free cash flow.
Our aggressive focus on working capital reduction, particularly in the area of inventory, resulted in a substantial source of cash flow during the year.
This performance, in addition to our notes issuance and credit agreement extension, significantly improved our financial and liquidity positions.
Finally, our market execution goals for the year were to have a good balance between price, mix and market share.
And during 2009, we finished the year with positive price mix and very good share performance in all of our key global markets.
Slide four highlights one of the most important aspects of our spending initiatives last year.
In this case, it's what we didn't cut and that was our investments in new product innovation.
We continue to invest in our business during the downturn as R&D and capital expenditures actually increased as our percent of total sales.
These investments will yield a strong cadence for new product innovation over the next 12 months and reflects the continued commitment we have to bringing new consumer relevant innovation to the marketplace on a continuous basis.
Turning to slide five, we expect to have a strong year for innovation with our pipeline now over $4 billion in future revenues.
From a product perspective, you'll see major launches as laundry, cooking, refrigeration.
In fact, Marc Bitzer will touch on a few of these products in a moment, but we expect to have a very strong year of innovation globally across our product line.
We do see many great opportunities for growth in markets around the world, largely enabled by this record number of new product innovation launches that we have scheduled for this year.
On slide six, I summarized our current demand outlook for 2010.
Overall, we expect global industry demand will show modest growth globally in 2010.
Obviously there's still a high degree of uncertainty in many facets of the global economy, but we do feel that we'll see in 2010 growth from a low base.
In the US, we expect major appliance demand to increase by about 2% to 4%.
This would mark the first full year of positive growth in four years and is largely driven by a more normal replacement market.
In Europe, we expect conditions will remain relatively more difficult with industry demand being flat to 2009 levels.
As you would expect, there's a wide range of outcomes by country, but overall, we're starting to see demand stabilizing and our forecasting flat demand for the year.
In Brazil, we continue to see very strong underlying fundamentals and we're forecasting industry demand growth to be in a range of 5% to 10% off of the strong year this year.
Finally, we expect the markets that we serve in Asia will grow in the 3% to 5% range.
We expect India to continue to show very strong growth, leading the region.
Finally, I would direct your attention to slide seven where we provide our 2010 financial outlook and guidance.
For the full year, we expect to generate earnings per share in the range of $6.50 to $7 per share.
Also for the full year, we expect to generate free cash flow of approximately $400 million to $500 million this year.
We expect the positive impacts to our operating performance this year will be a continuation of the significant cost reduction and productivity that we had last year, which again will be a significant contributor to our improvement in earnings.
In addition, we certainly expect higher unit volumes will contribute to our -- in part to our overall revenue growth and aid in improving our margins.
For the full year, we expect price mix and currency impacts will be generally neutral to our operating results.
And finally on the unfavorable side, we still see material and oil cost inflation increasing and we expect it will impact our operating results in the $200 million to $300 million range compared to last year.
At this point in time, I'll stop here and turn it over to Marc Bitzer for his review of our North American operations.
Marc Bitzer - President, North America
Thanks, Jeff and good morning, everyone.
Turning to slide nine, I would like to briefly go over some of our key accomplishments in 2009.
As Jeff mentioned earlier, we maintained a strong commitment to innovation investment, both in the form of R&D and capital expenses.
From a market standpoint, we delivered a strong increase in our branded share during the year and during Q4 in particular.
We also made strong progress with using our cost structure, a double digit reduction in manufacturing capacity, we reduced the SG&A structure by nearly $200 million or one percentage point of sales.
Finally, we saw strong improvement in our logistics network.
We have completed our move to a newer regional distribution center footprint.
We have implemented a new home delivery model that we believe is best in class in our industry.
And we expect this will yield both better service levels as well as a reduction in delivery costs.
On slide 10, we detailed fourth quarter results for North America.
We marked the first -- in Q1 '07, but we posted a year-over-year sales increase in North America.
Our unit shipment growth exceeded the market growth.
We reported operating margin of 5.2 percentage points and a six-point improvement over the year before.
That is largely driven by cost and productivity initiatives and higher volume, and partially offset by lower price index.
On slide 11, you can see some of our newest innovations.
As you know, we are focused on providing consumers with the greatest value by offering a preferred brand they can depend on with the most innovative features in the most cost efficient way possible.
From a dishwasher disposal cleaner to a completely new side-by-side refrigerator platform, our cadence of new product introductions remains very strong.
There's one product on this slide that I'll talk about in more detail and that is our new Whirlpool brand Vantage top load laundry pair.
You will see on that slide that this product features an LCD touch screen control.
It's the industry's first USB port that allows consumers to update and customize washing cycles and other controls.
And finally the fit, finish and design of this product is the lead forward from the industry's best in class model.
Turning now to our industry outlook for 2010 on slide 12, I review some of the backgrounds on the component of demand.
As part of our forecast, we expect to see a 27% increase in new housing starts or approximately slightly above 700,000 units.
We expect existing home sales to improve approximately 7% during the year.
And we're looking for consumer confidence to be stable to slightly up and they will remain at historically low levels or slightly above that.
Consumers are still very cautious given many uncertainties in the economy and we expect it to remain the case with our 10% unemployment assumption.
While general consumer uneasiness lingers, we expect to see stable replacement demand for the year with some delayed purchases during the beginning of 2009.
In summarizing, based on our current estimates of these economic variables, we believe the US industry demand will increase 2% to 4% in 2010 which is still well below historic or long-term trend demand levels.
Now I would like to turn it over to Mike for his review of international operations.
Mike Todman - President, Whirlpool International
Thanks, Marc, and good morning, everyone.
Let me begin with the general overview on slide 14.
During 2009, we saw a return to strong economic growth in Brazil and India.
These markets not only had a much faster return to general economic growth rates, but they also saw appliance demand return to growth rates well above the general economy.
Europe remained the most challenging region from an international perspective as we managed through a broad contraction in most economies.
From a Whirlpool perspective, we focused significant restructuring resources on the European region during the fourth quarter to better align our cost structure with industry demand levels, and ensure an appropriate structure for 2010 and beyond.
Overall, during 2009 we made strong progress toward our cost reduction goals across the region and strengthened our share position.
Turning to slide 15, our European sales improved 2% in the quarter.
In local currency, sales declined approximately 9% from the prior year.
Our unit shipments declined approximately 9% year-over-year, which was largely in line with the estimated industry demand levels during the quarter.
The region reported an operating profit of $19 million compared with the $2 million earned in 2008.
Results were unfavorably impacted by lower volumes while lower cost and higher price product mix partially offset these challenges.
While we have taken necessary actions and made progress in our European region, results remain below satisfactory levels and we will continue to adjust our cost structure accordingly.
Fourth quarter results from our Latin American business can be found on slide 16.
The region reported sales of $1.2 billion compared to $777 million in the prior year period.
Excluding the impact from currency, sales increased approximately 28%.
The sales increase was driven by favorable foreign currency exchange and strong demand for our appliances in the Brazilian market.
Results were partially offset by lower tax credit monetization models and product price mix.
Operating profit totaled $138 million, compared to $110 million reported during the prior year period.
Our fourth quarter results in the Asia region are showed on slide 17.
Net sales increased 34% during the quarter to $188 million, up from $140 million in the prior year period.
Excluding the impact of currency, sales increased approximately 27% compared with the prior year period.
The sales increase was driven by strong results across the region.
With our new industrial joint venture in China and our strong presence in India, we are well positioned to benefit from the growth trends in these markets.
Operating profit during the quarter was $6 million, compared with $3 million reported in the prior year.
The operational improvement was primarily related to higher unit volumes.
These improvements were partially offset by lower price mix.
A few minutes ago, Marc talked about our ongoing investment in our brand portfolio and strong cadence of new product introductions.
That is the case not just in North America, but around the world as we continue to provide consumer relevant innovations to consumers everywhere.
On slide 18, you'll see just a few of our international product launches.
Slide 19 summarizes our outlook for international operations.
Overall, appliance industry demand in Brazil and India remains strong and ahead of general economic growth rates.
We are seeing some commonalities in both these markets, including improved affordability, a developing middle class, a low base of applying penetration rates compared to the US and Europe, and solid economic fundamentals.
These factors, combined with Brazil's appliance stimulus program, have strengthened our position in those markets.
The Brazil stimulus program ended effective February 1.
Although we do not yet understand the impact of this change, it is important to note that all trade inventory prior to that date still qualifies for the tax holiday.
In addition, we believe that the underlying demand is strong, irrespective of the stimulus program because of low interest rates and underlying economic conditions.
And we continue to be very positive about the prospects for our Latin American business in 2010.
In Europe, however, we expect demand to stabilize during 2010 and we continue to pursue aggressive actions to improve our results in the region.
And finally, in Asia, our strong performance in the quarter highlights the early success of our joint venture that allows us to continue to add new product offerings.
And we see significant growth opportunities in the region, particularly in India and China.
And now with that, I'd like to turn it over to Roy Templin for his financial review.
Roy Templin - CFO
Thank you, Mike, and good morning, everyone.
Beginning on slide 21, I'll walk you through a summary of our fourth quarter performance.
Our net sales performance marked the first global unit volume increase we have had since the first quarter of 2007 with our units increasing approximately 9.5% from the prior year.
Our revenue was also favorably impacted by foreign exchange translation, which accounted for approximately seven points of the year-over-year increase.
The favorable impact from currency was primarily related to a stronger Brazilian Real and the Euro when compared to the prior year.
Looking at our margins during the fourth quarter, the positive year-over-year increase was primarily from our productivity and cost reduction actions.
These actions were partially offset by lower price mix and BPX monetization which declined $21 million from the prior year.
Finally, before we take a look at the income statement in detail, there are a few items I would like to highlight.
The first is a $46 million accrual related to a previously disclosed legal action pertaining to a collection dispute in Brazil.
This was recorded in interest and sundry expense.
The second item related to interest and sundry was a $13 million expense related to previously capitalized transaction costs.
We also recorded a net favorable $13 million adjustment related to operating and income tax settlements in Brazil in response to revised government options.
Turning to the income statement on slide 22, we reported net sales of just over $4.8 billion, an increase of 13% from the prior year.
Our gross margin rose 3.1 points to 14.1%.
As I mentioned previously, the most significant favorable impact on our gross margin improvement was related to our cost and productivity actions which were partially offset by lower price mix.
SG&A expense totaled $427 million.
Foreign currency translation and the nonrecurrence of an asset sale gain in the prior year accounted for over 90% of the year-over-year dollar increase.
Restructuring expenses totaled $55 million during the quarter and were largely related to cost reduction actions in Europe.
We currently anticipate recording restructuring expenses in the $100 million range during 2010.
This amount will be partially offset by curtailment gains due to a previously announced facility closure.
Finally, our operating margin expanded to 4.1% from 0.2% in the prior year.
Turning to slide 23, I wanted to touch briefly on interest expense.
Related to the revised tax settlement terms in Brazil noted in my earlier remarks, part of the settlement adjustment was recorded in interest expense.
Excluding this settlement, our interest expense would have increased, mainly due to higher average borrowing rates due to our notes issuance during the second quarter.
Turning to interest and sundry expense, the items I've mentioned earlier substantially offset favorable year-over-year currency, resulting from prior year losses on balance sheet positions and an asset impairment again recorded in the prior year.
Finally, turning to our tax rate, we recorded an income tax credit of $10 million during the quarter, corresponding to an effective tax rate benefit of 11%.
The fourth quarter credit was slightly below our previous quarterly expectation, largely as a result of higher pretax income and the establishment of reserves for foreign tax audits.
Our annual tax credit of 21% fell within our previously disclosed range.
For the full year 2010, we are currently estimating a tax credit in the range of 15% to 25%.
Finally, we reported EPS of $1.24 per share, including a $0.40 per share negative impact from the legal accrual that I noted earlier.
Moving to our full year free cash flow results on slide 24, as Jeff mentioned earlier, we had an outstanding year.
The strong working capital performance during the fourth quarter exceeded our expectations in every part of the world.
As a percentage of sales, our full year free cash flow was 6.4%, which is well ahead of our long-term objective in the 4% to 5% range.
Our full year free cash flow generation of approximately $1.1 billion, in addition to our term note issuance during the second quarter and the extension of our revolving credit facility through August of 2012 has substantially improved our financial position.
Turning to slide 25, we show our net liquidity position.
As you can see from this chart, our net liquidity position has improved to approximately $3.3 billion from $2.1 billion at the end of 2008.
At year end, our cash balance stood at $1.4 billion and we had full availability under our revolving credit facility.
On slide 26, you can see we have significantly reduced our net debt balance to the lowest level in four years.
We feel very good about our ability to continue to fund our restructuring and product innovation initiatives.
We have also consistently paid our dividend throughout 2009.
After funding these operating initiatives, a key priority going forward is improving our credit metrics with a goal of returning our credit ratings to prerecession levels.
Finally, turning to our financial outlook on slide 27, we are expecting to report earnings per share in the range of $6.50 and $7 per share.
This compares to the $4.34 we reported for 2009.
As Jeff reviewed previously, we expect to have favorable impacts from increased global unit volume, as well as our ongoing cost reduction and productivity initiatives.
In addition to these factors, the Brazilian government recently announced that it will not renew the IPI tax holiday program that has been renewed several times since mid-April.
While there will likely be some lag until all lower IPI based products clears the inventory pipe, as Mike referenced earlier, we have anticipated this change in our outlook.
From a headwind perspective, we are sending material and all related costs to increase in the range of $200 million to $300 million in 2010.
And turning to our cash flow outlook, we are projecting free cash flow between $400 million to $500 million.
Capital expenditures are expected to be in the range of $525 million to $575 million during the year.
After our strong working capital performance in 2009 and with our expectation of higher global unit volumes, we expect working capital will be a use of cash during 2010.
And with that, I'll turn the call back over to Jeff.
Jeff Fettig - CEO
Thanks, Roy.
I'm going to now turn to slide 29 where we outline our key operating priorities for 2010.
As you will notice, many of these priorities remain unchanged from what we outlined for 2009.
We continue to have a very strong focus on cost reduction across our global enterprise.
As Roy previously mentioned, we'll be taking additional restructuring actions during 2010 from previously announced actions as well as some new actions to continue to drive lower structural costs, lower capacity levels and taking productivity and other cost initiatives to offset material costs.
In total, we think we'll be able to expand our operating margins from our cost activities.
Cash flow also remains a very high priority for us in 2010.
As we mentioned, we had a record year for cash flow last year and we expect to generate solid free cash flow during 2010.
This is, despite our expectation, that we will have some working capital build during the course of the year as we return to sales growth.
Certainly given the amount of uncertainty that remains across the globe and the effects that we've seen over the last year of the global financial crisis, you should expect that we will carry a higher cash balance over the course of the year than we maybe historically have and we think it's appropriate in this period of time.
From a market execution standpoint, we will continue to balance our share and price mix as we manage our business in 2010.
We feel very good about our innovation pipeline, the cadence of new products that will bring into market during the course of the year.
We expect these new products to help us build our branded position during the year.
Our successful execution on these priorities will enable us to deliver strong earnings growth during the course of the year.
I would now like to turn to slide 30 and take a moment to discussion our long-term value creating objectives.
We view 2010 as a year of full recovery for our Company, where we'll regain a large portion of our revenues that's declined in both '08 and '09 and improving our operating margins.
From this base that we expect to build in 2010, we're recommitting to our value creation objectives for revenue, for earnings and for cash.
That means from a top line perspective, we would expect to continue to target annual sales growth in the 5% to 7% range, earnings growth in the 10% to 15% range and continue to improve our free cash flow as a percentage to sales and try to manage it between the 4% to 5% range.
We are emerging from one of the most challenging economic environments that we have seen in decades.
I think the very strong message for us is that I believe we are emerging this period as a much stronger company.
We have substantially lowered our breakeven point, substantially improved our financial strength and expect to bring a very strong cadence of new products to the market during 2010 and beyond.
While the economy remains volatile, we feel we are well positioned to meet our long-term value premium objectives where we've positioned ourselves to take create significant values for our shareholders in 2010 and beyond.
I'm going to end here and I would now like to open this up -- the call up (inaudible).
Operator
Thank you, sir.
We will now begin our question-and-answer session.
(Operator Instructions).
Our first question comes from Sam Darkatsh with Raymond James.
Sam Darkatsh - Analyst
Good morning, Jeff, Marc, Mike, Roy.
How are you?
Jeff Fettig - CEO
Good morning, Sam.
Roy Templin - CFO
Good morning, Sam.
Sam Darkatsh - Analyst
First off, nice quarter, all things considered.
The -- two questions.
First off, the Latin American expectations of up 5% to 10%, obviously the comparison, especially in the second half is going to be pretty onerous.
And Mike, I know you referenced this, but how much did the IPI favorably affect sales units in 2009?
How can you tell how much is the underlying economy helping that business versus the incentives?
That would be my first question.
My second question would have to do with price mix.
You're expecting neutral price mix in 2010, although it looks like price mix degraded pretty sharply in the tail half -- tail end of 2009.
Why does that stabilize, would be my second question.
Mike Todman - President, Whirlpool International
Okay.
Sam, let me try to answer your first question relative to the market in Brazil.
If you remember, the IPI tax holiday was actually put on in April of 2009.
We still saw growth in the Brazil business of over 30%, which essentially says that it was not -- that growth rate was not all driven just from the IPI tax.
Now, they've just repealed the -- if you will, that tax, so it's hard for us to know exactly what the outcome is going to be.
But suffice it to say, there's probably about 30 to 45 days of inventory in the system that will qualify for the tax.
Then after that, our view is that the underlying economics, both with low interest rates and the general economic conditions is going to drive favorable -- continue to drive a favorable market environment for us.
I feel pretty confident about that.
The other piece is that we've got the international businesses, the Chiles and Columbia, et cetera, which you know were down significantly in 2009.
We expect to have some recovery in those markets.
I can't give you an exact number of what the IPI tax drove, but we feel very comfortable about the 5% to 10% range.
Jeff Fettig - CEO
Sam, this is Jeff.
Let me take the price mix question.
First of all, we view managing price mix as a very important capability throughout our global operations.
Last year, 2009 was the third year in a row where we've been able to manage positive price mix in a very competitive global marketplace.
Our attention is no different in 2010.
I would also say that every year we get there in a different way, whether it be price or like-for-like pricing, regional, and product and brand mix and that sort of thing.
The way I would describe it is the story for 2010 is a little bit different.
In some high inflation markets like India, we've already announced and taken a price increase for 2010.
We did that in December.
In other regions like Europe, we finished the year driving very positive price mix.
The US gets a lot of attention where we had negative price mix in the fourth quarter.
There, again, we're very pleased with where we are today.
We're going -- last year in the first half of the year we had some very large -- and fourth quarter of '08, very high comparisons year-over-year, so we're comping against our highest levels the previous year.
I see innovation as being a driver of our ability to drive mix in the US.
You put it all together, it's hard to predict at the beginning of the year, but we have -- given our track record over the last three years, I feel pretty good that we're going to be able to manage that at least to neutral for 2010.
Sam Darkatsh - Analyst
The tail end of 2009 price mix degrading, was it mostly price or mostly mix?
Jeff Fettig - CEO
It was a combination of both.
Sam Darkatsh - Analyst
Okay.
It wasn't one of them driving it, per se?
Jeff Fettig - CEO
No.
Sam Darkatsh - Analyst
Okay.
All right.
I'll defer to others.
Thank you.
Operator
Our next question comes from Laura Champine at Cowen and Company.
Laura Champine - Analyst
Good morning.
A lot of below the line items moved earnings around in 2009.
You had legal expenses that presumably are one-time.
Can you run us through what your below the line assumptions are in your earnings guidance on tax, interest, sundry?
A better picture on that would be helpful.
Roy Templin - CFO
Sure, Laura.
Let me start with -- I'll try to go in the order that you see in the P&L.
First of all with respect to interest expense, I made the comment a part of this Brazil tax settlement in the fourth quarter, distorted would otherwise would be our run rate.
I think I've said on prior calls, the normal run rate for us right now with the base of interest we have is about $60 million a quarter or $240 million for the year.
Now, Laura, we obviously have the capability to use cash should we decide to do so in the first of May when our $325 million, 8% senior note becomes due.
Obviously if we use cash, that will change the trend that I've just given you, but net net, it's about $60 million a quarter.
Interest and sundry, you're right, we've had some one-time events this year, particularly with now this legal dispute in the fourth quarter and of course, the compressor settlement earlier in the year.
Laura, over the years our other income, other expense, our interest, sundry has been about $50 million to $60 million of expense.
If you wanted to increase that somewhat for higher legal costs related to compressor investigation, that might be prudent to do so which might take you to more of a run rate like $70 million to $80 million as you look out going forward in the current -- or excuse me, in the very near term.
From a tax rate perspective, again, I said in my script that we're projecting the tax rate for next year at about the same level of credit that we had this year.
Now, initially that may not seem real intuitive, but there's two pieces, Laura, that really offset one another.
One is logically the credit would get smaller year-over-year because we're going to have a much higher base of earnings.
And therefore, that brings down the overall credit that we have as a company.
Offsetting that, though, Laura, are two things.
One, we do think that given the innovation and the energy efficiency wrapped around the innovation that we'll deliver in the market in 2010, that we will earn higher energy tax credits.
And as Mike indicated earlier, now with the repeal of the IPI tax holiday, while we -- there would be some volume impact from that, we do expect to see and experience higher BPX tax credits in Brazil in 2010.
Laura Champine - Analyst
Thank you.
Roy Templin - CFO
You're welcome.
Operator
Our next question comes from Michael Rehaut at JPMorgan Securities.
Go ahead, sir.
Ray Huang - Analyst
Hey, guys.
It's actually Ray for Mike.
First question, wondering if you could just drill down a little bit more into the 2010 operating margin expectations, particularly in North America -- if you guys can get back up to more of a normalized operating margin there in 2010.
And also in Latin America with the monetization of the tax credit, do you think you can get the margins back up to like a 12% to 13% range?
Jeff Fettig - CEO
Well, let -- this is Jeff.
Let me give you a couple of perspectives.
One, expanding our operating margin is amongst the highest priorities we have throughout the Company and we made progress last year.
I expect to make -- or we expect to make further progress this year.
I think you can -- mention that by our earnings guidance because that largely would all be operating margin expansion.
The levers that we're driving certainly will benefit everywhere from some improvement, not a lot, but some improvement in volume, but really significant improvement in our ability to continue to drive cost productivity and cost.
Again, as you heard me say earlier, we expect PMR -- price mix to be neutral.
Yes, I do expect a very big improvement.
We do expect it around the world, every geography, some -- basically the lower the operating margin, the higher our expectations for improvement.
But we do expect it in all parts of the world.
I'll speak just for a moment for Latin America and let Marc Bitzer make general comments about North America, but -- and also I mention Europe.
Europe, obviously, has hit the low point.
They were negative in second quarter of last year.
They've improved every quarter since.
Obviously we're expecting a good improvement in Europe.
Latin America is at a very strong level.
In fact, ex-BPX, they're at or near some of our highest margins ever, but yet given the robustness in the economy, given our market position and our product pipeline and innovation, we expect to continue to improve our operating margin.
If we have more BPX, that will only help those margins, but we look at it with and without, and certainly without we're driving for some margin expansion.
Marc, I'll ask you to comment about North America.
Marc Bitzer - President, North America
For North America, we feel very comfortable about the exit run that we carried out in Q4.
Without getting too much into the specifics, but the two components price mix, very much along the same line of what Jeff outlined.
Globally, we expect for North America, taking in account both pretty high comparable rates in the first half of last year, of 2009.
Everything climbed -- a very big amount of new product innovations coming into -- particularly towards the latter half of 2010.
In price mix, we expect a neutral impact in the full year, very much in line for global perspective.
And the other elements is along the same lines of what we've done very well in 2009, a continued focus in cost productivity improvements which overall should help our gross margins.
Ray Huang - Analyst
Okay.
That's helpful.
Drilling down on the costs reductions and productivity, you guys also mentioned your raw materials about $200 million, $300 million.
Do you think the productivity and the cost reductions are going to more than offset that $200 million to $300 million?
Or are you guys expecting some additional opportunities on the cost savings side?
Jeff Fettig - CEO
Our first task is to try to minimize the $200 million to $300 million, but that's right now the range that we see it today.
But the answer -- direct answer to your question is yes, we expect our combined -- as we did this year, our combined global cost reduction activities and our productivity coupled with -- last year, as I said, we greatly lowered our break-even point to the volume line.
With some additional volume and with these cost reduction productivity activities, we expect to expand our margins, meaning we exceed these cost increases.
Ray Huang - Analyst
Okay.
Then the $200 million to $300 million raw materials, how much of a raw material increase does that bake in in terms of like steel and oil prices?
Jeff Fettig - CEO
That's what it reflects.
$200 million to $300 million includes oil, steel, base metals, components, et cetera.
Ray Huang - Analyst
On a percentage basis year-over-year, like where you think steel could end 2010 versus 2009?
Jeff Fettig - CEO
I'm not projecting that by category.
I'd say that the biggest factor and probably uncertainty is oil and oil related.
It's -- where it is today, it's up substantially from a year ago where it hit a much lower level.
That's probably the biggest driver.
Steel, just due to its weight is probably second, and then components and base metals and so on are probably third.
Roy Templin - CFO
This is Roy Templin.
I think the other thing to keep in mind is two things.
One, as you know, we do hedge commodities and so many times it's difficult to look at the commodity curves and then link it directly back to Whirlpool.
That's the first point.
The second point is keep in mind the circular flow of some of these components, as Jeff indicated, because we see it not only in the component prices -- excuse me, not only in the commodity prices, but then within components, motors, pumps, electronics, et cetera, that we purchase to put into our product.
You get a double impact there.
Ray Huang - Analyst
Great.
Thanks.
Operator
Our next question comes from the David MacGregor at Longbow Research.
David MacGregor - Analyst
Good morning, everyone.
Jeff Fettig - CEO
Good morning, David.
David MacGregor - Analyst
Just on the commodities, what percentage of your total 2010 raw materials requirements are price protected as of today?
Jeff Fettig - CEO
David, this is Jeff.
I don't have that -- that statistic in front of me.
I would just say that steel, obviously that's our biggest purchase.
In the emerging market that's never -- that's always open to discussion.
In the big markets like Europe and North America, we do have agreements within ranges, so I think our steel is pretty predictable at least in the big markets.
Oil and resins, oil is just -- we don't hedge it.
We can't hedge oil, so that is what that is.
Resins are related to oil and they generally have some type of broad band of range there.
Then I would say all of our strategic components and that stuff is pretty [low].
I don't know what that equates to in terms of a percentage, but that would be the color around those areas.
David MacGregor - Analyst
Thanks for addressing that.
As I was looking at your slide 30 where you talked about long-term value creating objectives, Jeff, there was no mention of the longer term 8% EBIT margin goal.
I wanted to just see if that's still your frame of thought on EBIT margins?
Jeff Fettig - CEO
Yes.
We've talked about operating margins, our expectation for what we believe this business ought to be able to deliver over time.
And we have absolutely not changed our expectations about that, 8%.
David MacGregor - Analyst
Just on that point, two parts to the question and I know the question was asked earlier about trying to drill down, maybe ask the question a little bit differently.
What's the extent of your unrecovered commodity cost inflation today?.
And,secondly, what's your capacity utilization rate today?
Jeff Fettig - CEO
David, we don't give out capacity utilization rates, but I would say we took out probably -- close to $5 million units of production capacity in the last 15 months.
And we've announced -- the things we've already announced for this year, we'll take out more.
It's -- despite -- I would say our utilization is increasing faster than the market is improving.
Roy Templin - CFO
David, it's Roy.
To build on what Jeff said, just a couple of statistics, because Jeff's right, the issue we have is if we get real specific, then we get into competitive, sensitive areas.
David MacGregor - Analyst
The $5 million unit number is very helpful.
That helps a lot.
Roy Templin - CFO
We took out just below 10% of the units from a breakeven unit perspective in 2009, so a big number.
Secondly, when you look at units produced, because we're comfortable giving you that number, David.
Year-over-year in the fourth quarter, we're up about 15%, where you would expect us to be, right, because we were so low a year ago.
But for the year -- for the year, we still ended up with about 3% unit production decline across the Company versus a year ago, David.
David MacGregor - Analyst
Okay.
And is there any way you can address just the unrecovered commodity cost inflation over the last five years and just where you are?
I'm trying to understand -- how do you cover this 300 to 400 basis point gap from where you are today to the 8% margins?
Jeff Fettig - CEO
David, over the last five years, the raw material commodity increase is well over $3 billion.
David MacGregor - Analyst
Right.
Exactly.
Jeff Fettig - CEO
And I think we've now -- out of -- if you go back to five years ago the margins of 5.5% to 6%, we're still short that much in terms of -- from all of our actions of recovery.
Again, I -- 200 to 300 is not insignificant at all, but I think give our scope and capacity, given -- I don't think 2009 was not a one-time event.
We have at least as strong a global initiative on this in 2010 as we did in 2009.
We have less headwinds on terms of things like volume and currency.
We still have material.
But I feel very comfortable, given what we know today, that based on these assumptions, that we will execute very well on cost and productivity.
We should be able to more than offset these material costs and have costs improve our margins in 2010.
David MacGregor - Analyst
Okay.
Thanks for addressing that.
Just last question, could I get you to address the Kenmore issue?
You mentioned a couple of quarters you thought you would be delta neutral and you thought you would replace the lost business.
Can you elaborate a little further on where you are now?
Jeff Fettig - CEO
Marc, could you go ahead?
Marc Bitzer - President, North America
David, it's Marc Bitzer here.
As you know, we don't get into the specifics of the contracts with any given trade market.
What I can tell you, however, is very consistent with what we stated before on similar calls.
We do expect to attend a somewhat lower OEM business in total.
At the same time, we expect to more than mitigate that through additional branded business growth with Sears and with other trade partners.
We -- I would say we're very comfortable, very well prepared to mitigate any potential OEM losses.
Jeff Fettig - CEO
David, the only thing I would add is that a big part of that transition has already started in Q4.
David MacGregor - Analyst
Right.
Jeff Fettig - CEO
You look at our Q4 performance, as we said, that we expect to rapidly grow our branded business.
That happened in Q4.
We lost some OEM business, or it went away in transition.
That transition is really -- already started last year.
David MacGregor - Analyst
Do you expect to have any negative revenue repercussion at all because on 2010 just because there's a gap from a timing standpoint?
Jeff Fettig - CEO
What we've said before has not changed.
For the full year 2010, we expect to maintain and improve our market share in the North America market, and that basically means more branded share and less OEM.
David MacGregor - Analyst
Great.
Thanks very much.
Nice job on the quarter.
Operator
We'll go next to Todd Schwartzman and Sidoti & Company.
Todd Schwartzman - Analyst
Good morning, guys.
Jeff Fettig - CEO
Good morning, Todd.
Todd Schwartzman - Analyst
Most of my questions have been answered, but just a follow-up on Sears.
Where are you with the Jenn-Air business in Sears at this point?
Marc Bitzer - President, North America
Todd, it's Marc Bitzer here.
On the Sears Jenn-Air business, as you know that has been previously communicated.
Sears had the Jenn-Air business for many, many years and a very significant amount of individual replacement demand which goes with general.
Sears has stepped up significantly in their commitment in terms of display requirements on the respected floors.
They have upgraded a lot of floor requirements and that business from what we see is progressing pretty well.
Todd Schwartzman - Analyst
And is there any way to get some numbers in terms of the incremental business from you?
Jeff Fettig - CEO
No.
We don't break out any specific branded numbers.
Todd Schwartzman - Analyst
Okay.
Can I get you to speak to 2011 tax rate assumption at this point?
Maybe even in a range?
Roy Templin - CFO
No.
I'm comfortable going out to 2010 and, as I said, that's based upon all of tour current assumptions.
Look, as you go out into 2011, two things that you need to think about, Todd.
One is, I've said before, piercing through the credits that exist in today's rate, this company's normalized run rate would be a tax expense of about 30%, high 20s to 30%, Todd.
And so that's point number one.
Point number two would be keep in mind that under the current legislation, the energy tax credits will end this year.
And as you know, that's been a big impact with respect to that otherwise normalized rate and those credits will end this year.
But beyond that, it's too early for me to go out in 2011.
Todd Schwartzman - Analyst
Got it.
And finally, is it possible to provide any additional color on the pricing environment by geographic segment?
Jeff Fettig - CEO
No, look, we never talk about forward pricing.
We have had some markets, as I mentioned like India, where based on high demand levels and also high inflation levels, we've taken some price increases that were announced late last year.
But overall, I would say we don't see any big changes around the world.
We're focused on really driving a positive level mix, utilizing our innovation to drive that mix.
We're seeing some demand recovery in some of the -- like the North American market, which is a big help.
But that's really all that I can say at this point in time on pricing.
Todd Schwartzman - Analyst
Terrific.
Thanks a lot.
Jeff Fettig - CEO
Thank you.
Operator
Jeff Sprague at Citi Investment Research.
Your line is open, sir.
Jeff Sprague - Analyst
Good morning, everyone.
Jeff Fettig - CEO
Hi, Jeff.
Jeff Sprague - Analyst
First on BPX, you guys recognized about double in Q4 what you did in Q2 and Q3.
I thought the tax credit regime was not allowing you to recognize BPX?
Roy Templin - CFO
Jeff, this is Roy.
That's a good question.
If you look at the details of -- as you know, this thing has been extended a couple of times.
But there was a very important detail in this last extension which enabled us to recognize more BPX credit, but also of course we incurred more IPI as a result.
And here it is, Jeff.
If you look carefully at the last extension, they basically did the extension by energy efficiency category.
They have categories A through E, more energy efficient to less energy efficient.
On those lesser energy efficient models, the holiday went away.
What you're seeing is an impact of the mix of business we had.
But you're right, net net, we had more IPI tax and therefore, an incremental ability to monetize.
Although nowhere near what we've been in the recent past, it's certainly greater than Q2 and Q3.
Jeff Sprague - Analyst
Roy, would your guidance assume back to some normal BPX of $120 million, $130 million a year for 2010?
Roy Templin - CFO
I think that's too high, Jeff.
And I say that because the way I think of this is we have a couple of recent goal posts.
You have two years ago where we had $169 million; that's too high because as Mike said, we had a period of tax holiday.
In addition to the very important point that everything that's in the trade that they've purchased without IPI tax, of course, can be sold to the consumer without the IPI tax.
That's one.
And the second thing is if you look at the fact that it depends upon a mix of business and our demand, I think, Jeff, it's fair to say it will be greater than the $69 million that we just had in 2009, but less than the $169 million.
And I would have a number closer to $100 million versus your $120 million plus.
Jeff Sprague - Analyst
That's helpful.
Thanks.
And just on free cash flow, obviously there's some big swings between '08 and '09.
I'm just trying to think about the idea of normal cash flow in the 4% to 5% range.
Just my observation here, but if we average '08 and '09 to take out that volatility, you did about $500 million free cash flow a year on average earnings over those two years of about $5.
Now we're looking at $6.50 to $7 in earnings.
And we're talking about cash flow that's the same as those prior two years, maybe lower, in the $400 million to $500 million range.
I'm assuming there's some pension funding and maybe some other dynamics, but could you just elaborate on that?
Is there anything there we should be aware of and thinking about how the cash works through this year?
Roy Templin - CFO
I think there's -- first of all, I think to your broader question, of course you have a margin change assumption in your broader equation, right.
As you look at the value creation objectives that Jeff shared, obviously you get the higher margin.
As you know, Jeff, our principle year in and year out -- the principle pipe for cash flow in any business of course is your after-tax earnings.
That's a very important element with respect to that.
I'll come back to your second part of your question though, and you're right.
As you look at next year's guidance, it falls in the level of what we've seen combined the last two years.
I think a couple of key things.
One is we are expecting -- and of course it's clear in the guidance to have higher cash earnings in 2010, but that is going to be offset by working capital.
Working capital will be a use of cash as we, again, grow our working capital to support elevated demand levels.
But remember now, that's coming off of a $618 million source of cash in 2009.
It makes the comparables a little bit hard to follow.
The other area that's important, Jeff, to your question, is the other operating accounts.
And as you know and you've asked me I think in prior quarters, that's been a big line item for us in this year because of two things.
One, we've had noncash charges that are negative in the earnings, but then positive in other operating because there's no cash associated with them.
And the second area is, as you would have expected and as we did experience, we had lower promotional payments coming into the year.
For example, that was roughly $100 million when you take our normal trended cash flow, better improvement in 2009 that won't be there in 2010.
And of course wasn't there in the prior year before that.
Pension funding, which was the third piece of your question, all up -- I think two things.
One, we did make a voluntary pension contribution of $74 million, which is embedded in the 2009 cash flow.
As a result of that, Jeff, we will have no required minimum contributions in 2010 for the US pensions.
We may or may not elect to fund some monies, but again, there's no required minimums.
When you look at the all up funding for -- that's looking at pensions, 401K and OPEV, because that's really the relevant question given the frozen status of our plans, will be about $160 million all in for funding for all benefit plans versus $290 million in 2009.
Jeff Fettig - CEO
And, Jeff, to answer your question on go forward, absent any unique changes in any given year, the simple answer is I think over time in our long-term value created goals, our focus and desire to significantly expand our operating margins will directly play into our ability to get to that 4% to 5% level.
Operator
We'll go next to Eric Bosshard at Cleveland Research.
Eric Bosshard - Analyst
Good morning.
Jeff Fettig - CEO
Good morning.
Eric Bosshard - Analyst
On the inputs and the cost saves, can you give us what the 2009 numbers were and what the 2010 looks like?
Jeff Fettig - CEO
I'm sorry, Eric, would you explain that a little?
I'm not quite understanding your question.
Eric Bosshard - Analyst
Sure.
I think you characterized it -- sure.
The input pressure in 2010, I think you indicated, was $200 million to $300 million.
What was that number in 2009?
Jeff Fettig - CEO
I believe we originally, in 2009, we originally -- last year was close to $200 million.
But it actually lessened throughout the course of the year and it was negative, but not very much.
Roy Templin - CFO
Yes, basically flat, Eric.
Eric Bosshard - Analyst
And then the cost saves -- what were the cost saves or restructuring saves, how would you characterize that?
I know that productivity is more along the way, but can you just give us any sense of the cost saves achieved in '09 and if there's a sense of what that number is in 2010?
Jeff Fettig - CEO
Yes.
Why don't you please answer that?
Roy Templin - CFO
Eric, I think your question is -- we've been projecting the cost savings that we were going to have around the actions that we had taken in the fourth quarter of last year.
We did end the year with about $175 million of cost savings from those actions, which is spot on what we estimated.
We had $55 million of benefit in Q4.
Eric, we continue -- and we see no reason to believe that we will not achieve the $270 million of annualized benefit in 2010.
We are absolutely on pace to do that.
Eric Bosshard - Analyst
That's roughly another $95 million of savings?
Roy Templin - CFO
That's correct.
Eric Bosshard - Analyst
In 2010.
Secondly, with the free cash flow progress last year and you indicated you have this note coming due in May, but what are the thoughts on the capital structure?
Are there thoughts on restarting the share repurchase?
Can you just give us some thoughts on that?
Jeff Fettig - CEO
Yes, Eric, this is Jeff.
Certainly our priorities are, I think, fairly consistent.
Number one is to fund the business.
We've indicated what that is and that's nothing out of the norm in our guidance.
Along with that is paying down debt and funding -- appropriately funding our pension obligations, which we've dimensioned what that is.
Right now, whether it be share repurchase or dividend, that's obviously a Board level decision that we look at over time to time, but I would say that is not our top priority right now.
We did say that we would be carrying a higher level of cash than what has been our historic norm for the reasons that we explained.
I think that's common thinking across many companies these days.
Right now, it's just very focused on driving this execution of the business, bringing these new products to the marketplace and funding debt pensions are our priorities.
Eric Bosshard - Analyst
And then lastly within Europe where you said there were some restructuring efforts focused in the fourth quarter, can you give us any sense or guidance of the magnitude of the efforts and how that can manifest in profitability improvement in 2010?
Mike Todman - President, Whirlpool International
Yes, Eric.
It's Mike.
If we had essentially -- we had two areas where we had the restructuring.
One was just in the salaried work force and we had some fairly significant reductions there.
And the other was to reduce, if you will, the people that we had in our factories.
And so we really took down, if you will, the work force that we had in those places.
I think you know in Europe that it takes a little while for that to flow through.
We expect to see some great benefits from that in 2010.
Operator
Looks like that's all the time we have for questions today.
I'll turn the call back to our speakers for any closing remarks.
Jeff Fettig - CEO
Again, I just want to thank you for joining this call today.
We look forward to updating you on our next call in April.
Thank you.