惠而浦 (WHR) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the Whirlpool Corporation second quarter earnings release conference call.

Today's call is being recorded.

For opening remarks and introductions I would like to turn the call over to the Director of Investor Relations, Mr. Tom Filstrup.

Please go ahead, sir.

Good morning.

I'd look to welcome all of you to our second quarter conference call.

Our opening remarks will refer to a slide presentation which is available on our investor's web page our regional segment information is also available on the same page.

This call and the slide presentation will also be archived on our web page for your convenience.

During this call we will be making forward-looking statements to assist in your understanding of our company's future expectations.

Our actual results may differ materially from these statements due to many factors which can be found in our latest 10-Q.

We will also be making comparisons of this year's GAAP earnings to prior year core earnings, which exclude one-time charges related to restructure activities, and an asset write down related to a minority interest in European business.

We believe this additional view of earnings provides shareholders with relevant information about the company's performance and more detailed informing regarding these charges.

A detailed recollection of last year's GAAP to core earnings is also available on our corporate web site on the investor's page under presentations.

Now I'd like to turn the call over to our Chairman and Chief Executive Officer, David Whitwam for opening remarks.

Thank you for joining us this morning.

With us, also today, is ,.

Jeff Fettig, our President and Chief Operating Officer, and Steve Barrett our Chief Financial, Officer.

This morning we issued what I believe is a solid second quarter of revenue earnings performance, given the ongoing economic and industry challenges we face in most markets around the world.

Revenues were at record levels--up some 9% over last year.

Excluding the effects of our 2002 acquisitions, as well as currency, net sales increased roughly 2%.

Again, we're at record levels, and we believe there will be (ph) continued global market share gains.

On chart 2, we have sum rides consolidated performance of $1.35 cents a share versus 91 cents per share in the second quarter of 2002.

As Tom has just said, there be addition we have also compared it to core second quarter 2002 earnings of $1.48 a share which excluded charges last year related to restructuring and asset writedowns.

We will continue for the remainder of this year to compare 2003 GAAP earnings to 2002 GAAP earnings as well as core torques give you a view of the comparative operating performance.

On chart 3, I remind you that we entered this year with about $1.33 a share of negative headwinds, driven by increased pension costs and the absence of Befiex tax credit in Brazil.

The differences amounted to 34 cents per share in the second quarter of 2003, as compared to the second quarter of 2002.

We continued to drive core activity, savings from restructuring, and other cost takeout activities to offset these negative year-over-year comparisons.

We have said from the beginning of the year that we believe that our cost side actions would largely offset this $1.33.

And we continue to believe that the actions we have and are taking will accomplish that goal.

Please turn now to chart 4.

As we announced to you in our press release during June, we recorded a second quarter curtailment gain of 19 cents a share, as we modified our retiree health care programs.

These decisions and actions taken by management not only had a positive P&L impact in the second quarter of 2003 -- which is a one-time event -- but more importantly will help to significantly reduce the rate of increase on our retiree health care costs going forward.

Again, and is as we announced in the press release, this gain was largely offset by the final expenses primarily from our 2001 recall of certain microwave hood combination products.

On chart 5, I've listed the drivers of our second quarter performance.

First, we continue to see strong demand for our brands as well as our product innovation in the markets that we serve.

Leading to overall record revenues.

In the important U.S. marketplace, we continue to see real strength with our KitchenAid premium line of major appliances with the brand delivering record revenues in the second quarter.

In addition, our Whirlpool brand also delivered record revenue and market share in the quarter.

We are delivering record levels of total cost productivity with aggressive steps taken on all fronts, including material costs, conversion costs, SG&A levels, including total compensation.

In addition, we continue to reap the benefits of our 2001 and 2002 restructuring activities.

Despite a significant down turn in consumer demand in our Latin America business the strength of our brands examine the intense focus on the cost side delivered year-over-year improvements in total operating earnings in Latin America.

And lastly in both Europe as well as in the United States during the second quarter we began to see a positive, albeit moderate, pickup in consumer demand for major appliances.

Lastly, on chart 6, we have reconfirmed our previous full year EPS guidance of $5.90 to $6.10 a share.

As I think each of you are aware, it continues to be more difficult than usual to forecast economic activity for our major markets around the world.

Volatility, uncertainty, and negative political events continue to make forecasting a very tough job.

Jeff will be giving you our very best view at this time of industry demand, market by market, and that demand forecast is to a large degree driven by our estimates of economic activity.

These could change as we go forward.

But again, based on our forecast today, we remain comfortable with our full-year guidance of $5.90 to $6.10 a share.

I'm going to turn this over to Jeff now for the detail review of the regional businesses.

Good morning.

I'm going to begin on slide 7, with comment about our North American business where we delivered a record level of revenues during the quarter.

Overall revenues grew by 6.7%.

Excluding the Whirlpool Mexico acquisition, our revenues were up 1.7% in an industry in the U.S. where T7 product shipments grew by .08%

Our operating profit declined by about $11 million during the quarter.

These operating results, as previously mentioned, were negatively impacted by increased pension and health care costs.

As Dave mentioned, and we reported a one-time gain of $21.6 million for the curtailment related to the change we implemented in our retiree health care plan.

And we also recorded a charge of $18.8 million primarily associated with the finalization of the product recall expenses.

During the quarter, we did have record shipments for both our Whirlpool and KitchenAid brands driven in part by the continued demand by consumers for our new product innovation.

Shipments for the Whirlpool brand Duet and the companion Kenmore HE 3T, shown on slide 8, grew by 72% during the quarter.

These washers, along with our Calypso (ph), the top load than washer, were recently selected as top rated products by a lead than consume are magazine.

I think these are good examples consumers are seeking strong brands and are willing to pay for it.

Our KitchenAid brand continues to expand its very strong product offering by introducing products for the new superpremium segment.

We call it our KitchenAid pro-line, in an example shown on slide 9.

This new offering includes bills in refrigerators, built-in oven and microwave ovens, hoods, cooktops, dishwashers, ice makers and trash compactors.

And so far it has been very well received by kitchen designers and architects.

This new line will be fully available in the third quarter and early orders to date have been very strong.

During the quarter for both the Whirlpool and the KitchenAid, brands shown on slide 10 we not only had record shipments, but also had increases in our average selling prices of 1% to 2%--in an overall market environment where prices declined by 2% to 3%.

Again, we believe this is more evidence of consumers are willing to pay for strong brands offering this relevant product innovation.

We're seeing this trend most clearly, which we see as an early indicator, in our single-family new home construction market.

This is where consumers are really stepping up to buy an upgraded full line appliance package of our brands.

Year to date, our sales in this channel segment are up over 30% for both the Whirlpool and the KitchenAid brands.

And based on current orders that we already have on the books, we believe these kind of growth rates are going to continue for the next six to nine months.

Looking ahead, in the second half of North America, we now expect industry demand to grow by 1% to 2% versus last year.

And for our business, we are forecasting continued strong revenue growth in moderate operating margin improvements.

I'm now going to turn to slide 11, and discuss Europe, where we improved our operating earnings by 17%, and added have a 23.7% growth in revenues, which as previously mentioned, had a very favorable euro-US dollar translation impact.

In local currency, our revenues were up 2% with unit volume growing by 3.8%.

External environment in Europe weak GEP (ph) growth -- under 1% -- and low consumer confidence levels During the quarters, however, we did see appliance demands Improve, growing by about 2% to 3%.

But with that we did continue to see if I significant market price pressures across all major markets.

For the second half we are now forecasting growth to be around 1% to 2%.

In Europe, we we've continued to control spending.

We're driving aggressive productivity through every part of our business, and we will continue in Europe to leverage our global product innovation into all of the European markets.

Looking ahead, we expect to deliver moderate revenue growth, and strong margin improvement during the second half of the year.

Turning to slide 12 to discuss Latin America, we had improved performance despite a very weak market in economic environment.

In Brazil industry shipments for appliances in the second quarter fell by 22%.

This was the lowest level of market demand in over ten years.

Government's efforts to improve the country's financial position so far have been successful.

Their fiscal surplus is growing.

The currency has appreciated.

But as a result, there has been significant decline in consumer demand.

The 22% drop in demand in the quarter really does reflect the tightening of consumer credit, where real consumer financing rates have hovered between 50% to 100% throughout the first half of the year.

Less credit availability along with increased unemployment and decline in real wages has had a major impact on demand.

We're now forecasting the second half of the year for demand to decline by 7% to 10% and we don't see any growth in demand until sometime in 2004.

Despite this environment, our dollar revenues for the quarter were flat and grew buy 10% local currency.

In Brazil, we have been able to use our strong brand position to keep appliance prices in line with inflation, and to grow our position with new product innovation.

Exports continue to be an important part of our Latin America business.

During the quarter they accounted for 29% of our total production.

We also had to overcome the ending of BFX tax credits which amounted to $9 million in the second quarter of last year.

And overall, even with these challenges our operating profit grew by 8.2% versus last year.

Looking ahead, as I mentioned earlier, we don't expect any significant improvement in the economic environment in Latin America.

We expect our business will have moderate revenue growth in the second half with slight operating margin improvement versus the levels we've had in Q2.

Turning now to a Asia on slide 13, we delivered here, too, I think, a solid receive my growth of 7.4%.

And we had operating margins of 3%, which were down from last year.

Despite very strong growth in both China and India, we experienced market price erosion across all the markets.

Additionally we saw the greatest impact of SARS in the Hong Kong region where retail sales decline by about 15% to 20% during the quarter.

Hong Kong is one of our most profitable markets in Asia, so this decline did have an (inaudible) impact in our results for Asia during the quarter.

We also, in the quarter, increased are operating reserves in China by $2.5 million, which impacted margins to reflect the current industry conditions we see there.

Looking ahead to the second half of the year in Asia we expect our business to continue to grow by 7% to 8%, with operating margins to approximate last year's levels.

To really sum up our global operating business, we do expect modestly improving global appliance demand during the second half of the year.

We will continue to manage our global operations and deal with these challenging economic and competitive conditions everywhere in the world.

As discussed previously with you, our focus for this year is really on three key areas. first is to continue to focus on develop our strong brands; the second is to continue to bring continuous and relevant product innovations to all market around the world; and finally, we will continue to drive productivity in every part of the business.

With the actions that we've already got in place in these areas, we do expect to deliver improved revenue growth and earnings in the second half of the year.

And we do remain on track to have a record year of revenues, very solid operating earnings performance, and we will generate strong levels of free cash flow.

So with that I'm going to turn it over to Steve Barrett.

Thanks, Jeff, and good morning.

If you will please move to slide No. 15, I'll walk you through our performance from operating profit to net earnings.

From operating profit the first two line items are interest income, sundry expense and interest expense.

The P&L impacts of these are essentially equal to a year ago.

Income taxes have decline year-on-year by $8 million, and that's entirely related to the decline in pretax income.

Note, however, that our effective tax rate on the quarter was 34.5%.

This is below our original expectations of a 36% effective tax rate.

And this is a function of tax planning work and additional foreign tax credits related to audit settlements.

Based on this we now expect to sustain a 35% average ETR (ph) for the balance of the year.

Slide No. 16 summarizes our cash flow performance.

Overall, and through June 30 free cash flow after dividends, was a negative $210 million.

Consistent with the cash seasonality of our business, this represents a $100 million improvement since last quarter end, and keeps us on track towards our fiscal year cash target.

Now, versus the comparable period last year, free cash flow is better by about $110 million.

There are three buckets which explain most of this change.

Unusual base period cash outflow related to the product recalls and tax payment against the gain on the interest rate swap.

The absence of these negatives combined is worth almost $225 million.

Now, partly offsetting this helpful effect, we have had a slightly more and a slightly higher level of working capital to, support our higher sales levels.

And increased capital spending.

On CAPEX, note that we expect to spend about $425 million in this year, essentially equal to 2002.

So what we are seeing here is really just a timing difference along with some new spending at our required businesses.

As I just said, where we are today keeps us on track to deliver our original free cash flow commitment of $350 million.

However, we are right now, also evaluating whether or not we should prefund some of our pension plan obligations, as the ERISA funding rules may make this advantageous.

Should we do this, the maximum impact to free cash flow would be a negative $50 million.

Now, turning to slide 17, I'll talk a little more about working capital, as well as some other balance sheet metrics.

Our networking capital level is now $1.65 billion.

This is equivalent to 14.5% of sales, which is equal to last year's levels.

On a year-to-date cash flow basis as shown on the earlier Slid, networking capital consumption has increased $40 million more than in the first six months of last year.

This increase is driven entirely by the overall growth in our business.

Now, within networking capital, there are some significant differences in both inventory and receivable changes compared to the first six months of last year.

These are largely offsetting, and reflect a very strong December '02 sales month, which drove receivables up and inventories down.

That resulted in a lower rate of receivables growth and a higher rate of in remember tore growth year to date versus year ago.

Today, we do have a slightly higher level of inventories than normal, and this is due to some of our restructuring footprint activity, and in some new customs requirements on imports.

However, our expectations is to drive both inventories and receivables lower over the balance fiscal.

And this is baked into our $350 million cash commitment.

Moving to debt, overall levels are up 2% to about $1.8 billion.

This increase is entirely attributable to currency, and the impact on our euro bonds.

Note that excluding last year's acquisitions of Vitromatic (ph) and Polar, debt actually declined by approximately $300 million.

Note also, that our mix of debt has changed.

With $200 million and 9% debentures just recently retired, and replaced with commercial paper, and less expensive debt, bank debt.

Our debt to total capital ratio is 61.8%, and that's down from last year's 64.1%, reflecting the past 12 month net increase in our equity base.

Our interest coverage ratio at 5.1 times, is essentially equal to last year's strong levels.

Overall our financial position remains strong.

Our debt rating remains triple B plus, with a recently upgraded outlook from Moody's.

And we anticipate strong year-over-year improvement in free cash flow.

As noted earlier, we expect to deliver $300 million to $350 million in free cash flow depending on what we decide around pension funding.

And we anticipate further reducing our debt to capital ratio to the range of 50% to 55% by year-end.

Looking at the return in equity and return on total capital metrics, these measures are presented on a GAAP basis--that is, with full restructuring costs, but I can excluding the FAS 142 impairment in quarter 1 of last fiscal.

ROE shows a dramatic improvement, which is driven by sharply reduced restructuring, and a lower equity base.

Return on total capital shows an improving trend from 16.2% to $17.5, also impacted by the restructuring and a lower overall capital base.

I'd like to briefly comment on our outlook for fiscal 2003 on slide No. 18.

As Dave noted at the outset, we are reaffirming our current outlook to deliver between $5.90 and $6.10 per share.

In the face of difficult industry and economic trends, we are doing this by rigorously attacking every element of expense; driving major improvements and material costs and planned productivity; implementing stringent spending controls; and reducing compensation expense and other discretionary activity.

Based on our current view of moderate second half economic improvement and industry demand in key markets, we do expect to deliver $5.90 to $6.10.

With that, I'll turn the call back to Dave.

Okay.

And we'd like to now turn it over to all of you for your questions and comments.

Thank you.

The question and answer session will be conducted electronically.

If you would like to ask a question today, please press star 1 on your touch tone telephone.

We'll take as many questions as time permits and proceed in the order that you signal us.

Additionally, if you are using a phone with a mute function, please make you're that it is turned off to allow you to reach our equipment.

Once again, that's star 1 if you would like to ask a question.

We'll take our 1st question from Sam Darkatsh of Raymond James.

Sam Darkatsh Good morning.

Three questions.

First off, you talked about your cash flow, and you talked about the likelihood of applying that towards debt.

Have we talked -- I'm sure internally we talked about it, but thoughts with respect to the dividend policy?

Any changes or thoughts with respect to that?

That would be my first question.

Sam, as we discussed in the past, you know, our board, every single time we look at the dividend, considers the appropriate level.

I think there is absolutely within our company and in our discussions with the board some positive feelings about at in time in the future looking to raise the dividend level.

At this point we have not taken that action.

Sam Darkatsh Okay.

Second question, you mentioned Duet and HE 3 being particularly strong, and perhaps in part caused one of our competitors to be in offering manufacturing discounts on their flag ship brand which goes right up against yours.

Do you foresee pricing pressures to HE 3 and Duet as a result?

Have we seen it or do you plan on seeing it over the next quarter or two?

Sam, this is Jeff.

We have not seen it, and we don't expect to have from our side any additional promotion or pricing taken down on that product certainly through the end of the year.

And final question, if we take a look at Latin American margins, second quarter over first quarter looks like the delta is more, is even higher than the BFX reduction.

And we've in the past talked about how we'd like to more than offset it.

Is there something that we can point to with respect to how we should look at operating margins going forward in that area of the world?

I know we talk about it a little bit more in the prepare remark, but if you could give a little more color, please.

Sam, the results in the second quarter were directly driven by a dramatic drop in industry demand, and there is significant excess capacity in the Latin America marketplace in the part of the industry.

We've had the ability to continually raise prices during the course of both the first quarter examine the second and the second quarter to cover material cost increases.

Yet the size of this industry decline directly impacted our margins in the quarter.

Jeff indicated in his comments to you we don't think the remainder of the year will be as negative as the second quarter was--a 22% down in the second quarter.

The remainder of the year could be in the 10 to 12% down area from a marketplace demand standpoint.

And so we think that we will show gradual improvement in margins.

There is also a seasonality impact.

Their second and third quarter are the bottom of the trough down there, and the fourth quarter is at the top of the seasonality.

So we'll see in improvement, but given the market dynamics and the industry demand, we're not bowing to get that business back to an 8% or 10% margin level this year.

I have other questions but I'll defer to others on the call.

Thank you.

moving on we'll have a question from Jeff Sprague with Smith Barney.

Hi, thanks.

Good morning, everyone.

First, I just wanted to explore, you know, kind of the market share dynamics in North America.

When you look at the fact that X acquisitions North America is up kind of a little less than 2% and the market was up about 1%, and you think about the positive mix and the comments you had about price, it would actually appear mathematically that your units are below the industry in the quarter.

You indicated otherwise.

I just wonder if you could shed a little more light on what you thought the unit volumes were in the quarter versus the industry?

Yes, Jeff.

What you said is absolutely correct.

We have had -- because we have had positive average selling price improvement, our revenues are higher than our unit sales.

I mentioned that the industry T7 was down 0.8% We were down a little bit below that so we lost a little bit of market share during the court in total.

But it was comprised of record level and strong growth in Whirlpool, the same with KitchenAid, our Kenmore business was down and some of our value brands were down.

I would say the trends, our trends are going in the right direction.

We're satisfied with those trends, and we think as the year goes on, we will be flat or slightly up in market share by the end of the year.

Great.

And I guess maybe along those lines I'm sure you're quite content to sell at the upper end and lose a bit at the lower end, but that does seem to be the prevailing trend at GE and Maytag and others which would lead us to believe that at the lower end the imports are nipping away.

You guys have addressed this question in the past, but are you seeing any increased traction there which has just got kind of a creeping negative effect on the overall pricing structure of the industry?

Jeff, you know, in term of the mix of our business, there is no doubt the upper end is growing.

In fact, we're seeing a shift.

And I think some of our stuff is helping to shift the industry mix there.

The bulk of our business is the broad mass middle and we continue to be very strong there.

The lower end, as we've talked about in the past, we look at product category by product category, customer by customer.

And we make decisions about -- we really manage based on the overall demand in the business and our capacity, how much business we want there.

And, again, we do that part of the business really on a product by product basis.

So I guess our view is that there has not been a dramatic shift.

There is a general, certainly a growth in the upper end and the middle and the low end, where there is not new products or new innovation, there is clearly price erosion.

And just a couple other quick questions on a different topic.

Could you give us a little bit of a sense of what the forward-looking pension expense might be in 04, given the curtailment actions? ?And also, the notion of increase than reserves in China.

Are you seeing some adverse developments in retail or maybe you could elaborate on that?

Let me take the China question.

About a year and a half ago we had our washing business and our microwave business were two separate businesses.

We combined them together.

We had completely different sales forces and trade structures, and we have been integrating them over the last year or so.

And as we did, as we do in all of our units, really audit their operations every year, we concluded that given-that transition in terms of bad debts, trade promotions, obsolete inventory, based on that merger, that we needed to increase our reserve for largely bad debts and inventory obsolescence.

So that's not an ongoing trend that was really, I would say, a conclusion after we merged those businesses together.

Okay.

On the pension side.

You know, we do expect our U.S. pension costs to increase slowly.

We expect our post retirement medical costs to increase much more slowly as we have restructured that.

I think we said at the last call we were also looking at the pension plan.

We have not announced anything, but we continue to look at ways to mitigate the year-on-year increase.

On both of those items we are now expecting the increase will be less than 10% year-on-year versus a rate that was running 15% to 20%.

Thank you.

Credit Suisse First Boston Michael Regan has a question.

Thanks, good morning.

I was wondering, if I look at incremental (ph) margins in North America sequentially, so if we X out the impact of Mexico and we just looked at North America sequentially because the year-over-year impacts from pension costs and those kinds of things it should have been about the same in each quarter.

Again, if we just look at it sequentially sales were up just North America ex mechanic can't consolidation about $140 million, and profits were only up about $16 million so about 9% , 10% incremental margin sequentially.

That seems a little low just given the positive things you're saying for mix and price actions and things like that.

And I'm wondering what might be going on here.

I mean, is price in the middle that bad that it's regular that big an impact when we look at the sequential margins?

Mike, there's a couple things.

First of all, if you look at our historically, generally we typically have a decline in our overall operating margins in North America in the second quarter because of a different mix of products.

For example, air conditioning is a huge part of Q2 and we have very little air conditioning Q 1.

So the seasonality is one part of it.

The other part of it I would say is that is timing of our productivity.

Second quarter of this year in North America, again, just because of where we started the year in inventory and changes that we have taken, the second quarter of this year in North America will be our lowest total cost productivity quarter for the year.

Those are the two major differences.

Okay.

And then I guess the issue always seems to come up, but Europe, it seems like you're I am implying price pressure has been as intense or more intense than it's been.

Margins continue to be difficult.

You're not really making the headway that I think you want to make or need to make.

Price pressure doesn't seem like it's going to go away for any reason, and so again we get back to the question of what do we do in Europe longer term if the margins or returns on capital don't turn out to be the way that we need them to be in.

The pricing pressure in Europe won't be there continuously, Michael, if we get the market that operates on healthy levels.

And right now the increase that we're seeing in market activity, Jeff talked about a 2% to 3% improvement in the second quarter in consumer demand, is encouraging to us, but it's not one that we're taking to the bank right now.

The pricing pressure issues are impacted by capacity utilization and the growth of the market.

So first off, when that continent returns to some decent level of economic activity, there will always be competitive pricing conditions, but they won't be as severe as we've seen over the last couple, three years.

And Michael, in the short term in terms of Q2 and going forward, a couple dynamics in Europe in the second quarter, the market was down in price on a like-for like basis of around 4% which is very high for Europe p our pricing was down around 2.5% which we more than compensated by the productivity.

We say the surprise in the quarter if there was one, is if fact that we had significant interEuropean currency impacts on our margins.

We have big sales volumes in markets like UK and Poland which had significant evaluations.

We import products into them.

That was over a $10 million margin hit in the quarter.

That's something that we've got to deal with.

In the second half we think we will be able to deal with it.

Those currencies appear now to be stabilizing.

In those markets which were significantly hit by currency we've already announced and are implementing August 1st price increases to make up part of that currency loss.

Our TCP in Europe in the second half will be greater than in the 1st half.

And then finally, another important factor I think also for the long-term is we are ram opinion up our eastern European production.

We have a major facility in Poland which largely will double its production in the second half of the year for export.

So that weak currency there will actually help us.

And it also gets to the fact that as we talk about before, by 2005 we will have 50% of our production value in these low-cost producing countries, which I think will ensure our competitiveness.

Michael, in the quarter that interEuropean currency impacted margins by about 2 points.

Okay.

That's a lot better answer than the price issue.

I don't share your hopefulness on price, Dave.

Well, I don't think it's going to turn positive.

I don't think we're going to get in an viral where we can raise prices.

Less worse.

Yes,, less worse.

That's a good word.

we'll hear with Eric Bossard with Midwest Research.

That This is actually James for Eric -- he had to take a call.

My question is with the inventory growth.

It seemed a little high and we were wondering what you guys were going to do with inventories and when we'll see a little improvement there?

Our inventories were up about $30 million in total above what our plan was for the quarter, and I'll let Steve address it in more detail here.

Yes.

The in inventory growth, you know, year-on-year, of course, as I said, was higher versus the six months of last year, simply reflecting the starting position for inventories, which were abnormally low at the beginning of this calendar year.

As I also said in my remarks, though, we are above a normal level, and there are really a couple reasons for that.

The stirs is that we continue to execute our restructuring and manufacturing footprint plan.

We have to build stock as we move production from one location to another.

And so we have had some stock increases due to that.

The second, a more recent one, which has to do on imports and containers imported into the United States homeland security is taking a longer period of time on that one, and that's cost us about seven extra days.

So that's really the flow effect right there.

Thank you.

Laura Champine of Morgan Kegan has a question.

.Good morning.

Could you talk about, you're obviously doing very well with the Duet and clips oh products.

Could you talk about what the change was in North American selling price excluding the laundry category in.

Well, that we think is competitively sensitive information and we don't get down to the product category, but the Duet by itself would not have taken our average selling prices up to that amount.

Laura Champine Okay.

Can you talk directionally about whether or not excluding the laundry category your ASP would be up or down?

Well, I'll give you a good exam tell if KitchenAid brand where we have a very small part of that business, less than 7% of that business is laundry.

Our ASPs were up slightly versus last year.

Broadly speaking, where we've had major new product innovations, we've had increases in our ASPs.

Where we've had little change, we also have had price deterioration.

But in total excluding laundry I don't have that number directly but we really don't pull it out directly that way.

Laura Champine Okay.

And any thoughts on potentially selling through not just Home Depot Expo but Home Depot in general?

As we've said, for a number of quarters now, we are really pleased with the decisions we made from a distribution standpoint.

We continue to sell the expo operations, our KitchenAid brand, and again as I look at our structure today, our distribution struck structure and how it's performing, we're pleased with where we are.

Thank you.

as a reminder, if you would like to ask a question today please press star 1 now.

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

Yes, good morning.

Can you just give us a sense of what your expected improvement in cost benefits ac tits would be in the first quarter versus the second quarter in.

That's really a competitively sensitive piece of information.

You know, we told you all in the past that we historically had driven our businesses to every year a 3% total cost productivity.

Again just to remind you, we define productivity, if manage cost $100 and there is 2% inflation, our business has got to take 5% out to get to a net 3.

We are running across our businesses at significantly higher levels than 3%.

We have record levels of TCPs for the first six months of this year.

They will be at higher levels for the second half of the year.

Okay.

In North America, KitchenAid--obviously a very strong quarter.

Can you give us a sense of the breakdown between retail sales versus the builders channel for the KitchenAid brand?

Well, in total for our business in North America it's about 70/30 retail to builder.

KitchenAid is about the same, although I would say that it is growing by design much faster in the contract channel than it is the retail channel.

So we really see that as a big, in fact, it is our fastest growing piece of our business, is KitchenAid in the contract channel.

and how much forward visibility do you have in the builders channel?

About six to nine months.

On firm orders. we really have about a year to 15 months in terms of, you know, what construction is actually started in the new permits and all that kind of tough.

Okay.

Thanks.

And on the Mexican operations, can you just give us an update on the operating leverage story there?

How are you coming along?

I understand through some of our store surveys that you were actually, the questions was raised earlier in call, you were actually higher in displacing higher impact refrigerators?

And also if you could just talk about the operating leverage story there and how much upside exists.

Well, first of all, on the compact refrigerators, that actually comes from our Brazilian operation.

And they are very competitive in that segment, and that's a part of their 29% of their production being imports.

They're exporting compact refrigerators, full-size fringe refrigerators, and air conditioners for us really around the world.

Mexico, I guess there's a couple dimensions on Mexico.

Number one is, we're can I significantly growing our business, our market share is up in the domestic market in Mexico.

The margins in that business historically have been lower than our U.S. margins.

They are improving, and our expectation is there is no reason to believe in our minds that our mar generals should be any different there than they are in the U.S.

So we have a lot of I think opportunity to grow operating earnings through our continue growth and efficiencies in Mexico.

And then the last dimension is the amount of products we're exporting out of Mexico into the U.S.

That really hasn't changed dramatically year-over-year because we're in the process of it's not just exporting but we are in the process of making investments in new product platforms which are probably six to 12 months away for not only the U.S. market but for multiple markets around the world.

That's when we'll really see the big jump in both production and exports out of Mexico.

Okay.

What's the capacity utilization of Mexico right now?

It's based on current install base, either about 75%.

With these investments we will have more capacity there.

We look in the next year and a half to double the exports out of Mexico.

Last question for David, it seems as though the business, I mean, I thought this was a pretty good quarter.

Someone in the market seemed to disagree with me this morning.

But do you take advantage of the strength in your operations right now and despite this big head wind and explore ways to take the Whirlpool brand outside of the kitchen and laundry room and see how far the consumer will get let you go with this brand is if and can you talk about what you're seeing in terms of preliminary results?

It is entirely based on what the consume are gives us permission to do, and we continually do a fair amount of research in trying to understand how far we can stretch this brand.

You've seen the gladiator garage (ph) works which carries the Whirlpool monitor on it.

We are licensing a major U.S. central heating and air conditioner manufacturer for the use of our brand with very nice royalties coming from that business.

It's a national distributor operation.

So we continue to look at a number of different opportunities.

But it's an area that we truly believe that we need to tread very carefully with.

We have seen participants in our industry take their brands where customers absolutely don't believe that they should be, and it ends up hurting the base business.

But, yes, we have a continual program of looking at opportunities outside of the standard core products that you've seen us sell in the past.

Thanks very much.

our next question is from Steven Simmons with Flippin (ph).

Really trying to, most of my questions have been answered but I'm trying to get a feel for the allure of maintaining your operations in Europe.

How much of the sales generated in Europe come from actual manufacturing assets in Europe?

Today it's probably close to 90%.

Jim, 90%.

What we've talked about over the course of the last couple of analyst meetings is that we are gradually moving production to low cost wage areas.

This year we'll be about 25% of our sales in Europe will come from low cost wage areas.

We define that not just as central or in eastern Europe but also Asia as well as Latin America.

And by 2005 we will be up to 50% of our sales levels in Europe will come from low cost manufacturing areas.

But still in Europe.

No, not, absolutely not.

We're moving to central Europe.

And again when we talk about moving to central Europe we've shared with you in the past there this is a 12% to 15% landed cost reduction back in western Europe when we move that production or put that production in place in central Europe, but, again, it's not all from there.

I mean, all of our microwaves, we've got a microwave plant in China, we build 2 million microwaves a year p they are almost all exported to Europe and the United States under our brand.

We're manufacturing in Brazil full had-size refrigerators.

They are having a very nice sales impact in Europe.

So it's a mix of our manufacturing footprint assets across the globe.

Steven Simmons It seems like it would -- I know you've mentioned this on several calls just kind of going through the scenario, but it seems like it would be beneficial maybe to dedicate some type of conference call just to what you're strategy in Europe is.

We hear bits and pieces from time to time but in an all-inclusive setting I think it would possibly give investors some confidence that manage actually is positive in the out years.

That is an excellent suggestion and we do have plans to put together an analyst meeting where we would bring you to a location and not just talk about Europe but talk broadly about our strategic direction.

Great, thanks.

Banc of America’s Nicole Parent has a question for us.

Los of my questions have been asked and answered.

I guess if you could just provide a little more color on the new innovative products that you've, particularly Gladiator Works, the Personal Valet (ph), kind of the pipeline as you look out over the next 12 to 18 months.

Yes, Nicole.

First of all, starting with graduator, we are in the midst of a national rollout.

We do have all of our products developed and supply base in place from an operations standpoint.

We have I think mentioned earlier, we are now selling through Lowe's which is starting to go very nicely for us.

We're also selling at, and, again, I speak of the contract channel, we think in the short to medium term the biggest opportunity we have is in the contract channel, both through direct builders, national builders, as well as our ACD network which saw literally thousands of mall to medium-size dealers in the marketplace.

Every one of those now are equipped to sell.

There is a lead time on it.

Again, I would say the business this year is not going to be a huge revenue impact, but the orders and the interest that it's generating is r encouraging.

And so I think we're really going to start to see some significant revenues for this really beginning next year.

And largely through the contract channel.

Personal Valet, there's two dimensions to that.

I don't know if you recall, I think it was the last meeting, we really talked about and showed a picture of our Family Studio which we introduced also to the builder, the national builders' ho here in the U.S.

It rally is all about here not only selling these products individually but selling them as packages, and part of the Family Studio is really a new kind of fabric care room frankly to make space for all new innovation that we're prig out, not only the personal valet but the drawing closet, we have a sink washing station as well as our Duet and Calypso products.

That, too, is starting to get real traction.

We do have the Personal Valet on sale through a limited distribution number of retailers in the U.S. as well as through our ACDs.

So a lot of these things we're really building the infrastructure we think to build a very nice business going forward and it's, right now I think, tracking pretty much in line with the way we would expect it.

Again, what I think we need to do is recognize that innovation and product goes beyond what we would call these high visibility, high-end U.S. product categories.

We've talk to you in the past about we've taken our Conquest side by side refrigerator, which that innovation is moving ice into the door significantly improving the capacity of the refrigerator.

We've taken the concept to Europe.

Totally new innovative product to the marketplace.

The Duet product is reaching the kind of success levels we have talk about.

We've now taken that to Europe.

That's a totally new product in the marketplace.

We will be introducing line extensions to the Duet product category that we have in the United States at different price points.

I've talk to you in the past that we've now just begun to introduce the world's lowest cost fully automatic washer that was designed and built in Brazil.

The manufacturing cost of $100, again, which accelerates the entry into the market of the first-time consumer am we've introduced, we talked about this KitchenAid pro line of small appliances.

They are very small and they are very high end.

Average retail is across seven or eight different categories of $250 to $1,000.

William Sonoma was so intrigued by it they have on bought our entire first year production, they will be the exclusive retailer of that.

So this goes beyond the high visibility things that we're talking about and what is innovation in one market in may not be in another.

We are absolutely focusing this on our global opportunities, not just the North American marketplace and not just the high end.

Great.

And I guess just a follow-up on Gladiator Works.

Could you talk a little bit about the brand strategy?

Because it seems like Gladiator Works is the primary brand with Whirlpool kind of taking a second tier?

It's hard to associate Whirlpool with Gladiator Works.

Could you talk a little bit about what the brand strategy is there in--

Yes.

It is absolutely to make sure that the consumer knows that this is a Whirlpool product, branded product from Whirlpool corporation.

I think most people, and I've gotten that same feedback from both friends and consumers, are taking their concern from front gates advertising in the front gate catalogue where they didn't have Whirlpool in there at all.

If you look at the version that came out this week the full page add starts with Whirlpool.

So in some respects it's correcting some of the mistakes that we and the retailers that is correct we allowed the retailers to make in presenting this to the consumers.

Great.

Thank you.

we'll take a follow-up question from Jeff Sprague.

Just a can I go one on the BFX I think it's $100 to $200 million that is theoretically there but you're not using.

Is there any visibility on your ability to tap back into that and any milestones we should be looking at?

No, there isn't.

We can't estimate the time.

It's in the Brazilian court system.

It isn't a question of whether we can take it.

It's a calculation of the remaining benefits.

And that judicial system down there moves with no predict predictability at all.

All right.

Thanks.

Time for one more question.

And that will be a follow-up from Steven Simmons with Flippin.

Yes.

When will you be putting out 2004 guidance?

Is that third quarter?

We are not even, we're just beginning our profit planning process for 2004.

Guidance, if given, will be at the end of the year. (inaudible)

Okay.

Thanks.

Okay.

Well, we thank all of you very much for taking the time to be with us this morning.

and once again thank you all for your participation.

That does conclude today's conference.

You may now disconnect.