Whirlpool Corporation (WHR) Q3 2007 Earnings Call Transcript

Larry Venturelli - Vice Presidentof Investor Relations Jeff Fettig - Chairman and ChiefExecutive Officer Mike Todman - President of NorthAmerican Division Roy Templin - Chief FinancialOfficer

Sam Darkatsh - Raymond James Michael Rehaut – JP Morgan David MacGregor - Longbow Research Ike Borcia - Morgan Keegan Eric Bosshard - ClevelandResearch Jeff Sprague - Citigroup

Good day, everyone and welcome to today's Whirlpool Corporation ThirdQuarter 2007 Earnings Release Conference Call. Today's call is being recorded.For opening remarks and introductions, I would now like to turn the call overto the Vice President of Investor Relations, Larry Venturelli. Please go ahead.

Thank you. Good morning, and welcometo our third quarter earnings conference call. Our opening remarks will referto a slide presentation, which is available on our investor web page. Duringthe call, we will be making forward looking statements to assist you in yourunderstanding of Whirlpool's future expectations. Our actual results could differ materially from these statements due to manyfactors discussed in our latest 10-K and 10-Q. During the call, we will be making comments onpre-cash flow and non-GAAP measure. Listeners are directed to slide 41 foradditional disclosures regarding this item. Now, I’d like to turn the call over to our Chairman and Chief ExecutiveOfficer, Jeff Fettig for his opening remarks.

Thank you. Good morning, everyone,and thank you for joining us today. Asyou've probably seen by now earlier this morning, we released our financialresults for the third quarter. Those ofyou following the slide presentations, these results are summarized on slidestwo and three. For the quarter, earnings from continuing operations came in at $175million, or $2.20 per diluted share. This was up approximately 31% from the$134 million or $1.68 per share recorded in the same period last year. Net sales were $4.8 billion, which wereimpacted by a weak U.S.market, and remained unchanged from last year's record levels. The increase in earnings for the quarterreflect several items including strong performance in our internationalbusinesses, continued strong efficiency benefits associated with the Maytagintegration, productivity improvement combined with very strong cost controlsand lower global taxes. Our results were also negatively impacted by unfavorable currency and anoverall very challenging third quarter in our North Americabusiness. There in North America our results were negatively affected by significantlyhigher material and oil related costs, lower industry shipments in the United States, and higher than normal new productintroduction costs and promotional expenses. As you've seen, this has been a very challenging year for the U.S.appliance industry for a number of reasons. On slide four, you can see that since thesecond half of 2004 through our forecast in 2007, we as a company globally willhave absorbed about $1.7 billion in higher material and oil-related costs.About $570 million of that will be incurred during 2007. And within that, our North Americabusiness represents about 70% of those costs or $400 million. Below this chart on slide four, you will see the U.S.industry's T7 volume over the last 21 years, and there are a couple ofobservations that I’d like to point out. First, you'll note that our current 2007 U.S.industry estimate is now, should be down approximately 4%. That's likely to be the largest decline thatwe've seen in the past 21 years. Secondly, you’ll note that the steep year over year decline in the U.S.appliance industry volume are not common. In fact, the appliance industry in the U.S.is a largely replacement market and, on average, grows between 2.5% and 3% ayear. The industry has only been downmore than 2.5% in two of the last 21 years, one year being 1989 and the otherbeing 2007. This is the first year ever where we've seen a significant decline in demandin the U.S. andsignificant raw material inflation. Inessence, we've had both a demand decline and cost spike at the same time.Globally we've been able to effectively manage these challenges by leveragingour global footprint in the mix of our business to deal with this negativeenvironment and stay on track to deliver a record year of revenues, earningsand strong pre cash flow. I’d like to update you on our share repurchase program, which we announcedin April, we would resume. During thethird quarter we repurchased about $150 million stock in the open market. Todaywe have approximately $214 million remains open under our $500 million sharerepurchase program. Our guidance for 2007 is unchanged and shown on slide five; we continue toexpect earnings for the full-year of $8 to $8.50 per share and pre cash flow tobe in the $600 to $650 million range. Joining me today on the call is Mike Todman, President of our North Americanbusiness, and Roy Templin, our CFO. Atthis point in time, I would like to turn it over to Mike to discuss the North America business.

Thanks, Jeff. And good morning,everyone. Let me start by giving myperspective on North America's performance during thequarter. As you will see on slide six,third quarter revenue $2.9 billion was down about 8% versus the previous year. The decline was primarily due to weak U.S.industry demand, which was down approximately 5% for the quarter and year to dateperiod respectively, as well as lower OEM shipments. Operating profit of $132 million declined 24%from the previous year primarily due to the continuation of significantmaterial and oil-related cost increases for base metals, component parts, steeland fuel, as well as lower than expected U.S. demand. Our margins were also negatively impacted by increased brand merchandisingsupport, to support new product transitions, as well as increased supportduring a very challenging industry demand environment in the U.S. Continued strong acquisition efficiencies partially offset the higher costs. Overall, we were disappointed with ouroperating results during the quarter. Weare clearly focused on actions, which we expect would significantly improve ourmargin in the fourth quarter and 2008. Weexpect the combination of improved industry demand, improved product mix,continued strong acquisition efficiencies, execution of our Maytag growthplans, higher levels of productivity and new product introductions to drivesignificant financial improvement in the fourth quarter. Industry shipment trends are expected to improve during the fourth quarterfollowing five consecutive quarters of year over year declines. You will recall that fourth quarter industryvolume was down approximately 8% last year. We expect the current year fourth quarter tobe up about 1.5% as we begin to go up against easier comps. Based on current economic conditions, the company now expects full year U.S.industry unit shipments to decline approximately 4%. We continue to introduce new innovation to themarketplace. The newest example of ourconsumer relevant product innovation is the Whirlpool Steam Washer and Dryer,an industry first shown on slide seven. Thatdebuted on the sales floors this month. Here, you see the products in our New Aspen Green color. In 2008 we willintroduce a new color palate across our entire laundry line. We've already introduced the steam option inother product categories across our brands globally. In addition to laundry, steam options can befound in our dishwasher, another industry first, and in cooking products. We are the global appliance leader in steam,and that is another example of how we are leveraging our innovation globally. The strength in our appliance innovation has created opportunities to expandinto adjacent businesses. In September,Whirlpool Corporation launched Affresh, a washer cleaner tablet shown on slideeight. These tablets remove odor-causingresidues in washing machines. This type of adjacent business is a source ofongoing growth. I’d like to make a few comments regarding the integration status and growthplans for the Maytag business. Effectivein the fourth quarter, we've completed the remaining laundry manufacturingintegration with the production exit from the Newton, Iowa facility. To date, the integration and efficiencyrealization has gone well, and we believe we have effectively laid thefoundation to address Maytag's cost structure. Acquisition efficiencies from the combined company have been robust andcontinue to track above our initial plans. With the integration activity largely behindus, we are now in the midst of a product innovation and growth plan, which arebeing supported by additional brand investment. Understanding the consumer is vital to our strategy as demonstrated on slidenine. The Maytag consumer base is large,established and loyal. Today, more than30% of U.S.households currently own at least one Maytag appliance, providing tremendousopportunity for future purchases. TheMaytag consumer demands durable and reliable products, which we are now able todeliver. During the third quarter, we introduced new Maytag and Jenn-Air products asshown on slides 10 through 15. This cadenceof new innovative product introductions will continue through 2008. Slide 16 shows expected Maytag productlaunches in 2008. You will see significant product differentiation and innovation launchesover the next several quarters, which clearly support the Maytag positioning ofdependability and durability. New top loadand front load Maytag laundry pairs will be launched in the second and thirdquarters of 2008. A new visual brand language for free-standing ranges goes into productionduring the third quarter of 2008. Approximately10% of the Maytag dishwasher line is new with 30% turned by the end of thefirst quarter of 2008. And as forrefrigeration, the transition of all side by sides and bottom out will besubstantially complete by the end of 2008. This commitment to brand investment, innovation and growth has enabled us toincrease our distribution during the first three quarters of this year andpositions us to grow the share of our Maytag brands beginning in the fourthquarter of 2007 and into 2008. And now I would like to turn the call back over to Jeff.

I'm going to turn to slide 17, where we’ll talk about our internationalbusinesses and you can see that we made significant progress over the past fewyears, improving our financial performance in all international markets. We've essentially doubled our operating profit margins from about 4% in 2004to over 8% this year. Year to date inour international businesses, we've increased revenues by about 19%, and weexpect this growth to continue for the balance of this year. I’ll now turn to our European business on slide 18, where revenue reached arecord level of $1 billion in revenues during the quarter, increasing 12% forthe prior year driven by sales of local brand and new innovative productofferings that we brought to the marketplace. And local currency sales increased by about 3%. Year over year unitshipments in the region exceeded industry demand during the quarter, which weestimated to have come in at 2%. Ourthird quarter operating profit increased from $57 million to $84 million duringthe period. The current quarter includeda $32 million asset sales gain compared to $8 million gain reported in theprior year. Our results also reflect productivity improvements, the benefits from hardvolume and improved mix. Partially offsetting the improved operating profitperformance was the impact of significantly higher material costs, which weabsorbed during the quarter. In Europe, our innovation teams remain strong, and wecontinue to leverage our global operating platform and innovation pipeline. You can see a couple of these exciting newinnovations we bring into the market on slides 19 and 20. In Europe, we continueto expect full year 2007 industry unit shipments to increase by 2% to 3%. I’ll now turn to slide 21 to review our Latin Americabusiness where we reported record third quarter revenue and all time recordoperating profit. Our revenue increasedby 23% to $830 million in sales, driven by strong appliance industry growth,the impact from our cost base price adjustments, which we implemented duringthe quarter, continued new product innovations, and strong economic conditionsthroughout the region. Excluding the impact of currency sales for appliances our [inaudible]increased about 10%. Regional shipmentsof appliances were slightly below industry demand, which we estimate grew by16%, and this was primarily due to the fact that we implemented our priceincrease during the quarter. For thefull year or year to date, our regional shipments continue to significantlyoutpace industry growth. And we docontinue expect to see this kind of growth of 15% to 20% for the full year in Latin America. Our operating profit increased 85% to an all time quarterly record of $103million during the period and our margins expanded to 12.7% from 8.5% lastyear. Strong demand for our leadingbrands and innovation, improved pricing, and strong productivity, mitigatedsignificantly higher material costs during the quarter. Innovation as in the other region continues tofuel our Latin America business, and you can see someexamples of this on slide 22 to 24. I would like to take a couple of minutes to take you into a deeper look intowhat's driving the business in Latin America. If you take a look at slide 25 you will seethat Latin America has been the fastest growingappliance region worldwide during the last five years. From 2002 to 2006, the region has had acompounded annual appliance growth rate of 13%, and we expect that number to beeven higher this year. The economy of Brazil,which is our largest market in Latin America, has beenresilient and exhibits very strong fundamentals, and you can see that on slide26. What we’re seeing, economically, in Brazil are low levels of inflation;declining consumer interest rates, significantly lower country debt and highlevels of international reserves, strong and growing GDP growth and improvingconsumer real income growth. Theseeconomic conditions, combined with very low appliance penetration in many ofthe key product categories within this region, position us very well for growthfor the number of years ahead. On slide 28, you can see our brand position and leadership across theregion. In Brazil,the Consul brand remains the number one appliance brand in the country, whilethe Brastemp brand is the leading premium appliance brand. The Brastemp brand is also the fifth mostwell-known top of mind consumer brand in Brazil,following great brands like Coca-Cola, Nestle and Nike. Whirlpool is the clear leader in this region. Our position is driven by a strong presence inall the key markets with powerful consumer brands and a continuous stream ofinnovation launches going on throughout the region. If you can see an example of that on slide 29 where our Latin America business has launched more than two new products every week,between 2006 through year to date 2007. Thishas, in part, helped enable us to grow faster in the market while improving ourmargins. I will turn now to slide 30 in Asia where we reported quarterly revenues of$123 million, an increase of 18%, excluding the impact of currency salesincreased by about 7%, led by new successful product launches, as well asimproved mix and strong performance in India which is our largest market withinAsia. We had an operating loss of $5million in the region from the last year's level primarily due to increasedbrand investment and higher transition costs associated with new productlaunches. You can see also, as you havein other regions, the innovations we are bringing to market on slides 31 to 33. Based on the current conditions we seein Asia, we still expect to see robust growth in 2007 inthe 5% to 10% range. At this point in time, I will turn it over to Roy Templin.

Thanks Jeff, and good morning, everyone. Before I begin, and as a reminder, during the first quarter of thisyear, the company adopted changes to its segment reporting consistent withrealignment made to our regional business operations. Regional results for 2006 have beenreclassified to reflect these changes and are shown on slide 34. As Jeff discussed in his opening comments andas shown on slide 35, net earnings from continuing operations were $175 millionor $2.20 per share compared to $134 million or $1.68 per share last year. Overall operating profit of $258 million increased about 15% from a year agoand included approximately $150 million of higher material and oil relatedcosts. These higher costs negativelyimpacted our operating profit margin by approximately three points in thequarter. Year to date, we have absorbedabout $455 million of higher material and oil related costs; roughly 70% ofthese increases impacted our North American business. Acquisition efficiencies continue to be strong. During the quarter, efficiencies were about$120 million, and integration costs were approximately $5 million. For the first three quarters of the year,total efficiencies were about $345 million and one time costs were $29 million. Included in our third quarter results for 2007 and 2006 are some large gainsand losses which I would like to highlight. A portion of these gains and losses arereflected within operating profit while others fall below the operating profitline. We've also included these items onslide 36 for your ease of reference. First, I will discuss the items, which impacted our operating profitperformance in both 2007 and 2006. During the third quarter of this year werecognized approximately $34 million in asset sale gains within the operatingprofit line of which the single largest transaction was a $32 million gainrecorded in our European business. Resultsalso reflect $12 million of non income based international tax credits. As we previously discussed with you last year, at this time, we had fourlarge gains and losses which, when combined contributed about $1 million tooperating profit. Last year's operatingprofit included the benefits from an asset sale gain and a favorable warrantysettlement. These benefits were essentiallyoffset by a pension curtailment loss and settlement losses on non income based taxes. Below operating profits, interest and sundry expense of $17 million in 2007compares to $24 million of income in 2006. The $41million negative year over year impact on our results isprimarily due to $32 million in gains associated with business sales during2006 and foreign currency losses on balance sheet positions in the currentyear. The company also recognized a $7 million investment gain this quarter resultingfrom the sale of shares in our Indiasubsidiary to meet New Bombay exchange requirements. Our effective tax rate was down significantlyduring the quarter when compared to the prior year. As we've discussed with you all year, the adoption of FIN 48, can driveadditional volatility in our tax rate from quarter to quarter. The lower rate in the third quarter wasprimarily due to required recognition of a discreet tax benefit within ourinternational business, based on our current outlook; we now expect our annualrate to be in the low 20’s. To conclude my walk through of the P&L, you’ll note that equity inaffiliates and minority interests negatively impacted our net earnings by $11million. This is due to operating lossesincurred by an international equity investment and higher minority earningsassociated with the improved earnings in our Latin American business. Turning to Slide 37, I will briefly comment on our cash flowperformance. Year to date, cash providedby continuing operations of $128 million was $168 million lower than lastyear's results, as current year results include higher restructuring activityprimarily in support of the Maytag integration, higher pension contributions,and cash outflow for the Maytag product recall which we've previously disclosedwith you. Other cash flows includeseveral adjustments to align accrual accounting to true cash flows fromearnings. Overall, working capital levels, as a percentage of sales, ended the quarterat 13.2% versus last year's reported level of 12.4%. Our overall inventory position at the end ofthe quarter increased $350 million from the same period last year. The year over year impact from currencyincreased inventories by about $140 million due to appreciation in both theEuro and Real. Higher inventory levelvalues to support strong sales growth in Latin Americacontributed about $100 million to the increase, and material cost increasescontributed just under $50 million of the overall increase. The remaining $60 million represents roughlytwo excess days versus the prior year levels. Turning to slides 38 and 39, you will note that our guidance for acquisitionefficiencies and integration costs remain unchanged. We continue to expect full-year earnings pershare from continuing operations to be between $8 and $8.50, which representsabout a 30% improvement from the prior year. During the fourth quarter, our earnings performance will be driven bycontinued strong performance from our international businesses, positiveindustry growth in the U.S. of about 1.5 points compared to an industry whichwas down almost eight points last year, improved product mix, strongproductivity as the benefits from projects initiated earlier in the year fullyramp up in the last quarter. We expectcontinued strong acquisition efficiencies and the benefits, from market shareimprovements tied to new innovative product introductions that Mike referencedearlier. We continue to expect our free cash flow for the year to be between $600million to $650 million. Historically, dueprimarily to seasonality, the company generates a significant portion of itsannual cash flow in the last quarter of the year, the main drivers of ourfourth quarter free cash flow will come from cash earnings and working capitalreductions primarily within inventory, partially, offset by the remainingcapital spending. The company does not expect any additional pension contributions during thefourth quarter. We will achieve ourannual guidance in a year marked by perhaps the steepest year over yearappliance decline in the last 20 plus years. And during a period of unprecedented material and oil related costincreases. These results reflect the benefit from strong international momentum, avibrant global operating platform and strong consumer brands backed by industryleading innovation. At this point, I will turn the call back over to Jeff.

Well, I would just summarize by saying, given the environment that wedescribed, a very significant increase in material costs, weak U.S. demand andI would say very robust growth in the international markets, we are pleasedwith the balance that we have across our portfolio and in managing the businessand delivering operating results. That certainly,challenges that we have that we're addressing, we think, as we are still in avery good position to deliver a record year performance, even within thesechallenging business environments of 2007. So, I'm going to stop here and open this up for your questions.

[Operator Instructions] We'll gofirst to the site of Sam Darkatsh from Raymond James. Your line is open. Sam Darkatsh - Raymond James: Good morning, gentlemen. Couplequestions here. First off, with the freecash flow in the fourth quarter, and it looks like, if my math holds I guessaround $700 million or so of free cash flow. And you are saying there is notgoing to be any pension contributions. Inthe third quarter your share repurchase activity was roughly equal to your freecash flow generation. Can we expect thatsort of ratio or activity on a go-forward basis; we're based on where the stockis?

Sam, as you know, we don't comment on prospective share repurchases, I willsimply reiterate what Jeff said in his script and that is that we still have$214 million remaining open on our authorization, but again, as you know Sam,we don't forecast share repurchases. Sam Darkatsh - Raymond James: Well, then directionally, how would you comment to the statement that itwould appear as though the best home for incremental cash flow at this pointmight be share repurchase vis-à-vis or in lieu of debt pay down? Would you comment on that statement?

Sam this is Jeff. I would say we arecontinuing to execute to the priorities that we've established which was numberone; fund the business we are doing that, there's nothing new there. Number two; pay down debt, we’re on track todo that and we'll continue to do that. Number three; return to shareholders throughthe share repurchase and those are the priorities we are executing with ourfree cash flow.

Sam, as you know just to reiterate what Jeff said, I think our focus hasbeen and our commitment was to get our debt levels back to pre-acquisitionlevels. We ended the third quarter, Samjust for your point of reverence, that debt EBITDA of 1.7. As you know, our goal is to be 1 to 1.5, andwe would be within that goal by the end of the fourth quarter.

For clarity. Sam Darkatsh - Raymond James: Okay. Second question, this is more of a housekeeping thing. In your earnings guidance for the year, arethere any, it doesn't appear as though at least in your cash flow guidance therewould be any subsequent asset sales, but would there be any P&L impact of aone time nature in the fourth quarter that you would anticipate at this point?

Sam again, without going into the quarterly guidance, I'm not aware of anysignificant P&L or cash flow one time items from asset sales in fourthquarter, no. Sam Darkatsh - Raymond James: Okay. Last question then I will defer to others. As it stands right now if raw materialsremained at current levels or inputs remained at current prices. What does 08’ looklike directionally versus 07’ from a raw material inflation standpoint? I mean you had rough $570 million in headwindsin 07’. Half that, three-quarters that,a third of that for next year? If youcould directionally help us.

If you just take the current prices today with commodities, spot market steel,etc., which obviously the way we buy new things will obviously haveopportunities across the business, but if you just take the markets as theyexist today, you would expect something about half of what you saw this year. Sam Darkatsh - Raymond James: And so would you anticipate then that the incremental Maytag efficiencies bealmost enough to offset that inflation that you are seeing at this point on 08’versus 07’?

I guess, we are not really prepared to give any specific guidance about 08’.And only thing I would say in the Maytag efficiencies is, as we ramp up our runrates this year, there will be residual effect next year. Sam Darkatsh - Raymond James: Okay. I'll get back in queue. Thank you, folks.

We'll take our next question from the site of Michael Rehaut with JP MorganSecurities. Your line is open. Michael Rehaut – JP Morgan: Hi. Thanks. Good morning. Firstquestion is around the progress with Maytag in the new products. It'scertainly, as you spoke over a couple times during the summer, it was an areaof focus and benefit that you were looking for in the second half of the year. During the prepared remarks, you talked a lotabout innovation in that area, particularly as it relates to 08’, across theyear almost pretty evenly distributed, but I was wondering if you could help mewith where you are in 2H07. It seemslike you continue to lose some market share, if you could kind of talk abouthow those new product launches in the back half of the year progressingrelative to your plans. If perhaps theoverall market weakness and perhaps higher competitive backdrop, may haveaffected the smooth rollout and acceptance of those products?

Sure, Mike. Let me comment on that. Actually, I would tell you that ourMaytag launches, our Maytag grand launches are going as we had planned, andessentially, we at the end of the third quarter, have introduced our new frontload washing machines in the Maytag brand that are very distinctive for thatbrand, so therefore different from what we've got out in the marketplace in theWhirlpool brand. We've introduced new dishwashers in the Maytag brand and so we arecontinuing to ramp our launch activity, and actually, if we look at the shareof the Maytag brands, year over year, we are about flat. So actually, what thatsays is we were beginning to recover and get to the kinds of growth levels thatwe expect to have for the Maytag brand. Thatwill only be strengthened in 2008 as we continue to launch products. Michael Rehaut – JP Morgan: So in looking at the sales decline where within the North American segment;where did the share loss come from? Andwhat do you think are the drivers to that perhaps if that would continue intothe fourth quarter or where do you see the weakness?

Mike, there are really two areas. Oneis our value brands and that's actually the biggest portion of the share loss,and I think I commented on the last call that we made some conscious decisionsto really exit some of the lower and unprofitable segments that our valuebrands were in. And the other is the weakness of our OEM supplier, or our OEM product. And that's an area where we continue to workwith new products, new launches, to try to maintain their rate of sale. I can tell you our balance of sale with themcontinues to be where it has always been, but that's obviously, an area that isalso challenged. But the value brandsegment is really the largest portion, so we expect, fully expect from thefourth quarter to really regain market share in our key brands as we have beendoing all year with the Whirlpool brand. Michael Rehaut – JP Morgan: And lastly, in terms of, just two more real quick questions. In terms of theraw materials obviously, oil has gotten out of hand here in the last quarter, butI was wondering if you could kind of walk through the puts and takes and whyyou are still comfortable with the 570 in material inflation for the year?

Well Michael, there clearly has been a lot of volatility and all across ofthe whole value chain. The raw materialsstarting with, I would say, base metals, but also steel, also oil related whichaffects plastics, have had increases or dramatic increases throughout thecourse of the year. I guess our comfortlevel is are almost at the end of the year. So, we pretty much know what our costs are going be between now and theend of the year, but the volatility is high and some of these are going to fallover into 2008. There, given the natureand the structure of many contracts, it’s still too early to predict accuratelywhat 2008 will look like, but we feel very confident about what the balance ofthis year is going to look like. Michael Rehaut – JP Morgan: Thanks and one last question, I'm sorry. The tax rate, clearly a big surprise duringthe quarter and as of the last conference call, you were talking about a mid 20’srate for the full year which implied a thirtyish percent rate for the back halffor 3Q and 4Q. I was wondering, if youcould go through what drove that this quarter, and why you still expect a low20’s tax rate. What are the, I mean,there's just such a massive difference and I was wondering if you couldcomment, going forward on what your thoughts are for 08’?

Michael, let me talk a little bit about the tax rate. First of all, a couple of reminders. We, initially, at the end of the last calltold you our guidance for the year will be somewhere in the mid 20’s. And as Isaid in my script, we now think that will be a low 20’s, and that will compareto a rate a year ago at about 20% or 21%, as well, so just to sort of level setrates. Let me talk specifically about the quarter, and let me go back to a coupleof things, Michael. One, as you know andwe've talked about, I guess, probably over the last year on these calls is we'vebeen executing a tax strategy around the world in terms of making our overalltax liabilities more efficient with respect to our earnings around the globe. Our highest effective tax rate is in North America where we have about a 37% rate and then it goes down asyou walk around the world to the low point in Asia at23%. So, part of what happened thisquarter was a dispersion piece and a dispersion component because as NorthAmerican and overall earnings go down, we actually benefit on the tax line, butthat was a small piece. The real happening in the quarter was that we had a deferred tax asset inour international business that we had fully reserved that based uponperformance in the operation and our tax strategy that we executed in thequarter, we took the benefit of that in the third quarter and that was about 15point reduction in the rate, Michael. Now, a little bit of reminder from an accounting perspective. As you know, and FIN 48 clarifies, that as weexecute our tax strategy, those pieces and components that relate to currentyear operations flow through the rate as a blended component of our effectivetax rate for the year. However, thoseitems, like this deferred tax asset that we now recognize, that don't relate tocurrent year operations per se, all the benefits of those items are recognizedin the quarter in which that particular action is taken and so, the issue forthe third quarter or the result of the third quarter is that you had a bigbenefit 15 points from this tax strategy action. You had some favorable dispersion, and then youhad a few points, Michael, that were simply a result of some other tax actionthat we've taken over the course of the year. Michael Rehaut – JP Morgan: I appreciate that detailed response. And its 15 points, what's that, I'msorry, in a dollar number?

Well, I think the average dollar effect there is about $7 to $8 million. Is that right?

The total asset was $30 million. Ithought you were asking in terms of the percentage point and impact on theeffective tax rate, Michael. Michael Rehaut – JP Morgan: Okay. That's the 15% as you said but the 30 is the dollar number.

That's correct. Michael Rehaut – JP Morgan: Thanks so much.

We can go next to David MacGregor from Longbow Research. Your line is open. David MacGregor - Longbow Research: Good morning, guys. As we lookforward to 2008, obviously you’ve got a lot of new product coming out under theMaytag brand. Can you talk a little bitabout what commitments you may have received from retailers on increased salesfloor presence or sales floor square footage for the Maytag brand? And maybe in the context of providing thatanswer, you can also address investor concerns about potential losses to theWhirlpool floor space presence as a result of the Maytag gains.

Yeah, David, let me address that. Whatwe have done is we've taken out some of these new Maytag brand innovations. Frankly, this is what we are getting fromretailers is a very positive response and this is not about replacing any ofthe Whirlpool brand product, that’s currently on the floor, it's reallyexpanding their floors with new Maytag brand innovation. As we've talked about, I think many times, itis a very different consumer and I think our retailers understand that thereare different consumers that are buying the Maytag brand, that aren’t buyingthe Whirlpool brand and what we have made a very conscious decision is toensure that these products are very differentiated. So, walking on the floor, frankly, youwouldn't be able to tell that it comes from the same manufacturer because theyare different. They are attackingdifferent segments and not only how we're positioning them, but frankly, thefeatures and so on that the brands have are different from one to the other. So, we are actually feeling very good aboutwhere retailers are the commitments that they are making and, frankly, thefloor space that both brands will occupy. David MacGregor - Longbow Research: And, there is still one retailer that is conspicuously absence from yourdistribution neutrality, any thoughts on where that may be going?

You need to help me, David. David MacGregor - Longbow Research: Home Depot.

Well, I think, we feel very good about what this Maytag brand can do to helpHome Depot and their appliance business. I would leave it at that. They are welcoming the new innovation and Ifeel good about where we’re positioned. David MacGregor - Longbow Research: Yeah. I guess, I was referring with respect of the Whirlpool brand and abroader brand offering for that retailer.

I really at this point, really don't have any other comment to make, David. David MacGregor - Longbow Research: Okay. Can you talk a little bit about the value brand demise? You said that you consciously walked away fromsome business and you're probably to be congratulated for that but can youquantify, how the value brands were down year over year, so that we can excludethat from the net number?

It was slightly over two points David, if you are talking specifically aboutmarket share. And again, that'ssomething that we consciously made some decisions, just kind of given wherethose value brands were performing. David MacGregor - Longbow Research: Okay and what is the risk to the current levels of profitability in Latin America for 2008?

David, we are very positive, as I described in some of the slides that weput in there. We are very positive aboutthe economic environment of Latin America. It's as structural and strong, as we have everseen over any period. I think there is alot of historical concern appropriately so for the historical ups and downsthat you would see in those markets. But, I really think particularly Brazil,but also a number of other markets are going through some very fundamentalstructural changes, so, I would just say from an economic and growthstandpoint, we are rather bullish about the Latin Americamarket over the next two to four years. David MacGregor - Longbow Research: You see the developments are sustainable for at least the next 12, 18months?

Yes, we do. David MacGregor - Longbow Research: Okay, that's fantastic. And then,last question, just globally, is there still a move to low cost geography storyhere?

David, not necessarily for us. Thereis of number of elements across the supply chain that as we will look at ourfactories, we have slightly over 40 factories around the world and our view isevery factory has to be best cost, best quality, best availability for theproducts they produce for the market they serve. That has changed and therewill continue to be some change with certain products at certain times. But also, our component and material supply chain continues to change, ourmanufacturing evolves, but I don't think, we feel pretty good about where weare. There will be changes over time aswe make new investments, but our need; we don't have a huge need to shipproduction to LCCs because they aren't necessarily the best cost countrydepending on what product and what market you sell to. David MacGregor - Longbow Research: Thanks very much, guys.

We will take our next question from the site of Laura Champine from MorganKeegan. Your line is open. [Ike Borcia] - Morgan Keegan: Hi. Good morning. This is actually [Ike Borcia] calling in for Laura todaywho is traveling. [Ike Borcia] - Morgan Keegan: My question is, what can you do to improve the U.S. OEM business and how canyou reduce your exposure to that business?

Let me maybe address that. I think,first of all what we do and what we will continue to do is ensure that weprovide them with the series with the right kind of product innovations thatsupport their overall business and then work with them to ensure that consumersknow and want to shop in that environment but, I will tell you the other thingthat we need to do and we are doing is leveraging all of our brands in ourbrand portfolio. Essentially, that meansthat we are bringing on innovation in the Whirlpool brand, bringing oninnovation in the Maytag brand, continuing to support our premium brands in KitchenAid and Jenn-Air, and I think if we continue to do those things, in fact, nomatter where consumers decide to shop, our brands will be available for thoseconsumers, and that's essentially what’s our approach and the strategy is. [Ike Borcia] - Morgan Keegan: Do you feel you're maintaining share within the OEM business?

Yes, we were. [Ike Borcia] - Morgan Keegan: Okay. And last question on what should we expect in terms of year endinventory levels?

Well Ike, this is Roy. We don't talk specifically about inventory perse, but we have said, and we remain committed to ending the year with workingcapital below where we ended the year last year. Point of reference, I think, we ended theyear last year at 11% the assumption that you are probably going to make, andit would be a fair one, is that in most of the reduction from where we aretoday to where we will be by the end of the year will be a result of lowerinventory levels. [Ike Borcia] - Morgan Keegan: Okay. Thank you.

You're welcome.

We’ll go next, the site of Eric Bosshard from Cleveland Research. Your lineis open. Eric Bosshard - ClevelandResearch: Thanks. Good morning. A couple ofpretty simple questions. First of all,within the North American business, I think you indicated total North Americanrevenues were down 8%. Can you give us asense of what the difference was between the legacy Maytag side of the businessand the Whirlpool side of the business versus that 8% number?

Eric, no we are really not splitting those businesses up. I mean really, as we progressed through thisyear, it's more and more difficult to assess that, so we don't break thatinformation out. Eric Bosshard - ClevelandResearch: Okay, is there a sense at all, of which is performing better and which isperforming worse?

Not well, but think about it this way, our premium brands Kitchen Aid andJenn-Air are performing fine. Mike hadsaid that Maytag brand if you will, that’s Maytag, Amana and Jenn-Air, in thethird quarter were flat year over year, so, we have had three quarter orwhatever decline and we are now calendaring that and we are now flat, and weexpect that to improve and grow in the fourth quarter and beyond and theWhirlpool brand has been growing share although all during this period of time. Eric Bosshard - ClevelandResearch: Okay, so the share erosion then is centrally focused on the value brands?

Well number one, its value brands, number two is our OEM business. For the quarter, that's what it is. For theyear, yes, our Maytag brands prior to the third quarter were down year over year,but they were the smallest of the three contributors. Eric Bosshard - ClevelandResearch: That's great. And secondly, within the North American profit in the quarter,I think the reported profit was $132 million, and it sounded like the net costsavings were around $113 million. And Iguess I would love to get a little bit better understanding of how the NorthAmerican profit ended at such a level that was somewhat well below what I hadexpected, and what the prior trend had been, and looking to the fourth quarterclearly what you are assuming takes place in the fourth quarter. So, can you just help understand thecomponents that drove the magnitude of the shortfall within the North Americanprofit especially when understanding how big the cost savings were?

Eric, why don't I start with the components and sort of give you themathematics of what happens year over year in the quarter for North America,and then Mike can talk a little bit about the composition of those and thefourth quarter piece, the second part of your question. The biggest piece by far, Eric, in North Americaresults continues to be material cost. Ithink Jeff said this in his script, if you look at materials year to date, up$455 million, 70% of that increase is in the North American business. Year over year, Eric that lowered theirmargins by about 3.5 points. And again,that by far was the biggest piece of the reduction year over year. The second piece is we also had a little over a point of lower price mix whenyou look at price mix year over year in the North American operations and thosewere offset by two elements. The firstone is productivity, which was about a point better. Again, when you look year over year and thenthe Maytag efficiencies and your numbers are very close. Maytag efficiencies was about 3% improvementwhen you look at Q3 this year versus Q3 last year. So, you got five negative and four positivethere, Eric, in terms of the key components.

You know, Eric, maybe what I can do is also give a little bit of perspectivethen on the other part of your question, which is going into the fourthquarter, and why we feel good about improving our margins in the fourthquarter. First of all, we have talked about a slightly increased industry demand, andthat will have a positive impact. Secondly,just seasonality and the kind of the seasonality of our business and we feelgood about that, but I would say, most importantly, these products that we’velaunched that did cost us some transition in the third quarter, we feel verygood about how they are ramping up, how they are getting on the floors and,frankly, early indications of the sell through in the fourth quarter and thoseproducts are at, largely, at the higher end and so, we see a positive marginmix coming from those products. So, a combinationof all those things, and, I guess, the last item is in the fourth quarter, youactually get a more positive impact from productivity so although materialcosts will continue, we will also get more productivity in the fourth quarter. So, those are really the drivers to ourconfidence that we will improve our margins in the fourth quarter. Eric Bosshard - ClevelandResearch: It was the price mix assumption, which I'm kind of surprised it was negativewhen considering you mixed out of a lot of value brands. Is the price mix assumption turn into afavorable one in the fourth quarter and why?

Yes. We do expect it to turn favorable in the fourth quarter. And a littlebit of what I've just stated is what we see is, we are seeing with the productsthat we've launched an improvement in our overall mix. We have to bear the cost of kind of thattransition as we came out of the third quarter, and that actually deterioratedsome of our mix. And then secondly, last year at this time, we actually had a price increaseso; we had a slightly negative impact as we get into this third quarter. We feel very good about kind of how we werecoming out of this quarter. Eric Bosshard - ClevelandResearch: And then lastly, within Europe, when you strip awaythe gains, it appears that the underlying operating margin contracted 30 basispoints year over year. Can you talk about if anything is changing materiallywithin the profit or momentum of the European market and business?

Well, yes, Eric, you may be right. It's basically the margins pulling that outwere flatter, within a tenth of each other. So, I view them basically as flat and givenmaterials have hit there too; we had about $30 million quarter over quartermaterial increase in Europe in the third quarter. Given the way European production works, July,August holidays, and then September is the primary production month, that isnot a very good productivity quarter normally for us, anyway. So, actually we thought pretty good about theEuropean performance, and expect that our productivity will catch up withmaterial costs in the fourth quarter, and we'll see margin expansion in thefourth quarter. Eric Bosshard - ClevelandResearch: And then just one last question, the SG&A looks like it was down about$50 million year over year. I don't knowif there are some other gains that show up in that, but is there a simpleanswer for the big improvement in SG&A year over year in the quarter thatwas different than what we saw in the first half?

I think that the simple answer, Eric, is there are two pieces. One is the Maytag efficiencies, and that'sabout seven tenths of a point reduction when you look year over year. The second key item, and you askedspecifically about any of the one time gains or losses, the non income basedtax credit that we had, the $12 million, was in fact in SG&A and that wasabout three tenths of a point. And thenthere are two other feature is that there are sort of offsetting. One iscontinued increase in brand investments offset by cost controls throughout thebusiness. Eric Bosshard - ClevelandResearch: Thank you, very much.

We have time for one further question. And we’ll go to Jeff Sprague from CitigroupInvestment Research. Your line is open. Jeff Sprague - Citigroup: Thank you. Good morning. Could wejust drill for a minute on this price mix question? It is surprising, as the prior questioner saidthat the price mix is negative one, if you moved out of these value brands andparticularly, just going back to my notes, price mix was positive five in Q2. I'm just wondering if you get just aggregatethat a little bit for us. Is the mixactually positive and prices down a couple of points here?

Yes. Jeff, first of all, for clarity on price mix, that the price mixresponse was, Eric had asked about margins. So, I want to clarify, first of all, thatprice mix and again that was relative to North America. If you look at total business, it was about sixto seven tenths of a point on total margins. Price mix from a top line perspective was actually favorable. If you do the math on unit’s reductions, weended with basically flat sales. We hadabout 3.5 points of currency improvement and about a point of favorable pricemix in the top line so; I want to be clear on that point. Jeff Sprague - Citigroup: Okay. And that's the total Whirlpool number, one point, or that's a NorthAmerican number?

That is a total Whirlpool number. Jeff Sprague - Citigroup: And could you give us North America?

Yes. North America was actually favorable by 1.5points. Jeff Sprague - Citigroup: And then if I could come back to this tax, Roy,I'm a little bit confused here still. If I think about the $30 million numberyou gave us and gross up the year to date for that that would imply your yearto date tax rate is 19%. I would thinkbased on what you said, that would be then your target full year tax rate wouldbe something like 19%.

Yes, Jeff, first of all, I mean, without having precision here, the fullyear tax rate, as I said in my script is in the low 20’s. I think part of the difference in your math iswe talked specifically about dispersion; we talked specifically about thisrecognition of a deferred tax asset. They’reobviously a number of other components going throughout the tax rate, some ofwhich get annualized as part of the operations and some of which were discreetyear to date. But net net, if you wouldfactor in a couple of the other discreet items that we had in the quarter, youwould end up with a rate in the low 20’s versus your 19%. Jeff Sprague - Citigroup: All right. And then the $12 million tax item you are talking about is that [Inaudible]or is that something else? And if it'snot [inaudible] it could you give us the [inaudible] number?

Sure. First of all, it's not [inaudible]. It's actually a social tax credit. Again, it came through SG&A, [inaudible],Jeff, was $25 million for the quarter versus $17 million a year ago Q3. Jeff Sprague - Citigroup: And, I guess this question of North American margins has been asked a coupleof times, but maybe again just to try to think about framing what's changed. Although these raw materials costs areobviously very onerous, I don't think your raw material headwind guidance hasactually changed for the year. So onroughly flat sequential sales, you do have a pretty meaningful drop in NorthAmerican operating profit. It soundslike we are getting this isolated down to promotion primarily is what I’ve havebeen able to glean so far, but how else would you characterize that? If we think about raw mat guidance hasn'tchanged, revenues are roughly flat, price mix is actually positive, is it allpromotion?

First of all our revenues were lower than we had expected. We reduced production so there is a volumeloss in this. What Mike, had describedis we did have higher than normal and fairly substantial new productintroduction cost during the quarter and there is promotional expenseassociated with that in the quarter. Whenyou add that up, on top of that, raw materials were higher during the quartereven though our 570 didn't change for the year, they were higher during thequarter. The flip of that is we thinkthey will be lower in the fourth quarter. Jeff Sprague - Citigroup: Okay. And I guess just last question, any change in the way you guysnegotiate raw mats? I think you had amix of annual contracts and spot and just giving us volatility and pressureover the last couple of years. Is anything changing in the way you try that setand determine your costs?

Well, Jeff, as you know in that market, frankly speaking, the way contractsare done today, it's changing all the time and it's basically moved to a muchshorter time frame or an index. So thereis inherently, I think, for most people who buy these types of products, morevolatility and less long term contracts. And that's what we are seeing in our business,as well. Jeff Sprague - Citigroup: Okay. Thank you.

Thank you. Well, listen, everyone.Again, thank you for joining us today, and we look forward to talking to younext time.

This does conclude today's teleconference. Have a great day.