Whirlpool Corporation (WHR) Q2 2008 Earnings Call Transcript

Greg Fritz - Director Investor Relations Jeff Fettig - Chairman and CEO Mike Todman - President of Whirlpool North America Roy Templin - CFO

David MacGregor - Longbow Research Sam Darkatsh - Raymond James Jeff Sprague - Citi Investment Michael Rehaut - JPMorgan Laura Champine - Morgan Keegan

Good morning and welcome to Whirlpool Corporation's second quarter 2008 earnings call. Today's call is being recorded. For opening remarks and introduction, I'd like to turn the call over to Director of Investor Relations, Greg Fritz, please go ahead.

Thank you, Kevin, and good morning. Welcome to the Whirlpool Corporation's second quarter conference call. Joining me on today are Jeff Fettig, our Chairman and CEO; Mike Todman, President of Whirlpool North America; and Roy Templin, our Chief Financial Officer. Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Whirlpool's future expectations. Our actual results could differ materially from these statements due to the many factors discussed in our latest 10-K and 10-Q. During the call, we will be making comments on free cash flow, a non-GAAP measure. Listeners are directed to slide 30 for additional disclosures regarding this item. Our remarks today will track with a presentation available on the investor section of our website at whirlpoolcorp.com. With that, let me turn the call over to Jeff.

Good morning, everyone, and thank you for joining us today. As you saw earlier this morning, we released our second quarter results. Now we'd like to provide you with some perspective on the state of our business and review our second quarter results. Let me start with the quarter, where we reported that net earnings from continued operations were $117 million and our EPS was $1.53 per share and that's versus $2.00 a share of last year. For the quarter, net sales were up at $5.1 billion which represents about a 5% increase versus the last year. Overall, I would summarize the quarter as follows. First of all, our Latin America region produced another quarter of very strong results with sales growing by 22% and our operating profit increasing by 40% on the year-over-year basis. Secondly, as we've seen in previous quarters, weakness in the US market persisted, with demand declining by 8% during the quarter. This is now the eighth consecutive quarter where demand has declined in the US marketplace. And third, we continue to face a surge in material and oil-related cost increases. To combat these unprecedented cost increases, we've implemented very strong cost reduction actions across the business and price initiatives which I'll discuss more in a moment. And lastly, I'd like to point out that in late April we did sign a joint venture with Hisense-Kelon Electrical Holdings in China, one of the leading electronic and home appliance companies in China. As part of the JV, we will benefit from sharing research, technology, procurement and development resources for producing refrigerators and washing machines in that marketplace. Overall, we believe this joint venture will allow us to accelerate our growth in this very important Chinese market. I now turn to slide 4 and talk about a little bit of the balance of the year where we expect US demand to be down a little bit more than we previously said. We're now forecasting that to be in the 6% to 7% range. Europe, we're seeing some slowing in that market and we're now projecting the year in Europe for demand to be down 2% to 3%. These markets continue to face very challenging macroeconomic conditions that we see are stressing consumers and therefore purchases. At this point, we don't see this trend abating in the near term and we're managing our businesses there accordingly. We are maintaining our full year outlook for emerging markets but we see some indications of slower growth in these markets as cost inflation also impacts the ability for consumers to purchase. We do expect now our 2008 material and oil-related cost to increase by $600 million to $650 million which is higher than our previous estimate. As you've all seen, we've seen a substantial increase in key commodities such as steel, and oil, and oil-related inputs. Given these factors along with very weak consumer sentiment in a lot of the key mature markets, as well as continued currency volatility, we're very focused on positioning our company and our business to address these macroeconomic challenges. As shown on slide 5, our business priorities for 2008, we are forced to implement our previously announced cost-based price increases globally. In light of the continued inflationary trends, we've taken multiple cost-based price increases in many markets around the world. Most recently in North America, we've implemented a July price increase which ranged from 6% to 10% on the effective products. In Latin America, we also have recently announced and are implementing price increases in the 4% to 5% range. In Asia, we have implemented price increases in all of our major markets of up to 13% with most markets implementing price increases in the mid to high single-digits. And finally in Europe, we've announced and are executing low single-digit price increases in most markets across Europe. So overall, we have, as we mentioned before, absorbed significant unfavorable material and oil-related costs. Now, if you go back to really when this trend started in mid-2004, well over $2 billion during the last four years, it's critical that we pass some of these costs through to our customers. Secondly, one of our critical priorities we've set for 2008 was increasing our new product innovation and focusing on improving our marketplace execution. We have done that in all parts of the world. As Mike Todman will touch on in a moment, we continue to perform very well in the marketplace relevant to the overall industry decline in North America. We are experiencing similar positive performance trends in most of our international markets. With our global new product launches, we are very focused on bringing innovating new products to consumers in every part of the world. The third area which is critical to us is productivity, where we are seeing very good progress on our enterprise-wide cost initiatives. Roy Templin will touch on this in more detail in a moment, but we're having very good success on the productivity part. And finally, in terms of adjusting our costs and capacity structure, we continue to take the very difficult steps of optimizing our manufacturing footprint, particularly in this type of environment. So far in 2008, we've announced the closure of four facilities in North America to better align our cost structure capacity with the current industry environment. At this point in time, I'd like to turn it over to Mike Todman to give you an update on our North America performance.

Thanks Jeff and good morning everyone. Let me start by giving my perspective on North America's performance in the second quarter. As shown on slide 7, our net sales declined 4% during the quarter to $2.9 billion with US industry demand for T7 appliances declining approximately 8%. Our brand and share growth is being fueled by the many new innovative product launches that we have discussed on previous calls. Turning to operating profit, profit declined $78 million to $101 million in the second quarter. This decline is mainly attributable to three factors. One, lower US industry demand. Two, higher material and oil-based costs. And three, increased brand investment. There are four key takeaways that I would like to highlight around our second quarter results. First, despite the lower US industry demand, our volume performance exceeded overall industry performance during the quarter. This improvement was driven by our Whirlpool owned brand product portfolio outpacing the industry. Second, we experienced substantial material increases in metal and oil-based purchase components. In addition, diesel fuel prices continued to accelerate resulting in substantial increases in our freight cost during the quarter. And third, we continue to invest in our brands particularly related to advertising. While we feel we are seeing some near term benefits on these advertising initiatives, these efforts did result in increased SG&A spending during the quarter. Finally, I would like to touch upon our inventory during the quarter. Given the challenging market environment we are very focused on aligning our product inventory with demand levels. Our team has worked very diligently in this area and we actually increased our inventory turnover during the quarter. Slide 8 provides an update on the status of the key indicators behind our 2008 US industry demand outlook. Considering the current outlook for these components, as well as sharply lower consumer confidence, our current outlook for US demand is slightly below our previous guidance. We now expect the US industry demand to be down 6% to 7% and as you can see, significant factors behind this change are related to consumer confidence and new housing completions which we now expect to decline approximately 28% from the approximately 20% previously expected. On slide 9, I would like to review the key initiatives underway given our expectations for lower industry demand and higher material and oil-related costs. One, as we discussed on the last call, a 6% to 10% cost-based price increase on selected models took effect at the end of the second quarter. Given the significant rise in raw material and oil-related costs that have persisted for several years, it has been necessary for us to take these increases to the marketplace. Two, we are accelerating our productivity initiatives and cost changes. As Jeff referenced earlier, we continue to take the difficult steps to align our capacity with demand. We have now announced the closure of four manufacturing facilities in North America. These steps will improve our capacity utilization in the region and improve our cost structure. Three, the record number of new product launches this year is providing us with strong new products in the marketplace. Our new products are being received very positively in the market and will allow us to build upon a strong momentum. Four, our increased consumer advertising during the quarter has been effective in the marketplace. And we will continue to make similar brand investments as we see the appropriate value from these investments. In summary, our organization remains well on track in executing the key initiatives we have previously articulated to you. While the macroeconomic environment remains very challenging, we are very focused on the key levers we control that will enable us to successfully manage through this environment. Turning to slide 10, you will find the summary of the second quarter product mix trends. This chart depicts our year-to-year unit volume change for T7 appliances. And as you can see, we have continued volume growth in our business with higher average selling prices. While we certainly are monitoring mixed trends on an ongoing basis, to date, we have not in our business seen a significant shift towards mixing down from higher price point products. Finally, I would like to turn to the outlook for North America for the remainder of the year on slide 11. As I mentioned previously, we now expect US industry demand to decline in the 6% to 7% range for the remainder of 2008. We expect to see continued weak conditions in the third quarter with some moderate improvement in the fourth quarter. We do expect, however, to see negative industry year-over-year comparisons in both quarters. We have implemented cost-based price increases to offset the macroeconomic headwinds and given the persistent rise in material and oil-related costs, our cost-based pricing adjustments were critical to ensure that our product prices reflect the value we bring to the consumer. With that I will turn the call back over to Jeff for his comments on the international operations.

Our international operations continue to perform well despite what we see as an increasing challenging market environment. Latin America continued to build on its strong performance trend during the quarter. Our European operations posted stable results in an increasingly challenged market environment. And our Asian operations has showed good growth and improved profits during the quarter. Overall, we are pleased with our international performance as they continue to perform well in an even more challenging environment. I'll turn to slide 14 to review our European business. For the quarter, European revenues increased 17% to $1.1 billion during the quarter. In local currency, our sales were up 2% from the prior year. Industry unit shipments for the region declined by approximately 2%, year-over-year. Our operating profit decreased 1% to $50 million in the second quarter. Our results were unfavorably impacted by higher material and oil-related costs, and we are able to substantially offset many of these costs through productivity and positive price mix. Turning to slide 15, our Latin America business once again reported very strong second quarter results. Our revenue increased 22% to $1 billion for the quarter and excluding the impact of the currency, sales increased by approximately 7%. Our operating profit increased 40% to $133 million during the quarter and our margins expanded to 13.3%, up from 11.6% a year ago. Overall, our increased unit shipments and very strong productivity and cost-controls, were all positive factors in our second quarter results. Here too, however, results were negatively impacted by significantly higher material costs. Slide 16 summarizes our second quarter results in the Asia region. Net sales increased 9% during the quarter. Our results were led by very strong performance in India. Excluding the impact of currency, sales increased about 8%. The region reported an operating profit of $5 million in the quarter, up from last year's levels. Our improved results reflect in improvements in productivity, product mix and price. These favorable factors, here too, were once again partially offset by higher material costs. Turning to slide 17, to give you an outlook going forward, in Europe, we currently expect 2008 industry volumes to decline in the minus 2% to 3% range. We saw industry softness in the first half of the year and we expect this to continue for the balance of 2008. The market remains split between positive growth in the Eastern Europe and negative demand in Western Europe. In Latin America, based on our current economic outlook, our previous expectation of industry unit demand in the range of 5% to 8% remains unchanged. While the first half of the year was well above this rate, we are seeing some signs of slowing in Latin America in total, but given the expected trend, we are comfortable with our full year estimate for the year. In Asia, 2008 unit growth estimates also remained unchanged in the 5% to 10% range. Again, here we're seeing the similar pattern in growth in Asia where first half results were very strong in terms of market demand and we're seeing more moderate growth rates in the second half of the year. As I previously mentioned, higher material and oil-based costs continue to have a very unfavorable impact on our international operations. We have and will continue to address these pressures across our business with productivity initiatives in implementing our announced cost-based price increases. Overall, despite more challenging conditions in Western Europe, we remain well positioned to deliver improved results in our international businesses for 2008. So at this point in time, I'd like to turn it over to Roy Templin for the financial review.

Thanks, Jeff, and good morning to everyone. Beginning on slide 19, I'll walk you through a summary of our second quarter performance. From a top line perspective, our recent trends in performance remained largely intact. We continue to experience strong sales from international operations, particularly in Latin America and the Asia-Pacific regions. In addition, foreign currency translation had a favorable impact on our net sales. Weak US and European industry demand offset these favorable factors during the quarter. Turning to the income statement on slide 20, during the quarter we reported revenues of $5.1 billion, up 5%. Excluding the impact of foreign currency translation, our sales declined 1%. The Euro and Brazilian Reais fluctuations accounted for the majority of the favorable currency exchange impact on our results. We monetized $47 million of BEFIEX [1:14/09 Replay] tax credits during the quarter based upon both, increased sales and the mix of those sales. Our gross margin contracted 30 basis points to 14.8% for the quarter. The decline in gross margin is primarily the result of increased material and oil-related cost. We absorbed approximately $130 million of increased material and oil-related costs during the second quarter. These costs were partially offset by favorable productivity initiatives and a positive price mix trend. Compared with the first quarter level, our gross margins increased 1.5 points. This sequential improvement was driven by favorable price mix and productivity initiatives. SG&A expenses increased $39 million to $502 million in the quarter. Approximately two-third of this increase was the result of foreign exchange translation impact on our results. As we discussed in our previous calls, we are also making brand investments such as increasing our consumer advertising which accounted for the balance of the increase. As we discussed last quarter, we executed a significant amount of our expected full year restructuring cost during the second quarter. We incurred $40 million of restructuring expenses during the quarter which corresponds to a $24 million increase when compared with the prior year. The increase in restructuring expense accounted for a half a point of unfavorable margin impact when compared with both, the prior year and the prior quarter. As a result of the items I just discussed, operating profit totaled $203 million compared with $247 million in the prior year. If you look at our tax credits in Latin America, they provided an incremental $20 million benefit during the quarter. This amount was more than offset by our increased restructuring expense of $24 million and some of the operating income impact of these two items was slightly unfavorable. Turning to slide 21, our other income expense had an unfavorable impact of approximately $26 million when compared with the prior year. The two main items are related to legal settlements during the quarter and unfavorable foreign exchange movements on balance sheet positions. Moving to our tax rate. We reported an effective tax rate of 1.5% for the quarter which was well below the prior year's rate of 14.5%. The decrease in rate compared with the prior year is mainly due to two discrete items in the second quarter resulting from foreign audit settlements and international tax planning initiatives which improved the level of tax credits available to the company. Slide 22 illustrates our working capital results for the quarter. Our working capital performance improved during the second quarter on both, a sequential and year-over-year basis. We improved our total working capital, as a percentage of sales, on a year-over-year basis as a result of improved accounts receivable days and accounts payable days. As Mike mentioned earlier, we improved our inventory turnover in North America during the quarter. However, our overall inventory turnover was slightly unfavorable as a result of higher levels of inventory in our international operations. Now I'd like to take a moment to discuss our free cash flow performance and that's on slide 23. For the quarter, we reported free cash flow generation of $262 million compared with $62 million in the previous year. The improvement was primarily the result of favorable working capital variances compared with the second quarter of 2007. Specifically, we saw a notable year-to-year improvement in accounts receivable and inventory during the quarter. Through the first six months, our free cash flow was approximately equal to the prior year. Similar to the second quarter results, improvements in working capital, primarily in the areas of accounts receivable and inventory offset lower income levels. Our capital expenditures totaled $124 million in the second quarter which resulted in an $18 million year-over-year increase. We continue to expect our full year capital spending to be in the range of $550 million to $575 million. Turning to slide 24, we returned $86 million to our shareholders in the form of dividends and share repurchases during the quarter. We now have $446 million remaining on our current share repurchase authorization. Finally, I would like to turn to our guidance summary on slide 25. Based on current economic and industry conditions, we are maintaining our full year 2008 EPS guidance in the range of $7 to $7.50 per share. As Jeff mentioned earlier, we now expect material and oil-related cost increases of between $600 million and $650 million for the full year. We expect to offset this increased amount with productivity initiatives, previously announced cost-based price increases, and a lower full year effective tax rate. For the full year, we now expect our tax rate would be in the mid-teens. Within this estimate, we continue to expect up to $100 million in restructuring charges. Additionally, we expect to convert these earnings into free cash flow in the range of $500 million to $550 million. At this point, I'll turn the call back over to Jeff.

Thanks, Roy. Let me sum this up and just repeat what I think is obvious. The global economic environment remains very challenging on all fronts and we see commodity inflation really evident in all parts of the economy and is weighing heavily on consumer's ability to purchase goods of all types. We see this inflation is now negatively impacting demand levels in most parts of the world. We are preparing our businesses to successfully operate in what we see is a much slower growth environment. To do this, we will execute on the things which we can control and are critically important to succeed in an inflationary slow growth environment. We've talked about this before, but we will continue to drive cost productivity in every part of our business. We will, as we have, adjust our capacity to deal with lower demand levels. We will continue to invest in our brands and bring on an ongoing continuous stream of innovation to the marketplace. And finally, we'll continue all of our efforts to have the marketplace absorb more of the impact of this inflation. In total, although we see a very challenging marketplace around the world, we believe we can address this environment and create significant value for our shareholders. At this time I'd like to open it up for Q&A. And I'll turn it back to you, operator.

Thank you, sir. (Operator Instructions). We'll take our first question from the side of David MacGregor with Longbow Research. Your line is open. David MacGregor - Longbow Research: Yes, good morning, everyone.

Good morning, David. David Macgregor - Longbow Research: In North America, revenue is down 4%, industry shipments down 8%, price 4%, improvement in price and share gains. Is there any way you can help us understand how much was price, and how much was share gain?

David, let me try to answer that question. Initially, I would say that on the price mix side we saw good improvement, but in fact, we were able to offset much of that margin through share gains. So a greater portion was through share gains, and then a slight improvement in price mix.

David, its Roy. Just to give you the traditional components, as you know, we don't bifurcate US from others, and you're talking about US, I know. But, if you look at North America in total, currency was 0.8 points positive in terms of their total delta in sales. Price mix, to Mike's point, was favorable by about 0.5 point. And then you've got an overall North America volume reduction of about 5.3%, and that puts down to the overall 4.1% total for North America. David Macgregor - Longbow Research: Okay. And then just shifting to the raw material cost inflation, can you just walk through the four segments and talk about where you're seeing the greatest amount? In terms of the incremental guidance that you provided on those pressures, how much of that is North America versus Europe versus Latin America?

David, this is Jeff. It's up everywhere. Oil and steel are the biggest deltas in our April guidance. I think at the time oil was at $110 or $115 a barrel. We get it from oil, two big areas. One is resins of plastics, which go into our products and everywhere you get it in diesel fuel or other fuel, used for shipment. So that's proportionately around the market. The steel markets are a little bit different, as you will know, around the world. Contractually, some are on indexes, some are monthly. Generally, our international businesses are more bearable, and so the other, I would say, steel has been largely an international. David Macgregor - Longbow Research: Do you have any major hedges rolling off in the second half or at the end of the year that we should know about?

No, nothing that's unusual, David, that would cause a distortion in trends. The timing of this has always depended upon hedges rolling over and new hedges coming on, as well as length of the contracts, but there is nothing unusual in the trends as we look forward. David Macgregor - Longbow Research: Okay, good. Congratulations on a good quarter in a tough environment.

Okay. Thank you.

We'll take our next question, this one from the side of Sam Darkatsh from Raymond James. Your line is open. Sam Darkatsh - Raymond James: Good morning, Jeff, Roy and Mike. How are you?

Good morning, Sam.

Good morning, Sam.

Good morning, Sam. Sam Darkatsh - Raymond James: Roy, I guess this question is for you. I'm trying to reconcile the forward guidance vis-à-vis where it was last quarter, because you are keeping it the same, although incrementally, you've got maybe $150 million of higher material costs. You've got some tax benefit this quarter, but at least if my math holds, you're still asking us to assume low 20% range for tax rate in Q3 and Q4. And pricing is the same as where it was in Q1, and volume is down a little bit from where it was in Q1. So where are you making up the difference between the $150 million in raw material inflation and the lower volume, versus where you were last quarter? I'm just trying to reconcile how you're keeping your guidance the same?

First of all, I will confirm your assumption on the tax rate in the back half of the year is correct, and that's how you're going to foot down to the roughly 15% rate. So I'll start with that. Sam, here are the pieces, in terms of what's happening with respect to our guidance from what we shared with you in April. There are two negatives, and Jeff touched upon those, and I know Mike touched upon one. And the first one, as you talked about, is materials. Obviously, we're looking at about $150 million increase in material costs. And then we've obviously adjusted our demand in North America from 5 to 6, to 6 to 7. Offsetting those two negative items are three components, Sam. The first one is pricing, and you talked about pricing being the same. However, that's not quite right, because we have now implemented back half of the year price increases in our international operations, which will take overall price mix for the year from what we had when we shared it with you in April. The second area, Sam, is in the area of productivity, and again, we continue to see favorable productivity trends. As you would expect, we continue to initiate incremental productivity, given the demand environment that we're seeing across the globe and so that number, again net-net from April, is favorable as well. And then the third component which you touched upon, and I touched upon in my script is the lower effective tax rate by about 5 points for the full year estimate and those are the components, Sam. Sam Darkatsh - Raymond James: Got you. Second question, the $600 million to $650 million, as it stands right now, and of course that's a moving target. Unfortunately, right now it's moving higher. But how does that look right now for '09 directionally, based on when your contracts roll over and hedges roll over? And just then and I have a follow-up question to David's question last round.

Sam, we have not provided a 2009 forecast of any type, but I guess I would say the drivers are out there and it depends on what assumptions people take on oil, steel and, really, the base metals. I guess, right now, given the trends, we think a lot of this inflation in 2008 will carry over into 2009 and until we see changes in those market trends, that is what our planning assumption is. As I mentioned earlier, we have the environment, we are positioning the business and as for an environment which continues to have this cost inflation. And so, as a result, in the absence choking off demand and slowing the growth patterns, that's how we're planning the business for the, I would say, foreseeable future. Sam Darkatsh - Raymond James: Last question, and I'll get back in queue. You cited the industry growth rates in North America and Europe. You did not cite it for Latin America. Obviously, you've got a large market share down there, but are you maintaining share? Are you losing share? What are the competitive dynamics in the Latin America market, since it's now such a large part of your business?

I would say we modestly outperform the market in Latin America, and in the parts of Asia that we're participating, we're either equal or slightly ahead of the market. Sam Darkatsh - Raymond James: Thanks so much.

Our next question is from the side of Jeff Sprague with Citi Investment. Your line is open. Jeff Sprague - Citi Investment: Thank you. Good morning, everyone.

Good morning, Jeff.

Good morning, Jeff.

Good morning, Jeff. Jeff Sprague - Citi Investment: Just one more on the cost side, we've danced around it a little bit here. But when we look at the $600 million to $650 million of pressure this year, that is, in fact, your full P&L impact net of hedges and other actions you've taken to mitigate raw materials costs. Is that correct?

That's correct, Jeff. Jeff Sprague - Citi Investment: So, just as we are all to make our own assumptions, but conceivably things roll-off and that would imply you're not actually feeling the full brunt of raw mats as they stand today, because you've got hedges and various actions in place.

That's a fair assumption, Jeff. That's correct. Jeff Sprague - Citi Investment: Can you also just help us understand the mechanism by which you try to get price? I'll be over-simplistic, but if we take the North American price of 6% to 10%, 6% alone, obviously, on $11 billion sales base in North America's $6 a share in price on an annualized basis. So, clearly there are catalog increases, and then there is a mechanism, you go to the market and there is a push back from retailers, and any number of things that probably happen. But, maybe you could give us a little bit of a perspective on the last time you went in to get price of this magnitude? How it played out? And what would really be a reasonable expectation for what could stick?

Yes, I'd maybe take that, Jeff. First, maybe go back to 2005 when we took a large price increase and we were able to actually take it through. In our July price increase and we've said, both at the time and in my script, that it was non-selective models, because as I had talked about, we had a number of new product innovations coming out through the year. So we didn't take it across to the board. In addition, as you know, our business is segmented between the contract channel and the retail channel. And so a lot of the price increases will go directly into the retail channel. But the contract channel has contracts that are out for a longer period of time. So it really is on selected models, but what we do experience and will experience is a total increase in price across the marketplace. But that kind of gives you a perspective of how we took this last price increase, and therefore what we expect.

And Jeff, and globally I would say, to your point, there are a lot of levers, in terms of really trying to offset these costs through, whether it be product mix or brand mix, and so on. In new models and the innovation, we will continue to do that. I think the point is that the inflation is at a point where, what we would call like-for-like pricing, are largely the increases we're now announcing. We're moving our maps in the marketplace; we're repositioning our aligned structure, and basically increasing like-for-like pricing to deal with this unprecedented inflation that we continue to see. And the announced increases we have to-date don't come anywhere near offsetting, in the calendar year, the kind of cost increases that we had this year. Jeff Sprague - Citi Investment: And I guess, Jeff, maybe you can pick that up too, on the productivity side. I mean, you know, it is a tough concept for us on the outside looking in to really get our arms around. Obviously, your guys are doing a very good job in the plans to squeeze out productivity when you've got these type of volume pressures. But how do we kind of get comfortable, or get our arms around what you can do next? What's left to do in the next area of improvement? Is it more capacity? Is there more left in Maytag? Is it purchasing? Is it this Chinese joint venture? What are the leverage that you have there?

Yes, Jeff. It's in fact, its all about if you are hitting on the right one. We have an enterprise-wide cost initiative across all parts of the business, and we have a very defined approach. Given material by itself is such a big part of our cost base, you're absolutely right. If materials are going out, particularly we agree that they are now, your opportunity space is more limited in doing so. So the approach we've taken is really dissecting our entire value chain and putting in place, and we began this well over a year ago, but starting to payoff with higher levels of what I would call controllable productivity that we've ever had. But it begins with products and product designs, designing our products more efficiently using less material content, less labor assembly. It does have to do with procurement. We continue to find big opportunities to harmonize parts around the world, returning in essence our volume in the scale which makes us much more efficient for us and our suppliers. We have significant efforts in all 43 factories around the world, from lean manufacturing and other continuous improvement to drive higher conversion rates. Our freight costs, which are, given as you would expect, the size of a fuel have become a larger portion of our total value chain, if you're also really finding efficiencies along the way we ship products, the minimum order sizes and that sort of thing. Driving, of course manufacturing footprint is a part of this. As you say, the way we've taken the difficult challenge; we've taken four facilities offline just in North America. We will continue to look at making sure that we're in the best cost locations for that. Yes, there is continued, what I would call, optimization. Basically, we have all the Maytag stuff integrated, but there are still optimization opportunities. And then we get into our SG&A and our infrastructure cost, so this is a very serious bear economic environment, and we're aggressively trying to manage every part of our business to ensure, on one hand, we stay very productive but on the other, that we're able to justify passing some of this inflation into the marketplace. Jeff Sprague - Citi Investment: And, I guess, just one last one for Roy. I guess you never give up on tax trying to find benefits and things like that, but what should we really think about for a normalized tax rate? Some year out there, 2010, or whatever when things stabilize, I know it is partly to be a function at geographic mix, but can you give us any direction there at all?

Yes. Jeff, let me make just a couple of comments, because I think it probably is worthy on me making a comment or two here on the tax rate. A couple of things; one, as you know, I had forecasted and predicted we would be in the roughly 20% range for the year on the last call, and obviously, we've taken that down five points from 90 days ago. Really, two things happened, [David], under the accounting rules. I know you already know this, but it's quite worth emphasizing. Two things happened in the quarter. One was, we had a favorable audit settlement, one of our international operations that was more favorable than we had anticipated and under the accounting rules that's what they call a discrete item. So we take the entire benefit in the quarter. The second item was, we actually worked pretty hard in a different international location to be able to optimize some tax credits under a law change that happened about a year ago, and we finished that tax plan in the quarter, which again gave us a benefit which is discrete in nature, and so you recognized the full benefit of all prior year impact in the current quarter. So those two items are what drove the rate from what you probably modeled in the low 20s, which is what I would have modeled down to the 1.5. As we look forward for the rest of the year, Jeff, those two items are also the two items impacting the rate, taking it down from roughly 20% to roughly 15%. As you go beyond that, I would still go back to the guidance I've given you guys before, which is somewhere in that mid-20s. It's probably where we would expect our rate to be, given our international dispersion of earnings and the opportunities that we have in front of us. Jeff Sprague - Citi Investment: Great. Thanks a lot.

You're welcome.

We take our next question from the side of Michael Rehaut with JPMorgan. Your line is open. Michael Rehaut - JPMorgan: Hi, thanks. Good morning, everyone.

Good morning.

Good morning, Michael.

Hi, Michael. Michael Rehaut - JPMorgan: First question, just with regards to the raw material assumptions, obviously steel and oil have continued to rise throughout the year and we're seeing steel contracts up in July and August and further. So, just wanted to understand, with the 600 and 650, roughly speaking, either at what price assumptions are you using there? At what point throughout the year are you looking at how much steel has gone up? Are you looking at June end or August end or September end, in terms of forward contracts, or how are you integrating the continued increase in that area?

Michael, the forecasts that we have, I would say, represents our best estimate of what we will pay for these goods throughout the balance of it, what we've already incurred and what we're going to pay throughout the end of the year. As it relates to steel, again, every market is a little bit different on the way steel is purchased. And again, some is a monthly negotiation, some is indexed. Some is relatively fixed or within a range. And so we're sitting here in mid-July, I guess our comfort with what we obviously wrong at the beginning of the year, we're obviously wrong in April, being low but I think now we pretty much know what the third quarter is going to be, and so the amount bearable is shrinking. And actually, I'd say oil is probably the biggest variable left on the material cost base. So we're reasonably comfortable, unless there is some kind of explosion in oil that this forecast is within the relevant range for the balance of this year. Michael Rehaut - JPMorgan: Okay. I guess the second question is just on the other eliminations line which I guess has a lot of different components to it, year-to-year and includes corporate overhead and such. You were at $86 million in the quarter and just wanted to try to get a sense, that I assume it includes the higher restructuring costs and if you could give us an idea of perhaps how those costs are perhaps somewhere of those restructuring, I assume, are related to North America versus Europe. If you could give us a sense, a little more granular detail of what's going on there?

Yes, Michael, first of all, I'll answer the first part of your question. First of all, you are correct, that line does include our restructuring expenses, and so if you were to bifurcate the key components that are within that line what you would find is $24 million more restructuring obviously negative year-over-year trend being offset by corporate G&A costs which are down about $18 million year-over-year. And so, those two together are what net you out to your $6 million change that you referenced in the first part of your question. In the second part of your question, Michael, we really had restructuring cost incurred in every part of the world. Each region had their share of restructuring costs. The greatest component, the biggest component was the restructuring we did in Germany, where we took down about one shift of our production in Germany and that was by far the single greatest contributor to the cost of $40 million in the quarter. Michael Rehaut - JPMorgan: Okay. Thanks, Roy. And just also on the interest in sundries. You said that there was an unfavorable foreign exchange and legal settlements, if you could also give us a little more granularity there?

Sure. In terms of waiting, the foreign exchange is a bit more than a legal settlement. Foreign exchange is a negative 13, Michael and again, with this be another income, another expense. What this is, is it's the currency. We actually had currency gains a year ago on our balance sheet positions. Again under the accounting rules, any balance sheet position you have and a currency, other than that location's functional currency, we basically adjust for currency. A year ago, those were gains. This year, they were losses. Again, it's spread amongst the number of positions around the world, but you had a $6 million gain, a year ago $7 million loss this year which gets to your $13 million. The litigation, again, was a non-recurring item in North America. It was roughly $10 million negative. Michael Rehaut - JPMorgan: Okay. Thank you, one more, if I could. Just on the BEFIEX credits. Do you have a sense of where you're going to be for the full year? You said it was 47 in the quarter.

That's correct, Michael. Again, BEFIEX, let me just give you a little bit of reminder here. BEFIEX is dependent upon two things. The reason we don't forecast BEFIEX is its dependent upon the level of sales we have which in turn determines how much industrialized product tax we pay, and so as sales go up, those taxes go up and we are entitled to more credit. The second piece, Michael, is a mixed piece, and for example, in the second quarter laundry picked up 5% in terms of balance sale of the mix. Laundry has the greatest proportion of IPI taxes which in turn brings with it in a higher BPX credit and so it is primarily mixed as well as volume driven and we just, again, because of the variability particularly on the mix side, we just don't forecast that going forward. Michael Rehaut - JPMorgan: Okay. But perhaps you could also just give where your balance is at this point at 2Q end.

Yeah, I think we'll filed a Q later today of the 875 million, Michael. Michael Rehaut - JPMorgan: Great. Thank you.

We have time for one last question. We are going to have a final question. This one is from Laura Champine from Morgan Keegan. Your line is open. Laura Champine - Morgan Keegan: Good morning. I know we have hit this ad nauseam. But can you give us the percentage of your total material and oil-related cost increase that you expect to offset with price increases this year. And also on that point, can you just give us a little more clarity into what specific productivity improvements are incremental to the productivity guidance that you gave us back in April?

Laura, first of all with respect to productivity, its really all the things that Jeff referenced are what are the components of what the difference is from what we gave you back in April. Net net, Laura, again, big part of this coming out of converging productivity and that's two things. It’s what we have done in the way of the traditional conversion productivity, plus cost reduction action that we have taken, not only in North America, but in all of our markets around the world. We've also got in there to just point SG&A actions that we have undertaken. So it’s the net of all those components which give us the increase relative to where we were in April. Laura, in simple terms, this takes us back to roughly the productivity levels that we thought we would achieve at the beginning of the year in our February guidance, but as you know, we lost a little bit of traction when we updated our guidance in April, and we're really back to that starting point where we were back in February, to make it simple. Laura Champine - Morgan Keegan: So the incremental change that helps you offset those cost increases is the price action that you're taking?

It is both price and productivity, Laura. And again, you are walking the delta forward from April. Actually, they are about equal in terms of their impact and ability to offset materials. They are roughly the same in terms of delayed offset. Laura Champine - Morgan Keegan: Alright, thank you.

You're welcome.

Well again, thank you everyone for joining us today. We appreciate your questions and we look forward to talking to you next time.

This does conclude today's teleconference. Thank you for your participation. You may hang up your lines at anytime.