惠而浦 (WHR) 2012 Q3 法說會逐字稿

Good morning, and welcome to Whirlpool Corporation's third-quarter 2012 earnings release call.

Today's call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Senior Director of Investor Relations, Joe Lovechio.

Thank you, and good morning.

Welcome to the Whirlpool Corporation third-quarter 2012 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 Larry Venturelli, our Chief Financial Officer.

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

Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements to you 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 8-K, 10-K and 10-Q, as well as in the appendix of this presentation.

Turning to slide 3, we want to remind you that today's presentation includes non-GAAP measures.

We believe that these measures are important indicators of our operation, as they exclude items that may not be indicative of, or are unrelated to, results from our ongoing business operation.

We also think that the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operation.

Listeners are directed to the appendix section of our presentation, beginning on slide 31, for the reconciliation of non-GAAP items to the most directly comparable GAAP measures.

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

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

Let me start by noting that we delivered significant improvement in our third-quarter operating results, driven by our North America, Latin America, and Asia regions.

Year-to-date, we're delivering on our commitments to expand our operating margins, and we significantly strengthened our free cash flow.

In fact, these results mark the third consecutive quarter of year-over-year operating-margin improvement this year.

Overall, our actions have more than offset higher material cost inflation and unfavorable foreign currency.

Our cost- and capacity-reduction initiatives are on track to deliver the expected $200 million of cost savings benefits for this year.

And, very importantly, we continue to see strong price and mix improvement during the quarter, driven by a strong cadence of new-product introduction and our strong global consumer brand portfolio, which is enabling us to mix up in most markets around the world.

As a result, we're increasing our full-year ongoing business operation guidance for EPS to $6.90 to $7.10 per share, and our free cash flow to between $125 million and $175 million.

Turning to slide 6, you'll see that overall revenues were up 5%, excluding the impact of foreign currency and BEFIEX.

This revenue growth was driven by our strong price and mix.

Our diluted earnings per share from ongoing business operations improved six times what they were last year, to $1.80 per share, compared to $0.29 in the prior year.

And our underlying free cash flow improved significantly year-over-year from our ongoing business operations.

Turning to slide 7, you can see our industry demand assumptions for the year.

Globally, we continue to expect second-half industry demand to improve from first-half levels.

And although while industry demand remains in many markets reel relatively weak, we are optimistic about some growth that we're seeing in some particular markets, and particularly trends that we're seeing in the US housing market.

Additionally, our ongoing business performance should continue to improve because of our strong pipeline of new-product innovations coming to the market and the benefit of our cost-savings initiatives that we've already announced.

On slide 8, you can clearly see our positive price and mix and margin-expansion trends over the last several quarters.

Year-to-date, we made very strong progress towards our full-year margin, and we fully expect to reach our full year operating profit guidance of between 5.5% and 6%.

At this point in time, I'd like to turn it over to Marc Bitzer for his review of our North America operations.

Thanks, Jeff, and good morning, everyone.

Let me begin by reviewing North America's performance in the third quarter.

Starting with slide 10, both revenues and margins for the region grew during the quarter.

And our strong operating margins exceeded 9% for the quarter and were driven by price and mix.

Our continued investment in innovation, coupled with strong market execution, drove significant [product] improvement.

Turning to slide 11, you see the net sales of $2.4 billion increased slightly over 2% from last year, driven by favorable price [and] lower volumes.

As was previously stated, our priority is margin improvement.

We have gained share in the higher-price segments across most products, driven by innovation, as evidenced by our positive mix.

Our ongoing business operating profit was $227 million, which more than tripled as compared to $62 million [to '11].

This means overall ongoing business operating margin was up almost 7 points year-over-year.

In addition to price and mix, the year-over-year improvement was also driven by the benefit of our cost- and capacity-reduction initiatives.

Turning to slide 12, you can just see just one example of a new innovation that is driving improved price and mix.

[The photo] shows our new Whirlpool White Ice appliance collection.

As I mentioned on our last call, shown on slide 13, it is important to point out that there is good upside for our business as underlying industry demand improves.

And as we've already stated during our last earnings call, we continue to see some early but consistent of housing recovery, which makes us increasingly optimistic about a more structural demand recovery.

And now I'd like to turn it over to Mike for his review of our international operations.

Thanks, Marc.

Turning to slide 15, overall, our international operations were led by strong performances in our Latin America and Asia regions, which more than offset the effect of unfavorable currency and the weak economic environment in Europe.

We delivered improved price and mix across our international business, as we continued to launch consumer-relevant innovations in every product category around the world.

If you turn to slide 16, you'll see our Latin America third-quarter results.

Sales of $1.2 billion were flat to the prior year.

Excluding currency and BEFIEX, sales increased more than 21% on higher volumes and improved mix.

Operating profit for the quarter totaled $118 million, compared to $147 million in the prior year.

The year-over-year decline was driven primarily by lower monetization of tax credits.

On an adjusted basis, excluding Brazilian tax credits, our operating profit for the quarter totaled $105 million, compared to $85 million, a 24% improvement year-over-year.

We saw good market demand in Brazil and across the entire Latin America region.

Turning to slide 17, we gained share in our core three appliances with positive price and mix, offsetting the adverse effects of higher material costs.

For our Latin America business outside of Brazil, we had a record operating profit across the region, and our adjusted margin increased more than 1 point.

Turning to slide 18, during the quarter, we faced continued weak consumer demand across the euro zone, negative conversion due to reduced production, unfavorable currency, and high raw-material costs.

Our Europe, Middle East, and Africa sales declined to $703 million, with unit shipments down 9% compared to the prior period.

Excluding the impact of currency, sales decreased approximately 10%.

The region had an operating loss of $35 million, compared to the $12 million loss in the prior-year period.

Given the environment, we have taken appropriate actions to position the business for a return to profitability during the fourth quarter as we realize benefits from our cost- and capacity-reduction initiatives; benefit from higher seasonal volumes during the fourth quarter; improved price and mix within key countries and across our distribution, supported by new product innovations; and realize the benefits from our ongoing productivity initiatives, which will ramp up in the fourth quarter.

We will further accelerate these actions to ensure we move to a profitable position despite a continuous negative environment.

Our third-quarter results in the Asia region are shown on slide 19.

During the quarter, we gained market share in India and expanded our margins across the region despite weak consumer demand and unfavorable currency.

Net sales decreased 6% during the quarter to $201 million, down from $215 million in the prior-year period.

Excluding the impact of currency, sales increased 2%.

The region's operating profit was $7 million, up from $4 million in the prior year.

In local currency, we are on track for a record-year performance in India, despite lower industry volumes and higher material costs.

Slide 20 shows the continued strong cadence of new international product launches and design awards during the quarter.

Now I'd like to turn it over to Larry Venturelli.

Thanks, Mike, and good morning, everyone.

As Jeff mentioned, and as shown on slide 22, given our strong year-to-date operating performance and trends entering the fourth quarter, we are increasing our annual ongoing business operations EPS range to $6.90 to $7.10 per share compared to the previous range of $6.50 to $7.

We're also increasing our free cash flow guidance to between $125 million and $175 million.

As you can see on slide 23, we continue to expect a 5.5% to 6% ongoing operating profit margin for the full year.

This translates into a 300-basis-point improvement.

Our ongoing operating profit margin increased to approximately 6% during the third quarter and is expected to continue increasing in the fourth quarter, given higher seasonal volumes, benefits from our cost- and capacity-reduction initiatives, and continued sequential productivity improvement.

Our year-over-year margin improvement drivers for Q3 were price mix, which was up approximately 4 points, and is trending higher than original expectations, driven by both cost-based price increases as well as favorable mix.

We continue to expect positive year-over-year price and mix for the balance of the year.

Another positive margin contributor has been benefits associated with our cost- and capacity-reduction program, contributing over 1 point to our year-over-year margin improvement during the quarter.

Material-cost inflation was approximately $60 million in the third quarter.

While we did benefit from sequential improvement in productivity from the second quarter, our productivity was somewhat impacted due to continued weakness in demand, primarily within Western Europe.

Now, turning to free cash flow on slide 24.

Consistent with our expectations, we did have cash outflow [for] the first nine months of the year of the year of $435 million, significantly better than the $740 million of outflow last year.

Adjusting for items impacting comparability, our underlying ongoing business cash flow improved by over $450 million compared to this time last year.

Let me spend a couple of minutes on some general topics embedded in our third-quarter results and 2012 guidance.

Before I do that, as a general reminder, slide 33 and 34 in the appendix will provide you with a reconciliation of our reported GAAP operating profit and EPS to ongoing business operations for 2012 and 2011.

Included in this table are third-quarter 2012 adjustments to drive our ongoing business operation performance, removing the impact of restructuring, tax credits, as well as the impacts from legal resolutions and an adjustment to normalize the third-quarter tax rate to reflect a rate of 25%, which is consistent with our full-year tax-rate assumption.

Turning to the financial summary on slides 25 and 26, let me provide a couple of important observations.

It's important to note that net sales in constant currencies, and excluding BEFIEX credits, were up approximately 5%.

Monetization of BEFIEX tax credits were $13 million, compared to $62 million last year, as a result of the IPI tax holiday in Brazil.

As of September 30, $202 million of credits remain.

The IPI tax holiday in Brazil was recently extended to December 31, and we now expect to monetize approximately $40 million to $45 million for the full year.

Regarding interest and sundry, in the third quarter, we resolved some nonrecurring legal items.

The net impact of these, $22 million in expense, was recorded in interest and sundry for the quarter and is adjusted from ongoing business operations to provide better clarity of our underlying business results.

Slide 27 illustrates our cost- and capacity-reduction charges.

The program is progressing very well.

We are on track to deliver $200 million of benefit in 2012 with an additional $200 million of benefit in 2013.

In closing, 2012 is shaping up to be a very solid year of margin improvement.

We have the vast majority of our legacy legal-liability payments behind us, and our underlying operating cash flow was strong.

During the fourth quarter, the Company completes its annual planning process, including contract negotiation with key stakeholders.

Consistent with prior years' practice we will provide guidance for 2013 during our next conference call in late January, early February.

Now I'll turn it back over to Jeff.

Thanks, Larry.

Let me sum up by turning to slide 29 and just highlight the following points.

Again, we are delivering on our margin expansion and cash-flow commitments for the year.

We continue to increase our cadence of new-product innovation in the marketplace.

We are realizing the benefit of our cost- and capacity-reduction initiatives, and we're beginning to see some positive growth trends, in particular, recent US housing trends.

So overall, we're pleased with our progress, and we expect to finish this year strong.

Given our improving operating margins we're upwardly revising our ongoing business operations and free cash flow guidance.

And as we enter the fourth quarter, we are on track for the year to realize our full-year operating margin target of 5.5% to 6%.

I believe this will -- we will achieve a record year of margin expansion across our global business, and we certainly believe at this point in time, we are on track towards delivering our mid-term 8% operating margin target.

As Larry mentioned, we're not giving 2013 guidance today, but we do fully expect our positive momentum to carry over into 2013 as we realize an even greater benefit from our restructuring and cost initiatives, as well as a continued strong cadence of new-product introductions.

Finally, on slide 30, I'm increasingly confident in our opportunities that we see to grow our business.

These opportunities for us will come through our investments in consumer-relevant innovations.

We see appliance growth opportunities in both developed and emerging markets.

We are making good progress in expanding into higher-margin, faster-growing adjacent businesses, and we continue to strengthen our global brand portfolio.

We continue to make progress on our road map for growth, and more importantly, we're performing at levels, and we'll continue to increase those levels, to create value for our shareholders.

So with that, I'm going to close down our formal remarks and open this up for questions.

Thank you, sir.

(Operator Instructions)

Sam Darkatsh, Raymond James.

Good morning, Jeff, Mike, Marc, Larry.

Two questions.

First off, market share in North America and Europe looked to be sharply lower.

I know some of that's by design.

When do you expect that to stabilize?

And how important is it to you as opposed to incremental returns on capital?

And the second question would be regarding sequential price versus mix.

Can you throw a little color specifically around the world as to what you're seeing sequentially with price and mix, as opposed to them combined?

Thank you.

Sam, it's Marc Bitzer.

Let me try to answer both questions for North America.

First of all, on market share, and again, let me give you broader context.

We've said all along, I think over the last five or six earnings calls, that our focus is on restoring operating margins.

Why?

Very simply, it doesn't make sense to push for volume and [then you have sub-par] margins.

I think it's more than fair to say [that] we've delivered on that promise.

We outperform our competitors by a long shot on our operating margin in North America.

With that in mind, our share loss actually is fairly small.

And I think more important, and I'm coming to [coming on by line], if you break down the components of the share movement, we actually gained share in the higher-end segment.

That is evidenced by the strong, I would say exceptionally strong product mix, price mix, which we got in Q3.

And obviously you wouldn't get that kind of mix if you don't gain share in the higher-end segment.

At the same time, and that's by design element, we did not go out to certain unprofitable low-end market shares.

[And both -- I did that] by design.

And I would say that has certainly stabilized now.

So I don't expect -- we don't give forward guidance, but I would consider that right now as a stable market share.

And we're pretty comfortable with the levels right now.

On your second part of your question, on the sequential pricing, actually, as Larry indicated, the global price in Q3 was slightly above 4% year-over-year.

North America was quite a bit above that, which basically also tells you sequentially we were stable, which I would say given that we've [kind of going to be at the mercy at the price increase of last year], it's a very strong performance.

And again, as I mentioned before, it's largely mix-driven, because obviously, the like-for-like pricing [affects basic levels of merger price increases].

Okay.

Sam, let me address your first question on Europe market share.

We did lose some market share, although not significant in Europe.

But again, it's clearly focused on making sure that we go after the share that really counts for our business, and so we don't expect that to continue.

As a matter of fact, what we saw in September is that we started to recover share in key categories that we wanted to, and we expect that to continue as we go into the fourth quarter.

In terms of your second question on sequential price mix, for the overall international region, we were stable.

And then region-to-region, it was more or less stable in most of the regions, I think slightly down in Europe.

But everywhere else, it was stable.

Sam, from both Marc and Mike's comments, from a global perspective sequentially, price mix held up very, very well.

We did have some nice margin improvement coming from restructuring and productivity between Q2 and Q3.

As far as what we'd expect in Q4, due to the seasonality of the business, we'd expect the mix up again in Q4.

Thank you.

Joshua Pollard, Goldman Sachs.

Hi, thanks for taking my question, guys.

My first one is on your 2013 restructuring benefit.

I think of your productivity and restructuring in two separate buckets.

There's the ongoing piece, which is pretty hard to see in your margins, and then there's what you guys have done over the last year, which is obviously showing up in your margins.

When you say restructuring for 2013, a benefit to be $200 million, which of those two buckets does it fall into?

Should we see that in your margins?

And if so, in what regions?

Yes, Josh, this is Jeff.

Absolutely, [and then when] we communicated it in two buckets.

The restructuring benefits relate to the announcements we made a year ago at this time, where we said we were going to reduce our fixed cost.

We were going to take out unprofitable capacity, and that we would deliver $200 million in net benefits to our P&L in 2012, and another $200 million net benefits to our P&L in 2013.

And that's still the plan, and we're on track to do that.

Separate from that is our ongoing net-cost productivity, which takes into account material, inflation, et cetera, et cetera, and then the productivity actions that we take to offset that.

This year, we continue to have -- given the GDP around the world, very high raw-material cost inflation.

We had very high salary and benefits and electricity and things like that around the world.

We did have a good -- we are having a good year in gross productivity, but that's an area where we have not been able to fully offset that inflation in our net productivity.

Going into next year, we'll see.

When we give guidance in late January, early February, we'll give you our assumptions on that, but typically, we would try to offset all of that and have positive net productivity, particularly if we have stable or modestly growing volume.

Josh, this is Larry.

As far as the restructuring in the margin, an approximation, you see about 85% of restructuring flow through gross margin, about 15% would be within the SG&A area.

The regional split, 75% North America.

Europe would be 15% to 20%, and the rest of the world would be the balance.

Okay.

Thanks so much for that answer.

My second one is on your volumes by end market.

This question is going to be for Marc.

Can you talk about your volumes in the contractor channel versus retail?

And then within the retail, can you talk about how long it's going to take you guys before you lap the market share losses that you guys have blatantly taken this year?

In other words, should we expect relative to [AHEM6] that your retail volumes are 5 to 6 points below the industry for the next four quarters, or is it some shorter period of time?

It's Marc Bitzer.

First of all, when you look at our Q3 volumes, there's probably one additional comment which we need to make.

There was specific impact due to an exceptionally weak Mexican market, which has an impact on the overall quarter.

But having said that, our volumes are up in the US, have been down in Q3.

To answer your question about the state of retail versus contract if you want to make that [specification].

Obviously, [to weigh that data] of so-called contract or builder channel is significantly lower [for us to retail vendor to a five or a six].

We talk about a factor of [eight].

Now what has happened in the meantime is we -- I would say significant strength in our position in that contractor builder channel, and in our view, very well positioned for an upturn in that market.

Given the recent trends in the housing markets, it is yet too early to see that impact in our numbers.

Yes, we see an increase in our building contract channel, but it's not to a magnitude that has had significant weight in our overall business.

Having said that, there's ongoing good news in the housing market.

I expect that positive momentum to more and more show up in our overall numbers.

Okay.

What was the difference in the growth between retail and contractor for the quarter?

No, what I said, Josh, is that the contract channel in terms of impact or size [technical difficulty] for us is down by a factor of three, pretty much [was a peak].

We're talking about a very, very significant.

Year-over-year, Josh, absolutely we're seeing increase in the contract shipments year-over-year and strong double-digits, as we have all year.

I think Marc's point was it's just a small part of the total market.

Okay.

Well, thanks, guys.

I'll hop back in the queue.

Appreciate it.

David MacGregor, Longbow Research.

Congratulations on a very good quarter.

Thank you.

I guess you still have a few billion dollars of unrecovered cost inflation over the past decade.

What's the opportunity to continue leveraging innovation to get pricing and rebuild margins?

That would be the first question.

David, we absolutely agree with you.

Despite generally difficult economic conditions around the world, we continue to see every day that consumers pay for real innovation.

And that's why our focus is, and has been all through this downturn, to -- we never have stopped or reduced our level of investment in new-product innovation or R&D.

If anything, we've been increasing it of late.

So you ought to expect the cadence of innovation from us to continue, and probably at an increasing rate, because that is -- that, with strong brand, is how you can sell and create value in our business, at least in our business model.

But we don't take our eye off productivity.

That's why a year ago, we said we did not know when global demand levels would return, or what the new norm was, and that we were going to reduce our fixed costs by $400 million to adjust to this -- today's level of demand and expand our operating margins.

We'll have that, again, $200 million, which is almost 1 full point, or is 1 full point, going into next year that we fully expect to realize.

Then lastly, I'd add productivity.

Again, even during this prolonged downturn and weak global GDP growth, we've had tremendous [bend in] material-cost inflation.

There are times, like we did this year, and some last year, where it is imperative that we go out [with] cost-based price increases, as we have.

In some high-inflation markets of the world, we've even recently announced new price increases.

We're willing to do that.

I think going back to Marc's question, we don't see a lot of value in chasing low-end, in our view, profit-destroying, pieces of business, when we have opportunities to invest in new-product innovation that we get paid for.

So, we are committed.

We're by no means done.

Our operating margin target that we laid out a couple years ago for [2014] was 8% plus operating profit.

We're still committed to that, and we see ample opportunities around the world to be able to achieve that.

The question is in light of the innovation that you're bringing to market, can you -- does that give you the means to achieve pricing despite a flat raw-material market?

Flat raw-material market should continue for another couple of years.

Is innovation enough to allow you to continue to improve your pricing as you go and recover $2 billion of unrecovered cost inflation?

Again, I think $2 billion that you talk about, it is true.

That's what we have absorbed.

I'll put it a different way.

I do believe we can sell our new-product innovation at attractive value-creating levels, which will in fact continue to drive us to mix up.

Nowhere in the world today are we satisfied with our operating margins.

So we're taking actions on both new-product innovation in parts of the world, and new pricing, but certainly also focusing on cost and productivity to ensure that we have a pipeline of margin-expanding activities in our system to be able to deal with whatever kind of environment we see.

Second question, last question, you're talking about the $200 million restructuring benefits and creating net P&L benefit of $200 million a year for two years.

But if we get some kind of a cyclical recovery in 2013, presumably everybody's going to beef up their ad spend.

And I'm wondering how much of that $200 million for 2013 you think you can actually take to the bottom line versus having to redeploy into brand support?

We've already been beefing up our brand and new-product innovation investment.

And as we have more and more new products to do, we'll continue to do that.

Again, we're not giving 2013 guidance today.

But the flip side of -- as we see recovery, we're going to have volume leverage as well.

I think there's -- again, I think there are a number of levers available to us in our business to both invest the right way to create value and to fund that while expanding our operating margins.

Thanks very much.

Great quarter.

Eric Bosshard, Cleveland Research.

Two questions.

First of all, the increase in the full-year guidance, it looks like Europe, you're probably going to make less money than you originally expected.

So I'm interested in the moving parts within the increased guidance?

That's my first question.

Yes, Eric, if you look at where we are year-to-date, and again, we talked about continuing to see strong momentum as we finish the year.

On a full-year basis Europe is lower and North America is higher, and everywhere else is about the same.

And then secondly, with North America, you've been focused this year on -- focused greater on profitability and less on volume, and your retail partners have gone along with that.

I'm curious in -- if you think this is sustainable for an extended period of time?

How you think about that as we look into 4Q and even into 2013?

Eric, it's Marc Bitzer.

Again, let me reiterate.

Our focus has been on margin expansion.

I think the big difference in Q3, even compared to prior quarters, it's more than just price mix, but we'll also have now price mix and productivity, and part of that is coming from [this rupture].

I would say our margin expansion is now on better footing than it was probably in Q1, Q2, which I think also speaks volumes about sustainability.

And our ability to keep pricing up on several sequential quarters and getting cost gives us quite a bit of confidence to make it sustainable.

Eric, I'd add to that, too, is our trade partners certainly expect and benefit from our new-product innovation.

They expect us and benefit for us investing in our brands, which brings customers in their doors.

Selling a better mix of product for them is as helpful to them as it is to us.

Lastly, the assumption for 4Q North America is an improvement in volume relative to year-to-date and relative to 3Q.

Interested in what you're seeing in the business that gives you some confidence and a little bit of a step-up of volumes in 4Q?

Eric, it's Marc Bitzer again.

As you've seen, we've kept our full-year volume expectation, our industry guidance on the same level, zero to minus 2. If you mathematically would take the midpoint, that would give you a 3.5% to 4% growth.

I think what is right now factoring into our guidance is more of the lower end of that range, which is probably making the 1% or 2% growth in Q4.

And that's pretty much what is the most troubled scenario.

We continue to see a lot of volatility on the market, but right now, we're expecting 4% coming from the margins and cost [take-ups], we're in a very good position for Q4.

The only thing I'll add is just in globally for the Company, Q3 to Q4, volumes in general up around 15% sequentially, so --

Normal seasonality.

Normal seasonality, right.

Great.

Thank you.

Ken Zener, KeyBanc Capital.

Good morning.

What a difference a year makes.

I agree.

Yes.

Lot of questions already asked.

If you could give us a specific update on US Home Depot, the pilot program?

Give us a comment on Brazil relative to your margin outlook as it relates specifically, I believe, to one of your competitors perhaps losing a land position to make a factory?

That's the first question.

Ken, it's Marc Bitzer.

Let me first take your Home Depot question.

As you know, we have a long-standing policy of not of getting too specific [about trade partners drags or actions].

But obviously, it's a well-known fact that we participate with the Whirlpool brand in addition to our success with Maytag and Amana business at Home Depot in what Home Depot put out as a pilot, what they call the [jumbo store, the expansion of store space].

I would say the only comment which we can make, we're actually very pleased with the progress so far, and it's in line or even slightly above our expectations so far.

And Ken, to answer the question on Brazil, we feel good about our continued margin expansion in that region.

We're expecting to see that progress continue in the fourth quarter.

Our volumes have been very strong, as you can see, in the core three appliances, so the strategy that we've deployed all year is working.

And frankly, I won't speculate on what our competitors will or will not do.

What we're trying to do is execute our strategy, have the right innovation in the market, and ensure that consumers want our product (technical difficulty).

And so far, it's working.

Okay.

To the extent that you said the volume shortfall, while partly from Mexico, was certainly related to walking away from some of the low-end share, Marc, I believe you said that those share losses had stabilized.

Would that imply to the extent that you got margin growth in the third quarter due to mix, if you're now not bleeding off share in lower-margin product, does that imply sequential margin pressure in North America?

Ken, it's Marc.

Obviously, there's a number of questions embedded in one big question.

On the volume, Mexico had a very peculiar and very soft market I would say year-to-date, which is kind of unusual even in the emerging-market pattern, which we expect to stabilize going forward.

But that had a very significant impact, or had it significant impact in our overall [Q3 unit shipments].

My comment on the low end was referring to, and it's again, in the context of margin expansion.

We focused on selling innovation, particularly on the higher end of the market, and [both] had a pretty significant mix growth.

At the same time, we did not aggressively go after some of the low-end, unprofitable market segments, and that's where we [vacated] some share.

I would say that action is behind us and has pretty much stabilized.

So as such, I don't -- from that national trend, I don't expect a big change.

As you know, we can't comment and won't comment too much about Q4-specific.

But I don't expect a massive change in market share trend so far.

All right.

My last question would be taking a step back, given near 600, 700 basis points margin move in the US, and -- how much of the ITC petitions -- there's two of them, obviously the refrigerator being appealed, but the current tariff in place on washers.

How should we think about perhaps benefits you're already receiving from these petitions relative to your internal actions related to price and not willing to back up?

How much of the tariff benefit, i.e., has been already perhaps incorporated?

Thank you.

Ken, it's Marc again.

Simple answer is zero.

I don't think we have any benefit in our current Q3 performance, which also means deferred positive outcome, which [we count them, they should be upside].

Thank you.

Michael Rehaut, JPMorgan.

Thanks.

Good morning, everyone.

First question on North American margins, obviously great performance, and congrats on that.

Looking at the performance sequentially, though, up about 180 bps, excluding the gain from 2Q, on slightly lower revenue and part of that, as you've been talking about, is mix.

Is that the biggest driver in terms of the sequential improvement in margin profitability?

Or are there incremental benefits coming from price, or even perhaps on a sequential basis, any benefit from lower raw materials?

Michael, it's Marc Bitzer again.

Just on your question, sequential margins.

I think there's two components which you've got to look at.

One is the pricing component as such, which pretty much held as an impact.

However, the composition of the pricing impact has changed.

In Q2, we bought a little bit more like-for-like and less mix, and now it's a whole lot more mix and less like-for-like.

And that's just the nature of us going to [get anniversary of the price] increase from last year.

The second component that has changed is we see cost and restructuring benefits in Q3 to a higher or much higher extent than we saw in Q2.

Okay.

Also, looking at Europe, Mike, if you could shed some light.

At least on a stated revenue basis, revenues have inched up a little bit in 2Q and 3Q coming off of the first quarter, yet margins have obviously deteriorated.

Just trying to understand it sequentially in terms of -- because certainly, you've been getting some restructuring benefits from a cost side this year, but it seems like the profits have been going the other way despite higher revenues.

So what's been going on there, and what's behind the confidence behind profitability in the fourth quarter?

Yes.

First, Michael, just to look at -- although revenues have been going up, we've had to take out fairly significant amount of production.

And from a seasonal perspective, you normally see increases in volume quarter-over-quarter, but still, if you look at the third quarter, revenues were down about 10%.

But why we're confident going forward is both on the restructuring side in terms of the benefits as you know, takes a little bit longer to ramp those up.

We're going to see more of those in the fourth quarter.

We see more productivity coming in the fourth quarter.

We have higher seasonal revenues in the fourth quarter.

And we already saw -- we were already profitable in the month of September, and we see that continuing in October.

So we're pretty confident that we flipped, that all of the actions that we've been taking very aggressively are really starting to work, and we're beginning to see that turn in Europe.

Okay.

One last one, if I could sneak it in, about bigger picture with product innovation.

And Jeff and Mark, you've both highlighted the shift to the higher-end products, I think, benefiting.

Is that something -- I assume that's something that obviously you're counting on into '13.

Just trying to get a sense of, particularly on the mix side, the mix benefit, has that something that's been emerging over the last couple of quarters and you'd expect that positive mix shift in North America to flow over into '13?

And if there's anything additional in terms of perhaps a volume benefit relative to the market in general from product innovation?

Both of these comments I'm really centering around North America here.

Michael, this is Jeff.

I would say this is a trend we've seen for the last seven or eight years really, with the exception of late 2008, early 2009, that consumers buy value.

And given the average appliance lasts for 10 plus years and that we're still clearly in a replacement market, when people go into stores and see our products, they see things very dramatically differently than they did 10 years earlier when they purchased whatever product they're replacing.

And that value is relevant.

Yes, there are -- there is a small portion of the market who can only by the affordable, from a price standpoint, opening price-point product, but that's very low in our market compared to certainly other markets around the world.

And what we've seen with, again, only a small, less-than-half-a-year interruption is that when you bring value to the marketplace in the form of new-product innovation, given the consumers' choice, they will mix themselves up, because the value they're receiving is a great value.

It's a value in terms of the performance of the machine, the energy efficiency, the water efficiency, the design, and on and on and on.

So I don't see this as a 2012 trend.

I see this as a structural trend, and our view is, is to increase our cadence of new-product innovation, continue to offer great values in the marketplace, supported by consumer-demanded, strong brand-preference brands, and that -- and we have a portfolio that's made to mix up.

Larry, one quick question on pension.

I noticed that the cash-flow guidance has benefit contributions or pension contributions up to $200 million, versus previously up to $250 million.

Is that something that also works through the income statement, and that perhaps there was less pension expense, quote unquote?

Or if you could just describe what you expect to work through the income statement this year versus perhaps previously, and where you think pension contribution could be in '13 even?

Yes, a couple things, Michael.

We did adjust the pension contributions from -- up to $250 million to $200 million.

Has to do with the new legislation.

It had no P&L impact whatsoever.

The cash change that you saw, we did have the higher operating performance that you mentioned, a lower pension cash, a little bit lower restructuring cash, but I also mentioned in my prepared remarks that we have lower BEFIEX credits.

[This has less cash.] Then we have the legal resolution that also occurred in Q3.

We'll have a little bit slightly higher working capital than we originally expected.

We're taking out a lot of working capital to generate cash.

So net-net, operationally, the business is doing well from a cash perspective.

From a pension-expense perspective, again, both in the US and foreign, we have about $50 million of pension expense.

We'll provide you with additional guidance when we talk next time regarding expense.

The new legislation will increase our pension expense by about $12 million next year, but I don't expect a significant increase above that.

Okay.

Not even with the lower interest rates?

Not -- remember, our pension plans are frozen.

So we don't, on the expense side, have a lot of impact from pension -- from the interest rates.

From a contribution perspective, we would expect to pay less cash next year.

Listen, everyone, we're going to conclude the call here.

Thank you again for joining us today, and we look forward to talking to you early next year.

And this concludes today's program.

Have a great day.

You may disconnect at this time.