惠而浦 (WHR) 2014 Q2 法說會逐字稿

Good morning, and welcome to Whirlpool Corporation's second quarter 2014 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, Chris Conley.

Thank you, and good morning.

Welcome to the Whirlpool Corporation second quarter 2014 conference call.

Joining me today are Jeff Fettig, our Chairman and CEO, Presidents Mike Todman and Marc Bitzer, as well as 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 assist you in understanding Whirlpool Corporation's future expectations.

Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K, and our other periodic reports, as well as on slide 2 and 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 operations, as they exclude items that may not be indicative of or unrelated to results from our ongoing business operations.

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

Listeners are directed to the appendix section of our presentation beginning on slide 39 for the reconciliation of non-GAAP items to the most directly comparable GAAP items.

With that, let me turn the call over to Jeff

Good morning everyone, and thanks for joining us today.

As you saw in the earnings release from earlier today, overall, our results were largely in line with our expectations, as we managed through a challenging short-term global demand environment.

Our second-quarter ongoing business earnings per share were up 11% versus last year.

And these results were primarily driven by record profits in our North America business.

Overall, the underlying fundamentals of our business remain strong.

We see global demand trends improving, and we expect second-half earnings to ramp up due to a variety of reasons.

If you turn to our financials on slide 6, excluding the impact of foreign currencies, our revenues were up about 1% versus last year.

Our ongoing business earnings per diluted share increased by 25%, or up approximately 11%, to $2.62 compared to $2.33 last year.

Turning to slide 7, and factoring in the first-half actual performance for industry demand, we have revised our regional industry demand assumptions.

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

For North America, and specifically the US, we have revised our industry demand assumption to be up about approximately 5% per year.

We did have a slow start for the year in January and February, but since March -- March through June, we've had very strong growth, over 6%.

So this adjustment really just reflects the slow start which we saw in January and February.

In Europe, we see about the same.

We continue to expect flat to up 2% industry for the full year as the region continues its recovery.

For Latin America, we are revising our industry assumption to flat to minus 3% for the full year.

Again, primarily due to the short-term impact that we expected and saw from this year's World Cup, and some uncertainties around government elections in Brazil.

And finally, our Asia industry forecast is flat for the full year, with China being down for the year and India being up.

Again, overall, we remain very confident in the underlying fundamentals of our business, and have multiple opportunities to achieve profitable growth.

To date, our business performance has put us in a very strong position as a company.

This has allowed us to enhance our returns to shareholders, as we announced in April a dividend increase and a $500 million share repurchase authorization.

We have significantly increased our brand and product investments, and we will see an acceleration of new product introductions in the second half of the year.

But at the same time, we are significantly improving our global operating platform.

And this is demonstrated by our recently announced agreements to purchase majority stakes in Indesit in Europe and Hefei Sanyo in China.

This will allow us to significantly increase the scale and size of our operations in both of these important markets in the world.

So in total, we're very well positioned.

We're on track for a record year of operating performance, and we're setting up a platform for future growth and very strong value creation.

So at this point in time, we will get into the regional details, and I'd like to turn it over to Marc Bitzer.

Thanks, Jeff, and good morning everyone.

Let me begin on slide 9 by reviewing North America's record performance in the second quarter, starting with the top line.

Net sales of $2.7 billion for North America were up 3% compared to the prior-year period, and up 4% excluding currency.

We saw operating margins expand by 50 basis points in the quarter, due to unit volume growth in US major appliances and the benefits of ongoing cost productivity, along with cost and capacity reductions, more than offsetting unfavorable currency and higher material costs.

We also increased our investment for our brand marketing in support of new product launches to drive continued growth.

Our ongoing business operating margins were 10.6% for the quarter, with record second-quarter ongoing business operating profit of $285 million, compared to $262 million in the second quarter of 2013.

The consistent and disciplined execution of our actions resulted in the 5th quarter of year-over-year revenue growth, and the 11th consecutive quarter of year-over-year margin improvement.

Let me take a moment to talk about our expectations for 2014, as shown on slide 10.

Overall, we were pleased with our record operating profit in the first half.

US appliance demand has rebounded from a slow winter start, as March through June sees seven industries up 6.6% compared to the prior year.

However, we are adjusting our full-year industry forecast to approximately 5%, which is the lower end of our previous guidance range, as we don't expect the industry to fully make up from that slow start to the 7% growth level.

The macroeconomic indicators point to a strong second half, as we're seeing the lowest unemployment rate since September 2008.

New housing starts and existing home sales are improving, and within range of our expectations for the year.

And finally, we believe strong replacement demand with continuous consumers replace older appliances with our innovative energy-efficient products.

In addition, we expect positive net cost productivity from our ongoing programs to accelerate in the back half of the year.

And in the second half of the year, we're excited to launch many innovative new products in almost every core business product category.

We're also driving growth beyond our core business, as shown by our recent announcement with Procter & Gamble to introduce the revolutionary at-home clothing care system called Swash, and our expansive slate of launches within the KitchenAid small appliance business.

Turning to slide 11, you can see an example of our new Maytag dishwasher that is part of our new Maytag brand design that follows our successful Maytag Man brand campaign.

Maytag dishwashers are our quietest dishwasher ever, with strength to handle tough loads.

It also features an industry exclusive stainless steel silverware basket and a tiered upper rack to hold large plates and taller items.

I will now talk to the second quarter results for our Europe, Middle East and Africa regions, as shown on slide 13.

Sales were $746 million, compared to $731 million in the prior year.

Excluding currency, sales decreased approximately 3% year over year.

The cost and capacity reduction initiatives, which were put in place, combined with ongoing productivity programs and improved product mix, have delivered another quarter of positive operating profit.

Operating profit of $2 million improved by $8 million compared to the prior-year period, and operating margins improved 110 basis points.

Now turning to slide 14.

While the market environment in the Eurozone remains somewhat soft and mixed by country, we are seeing some recovery, and expect normal seasonality as we progress throughout the year.

We expect positive operating profit and margin expansion, driven by continued benefits from our ongoing cost productivity programs and our previously announced restructuring initiatives.

And we continue to focus on our innovative new product launches and growth beyond our core, specifically with the growth we've seen in the kitchen small appliance category within Europe, Middle East and Africa.

Turning to slide 15, as Jeff mentioned, we were extremely pleased to sign the binding agreements to become majority shareholder of Indesit.

We are acquiring a 66.8% voting stake in Indesit from a [minority] family for EUR11.00 per share.

To date, we have acquired 4.9% of our voting shares of Indesit.

The value of this transaction is EUR758 million, or approximately $1 billion.

In addition to a share price, Whirlpool will assume indebtedness of Indesit upon closing.

And we intend to pay for this acquisition with cash on hand, together with private, domestic and international public debt financing.

And we expect judicial and regulatory approvals by the end of 2014.

Once the transaction is closed, we will launch a mandatory tender offer, in accordance with Italian law, to acquire additional shares.

Slide 16 highlights our opportunity to create a significantly more efficient and value creating appliance business in Europe.

With a tremendous strategic fit for complementary country positions, products, brands and distribution, and with efficiencies in R&D, capital spending, and value chain costs, as well as operational scale with increased volume and more effectively integrating our product platforms.

Now, given our prudent track record of generating value with our acquisitions, with high confidence in our ability to execute this transaction successfully.

And we expect to more than double our presence in the world's largest appliance market and create value for our shareholders.

Once we complete the integration, for the reasons I previously described, we expect our combined European business to have EBIT margin of 7% to 8%, and free cash flow generation of 6% to 7%.

Which will make Europe a significant contributor to the overall financial results of Whirlpool Corporation.

And we expect it will take about three years to fully achieve these benefits.

Following the closing of the transaction, we will provide investors with our detailed plans on how we intend to create this profitable growth and shareholder value with this important acquisition in Europe.

And now I would like to turn it over to Mike.

Thanks, Marc.

If you turn to slide 19, you will see our Latin America results.

As expected, our second-quarter results were primarily impacted by lower demand, as consumers focused on brown good purchased during the World Cup.

Sales for the quarter were $1.1 billion.

Despite industry volumes being down approximately 17%, our net sales, excluding currency and BEFIEX, decreased approximately 4% compared to the previous year.

We continue to gain share both year over year and sequentially, as we benefited from our compelling brands and the beginning of new product introductions.

We also benefited from previously announced price increases, for which the benefits will accelerate and increase in the second half of this year.

Our ongoing business operating profit for the quarter totaled $87 million, compared to $111 million in the prior-year period.

Improved product price and mix was more than offset by lower unit volumes, higher material cost and foreign currency.

GAAP operating profit totaled $87 million, compared to $135 million in the prior year period, which included $24 million of BEFIEX tax credits.

Turning to slide 20 for our expectations of the region, and given the continuation of the World Cup in July and the government elections in Brazil, we are now lowering our industry assumption to flat to down 3% for the year.

However, we continue to believe that the macroeconomic indicators in Brazil point to long-term healthy demand growth, as unemployment is at historically low levels, below 5%, real wages are growing, inflation is within the target range, and debt as a percent of income is primarily driven by increased investments in housing.

All of these signs are positive for appliance industry growth.

We also expect to continue outperforming the industry and growing our revenue, given our strong market position and current competitive environment.

Our recently announced price increases will impact the second half by helping to offset negative currency impacts and significant levels of inflation experienced throughout the year.

And we are launching over 100 new models in this second half, across all product lines and with exciting innovations.

In summary, we do expect a strong second-half performance in our Latin America business, due to the already discussed price increase benefits, the launch of exciting new products, and the tough currency comparisons being behind us.

Our second-quarter results in the Asia region are shown on slide 23.

Overall market demand was soft, but improved versus the first quarter, as the Chinese economy continues to grow at a more moderate pace.

In addition to the overall slowdown in China, our business was down significantly.

Our trade customers began reducing their Whirlpool inventory in anticipation of the integration with Hefei Sanyo and the expected delivery of new product lines.

This resulted in a sales decline of over 80% for the second quarter compared to prior-year period, and therefore had a significant impact on margins and production.

We expect that after the transaction closes, we will return to far more positive revenue growth as we launch our new integrated product lines.

These short-term trade actions are having a significant impact on our current business, due to reduced shipments and production volumes, as indicated in our adjusted guidance.

Post-approval, we are confident this acquisition will put us in a very strong position as we enter 2015.

Net sales during the quarter were $211 million, compared to $246 million in the prior-year period.

Excluding the impact of currency, sales decreased approximately 9%.

GAAP operating profit of $4 million compares to $14 million in the prior year, and operating margins declined 370 basis points compared to the prior-year period.

The benefits of cost base price increases and ongoing cost productivity were more than offset by the trade adjustments of volume in China, higher material cost and foreign currency.

Turning to slide 24, we continue to execute ongoing productivity actions and cost base price increases across the region to offset inflation and currency, and to execute new product launches.

We are also on track to become the majority shareholder of Hefei Sanyo to accelerate our growth in the emerging Chinese market.

As shown on slide 25, and as previously announced, we are in the process of acquiring a 51% stake in Hefei Sanyo for approximately $547 million.

Hefei Sanyo's expanded distribution, competitive products, and complementary manufacturing, combined with a proven management team and significant capacity to enable growth, will provide us with an outstanding platform for growth in China.

As you can see on slide 26, the approval process in line with our expectations, and we have received the majority of the required approvals for this transaction over the past 12 months.

The transaction remains subject to the Chinese securities regulatory commission approvals, tax clearances, and payment approvals, as well as share registration at closing.

We continue to expect the transaction to close by the end of this year, or possibly by the end of the third quarter.

Investment, integration and transition cost, which began in the second quarter, will have a negative impact to earnings and cash during 2014.

However, once combined, we expect this transaction will be meaningfully accretive in 2015, which would be the first year post-integration.

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

Thanks, Mike, and good morning everyone.

Our second-quarter results were in line with our expectations, and we are on pace to deliver another record year of ongoing business operating performance, as shown on slide 29.

We are adjusting our full-year guidance to reflect the impact of investment and integration costs related to the pending acquisitions of both Hefei Sanyo and Indesit.

As Mike mentioned, our trade customers in China are reducing their inventories in anticipation of our integration with Hefei Sanyo, which is impacting both our GAAP and ongoing EPS guidance by approximately $0.50 per share.

And the pending acquisition of Indesit in Europe is impacting our GAAP EPS guidance of $0.25 per share, as we incur additional investment expenses in 2014.

Our guidance for annual GAAP diluted EPS is now in the range of $10.30 to $10.80 per share.

And annual ongoing business diluted EPS is now $11.50 to $12 per share, which represents a 15% to 20% improvement versus a year ago.

Our expectations for 2014 free cash flow of $600 million to $650 million now reflect the impact of these two adjustments.

Overall, the underlying fundamentals of our business remain very strong, as we continue to invest in our business and bring innovative products to our consumers across the globe.

As I speak to the financial results on slides 30 through 32, you will see how we continued to expand our ongoing business operating margin in the first half, and expect to deliver another balanced approach towards margin expansion, resulting in an 8% plus margin for the full year.

For the first half, price mix was up 0.5 point, and we continue to expect to realize 0.5 point to 1 point of margin, driven by our cost base price increases, innovative new product launches, and growth beyond our core business.

Our cost and capacity reduction initiatives contributed another 0.5 point, consistent with our full-year guidance.

For the first half, our cost productivity more than offset material cost inflation of $100 million to deliver a positive 0.25 point of margin expansion.

Our ongoing cost productivity for the year is on track to more than offset approximately $150 million to $200 million of year-over-year material cost inflation, and is expected to deliver a positive 0.5 point of margin to 2014.

As planned and previously communicated, our increased marketing technology and product investments primarily reduced margins by a full point during the first half.

And we expect them to have a negative 0.5 point to 1 point of margin impact for the year.

Overall, our first-half margins were firmly on track with expectations, and consistent with our expected full-year improvement.

For the second quarter, ongoing business operating profit benefited from improved product price and mix, ongoing cost productivity, and the benefits from cost and capacity reductions.

Lower volumes, largely attributable to the short-term impact from the World Cup in Brazil, higher material cost, unfavorable currency, and investments in marketing, technology and products negatively impacted results.

We continue to expect a stronger second half, as we introduce a significant number of new products, productivity ramps up, Latin America price increases fully take effect, and tougher first-half currency comparisons are behind us.

We believe our expected margin improvements, combined with positive revenue growth, will enable us to deliver strong double-digit improvement in ongoing business earnings per share during the second half.

The graph on slide 33 illustrates expenses associated with our cost and capacity reduction initiative.

The actions we have been taking over the past couple of years and into 2014 represent a generational change to our footprint and cost structure.

The additional cost and capacity reduction actions we took earlier in the year were to address the soft but recovering European market, and continue to expand our margins.

For the first half, we incurred approximately $63 million of charges.

And for the full year, we expect approximately $100 million of charges and $80 million of ongoing benefits.

As we continue to improve margins and grow revenues, our plan is to deploy the cash generated from our business are solid, as shown on slide 34.

We are funding the business for growth and significant product introductions in the second half, including capital expenditures between $625 million and $675 million for the year.

We recently increased our quarterly dividend on the Company's common stock and authorized a new share repurchase program.

Finally, as previously mentioned, we are on track with our acquisition of a majority stake in China's Hefei Sanyo, and have recently announced our intention to purchase a majority stake in Italy's Indesit.

In summary, given our profitable growth trends, increased investment capacity, and strong balance sheet, we will balance funding for all aspects of our business to ensure the best long-term value creation for our shareholders.

Now I'll turn it back over to Jeff.

Thanks, Larry.

I'll summarize our expectations for this year on slide 36.

As we mentioned, we are expecting to significantly ramp up our second half earnings.

Based on what we're seeing, our improvement in global demand trends, our continued investments in our brands and new products will support a very strong lineup of new innovative product introductions during the second half.

We are achieving higher price mix, which should continue at an accelerated rate in the second half.

And finally, the normal higher seasonality of productivity we fully expect to happen.

Additionally, as mentioned in the previous remarks, the Hefei Sanyo acquisition provides us a true transformational growth opportunity in China.

We will more than 5 times our size in this very important emerging market.

And the Indesit acquisition in Europe provides a very significant opportunity to position our European business for competitiveness, leading to growth in ongoing value creation.

Both of these transactions are on track to close by the end of the year.

We remain confident in our ability to deliver another record year of operating performance in 2014.

Further out, I would like to turn to slide 37, which really highlights how we're creating multiple paths to profitable growth.

First, I would remind that our North America region, we believe, is still the early stages of the replacement cycle, as well as a multi-your housing rebound.

As we mentioned in the last call, we're beginning to see improvements in discretionary demand.

So we see several years ahead of us with good industry demand growth.

Secondly, our pending acquisition of Indesit in Europe is a very important part of a comprehensive strategy, and provides us to improve our competitive position in Europe.

And very importantly, create a consistent and meaningful source of value creation for our shareholders.

And again, Hefei in China establishes a broad platform for growth in China's emerging market, which still has low levels of appliance penetration, as we will 10 times our distribution throughout that country.

We also have very good opportunities to increase appliance penetration and continue to gain market share throughout the Latin American regions, given our strong brands, our proven cadence of innovation, and overall cost leadership.

In addition, as we continue to expand globally, we have opportunities to fully leverage our fixed cost structure, and ongoing productivity programs to ensure our competitive position and continue to improve our margins.

We have a strong cadence of bringing innovative products to consumers and leveraging the best brands in the appliance industry around the world.

We are driving both revenue and margin growth by also extending and expanding beyond our core appliance business, with such products that you'll see in our KitchenAid small appliances line, which we are now selling in many, many markets around the world.

And also our water business, where we are growing in all parts of the world.

So in total, we believe these multiple paths to profitable growth provide us with great opportunity to achieve our value creating objectives, and will ensure that we continue to deliver strong value creation for our shareholders.

So with that, I'd like to end our formal remarks and open it up for questions.

(Operator Instructions)

Michael Rehaut, JPMorgan

Thanks, good morning everyone.

First question I had was actually -- and obviously, a lot of activity in China and Europe.

But I wanted to focus on your biggest region, the North American market.

And specifically, just get a little bit of incremental color, if possible, on the trends during the quarter.

As you mentioned, volumes improved in the second quarter.

And maybe perhaps not enough to maintain the overall shipment guidance.

But if you could go into a little bit more detail in terms of the competitive market?

If you view, from a competitive standpoint, if incentives or discounts in the industry are stable?

How you are seeing some of the different end market drivers?

New construction versus repair a model?

Any kind of interesting trends from both the end market perspective and the pricing and discounting perspective?

It's Marc Bitzer.

Thanks for the question, which is obviously 10 questions embedded in one question.

So let me try to give you -- split it up in both industry, and then our own performance in this quarter.

First of all, in industry.

If you just look at the second quarter of US, the market actually has grown 5.8% of T7, which basically is exactly in the range of what we earlier indicated, 5% to 7%.

And the reason why that's exactly the range is because the underlying macroeconomic indicators are exactly where we have had them

I.e.

if you look at housing starts, we continue to see above 1 million existing home sales, with more (inaudible) new number.

We always said it is slightly above $5 million.

It is slightly above $5 million.

And unemployment rate are favorable or getting better.

So I would say from a fundamental growth drivers in the market, nothing has changed.

The only difference on a full-year perspective is just the last six or eight weeks which we had in Q1, I don't think the market is strong enough to just mathematically make it up for the rest of the year.

But the underlying run rate of the industry, we still see in the original 5% to 7% range.

And that's an important factor, and everything which we see today on current trends are exactly confirming that direction.

You asked about the overall promotion environment.

I would say the same comments as I made in the last earnings call, by and large unchanged.

There's always promotions in the market.

We participate when we can create value for our brands and our shareholders, and if we don't see it, we don't participate.

So we don't see a radical change in the second quarter based on promotional activities.

If you now come a little bit more to our own performance in the second quarter in units, and I also saw in the earlier analyst reports, I think there may be some confusion out there.

Yes, it is true that for Whirlpool North America, we published a 0.6% volume decline.

However, it is very important, and we made that point earlier, these units encompass way more than we see seven industry shipments, which typically people compare to.

In these units, the [mines] opens 6%, it's the T7.

It's the additional major domestic, which we call T12.

It also includes Mexico, it also includes Canada, and it also includes small domestic appliances.

If you would just go down to a T7, which we don't typically publish, but we have roughly a mid single-digit unit growth, which would indicate that we pretty much held our market share by and large.

And that is despite, and that is important despite, us having some availability issue in our laundry products, which is our biggest category.

And -- but it is also important to note these availability issues are behind us.

They are behind us.

They are very Q2 events.

They are behind us, and we are fully back on track.

That's a great answer.

I appreciate all the detail.

Just a quick second question for Larry, if I could.

The guidance coming down about $0.50 on an operating basis, fully attributable to the China trade inventory issues.

But additionally, your industry outlook for several regions was notched down a little bit.

So I was wondering if there was anything in the overall view that is offsetting a look for a little bit of reduced volume, if that's on -- from the margin side, or corporate expense, or any of the other line items?

Yes, Michael.

We modestly took down our industry guidance assumptions in North America, Latin America.

And you've seen the Asia adjustment reflected in our guidance.

I think the thing to point out is that, if you look at countries like Latin America, where we are gaining share and we are benefiting from price increases, that has largely enabled us to offset the industry guidance change.

Michael, this is Jeff.

I would add, too, given the industry assumptions for demand are marginal.

And they really reflect what's already happened in the first six months.

So on a go-forward basis, we feel actually pretty good about run rates for demand.

And on top of what we think we're going to be able to do in the second half.

So we see a actually improving demand revenue growth environment for the second half.

I would just add, Michael, if you look at the half point sales run rate, we mentioned a few things.

Marc mentioned January and February weather, had a lot of currency in the first half.

World Cup availability, China customer, inventory reductions.

If you strip that all away, our half one run rate is the mid-single digits.

And that certainly supports what we would expect in the second half of the year.

Denise Chai, Bank of America Merrill Lynch

Great.

Okay, thank you for taking my question.

So just in terms of the laundry supply issues that you had in North America, can you quantify how big that was?

Denise, it's Marc.

We're not going to go into the specifics of quantifying it.

However, it has been material.

Laundry is overall our biggest category in majors, okay?

And we have basically, in preparation for a major product launch which we have in Q3, we had to somewhat limit production capacity as we go through this massive shift on the assembly line and the tools.

So but temporarily, there was about a six-week issue, but six weeks of laundry with constrained availability has a material impact.

I would just directionally say, it's clearly above $10 million.

Okay.

Got it.

And then, in LatAm, can you talk a little bit more about the price increase that you're putting through this quarter?

And what you're seeing for orders after the World Cup?

Yes.

Denise, it is Mike Todman.

We had already talked about in our first-quarter earnings call, that we had executed that price increase.

And what we said is that it would step up over the course of the rest of the year.

And so what we're expecting is to see significant step-up in the third quarter, and as we go into the second half, for that price increase.

And to date, July was still relatively soft because of the World Cup.

But what we are seeing is a pickup in orders, and in line with what our expectations are.

Okay.

Great.

Thanks.

And just lastly, in terms of the Indesit acquisition, could we get some -- a little bit more detail in terms of your high-level thoughts there?

You mentioned seeing a -- mentioned that a 7% to 8% operating margin might be possible in three years.

What needs to happen for -- what do we need to see for that to happen?

And what would be the cadence of that kind of improvement for -- is there anything qualitative you can go into a little bit there?

And also, you're expecting $80 million of ongoing benefits in 2014 from restructuring.

So far, we haven't seen a whole lot.

So is that still $80 million for the full year of 2014?

Denise, this is Jeff.

Let me answer the last question first.

Yes, we actually are seeing some of them, Denise, in terms of the improvement of Europe.

But they do accelerate in the second half, and we will deliver at least $80 million worth of benefits on a full-year basis.

As it relates to Indesit in Europe.

First of all, if you just take public data, the combined companies are a $7 billion company.

So we -- certainly are -- gives us a competitive scale to accomplish a lot of things, not un-similar to some of our past large-scale acquisitions, in terms of benefits.

We're -- in terms of the timing, I would start with, and again, just based on public data, and certainly our business is improving.

They indicated through their guidance that their business is improving.

So there is a baseline that we believe we can build off of.

And it -- without getting into all the details, it would be the -- really optimizing the opportunities we see of a much larger scale business across the value chain.

So -- and again, in terms of timing, it is premature for us to talk about that.

But it -- Marc's comments of 7% to 8% EBIT company is clearly within our expectations.

And it does take some time, but it -- to ramp up.

You ought to think of the ramp up as opposed to waiting three years, because we certainly wouldn't plan to wait for three years.

Okay, and let me just slip one more in here.

There was a pretty meaningful increase in inventory.

Could you talk about what was driving that?

Was it timing or something else?

And in terms of US retail inventory levels of appliances, would you say that that correction is done?

Because I think you were saying that, all year long you had seen sell-through exceed sell-in.

What are you seeing there?

Denise, this is Larry.

On our inventories, as planned, they are up year over year.

We have a significant number of new product launches in the second half of the year, and due to that, we did increase levels of inventory.

Now, we will bring that level down throughout the balance of the year, as we normally do.

But we did plan for higher inventory.

And Denise, it's Marc.

To your question about US retail inventories, I would say by and large, our sell-through of our products during Q2 exceeded the sell-in on our products.

Which basically tells you we probably had a slight inventory burn on our branded products in the second quarter.

Okay.

Can you see if that is done yet?

Any sense?

Because it's been going on for quite a while now.

The market is -- consumer market is good.

Our brands are in high demand.

So I think it's that -- I can't predict by retailer, but I think in total, we expect to have good demand.

Great.

Thank you so much.

Ken Zener, KeyBanc

Good morning gentlemen.

Good morning, Ken.

Busy quarter here.

We've talked about putting on an index for you guys for [say hem six].

I would just reiterate the usefulness, given your guys' comments about the market and investors' perception.

Second, related to the US market, given the implied back half volume that you're talking about for the industry, which you've already been doing.

Given that it's a tougher comp in terms of the growth rates last year, what kind of, from a growth rate perspective, given the higher growth rates, what gives you confidence of visibility into that?

Is it the shipments?

Is it the declining inventory that you are seeing domestically?

Ken, it's Marc Bitzer.

First of all, I'm commenting on the second half against the background of industry assumption.

Back half is 5% to 7%, consistent with what I said earlier.

The confidence which we have on our own volume growth in that environment is A, we have a massive amount of new product launches.

In particular laundry, but also kitchens, small domestic appliances, throughout the entire third quarter, and then laundry also in the fourth quarter.

So there's a large number of product launches coming.

In addition, we know, at least in our products, [create] inventories are low, and we see that as a business right now progresses, we have pretty strong shipments.

So that gives us all the confidence for back half.

And of course, we have a pretty firm indication of what we should expect around thrust for promotion period in Q3 and Q4.

Put that altogether, we're very confident behind our plans.

And Ken, the market data March through June is up 6.5%.

July looks good.

So we feel pretty confident with it, as Marc said.

And I guess Marc, you made the comment around -- or it was Larry -- the $10 million related to the laundry.

I'm assuming that -- is that EBIT?

Or is that sales $10 million?

Ken, it's Marc.

I said significantly above $10 million, and it is EBIT.

Right, because $10 million would be $0.09.

Okay.

So that was -- good.

Now moving on to another thing, because there's such a rich quarter here.

The $0.50 hit in China, or related to trade inventory.

It I tax effect that $50 million, you get upwards of $40 million EBIT.

And my recollection was that you guys had North of $200 million of sales.

Could you correspond the high EBIT impact relative to the $200 million?

And why that was a surprise to you guys, if that wasn't in guidance already?

Original guidance was profitability in China.

And as Mike mentioned in the script, sales are down can significantly.

So it will be -- our base China business would split to a loss.

And Ken, there too, as Mike explained, the wild card in the whole China situation is the timing of the approvals.

There's many levels of approvals.

We got through most of them very quickly.

In fact, quicker than what we thought on our internal plan.

But we still have the -- as Mike talked -- the equivalent of the SEC approval, as well as the tax and all that.

The fact of the matter is, though, the -- our trade partners know or believe that ultimately this is going to work out, and they are preparing to do business with the new entity.

And the fact that they are preparing basically meant they didn't buy from us.

And they're -- and so we're basically, until we get this all combined, we're basically not selling hardly anything in China.

And I think we have new lines ready to go, and so on and so forth.

But again, we just need to get this done.

We're optimistic we will get it done soon, but there is a transition cost.

It was not forecastable, simply because of the variable of approval.

Okay.

Because it sounds -- it seems like the EBIT, relative to the sales at $200 million-ish, would apply a very high incremental EBIT versus --

Basically, you have all fixed cost, and factory under-absorption, not all is cash, because some of t is a burden and stuff, but yes.

Our whole fixed cost structure, which we are now reducing very aggressively.

But the fact of the matter is, we're not -- let's call it on the small existing Whirlpool business, we basically aren't selling anything.

Yes, you're taking a beating there.

I hope the guidance impact this year is a function of the upside of when you choose to give guidance for that acquisition.

And as Mike said, and I think you see on the one chart, it will be earnings and cash negative this year, as we absorb all these transition expenses.

And we do expect the approval this year, but we expected to be a nice contributor to our overall operations beginning next year.

Very good.

The next point.

Europe.

Marc, really appreciate the 7% to 8% margin in guidance directionally in year three.

My calculation is that is roughly $4.50 in EPS, compared to roughly $0.60 today from Europe, so it's obviously very meaningful.

Could you address, if any, the volume assumption that would underlie that?

Or is that simply consolidation of functions like distribution and overlay in production areas?

Ken, first of all, let me come back to [author] the process where we are.

We signed, but we have not completed, and there are several approval steps which we have to go through.

Just are -- please bear with us until we close the transaction, and then we will show you all the details about baseline assumption synergies, restructuring, industry forecast, breakdown and everything, including cash flows by year.

It is just premature and inappropriate, given the state of the process where we are to go into these details.

Understood.

Thank you very much, gentlemen.

Thank you, Ken.

Jay McCanless, Sterne Agee

Good morning, everyone.

First question I had is on the small appliances in North America.

Can you discuss what percentage that is of revenues now?

And give us some numbers around what kind of growth you saw year over year in that business?

It's Marc.

And first of all, we don't break down what we have [SDA] revenues from the rest of the business.

However, let me just make a broader comment.

We had, on small domestic appliances, if you look at the last three or four years, we had a really, really strong growth trajectory.

Very strong, clearly above market average, and clearly above the rest of the company.

We had this year in North America a little bit of setback, which is related to two specific trade partners who took inventory down.

There were some challenges.

Which I would say is not reflective of the overall long-term growth trend.

And it is also not reflective of what we see, for example, in Europe, where small domestic are still growing heavily.

Having said that, we have maybe one of the largest product launches ever in Q3 in small domestic appliances.

That's why I am very confident we will very quickly get back on the growth trajectory, but it was somewhat a negative for us in Q2.

Okay.

And then just one other question.

With the Maytag spin, I know that was a topic of conversation in the last conference call, and it sounds like a fairly large product launch coming for 3Q.

Directionally, what should we expect for North American operating margins?

Is there still going to be a lot of SG&A loaded into there?

If you could give us some guidance, I'd appreciate it.

It's Marc Bitzer again.

So first of al, on the product launches, the ones which I referred to earlier are multi-brand product launches.

So we basically -- it's particularly on top loaders, which is the bulk of our laundry business.

Where we have a number of launches, pretty much from September this year until Q1 next year.

It's almost an entire top loader line.

So that is obviously big and significant and impacts all our brands.

In addition, we had a number of dishwasher launches, which also continue to progress in some of our product categories.

So that is -- just given the size of our laundry business, is massive and impactful for North America business.

As you probably also know, we don't get margin guidance by region and by quarter.

I would just, in general terms phrase it, we have the North America 11 consecutive quarters on year-over-year market expansion, and I don't intend to break that string.

The only thing I would add to Marc is, if you look at our half point margin, and what we're guiding to for the full year, we do expect second half to have a nice margin increase.

And we'd expect that in all three of our largest regions around the world.

Great.

Thanks for taking my questions.

Thank you.

David MacGregor, Longbow Research

Good morning, everyone

Good morning, David.

Jeff, congratulations on Indesit.

Nice job there

Thanks, David.

I guess I wanted to get Mike to talk a little bit about Latin America.

And so far, the discussion has seemed to have been focusing around the impact of the World Cup, and not as much, perhaps, on the macro developments down there.

And -- so is it safe to assume that your view on the weakness down there is, it was largely associated with the World Cup?

And now that's behind us, we should begin reverting back to a more normal market condition?

Or is there a bigger macro condition down there that really is at play?

No, David, as I said in the script, we think that the underlying macro environment is actually pretty good.

When you look at unemployment rates, they are down.

Real wages are up about 3%.

Inflation is kind of in that band; it's around 6%.

So we're actually feeling pretty good about the macro environment.

There are some things, the World Cup was one.

There are some elections going on.

So you never know what short-term impacts those are going to have.

But largely, we think we're going to get back to a -- it is certainly a better growth environment and scenario.

And if you think about it, in the first quarter, the market was up 10%.

Then it was down 17% for the second quarter.

So what we're expecting is, the market to rebound, and certainly be flat to positive as we go forward.

And David I would add that, as we've talked in the past, there's really three pieces of our Latin America business.

There's Brazil appliances, there's the appliance businesses in all the other 30 markets surrounding Brazil, and there's our global compressor business.

And the fact of the matter is, our Brazil appliance business has been, even in this environment, performing extraordinarily well.

There was clearly a volume hit in Q2, which we fully expected.

But even with that, we -- our appliance business performed very well.

The real weaknesses have been more international, which -- Argentina, Venezuela et cetera.

Perhaps Columbia is the only strong market in the group.

Although we are now seeing that improve.

And the other part was global compressors, which -- where we have a big presence in China.

And with the very double-digit decline in the first half of the year in refrigeration, that impacted that.

So all the pieces are coming back.

But I think the one misconception is that our Brazil appliance business is weak, and it is not.

The market was weak, but our business was very strong.

Okay.

And then Jeff, if I could just get you to talk about some of the discussion that's in the public forum right now concerning General Electric's appliance business, and the possible sale of that business.

They are your largest competitor in the builder channel.

Maybe you could talk about the competitive strength or the competitive vulnerabilities of your builder channel business versus the change of ownership in that business?

And how does it influence your overall North American competitive situation?

David, I only know what I read about, as you do, so I can't really comment specifically on that situation.

I can comment on our business is, we feel very good about our position.

In the builder channel itself, we've made significant inroads over the last five or six years.

And those inroads start with the fact that we've got an outstanding brand portfolio.

We can meet the needs of virtually all price levels in the marketplace, which is a huge advantage.

So that's supported by, again the -- we -- even during the downturn, we invested heavily in new product innovation.

And then thirdly, we built -- that market has specific -- system requirements from ordering, delivering, servicing et cetera.

And we have built up our capabilities, which were massive investments over a long period of time.

And so we have those capabilities.

As does the competitor you talked about.

So anyway, we're growing, we're winning new customers.

It's a market that's going to continue to grow for some time.

And I don't see any change in the trend that we currently have.

Thanks very much, guys.

Thanks.

Megan McGrath, MKM Partners

Good morning.

Both of my questions have been answered, but just a couple quick follow-ups.

In Europe, does the pending Indesit acquisition put any of your recent cost-saving initiatives on hold until you get that completed?

Megan, it's Marc Bitzer.

No.

We already announced restructuring initiatives are fully on track, and will be implemented and executed.

So that is not impacted by Indesit.

Okay.

Great.

And then just one final follow-up on Latin America.

You have talked about raising prices to offset higher inflation.

It looks like that didn't occur in the second quarter.

Was that more of just a timing issue?

Or was the inflation more aggressive than you had initially anticipated?

Yes.

Megan, what we said, actually, at the end of the first quarter, is we had already announced these price increases, and that they would scale in, if you will, over the course of the year.

And so what we're expecting is to benefit more from the price increases in the third quarter and the fourth quarter, and as we go throughout the year.

But it's the same price increase that we took.

It's how we introduced and are realizing them.

Great.

Thanks so much.

Sam Darkatsh, Raymond James

Good morning, Jeff, Marc, Mike, Larry, how are you?

Good.

Most of my questions also have been asked and answered, but two also follow-up questions.

First, regarding, Larry, the $0.50 item, the trade inventory transition.

How much of that impact, that $0.50, is in the back half of the year versus was already recognized in the second quarter?

$15 million in Q2.

The balance would be in the back half.

And I -- should we -- I guess Mike, assume that this is a permanent impairment of your legacy Chinese business?

At some -- I don't imagine that business is coming back, even after the Hefei deal is consummated?

No.

What we were expecting is to actually resume and grow from the business.

And we -- as we introduce new model lines, we're certainly expecting not only to recover, but to grow, as we expand distribution into all the distribution outlets.

So no, it would not be permanent.

So what was the reasoning behind the huge takedown at retail?

I'm confused.

If you think about it, Hefei Sanyo is about 5 times our size.

And so what the trade knows is that there would be new model lines coming in.

There is probably some new terms.

And so what they're basically doing is protecting, at this point, if you will, their inventory.

They are making sure that they don't have too much, as they know these new lines are going to be introduced.

And so it's a one-time adjustment, but they will re-buy as we move forward and as the -- from the new combined entity, as the transaction is closed.

Okay.

I guess what was surprising about it is, that wouldn't have been fleshed out within the due diligence process that that type of scaled response would be a possibility.

Sam, this is Jeff.

As I said before, the variable is the timing of approval.

So that is a variable.

And we saw this in the second quarter, which was bigger and more than we previously thought.

But the fact of the matter is, it is still dependent upon the approval.

So that was hard to forecast.

Understood.

Last question.

The acquisitions that you're making, the two of them plus, I'm guessing, the future restructuring that is going to occur in order to integrate.

Does that free cash flow usage preclude any share repurchase activity this year or next?

No.

So we might expect share repurchase activity in the back half of the year once you generate the free cash?

What I would say, Sam, is we do intend to repurchase shares in the future.

And we continue to balance the various aspects of capital allocation we have.

But our intention would be in the future, yes, we would be repurchasing stock.

Okay.

Thank you both -- thank you all.

I appreciate it.

Eric Bosshard, Cleveland Research

Thanks.

Two things.

First of all, on the year performance versus the AHAM.

And I appreciate the distinction that it's a bit of apples versus oranges.

Could you just flush out a little further, in 1Q, I think your units were up meaningfully more than the AHAM industry number, up four versus one.

And then that reversed, obviously, this quarter, from 3 or 4 points ahead to 6 or 7 points behind.

Can you just explain a little more what changed so markedly between 1Q and 2Q in that apples versus oranges comparison?

Eric, it's Marc Bitzer again.

Just coming back to my earlier comments, I said that in Q2, if you look at the AHAM T7 shipments, we were mid-single digits.

So I didn't say we were down.

We actually were up mid-single digits.

Which also means the rest of the different to the overall unit shipments came from Canada, small domestic, and some of our businesses.

On the so -- which basically means, on our AHAM shipments, we pretty much held market share year over year, directionally.

In Q1, we picked up market share year over year, and now we held market share.

Right.

I guess -- I probably didn't make my question clear.

The non-T7 -- it looks like the performance was much weaker in 2Q than it was in 1Q.

That's what I am trying to figure out: what was so different in 2Q versus 1Q?

I think the biggest difference you would see year over year is Canada and small domestic appliances.

And is that confined to 2Q?

Or is that ongoing?

How should we think about that?

As I mentioned earlier, we're very confident in our small domestic appliance business for the back half of the year.

Just back with the number of product launches.

And the Canadian market is sluggish, and has been impacted by currency, therefore having significant price increases.

And that's got to settle its way through.

And then the second question.

Jeff, in Europe, the 7% to 8% margin target three years out is, I think, more than you have made in the past.

I'm just curious, as you look at both the market and the new business or platform you'll be operating there, what's different on either side of that that would allow this to make margins that you haven't achieved in the past?

First of all, we have achieved those in the past.

It's been, albeit, a while.

Second of all, there's some -- I think if you look at the one or two companies that have big scale, these are not new levels for the industry.

And Marc, you might want to comment on the parameters.

Eric, to the earlier comment, obviously, we will give you all the details post-closing.

And then you will understand the assumptions about scale, synergies, restructuring and baseline [resumptions].

But I really want to refer back to Jeff's earlier comment.

We made 7% plus margins in the 1990s.

We made 6% plus margin in 2000s, and that was with a lower scale position.

To Jeff's earlier point, there are players in Europe who make 8% or 9% operating margin on a sustained base.

So these are not out of the normal margins.

But obviously, the key will be for you to understand, post-closure, all the ingredients and how we come up with that plan.

Okay.

Thank you.

Okay.

That -- we're going to conclude the call here.

Thanks, everyone, for joining us today, and we look forward to speaking with you next time.

This concludes today's program.

You may disconnect at this time.

Thank you, and have a great day.