惠而浦 (WHR) 2014 Q3 法說會逐字稿

Good morning, and welcome to Whirlpool Corporation's third-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 third-quarter 2014 conference call.

Joining me today are Jeff Fettig, our Chairman and CEO; Vice Chairmen, Mike Todman and Marc Bitzer; as well as Larry Venturelli, our Chief Financial Officer.

Our remarks today track with the presentation available on the Investors 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.

Also note that disclosure on the expectations and financial impacts of our acquisitions of majority interests in Indesit and Hefei Sanyo is currently limited, due to the timing of the closing of these transactions.

Both Hefei Sanyo and Indesit are publicly traded companies with independent reporting requirements and regulations, and it is not yet appropriate for us to fully discuss their financial or operational results.

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

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

We also think 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 37, 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.

As you saw in our earnings release, we delivered a good quarter -- another good quarter of results with revenue growth, margin expansion, and record earnings.

Our ongoing business earnings per share were up 12% year over year.

These results were mainly driven by revenue growth, ongoing cost productivity, and the benefits of our cost and capacity initiatives.

We continued our investments in our brands and our products, and we're delivering a very strong cadence of new products, which will help our business in the fourth quarter and continue into next year.

In addition, we're very pleased to have closed our acquisitions by acquiring a majority interest of Indesit, in Europe, and Hefei Sanyo, in China.

Both of these acquisitions represent transformational opportunities to create value for our Company.

Overall, we are on track to deliver record operating profit and earnings per share this year, along with strong free cash flow.

And, based on the momentum we've had year to date, we remain confident in the performance of our business, and we have created multiple opportunities to drive profitable growth and value creation.

To fully communicate our comprehensive strategy for growth, and review our long-term value creation opportunities, we are hosting an investors day meeting on December 17 in Chicago.

Here, we expect to share our specific plans for both our new acquisitions, as well as our overall expectations for our future business performance.

Now, I'll turn to slide 6 and talk briefly about the third quarter.

As you can see, our revenues were up 4% versus last year, excluding currency impact, and our ongoing business earnings per share increased by 32% -- or, I'm sorry, $0.32, to a record level of $3.04, up 12% versus last year.

On slide 7, we've listed an update of our regional industry demand assumptions.

Overall, not a lot of change.

North America continues -- we continue to expect 5%-plus growth in the US market.

That's about where we've run year to date through September.

In Europe, we continue to expect the industry to be flat to up 2% for the full year as the region has spotty recovery across the different markets.

We are revising downward our Latin America full-year assumption to minus 4% to minus 5% for the full year.

This really reflects the weak regional demand that we've already seen year to date, although we have seen some modest improvement in the last couple of months.

Finally, our Asia industry forecast remains flat for the year, with China being modestly down and India up.

Our business performance has put us in a very strong position, which has enabled us to both strengthen returns to shareholders via higher dividends and in share repurchase, and, at the same time, enabled us to invest in value-creating acquisitions.

So, in total, we are on track for a record year of ongoing business operating performance, and we're continuing to build a great global platform for future growth and value creation.

With that, I'm going to turn it over to Marc Bitzer.

Marc?

Thanks, Jeff, and good morning, everyone.

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

Net sales of $2.8 billion for North America were up 6.3% compared to the prior year and up 6.9% excluding currency.

Consistent and disciplined execution of our actions resulted in the sixth consecutive quarter of year-over-year revenue growth.

Our ongoing business operating margins were 10.9% for the quarter, with a record operating profit of $304 million, compared to $289 million in the third quarter of 2013.

Operating margins were relatively flat in the quarter, as ongoing cost productivity and higher unit volumes were offset by the unfavorable impact of product transitions, higher material costs, and unfavorable currency.

Now, let me take a moment to talk about our expectations for full-year 2014, as shown on slide 10.

Overall, we're pleased with our record operating profit on a year-to-date basis.

US supply and demand continued to strengthen in the third quarter, and while we have experienced additional monthly and quarterly fluctuations, we expect the full-year industry to remain at its current year-to-date growth rate levels of up 5%.

We continue to see improvement in employment and consumer confidence, which bodes well for all aspects of demand in the US.

In addition, we expect positive net cost productivity from our ongoing programs to continue accelerating in the fourth quarter.

We're excited to launch many innovative new products in almost every core business product category.

In the second half of this year, we have product-line transitions in top-model refrigerators, freezers, top-load laundry, and dishwashers, which represent a significant portion of our overall US core business.

As expected and planned, these product-line transitions have unfavorable short-term impact on product mix and margins, as existing product lines were transitioned out to create space for the new product.

As the new products become available to consumers, who demand very innovative new features and energy efficiency, we expect revenues and margins to improve and working capital to return to more normalized levels.

Turning to slide 11, you can see an example of our product leadership in the laundry category.

The revolutionary new Whirlpool Cabrio washers and dryers have a fresh design, increased capacity, and intelligence that makes clothing care easier than ever.

And we're proud to bring the newest innovation dryer technology to the US market this quarter.

Our new Whirlpool HybridCare clothes dryer, with ventless hybrid heat-pump technology, an industry first in the US, is designed to regenerate energy during the drying cycle to reduce energy consumptions while providing dryer speed and performance flexibility.

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

Sales were $785 million, compared to $778 million in the prior year.

Excluding currency, sales increased 1.2% year over year.

Our cost and capacity-reduction initiative, combined with ongoing productivity programs and higher unit volumes, have offset unfavorable product price and mix, and currency, to deliver another quarter of expanded operating profit.

Operating profit was $9 million, and operating margins improved 110 base points.

Now, turning to slide 14.

While the market environment in the eurozone remains soft, we continue to see slow recovery and expect normal seasonality for the fourth quarter.

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

We continue to focus on our innovative new product launches and growth beyond our core.

As Jeff mentioned, we were extremely pleased to close the transactions to become majority owner of Indesit.

Turning to slide 15.

You can see that we have completed several of the key steps required to make the [transition] process.

To date, we've acquired a 60.4% stake in Indesit, which represents 66.8% of the voting stock.

At this time, court approval and the European commission's antitrust approval have been received.

And, in accordance with Italian law, we have filed our notice to initiate a mandatory tender offer for remainder of Indesit's outstanding shares, with intention to de-list the company between the fourth quarter of 2014 and the first quarter of 2015.

As Chris mentioned in the beginning of this call, our disclosures are limited at this time because Indesit is currently a publicly held company and is not yet fully owned subsidiary of Whirlpool.

Additionally, Indesit has not yet disclosed their third-quarter financials, so any disclosure on our part would not be appropriate.

For 2014, the impact of our majority interest on earnings in our ongoing business is negligible, as positive earnings will be partially offset by purchase-price accounting adjustments.

And, based on Indesit's historical cash flow patterns, we believe a cash flow impact in 2014 will be moderately positive.

After de-listing and integration, we continue to expect this transaction will be meaningful and accretive on an ongoing basis, starting 2015.

We expect efficiencies in R&D, capital spending, and value chain costs, as well as operational scale, with increased volume and the ability to more effectively integrate our product platforms across a larger European market position.

This acquisition represents a substantial change to our position in Europe and, combined with existing cost and capacity-reduction initiatives, creates a path to earnings growth and long-term shareholder value creation that is independent of market recovery.

We plan to share more details on these expected benefits during our investor day in December.

Turning to slide 16, you can see just one example of our innovative product development capabilities in Europe, the Bauknecht dishwasher, with PowerDry 3D airflow, delivers optimum drying performance with minimal energy consumption and spotless drying.

Now, I'd like to turn it over to Mike.

Thanks, Marc.

If you turn to slide 18, you'll see our Latin America results.

During the quarter, our Latin America region delivered record ongoing operating profit while operating in a challenging external environment, due to the end of the World Cup currency fluctuation and uncertainty around the recent government elections.

Sales for the quarter were $1.1 billion.

Despite industry volumes being down approximately 8%, our net sales, excluding currency and BEFIEX, increased approximately 3%, compared to the previous year.

We are benefiting from previously announced cost-based price increases, which have accelerated in the second half of the year, new product introductions, and improved mix in our appliance business.

As we look at profit for the region, our ongoing business operating profit for the quarter totaled a record $118 million, compared to $104 million in the prior-year period.

Improved product price and mix, and new product introductions, more than offset lower appliance demand and higher material cost.

GAAP operating profit totaled $118 million, compared to $133 million in the prior-year period, which included $29 million of BEFIEX tax credits.

Turning to slide 19 for our expectations of the region.

Our full-year industry assumption has been revised to down 4% to 5% for the year, reflecting lower short-term, although steadily improving, demand.

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

All of these signs are positive for appliance industry growth.

In fact, in the third quarter, became progressively stronger as Brazil's industry demand improved from down 13% in July to down 7% in September.

We also expect to continue outperforming the industry, and grow our revenue, given our strong market position, industry leading brands, and strong cadence of new product introductions.

The effect of our recently announced cost-based price increases, along with new product introductions, improved mix, and continued productivity will continue to help offset negative currency impacts and significant levels of inflation experienced throughout the year, as we continue to grow beyond our core and launch new models across all product lines with exciting innovation.

Turning to slide 20, we are highlighting growth beyond our core appliances with the first all-in-one beverage platform for our Latin American consumers, in which we deliver a completely new business model, including B.Blend as the first countertop appliance that can deliver hot, cold, and carbonated beverages.

And, in partnership with Bevyz, B.Blend uses a capsule-squeezing system to create automatic beverage dispensing and has 24 capsule options of beverages.

Now, turning to our third-quarter results in the Asia region, which are shown on slide 22.

And, to fully understand these results, it's important to note that there are two very different drivers.

One, our India business delivered strong results, with another quarter of revenue growth and margin expansion.

And, two, yet we continue to experience our short-term issues in our China business, related to the acquisition of Hefei Sanyo.

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

Similar to our comments in the second quarter, our trade customers continued to stock and sell well-known Hefei Sanyo-branded appliances but cut back on orders of our Whirlpool-branded products until the closure of the acquisition.

These trade customers were anticipating new product lines and, as a result of our integration with Hefei Sanyo -- and in order to avoid excess inventory -- they postponed ordering Whirlpool products.

As a result, our sales declined significantly in the quarter, impacting margins and production volumes, which contributed to the 20% revenue decline and $8-million operating loss in Asia for the third quarter.

Now that the acquisition has closed, we expect to return to far more positive revenue growth as we launch our new, integrated product lines that leverage the combined technology of both Whirlpool and Hefei Sanyo.

And, we will begin launching these new products in November.

With the transition issues largely behind us, we are confident that this acquisition will put us in a very strong position as we enter 2015.

Turning to slide 23, we continue to execute ongoing productivity actions and implement previously announced cost-based price increases across the region to offset inflation and currency, and to execute new product launches.

Lastly, we are prepared for a successful integration as we have become the majority shareholder of Hefei Sanyo and will leverage the combined company to accelerate our growth in the emerging Chinese market.

As shown on slide 24, we have received all of the approvals and completed all the steps required to acquire a 51% stake in Hefei Sanyo.

We have acquired Hefei Sanyo's expanded distribution of over 30,000 distribution points, competitive products, and significant capacity in a complementary low-cost manufacturing base.

Combined with a proven management team that has consistently delivered growth and results that, on average, deliver 7% to 8% operating profit margins, we have created an outstanding platform for growth in China.

As we move forward with the integration process, transition costs will be behind us, and we will focus on driving sales growth and cost synergies to deliver profitable growth and reinvest in our business.

At a very high level, our combined China business with this acquisition would be over $1 billion in sales, and our earnings accretion would be approximately $0.80 to $0.90 per share, compared to a 2014 baseline.

That accretion is based purely on the recovery of our base China sales, added together with our portion of Hefei Sanyo's 2013 operating performance.

Therefore, once integrated, we expect this transaction will be meaningfully accretive to 2015 and beyond.

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

Thanks, Mike, and good morning, everyone.

Let me start on slide 27.

Our full-year ongoing business EPS guidance remains in the range of $11.50 to $12, which represents a 15% to 20% improvement versus a year ago.

The business is performing very well, and we continue to navigate effectively through global volatility and demand, currencies, and material costs.

Given the accelerated pace we have been on to close both the acquisitions, we are increasing acquisition-related costs during the fourth quarter and are adjusting GAAP guidance to a range of $9.40 to $9.90 per share.

This change reflects incremental investment expenses and purchase-price accounting adjustments related to the acquisitions, as well as additional restructuring charges primarily related to integration activities.

These charges will enable us to accelerate the benefits of the acquisition.

A reconciliation of these adjustments to GAAP EPS can be found in the Appendix, on slide 44.

It's important to note that all changes to our original guidance have been related to upfront costs to acquire both Hefei and Indesit.

Our base business continues to perform in line with our original guidance for the year.

Our expectations for 2014 free cash flow of $650 million to $700 million have increased from previous guidance due to our strong underlying operating performance and expected incremental cash flow from the recently acquired companies.

As I speak to the financial results on slides 28 through 30, you will see how we continued to expand our ongoing business operating margin in the first nine months of this year and expect to deliver another balanced approach towards margin expansion.

Year to date, price mix is up 0.5 point, and we expect to realize 0.5 point of margin for the year, driven by our previously announced cost-based 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 nine months of 2014, our cost productivity more than offset material cost inflation of approximately $140 million to deliver a positive 0.25 point of margin expansion.

And, our 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 it is expected to deliver a positive 0.5 point of margin for 2014.

Our planned increases in marketing, technology, product investments, and the impact of currency reduced margins by 0.75 point, year to date, which is in line with the full-year guidance.

Given a combined impact from initially consolidating the acquisitions and required purchase accounting adjustments, we expect that acquisition margins in the near term will be slightly dilutive by about 0.5 point.

More importantly, as we integrate the businesses and realize synergies, we expect the impact of both businesses to be accretive to our margins.

As a result, we are expecting full-year operating margins of approximately 7.5%.

Excluding the impact of acquisitions, we are firmly on track with our previous guidance of 8% margins.

Ongoing business operating profit for the third quarter reflects revenue growth, ongoing cost productivity, and the benefits of cost and capacity-reduction initiatives.

Lower volumes, largely attributable to demand softness in Brazil and China, higher material costs, and unfavorable currency negatively impacted results.

As a note, third-quarter gross margins were down about 1 point versus the prior year on a GAAP basis.

This drop was driven primarily by unfavorable currency and nonrecurring BEFIEX tax credits from last year.

We continue to expect a strong finish to the year, with our new product launches, a ramp-up in productivity, and Latin America price increases taking full effect.

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

As we turn to slide 31, we have a few updates on liquidity.

Our balance sheet remains strong, and our credit ratings were reaffirmed, post-acquisitions.

We recently renegotiated and increased our credit facilities.

We will fund our acquisitions with approximately $500 million in cash and $1.5 billion in debt.

During 2016, we expect to return to pre-acquisition debt metrics.

As we continue to improve margins and grow revenues, our plans to deploy the cash generated from our business are solid, as shown on slide 32.

We are funding the business for growth of significant product introductions.

Earlier this year, our Board increased quarterly dividends on the Company's common stock and authorized a new $500-million share repurchase program.

As reference, since resuming our share repurchase program in 2013, we have repurchased approximately $375 million in stock.

Finally, as previously mentioned, we are spending approximately $2 billion to fund the acquisitions of Hefei Sanyo and Indesit.

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

Let me take just a few minutes to walk you through our cash flow assumptions and a brief update on restructuring.

We historically use cash in the first half of the year and generate cash in the second half -- this year is no different.

In the fourth quarter, we expect to generate cash through strong cash earnings and working capital improvements.

As for restructuring, we have incurred approximately $100 million for charges, year to date.

For the full-year 2014, we expect approximately $150 million of charges and $80 million of ongoing benefits.

This reflects an increase of $50 million in charges from our previous guidance, largely associated with our acquisitions of majority interests in Hefei Sanyo and Indesit.

We expect to update our forward view of these items and share details of our long-term value creation strategy, as Jeff mentioned, with you at our investor day on December 17 in Chicago.

Due to the expected demand for the event, our investor day will be webcast for those investors and analysts who are not able to attend in person.

Those webcast details will be provided in early December.

Now, I'll turn it back over to Jeff.

Now turn to slide 34, where I'll summarize our expectations for the year.

Again, we delivered another quarter of revenue growth, margin expansion that resulted in record earnings.

We are continuing to invest in our brands and have a very strong lineup of innovative products coming to market in the fourth quarter and into 2015.

So, we feel we're very well positioned to capitalize on improving global demand trends.

As I mentioned, our acquisitions provide us with a truly transformational growth opportunity to create significant value through successful integrations.

So, overall, we remain confident in our ability to deliver a full-year record year of operating performance in 2014, with our operating margins in line with our stated goal of 8%, excluding the impact of acquisitions.

I would point out, our 8% goal is a milestone.

It's not a destination for us.

And, if you turn to slide 35, this frames our comprehensive strategy for growth that we've now created where we believe we can grow our revenues, expand our margins, and create significant shareholder value.

We are growing geographically through our acquisitions in Europe and China, as well as expanding our emerging markets exposure in those markets where we see appliance growth opportunities and favorable demographics.

Our North America region is poised for multiple years of growth through a strong replacement cycle, continued improvements in housing, and improving discretionary demand.

And, from a product and brand perspective, we have a very strong cadence of innovative products coming to the market, which will benefit customers around the world.

We believe these investments will deliver both revenue growth and margin expansion.

And, finally, we have opportunities to fully leverage our global fixed-cost structure and drive ongoing cost productivity around the world.

This will ensure our competitive position and continue to help improve our margins.

So, we believe that these multiple paths for profitable growth -- geographical expansion, brand and product innovation, and cost structure improvements -- provide us with an outstanding opportunity to achieve our next level of performance, and in doing so, we'll deliver strong value creation for our shareholders.

So, we do look forward to sharing in more detail these plans at our investor day in December.

With that, I'd like to end our formal remarks, and we'll now open it up for questions.

(Operator Instructions)

We'll go first to Ken Zener with KeyBanc Capital.

Please go ahead.

Your line is open.

Good morning, gentlemen.

Good morning, Ken.

So, Latin America did far better than I think most people expected, in line with what you were talking about.

You talked about so much good news.

I'm going to try to pick a hole in the North America margins here.

The lower incremental margins year-over-year, is that attributable to Maytag?

Obviously 11%, nearly 11%, it's a very good margin, but in terms of the incremental, did that have any particular drags in it related to product introductions, marketing, or anything that you would like to call out versus the longer term 15% incremental EBIT?

Ken, it's Marc Bitzer.

First of all, thanks for picking on North America (laughter).

I know (laughter).

But, apart from that, as you highlight, first of all, 11% operating margins in a historic context, and also when you look at our competitor results, is nothing I'm going to apologize for.

Having said that, at the same time, and we alluded in the script a little bit, I think there's always a couple items in every quarter, but I think what was this quarter particularly strong was the amount of product transitions.

And, to put that in context, product transitions are part of our life.

We typically transition every year about 20% to 30% of our products.

If you know that in this quarter we transitioned the entire top line refrigerators, the entire freezers, the entire top loader line, you know this is well, well beyond normal.

Transition costs in both sides of the equation may cost in manufacturing efficiency because you're ramping down, ramping up, even more so, it costs you basing on pricing because you have to discount the end of a line to create new space.

So, if there was one factor to highlight, I think it's the unusual amount of product transitions in Q3 which also is by and large behind us.

There's some carryover in Q4, but it's by and large behind us.

And, I guess is there a way for you to quantify a normal product transition in terms of drag so we can understand the impact on the third quarter?

No, Ken, let me just maybe rephrase the answer slightly different.

First of all it has been unusually high, and it had a material impact.

Having said that, let me answer the other way around.

The 11% in our view does not mark at all the ceiling of our North American margins.

Okay.

Great.

Do appreciate your comments on the Hefei Sanyo.

I think this is the first time you've talked about the earnings accretion.

So, the $0.80 to $0.90 that was discussed off of -- on your business when it's fully integrated, I believe that -- and if you could clarify.

I believe that accounts for roughly $0.50 of drag in 2014.

So, the guidance for Hefei Sanyo would be in the $0.30 to $0.40 range.

If that's true?

And then, second, because you now own it, how should we think about the fourth-quarter sales impact?

You talked about a big drag in the third quarter and purchase accounting.

That's getting pushed below the line.

How should we think about the operational EBIT that you're guiding to?

Thank you.

Okay.

Well, Ken, first of all, I think your math is right.

It was about $0.50 of drag.

And then, all we've done is add the $0.30 to $0.40 based on their performance this year.

Okay?

So, that really doesn't speak to what our expectations are moving forward.

In terms of sales improvement in the fourth quarter, clearly we expect to see a good increase in sales as we begin to floor the new product lines throughout distribution.

I'm not going to give a specific guidance on the EBIT number, but yes, you're right.

There will be PPA adjustment, but all of that is factored into our overall view and outlook.

Ken, this is Jeff.

Again, we'd like to be -- we just closed Friday on Hefei and basically about 10 days ago on Indesit.

We obviously know the business.

We've modeled the businesses, so on, so forth.

I would just say there's a lot of moving parts at this point in time that -- everywhere from their run rates, our run rates, and so on.

Both businesses continue to perform in line with what they've seen which are both publicly -- public information.

There is accounting activities that will be impacted.

So, our overall guidance at this point as it relates to the fourth quarter is largely negligible on the earnings side.

It could be a little up, could be a little down, we don't really know right now.

We do think on the cash side, it will be marginally up.

So, I wouldn't worry so much about fourth quarter.

I think --

Okay.

We'll get all that behind us, and then when we talk about next year, we can talk about how these pieces really -- what I would call the expanded whirlpool will look like by region.

And, if I could just ask one more.

Brazil, the outperformance, given I believe investors' baseline because you talked about having record EBIT there, and I know that there were some doubters.

Can you discuss why that was so strong?

Is it just that the pricing you were able to get really offset obviously cost-based inflation -- or currency inflation?

But, why are the margins -- was there something really unique in the quarter?

Because it was a very strong performance, obviously given the volume there.

Just a little more clarity since that was one of the main concerns for investors.

Thank you very much.

Thanks.

There wasn't, Ken, just to answer your question, anything particularly unique.

We have three factors.

One was the cost-based price increases, which I think I commented in the second quarter, would begin to take full effect as we went throughout the year.

Second is we've had and continue to have new products that we're introducing into the marketplace, and those products that we introduced generally have a higher ASV and a higher margin associated with them.

And then, thirdly, that's also driven mix.

So, it's really all those three factors that have -- that drove the performance of Latin America.

I would just add, it's pretty much in line with what we expected and we talked about in our Q2 call, that we were taking strong actions to offset inflation to deal with currency devaluation and so on.

But, to Mike's point, the other part was we've been investing very strongly in our product innovation and product leadership there.

So, a lot of these new products really have helped the mix along with the price increase and help us more than offset this down market.

Thank you.

Next question.

We'll take our next question from David MacGregor with Longbow Research.

Please go ahead.

Your line is open.

David MacGregor, your line is open.

Good morning, everyone.

Good morning.

I guess I wanted to ask you just about the non-core business you like to talk about and the adjacency's business and just how that's setting up for the fourth quarter?

I know it's a seasonal business, fourth quarter is very important.

How is your offering versus last year?

Can you talk about any gains in listings, and how do you quantify that for us?

David, this is Jeff.

Let me just talk globally.

We've got a number of things that are reflected in really regions around the world, but if I take our KitchenAid small domestic appliance business globally, it's growing very nicely.

I think you've seen a lot of the new product innovation, new launches that are going on.

Right now, they are on a limited basis on distribution, but that business going strong, going well.

Our water business worldwide is good, very good in many parts of the world.

Water/beverage, you saw the new B.Blend introduction in Brazil which is the world's first beverage product.

That's just now starting up.

So, as I look at these businesses around the world, all continue to improve.

We have some businesses growing double-digit, some just starting up.

You've probably seen our new Swash launch here starting in the United States, that really started in September, and started shipments in October.

So, we've got a combination of big businesses growing high-single or double digits, and a lot of new seeds that are just taking hold and beginning to grow.

But, in total, these businesses represent a little over 20% of our business, and as I have said before, they have significantly higher margins than what we call, if you will, our traditional core.

So, I think we'll have a good fourth quarter.

Question on Latin America, just to follow up on the previous discussion.

Seems like volumes are getting better according to Michael's comments, and I guess the question is in a scenario where volumes recover, can you continue to maintain the pricing?

Or, does competitive forces begin to erode that?

David, I won't comment specifically on that.

I think what we've done is executed our plan, but what we're seeing in the market is what we expected.

It's still a little volatile, but we're performing the way we expect with new products, and we're comfortable where we are in terms of our execution of the prices.

David, we talked about Brazil, but I'd say all of Latin America, and I'd say other emerging markets like Russia, Turkey, India, et cetera, where we have a lot of dynamics going on at all times.

We have rapid demand changes, rapid currency changes, high levels at times of inflation, and so on and so forth.

And, what we feel good in our business is we've got very experienced leaders in each and every one of these markets.

There's no one way to manage through this.

You have to try to stay ahead of the change curve, and so far, we've been doing a pretty good job of that this year.

So, Brazil, we're going to have -- despite the environment, we're going to have a record year in Brazil.

The rest of Latin America, we're off to a slow start in the beginning, but we're tracking very well throughout Latin America.

So, it's not just one thing.

It's managing all this volatility together, and fortunately, we have the size and scope of the business that we can lead these changes in the marketplace.

That's what we've been doing.

We'll take our next question from Denise Chai with Bank of America.

Please go ahead.

Your line is open.

Great.

Thank you.

Just want to ask first on guidance.

You said that in the fourth quarter given the acquisitions, the impact from acquisitions could be up, or it could be down.

Does your guidance, which you've maintained at $11.50 to $12, include any impact from acquisitions?

What we said, Denise, was the current ongoing guidance -- we said that the acquisitions would be neutral to the earnings.

Okay.

And, that's just obviously due to the fact that we haven't had the businesses for the full quarter.

We haven't begun integrating the businesses.

We have some purchase accounting that we're factoring into the business, and then we're absorbing a little bit more interest.

So, net-net, essentially, it will be neutral.

Okay.

And then, in terms of the raise in your free cash flow guidance, how much of that can we attribute to Indesit?

I would say the acquisitions in total, and I would just take into consideration the fact that we have some higher acquisition-related costs.

We're doing a little bit more restructuring.

But, in general, I'd say around -- in that $100 million range.

Okay.

Combined acquisitions.

Okay.

So, in the slides, you said that Indesit was going to be a -- it would contribute positively to free cash flow.

We are.

I'm saying the combined businesses will contribute.

The acquired businesses will contribute about -- approximately $100 million.

Okay.

Okay.

Got it.

Could you talk a little bit about the change in working capital you saw this quarter.

Was it really just related to new product transitions?

Or, was there something seasonal or perhaps related?

I'd say our working capital year-over-year is up marginally -- I think $35 million, $40 million on a year-over-year basis.

Historically, what we do -- you see, due to seasonality of our business, working capital will come down in the fourth quarter.

We'd estimate that to probably in the range of $700 million, and we'll generate essentially the remainder of the cash through cash earnings.

We'll take our next question from Jay McCanless with Sterne Agee.

Please go ahead.

Your line is open.

Thanks for taking my questions.

First question I had is on raw materials.

Can you comment on what specific commodities caused the cost pressure this quarter?

And, am I reading the guidance correctly that you expect some of that to abate in 4Q?

Yes, Jay.

We've got a couple things.

One, in the currency markets, we've had raw material increases across the board all year.

And, that would be Latin America and India and places like that.

But, as we highlighted before, we were particularly negatively impacted in some regional markets.

Probably the biggest single one is steel in the US, which is higher than we expected, and everything else is pretty much as we expected.

In terms of reductions, there's clearly been a big change in the external environment over the last 30 days, whether it be oil or input costs or base metals or so on.

We'll have to see what happens.

We don't have a new forecast for the year, but currently the external environment from just a pure raw materials cost appears to be turning downward, which if that holds, that ought to translate into lower material costs.

Thank you.

And then, the second question I had was looking at promotion.

You said that the transition to the new lines looked like it was a drag on gross margin this quarter.

That should be done with.

How much are you thinking about increasing promotions?

Or, adding some SG&A to really push for the holiday season and push some of these new brands?

And, are you expecting the spend for that to be up on a year-over-year basis?

Assuming that you've got more product launches, et cetera.

But, on an apples-to-apples basis, do you expect the spend is going to be up for the promotional activities going into the holiday season?

Jay, it's Marc Bitzer.

Let me try to answer this one.

As we indicated in earlier calls, we will not give forward-looking statements on promotional pricing strategies.

However, let me just comment on Q3 and our past behavior.

And, Q3, I want to underline is consistent with our past behaviors on promotion.

I think we've got to differentiate between promotions on one side, and product transitions on the other side.

Promotions we always said we will participate when we see value creation opportunity for us and the consumer, and that policy hasn't changed in Q3.

What is different in Q3 is the unusually high amount of product transitions.

Whenever you do product transitions, it's a closeout where you just need to put certain [message] in market in order to free up the space.

That has been higher than normal.

Higher than a normal quarter in a normal year.

But, that is largely behind us.

Okay.

Great.

Thanks for taking my question.

We'll take our next question from Michael Rehaut from JPMorgan.

Please go ahead.

Your line is open.

Thanks.

Good morning, everyone.

Good morning.

First question on -- just wanted to circle back to Latin America, with the good performance there, the strong performance there.

Just trying to get a sense for the ongoing timing with the cost-based price increases against currency and inflation?

And, given how currency has moved throughout the last two, three months, just wanted to get a sense to your best estimate on the current level of profitability here, a little bit over 10%?

Given where currency and perhaps also inflation has moved during the quarter, is this number sustainable near term?

Or, would there be additional actions required to allow this level to be maintained?

I think, Michael, probably the best way to answer that question is go back to beginning of the year when we saw what the environment was.

We took appropriate actions.

And, I talked earlier in the year that we took some cost-based price increases.

Actually, I think we took two price increases, but it's more than that.

We're looking at what's going on in the environment all the time.

We're launching new products all the time.

We're looking at how best we can manage our mix and improve our mix during the course of time.

So, I do think we are at margin levels that we can sustain.

So, that -- and I think we just do what we need to do in terms of what we execute in the market.

There's nothing that we've seen that's unexpected.

So, we're basically operating in an environment that we expect and executing what we need to deliver at these operating margin levels.

So, in other words, Mike, given what we've seen over the last month or two, you wouldn't expect to see an incremental negative impact on margins, all else equal?

Well, I don't expect to see that, no.

Okay.

The only thing I would add, Michael, is the price increases were taken throughout the third quarter, and there will be additional benefit in the fourth quarter.

That's helpful.

Thanks, Larry.

And, I guess just a second question, going back to North America for a moment.

I know there has been a few questions around that potential impact of the product transitions, and I guess we're not going to get necessarily a quantifiable answer.

But, just looking forward, certainly it appears that you're saying that there would be some type of drag that would alleviate in the 4Q.

And, if you can't necessarily break that out from a numerical aspect, was just thinking about longer term in this business, and I think in general perhaps you've talked about an incremental margin of 20%, 25% on a consolidated basis.

And, certainly that would apply to North America.

Is that still the right way to think about this business as you grow it going forward?

It's Marc Bitzer.

Let me try to take a shot at your question.

First of all, no, we're not going to quantify the expense transitions and what it means for Q4.

But again, keep in mind there's two aspects to this one.

We had in Q3 inefficiencies on both a cost side and the pricing sides.

Going forward, first of all, that's going to be absent largely.

Second of all, of course, when we introduce a product like the new top load washer, which we believe is absolutely industry leading, we also expect higher sales and higher margin realization.

Otherwise, we wouldn't introduce new products.

We feel extremely confident about these new products which we're introducing.

That on its own should help us on posting even stronger margins going forward.

Great.

Thank you.

We'll take our next question from Megan McGrath with MKM Partners LLC.

Please go ahead, your line is open.

Good morning, thanks.

Just wanted to switch to Asia a little bit.

Your inventory reduction issues are happening at the same time where there's some concern over slowing growth.

So, do you have any sense, excluding the inventory pulldown, what the overall market for appliances is doing in China right now?

Yes.

The overall market in appliances was slightly down year-to-date, Megan, 1% to 2%.

It's not significant, and we expect that the market will be somewhere in that range through the course of the year.

Okay.

Great.

Thanks.

That's helpful.

And then, when I think about this -- I know you'll give us more detail in mid-December, but if I think about that business moving forward, you just closed the acquisition.

Should we expect that you'll see a little bit more of that inventory pulldown this quarter?

Or, do you think that's pretty much 100% done?

I think, Megan, that's pretty much done.

As I mentioned, we are launching new products in the Whirlpool brand, starting in November.

So we've got to get those products floored.

We've got to get continue vein the inventory out there.

So, I'm expecting to see some improvement as we move forward from now.

Okay.

Great.

Thank you very much.

We'll take our next question from Tom Mahoney with Cleveland Research.

Please go ahead.

Your line is open.

Hello.

Tom on for Eric Bosshard today.

Good morning.

I wanted to know, as you look at Latin America and the units down there, it sounded like the market was maybe a little better than your unit shipments down there?

What were the moving pieces within that in the quarter?

Tom, we did lose a little bit of market share in the quarter, not unexpected.

We expected it.

Year-to-date, our share is flat, and we expect that we'll begin to recover that over the course of the remainder of the year.

So, we're actually feeling pretty good about where we're positioned.

Okay.

And then, you talked about September -- or exiting the third quarter down 7% year-over-year.

What are you expecting for growth as you move through 4Q and into 2015?

Well, I won't give 2015 at this point.

But, we are expecting the market still to be down in the fourth quarter and that still achieves the guidance that we get.

Thanks.

Other questions?

We'll take our next question from Denise Chai with Bank of America.

Please go ahead.

Your line is open.

Thank you.

Given that the China market is still a little bit on the soft side, could you comment, please, on your global compressor business, and how that performed during the quarter?

Yes, Denise.

Our global compressor business, actually, our revenues were up in the third quarter, despite the soft market.

But, if you remember, we're comping against a quarter where last year there was a port closure.

So, I would say overall if you normalize, the compressor sales are slightly down in total from an industry perspective.

Okay.

Thanks.

Just two more quick questions.

Could you please give us the gross margin by region?

And then, just looking at your corporate cost line, so far this year, it has been running at $47 million, $48 million a quarter.

This quarter was only $36 million.

Is this lower level sustainable, or was there something one-off?

I think we provide the operating profit by region.

The Q will be out later today, and I think you'll have that, Denise.

You can take a look at that.

Your question was on corporate's -- the corporate line?

Yes.

Figure a couple hundred million of what we call corporate administrative cost, and then you'll have $150 million in restructuring that goes into that line item.

Okay.

Great.

Thank you.

Other questions?

At this time, I'd like to turn the call back to our speakers for closing remarks.

Well listen, being no more questions, again, we appreciate your interest in this call.

Again, we're really -- we're pleased so far with the performance we've delivered this year, and we look forward to updating you on our longer term view of our business as we mentioned on December 17.

Thank you very much.

This concludes today's program.

You may disconnect at this time.

Thank you and have a great day.