惠而浦 (WHR) 2003 Q3 法說會逐字稿

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

Today's call is being recorded.

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

Please go ahead, sir.

Good morning, I'd like to welcome all of you to our third quarter conference call.

Our opening remarks will refer to a slide presentation which is available on our investor web page.

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

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

Our actual results could 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 restructuring activities.

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

A detailed reconciliation of last year's GAAP to core earnings is available on our corporate website on the investor page under "presentations."

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

David?

Thank you all for joining us today.

As I indicated in our press release this morning, I am pleased with the overall third quarter performance of the company.

At the revenue line, we had a very strong reported sales gain of 12.8%, excluding currency, dollar sales were up 9%, solidly outpacing the global appliance industry performance and we're on slide No. 2 on the Internet presentation.

Our reported earnings were $1.48 per share, it was off 8.6% from last year's core earnings of $1.62 per share, which excluded the impact of 16 cents a share in restructuring related charges last year.

As Tom said, you will recall that we have, throughout this year, compared this year's net earnings to both 2002 net and core earnings, so that you would have a clearer view of the relative operating performance comparisons.

Now to slide 3, as we've indicated from the beginning of this year, our task has been to overcome $1.33 in negative year-over-year comparisons, which is comprised of 86 cents per share in U.S. pension cost increases and 47 cents a share with the loss of the BFX tax credit in Brazil.

These two items totaled 33 cents per share in the third quarter.

Additionally, in this third quarter, foreign currency negatively impacted net earnings by approximately 10 cents per share.

And additional share dilution, resulting primarily from the company's higher stock price and employee stock option exercising reduced third quarter earnings by 4 cents per share.

There are several drivers that helped us overcome a large part of the impact of these negative items.

You go to slide 4, first we can continue to see very strong demand for our brands, leading to record revenues.

In North America, record revenue performance with our Whirlpool and premium KitchenAid brands was driven by a continuing stream of innovation in both products as well as services.

In Europe, we continued to drive solidly improved volumes, as well as improved operating profit performance.

In total, and regionally, we are delivering record levels of total cost per activity.

We are realizing the benefits of our restructuring activities that have been executed over the last couple of years.

All of these drivers are producing strong underlying operating performance improvements in our business and have allowed to us largely overcome the $1.33 per share headwind we faced as we started this year.

As we look to the beginning of 2004, these negative year-over-year items will be largely behind us and those underlying operating performance improvements will be translated far more directly to net earnings improvements.

Looking ahead to the fourth quarter, we see solid margin expansion for the total business and we will deliver record earnings and record performance levels for the company in the fourth quarter, despite the significant challenges that we face in our Latin American business.

Jeff Fettig will shortly cover in detail each of the regional businesses, but clearly while we are seeing some positive economic signs in Brazil, the appliance industry continues at more depressed levels than we had forecasted earlier in the year.

In our press release this morning, I indicated that our Latin America business fell short of our third quarter forecast and will also fall short of our full-year expectations.

Going to slide 5, accordingly we now believe that our full-year earnings will more closely approximate the lower end of our previous guidance of $5.90 to $6.10 per share.

Today, we are seeing many positive signs as we monitor the progress that the government is making in Brazil.

But we believe it will be more impactful on our 2004 business than it will be on the fourth quarter of this year.

Stepping back, again, and looking at our total business performance, I do believe that we had a very solid quarter.

We overcame the 33 cents a share in various year-over-year charges, plus the challenges in Brazil.

I will reiterate that we believe we will deliver solid margin expansion in the fourth quarter.

We will post record earnings per share and revenue performance and as we enter 2004, most of the sizeable negative headwinds of $1.33 a share that we've experienced this year will be behind us.

And again, consequently, the underlying operating performance will far more directly translate into net earnings and earnings per share growth.

Let me now turn this over to our President, Jeff Fettig, for a more in-depth regional review.

Good morning, I will begin on slide 6 with comments about our North America business, where as Dave mentioned, we recorded a record level of revenues for the third quarter.

Our overall revenues grew by 12.1% in an industry where the T7 product shipments grew by 9.3%.

Our operating profit declined by $4 million versus last year.

And again to note, these end results included about $22 million in additional pension expense, which was equivalent to 1.1 points of operating margin, as well as $4 million in negative currency impacts from imported products sold in the U.S.

During the quarter, we had record shipments for both our Whirlpool and KitchenAid brands, which grew 18 and 16% respectively.

This performance for our two major consumer brands reflects the growing strength of these brands with consumers and the very positive response we continue to have for our recent new innovative product launches.

Our new premium KitchenAid pro-line which is shown on slide 7 is off to an outstanding start and will continue to extend KitchenAid's leadership position in the premium appliance segment.

Along with that, our new KitchenAid portable pro-line is truly, we believe, redefining the premium portable appliance segment of the market.

We did begin with full production of these products in September.

Williams Sonoma, the upscale retailer of premium home products has committed to the full year of production of these pro-line KitchenAid portables for the balance of the year.

We just flipped through slides 8 through 13, you will see the Williams Sonoma fall catalog, which features exclusively the KitchenAid pro-line products with both the front and back covers of their catalog, as well as the first four pages of this catalog with full product descriptions.

Never before have we had such an overwhelming response in trade support for a new product line offering.

We believe both the pro-line portables and majors will create well over $100 million new revenue gross premium for us on an annualized basis.

Looking ahead to the fourth quarter in North America, we expect industry demand to grow by 2 to 3% and expect to continue to outpace this growth in the market.

We also expect to have very solid margin expansion, driven by both product and brand mix, as well as record levels of productivity.

On slide 14, I will turn to Europe where we improved our operating earnings by 40% and had a 19% revenue growth.

Of course, in these numbers, we had the very favorable euro, the U.S. dollar translation impact, but in local currency, revenues were up 5%.

We did see improving market demand during the quarter, which we estimate the market to have grown by about 3 to 4%, that's slightly different than what's on your slides, showing 2 to 3%.

Our unit shipments for Whirlpool grew by 7%.

And although most economic indicators remain negative across Europe, we have seen a clear uptick in consumer sentiment majors in all major markets in Europe.

We're now forecasting the market demand will be in the 2 to 3% growth range in the fourth quarter and our business continues to have a very strong order pipeline.

We will also continue to drive record levels of productivity in Europe for the balance of the year.

And in total, we expect to grow our business in Europe in the fourth quarter and margins should approximate our third quarter levels.

Turning now to slide 15, as Dave mentioned, our Latin America business continues to be negatively impacted by very weak consumer demand.

During the quarter, the Brazilian market demand declined by 10%.

Revenues for us during the quarter grew by 7.4% in part due to a strengthening in Brazilian currency versus the U.S. dollar.

Our revenues were up 1% on a currency-adjusted basis.

Our operating margins were 4.2%, which was a 4 point decline versus last year.

Margins were negatively impacted by lower demand, stronger local currency and increases in material cost.

The market situation as we've spoken about before has been very depressed all year.

The new government in Brazil has successfully improved the Country's financial risk position in the eyes of the global financial community.

But as we said before, these actions have kept consumer demand and particularly consumer interest rates very high.

Well over 100% for most of the year.

Which really has caused a sharp decline in the installment purchases.

Late in September, the government began to take action to stimulate domestic demand.

These actions are highlighted on slide 16.

Interest rates have dropped significantly over the last several months, and in addition, the government has launched a stimulus package to spur demand with consumers for purchases of major appliances.

This stimulus consists of an interest rate offering of 2.53% per month on purchases of selected products and extends the installment period to a maximum of 36 months, which makes the monthly payment much more affordable to the mass consumer market in Brazil.

This compares to previous market offerings in the 5 to 8% interest per month with only 12 months of credit.

So, with this offering, we've also seen that retailers in Brazil followed in our increasing our advertising, promotions, as well as lowering their store credit interest rates on all products.

To date, after only 30 days, we've seen a marked change in the environment.

Trade orders are up significantly and the early signs are that consumer demand is beginning to increase due to this offering of affordable consumer credit.

Our own order pipeline in October is about double what it was a month ago, so we're beginning to see the positive impact of these programs on our business.

Given this positive change in the environment, we do expect to see increased demand in improving operating margins in Latin America in the fourth quarter.

Now turning to slide 17, in Asia, we had revenue growth of about 5%, led by solid increases in our two primary markets in Asia of India and China.

Operating profits were down by $2 million and this decline came totally from a continued slowdown in the Hong Kong market.

This market, although small, remains down very significantly post-SARS and it is one of our most profitable markets in Asia.

We are expecting very strong improvement in our Asia business in the fourth quarter.

The fourth quarter period is the highest -- seasonal, is the period where seasonal demand is by far the highest in the year within the region.

And given our trends in India and China, we expect to have strong double-digit growth and a marked improvement our operating margin versus the third quarter.

To sum up slide 18, we clearly are beginning to see positive momentum in most of the key global markets around the world.

Consumer demand appears to be improving and we're outpacing the market due to our strong brand position and consumers' response to our new product innovation.

We expect this momentum will continue in the fourth quarter and that we're going to be able to deliver a record year of revenues, solid earnings performance, largely offsetting the $1.33 per share that Dave mentioned earlier due to pension expense and loss of BTX tax credits.

Additionally, we expect to generate very strong levels of free cash flow throughout the balance of the year.

With that, I will turn it over to Steve Barrett, our CFO.

Thanks, Jeff and good morning.

If you will please move to slide No. 19, I will walk you through our performance of operating profit to net earnings.

From operating profit, the first line item is interest income sundry expense.

You will note that we are $5 million higher in net expense than last year.

This is primarily attributable to a less favorable currency impact on our Brazilian business.

Interest expense is $5 million better than last year, reflecting lower post-acquisition debt and primarily lower overall interest rates.

Income taxes declined year on year by $4 million, entirely related to the decline in pretax income.

Note, however, that our effective tax rate on the quarter was 34.6%.

As communicated during the last conference call, this is below our original expectations of a 36% ETR.

A function of tax planning work and additional foreign tax credits related to audit settlements.

Based on this, our year to date effective tax rate is 35% and we expect to end the year at this rate.

Slide No. 20 summarizes our cash flow performance.

Through September 30, free cash flow after dividends was a negative $23 million.

This represents a $187 million improvement over our Q2 actuals.

Included in our free cash flow actuals for the quarter is a pension contribution of $164 million, of which $162 million was voluntary.

This voluntary contribution will enable us to sharply reduce and level out future pension contributions.

Additionally, the pension fund asset returns we received from this contribution will enable us to limit projected pension expense increases in 2004.

With this contribution, we now expect to generate approximately $250 to $275 million in positive free cash flow during 2003.

We have exceeded last year's free cash flow by about $16 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 $240 million.

Partly offsetting this effect was our pension contribution of $164 million.

We also had higher restructuring-related spending and slightly more working capital to support higher sales levels.

Turning to slide No. 21, I will talk a little more about our working capital as well as some other balance sheet metrics.

Our net working capital level is at $1.534 billion, this is equivalent to 13.1% of sales, which is 1 point better than last year's levels.

On a year to date cash flow basis, as shown on the earlier slides, networking capital has increased $25 million more than in the first nine months of 2002.

This increase is driven by the overall growth in our business, which is up 7% year to date, excluding currency.

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

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

Resulting in a lower rate of receivables growth and a higher rate of inventory growth year to date versus year ago.

Our inventories remained only slightly higher than originally anticipated.

This is partly due to the continuing weak economic conditions in Brazil but really more a function of increased exports out of Brazil and normal inventory banking in support of our restructuring and footprint activity.

However, our expectation is to drive both inventories and receivables lower over the balance of this fiscal and this is baked into our $250 to $275 million cash commitment.

Moving to debt, overall levels are down 11% to about $1.6 billion.

As you recall, during 2002, we took on additional debt to fund our acquisitions.

We've been able to pay down our debt with cash flow from operations.

Our debt to capital ratio of 57.6% is down from last year's 65.6%, reflecting our lower debt requirements.

Our interest coverage ratio of 5.4 times has improved from last year's strong levels.

Overall, our financial position remains strong and our debt rating remains triple-B-plus from Moody's.

Now, looking at the return on equity and return on total capital metrics, these measures are presented on a GAAP basis that is with full restructuring costs, but excluding the FAS 142 impairment charge in Q1 of last year.

ROE shows a strong improvement and this is primarily driven by lower restructuring costs.

Return on total capital shows an improving trend from 16.9 to 17.8% and this is also impacted by our restructuring program.

I'd like to briefly comment on our outlook for fiscal 2003 on slide 22.

As Dave noted at the outset, we're feeling quite positive about our results for this quarter.

Solid volume progress, together with productivity and restructuring savings, combined to offset almost 2/3 of the headwind and share count dilution effects we experienced.

However, the macroeconomic situation in Brazil has been much tougher than we originally anticipated.

And while we now expect improving trends in Brazil, the year-to-date impact has been significant.

Accordingly, we now expect total year results closer to the low end of our prior guidance.

And finally, on free cash flow, we now expect to conclude the year in the range of $250 million to $275 million and this is essentially in line with all earlier commitments adjusted for our recent action on pension funding.

With that, I will turn the call back to Dave.

Okay.

And let me 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, you may do so by pressing the star key, followed by the digit 1 on your touch-tone telephone.

If you're using a speaker phone, please be sure your mute function is turned off to allow your signal to reach our equipment.

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

Once again, ladies and gentlemen, that's star 1 on your touch-tone telephone.

And we'll take our first question from Nicole Parent with Banc of America Securities.

Hi.

This is actually Melissa Roberts, Nicole's associate.

Nicole had to step out for a minute.

My first question is, could you provide some color maybe on 2004 and by region?

And secondly, can you talk a little bit about why other income was lower in the quarter and kind of below recent trends?

And what we should be looking for for Q4 and 2004?

Thanks.

First to the outlook for '04, we will not be issuing any guidance on '04 until late in the year or probably in January when we issue our fourth quarter earnings release.

Right.

On the other income and other expense, that is an item, as I have explained in the past that is impacted quite a bit by currency fluctuations.

And about a year ago, as I was coming on, we experienced in Brazil a major devaluation in the currency.

Approximately 1/4 of our sales out of Brazil are U.S. dollar-based.

That created a windfall balance sheet effect of about $13 million and there were some other items within that account, but we're simply not experiencing that same effect in this quarter.

Okay.

Thank you.

And if I could just follow with one more question.

I think the materials today kind of suggest that pricing was tough in Europe.

Could you talk a little bit about that?

Yeah, the pricing trends in Europe are really a continuation of what we have seen most of the year.

It has been products and the like for like basis have been down 4 to 5%.

Our pricing and our delta between unit sales and revenues has been about 2%.

So, we're experiencing about half of what the industry is.

And fortunately, we're having very strong levels of productivity, so we're still able to offset that and increase our earnings.

For example, in the third quarter, our European revenues, or units were up about 6.7%.

X currencies our revenues were up a little over 5%.

So, you can see the delta there.

Okay, thank you very much.

Uh-huh.

We'll go next to Eric Bosshard with Midwest Research.

Hi, this is actually James, Eric's associate.

Eric had to step on another call.

My question is, you had mentioned that your North American revenues were outpacing industry.

I was hoping that you could elaborate on market share dynamics taking place in the North American market, not only in terms of your different product lines, but also in terms of the different price points?

Well, the way we usually reflect it is through our brands and as I mentioned, the T7 industry was up 9.3%.

Our KitchenAid brand was up 16%.

Our Whirlpool brand was up 18%.

If you take the other pieces of our brand portfolio, our Kenmore business was positive but it was single-digit and our value brands were slightly positive.

So, that's really the composition, so in essence, we have in total, we gained share in Q3, particularly in our Whirlpool and KitchenAid brands.

And again in North America, we had revenues up some 12.1%.

We had units up 12.9%.

So, we were very close on a unit and revenue basis.

Thanks.

We'll go next to Jeff Sprague with Smith Barney.

Thanks, good morning.

I guess I'd like to explore the margins a little bit.

I'm actually a little further confused based on the last answer about the strength in KitchenAid and Whirlpool.

Stripping through kind of the pension headwind in North America, it looks like North American margins are flat, down slightly, somewhere in that range on really robust volume growth and apparently volume growth at the top of your brand structure.

So, I guess I don't understand why there's not better conversion of that revenue growth into margin expansion?

Yeah, Jeff, two or three things I would point out.

One is, embedded in those Q3 numbers is the pension increase which equates to about 1.2 points of margin.

Secondly, and it's not a big item, but we do import product from Europe, so, for sale in the U.S., which cost us about $4 million or that's about 2/10 of a point.

And third thirdly, we continue to invest in our brands and we're investing in product innovation at an ongoing rate, which we're up slightly during the quarter.

So, that's the color behind those numbers.

As we mentioned, we do think we will have our strongest margin quarter in the year in the fourth quarter with this same brand mix, but with a much, just a timing of our productivity this year, will be highest in the fourth quarter and we're expecting about a full point of margin improvement fourth quarter versus third quarter.

I mean could you elaborate a little bit more on that Delta?

Because, I guess, the pension and the import issue looks like it explains the margin decline.

So, then you don't have the leverage, so basically you got flat margins on sales up 12%.

So, is there a certain amount of spending that happened in Q3 that doesn't happen in --

Really, three things, Jeff.

One is, as Dave mentioned, there was a little bit of price erosion, as you saw in Q3, in terms of about 8/10 for not margin, necessarily, but ASP versus units.

That had a negative impact on margins.

No. 2, just again, the timing, our productivity was actually lower in Q3 just from the timing of projects we had planned in the year.

On the other hand, it will be the highest of the year in Q4.

And thirdly, we are investing at a higher level to drive these new product innovations both in engineer expense and market launches, which is more just, is timed with these product launches.

So, those are really the three drivers behind that.

And if I could get one more in on the pension dynamics.

The comment about headwinds is more along the lines, I take it, of no substantial increase in the headwind.

For example, your pension expense, I would gather, is a little higher in '04 than it is in '03, so there's no reversal there.

Is there any reversal, though, in the ability to use BFX or anything else that potentially is a tailwind of sorts in '04?

No, both of those headwinds will exist in '04 and again, with those we will drive to record levels of earnings and solid margin expansion in the fourth quarter.

And could you just update us on the funded status of the plan and --

Okay.

Jeff, on an ERISA basis now with this latest traunch we've put in, it's overall about 120%.

Now, on an accounting basis, looking at the ABO versus the market value of the assets as of yesterday, it's about $50 to $100 million.

But as you know that ABO number is very sensitive to changes in the discount rate.

And I think every 25 basis points in our business is worth about $50 million.

So, we're assuming now about 6.25, that's down from the 6.75 we closed out December with.

I guess you will take an equity charge of that $50 to $100 million in the fourth quarter, then?

Well, we're hoping not, actually.

The market return on the assets, just in the past six weeks, has been quite strong for us and we are within spitting distance right now of no equity charge at all.

And if we do have one, again, it all depends largely on where the interest rates go.

It would be $30 to $50 million.

But the way things are going, we really don't expect one.

And I'm sorry, could you just give us a little color on what the incremental pension P&L looks like in '04 versus '03?

Minimus.

Very largely a function of what we just did with the $150 million in.

That was the purpose of that voluntary contribution.

It did two things.

One, it reduces the contributions we have to make over the next five-year period and takes out the large volatility year-to-year.

And again, will take down our contributions or expense levels next year as Steve said to minimus levels.

Okay, thanks a lot.

We'll go next to David MacGregor with Longbow Research.

Good morning.

Good morning, David.

I wondered if you could talk a little bit about a couple of the moving parts as we move from 3Q into 4Q, specifically the restructuring benefits.

And secondly, your cost productivity benefits.

I know you typically talk about realizing or aiming to realize a 3% year-over-year gain on your cost productivity program.

I guess what I'm trying to get a sense of is how much of that comes to the bottom line in the fourth quarter versus what came to the bottom line in the third quarter?

David, as we've chatted before, we're running significantly above our 3% past targets on total cost productivity.

Let Steve deal with the --

I will address the restructuring program that we closed out last December.

As we have previously disclosed, in that program, annualized savings of about $200-plus million are expected.

The year on year for total 2003 was about $45 million and so each quarter we're adding in about $12 to $15 million.

So that's the net extra we expect from just that piece in Q4.

And that's part of our productivity.

Right.

David, I would also add in, it varies a little bit by region, but particularly with North America, where we expect to have a big increase quarter-over-quarter.

Fundamentally, our total cost productivity is driven by improvements in manufacturing processes, by procurement, product redesign and specific projects.

The first two items are rather consistent throughout the year.

The second two are timing-specific and those are the two things where we have clear, have already executed projects, which will show those benefits in the fourth quarter.

And in the case of North America, we expect we will almost double our total cost productivity in the fourth quarter versus the third quarter, based on those two items.

Okay.

Good.

I'm sorry?

Okay, I had a couple of other questions, just on the cash flow, I guess in the past you've talked about your share repurchase program becoming a little more of a priority as you would get your debt to cap down closer to sort of the mid-50s and I see we're getting pretty close to that point now.

I wonder if you could just talk about how much cash you'd have left in the cash flow program this year for share repurchase authorizations and the extent to which that's becoming an increasing priority for you?

Surely it's becoming more of a priority because of the dilution we saw in the third quarter with an extra 1.5 million or 2 million shares out there.

So, we are really focusing on that.

As we look forward, we still believe that our shares represent a value for our company, that we can create value by buying back our shares.

I wouldn't say it's reason to any higher level of priority than it has in the past.

We've talked about paying down debt, we've talked about funding, the strategies of the company, acquisitions, as you know, we did Mexico last year, we did Polar last year.

So, it's one of the pieces of the mix on how we use the capital of the company and we continue to look at it, David.

As well as looking at using the cash for increased dividends.

Okay.

And on Latin America, I wonder, can you just talk about whether Embraco is growing or not?

Embraco is growing.

It has approximately 24% market share of the world compressor market.

They were impacted in the third quarter by currency, because as we have talked in the past, an excess of 60% of the production coming out of Brazil is dollar-based.

So, that surely impacted us in a negative way.

But they are growing.

They are, I think clearly the world premiere quality and technology leader in hermetic compressors for refrigerators.

What are your capacity utilization rates across your entire Latin America business, both Embraco and the consumer business?

Embraco is running flat out, 100% capacity utilization.

The industry in the major appliance side is running at something around 50% capacity utilization.

We are not much different than that.

What we've talked about in the past, we've lowered our break-even in Brazil over the last couple of years in excess of 40%.

We've done that not by taking hourly workers out, but by fundamentally changing the cross structure of the business.

I think you all know we have the preeminent market position in brands.

We have about 37% market share in Brazil.

We got in the high 40% on value share.

And we've got a whole new cost structure put in place.

So, as this market comes back, it will come back.

We will leverage that cost structure, I think, in a very positive way.

So, turning to Latin America's export story, do you get 1 million units this year?

Yes, we will get to 1 million units.

That will be up from 250 or 275,000 last year.

And maybe you can just, while we're talking about exports, talk about some of your other export bases around the world.

Are export volumes increasing in line with your earlier expectations?

Or is there a slowdown in the export volumes?

No, I would say it's increasing, I will give you two or three examples.

One, as Dave mentioned, Brazil, we will go from about 250,000 units to over a million units.

In China, through our microwave oven facility, we will export close to 1.3, 1.4 million units to primarily Europe and North America.

In Europe, we're well on our way to exporting over between 600,000 and 700,000 of our Duet washers from Germany to the United States.

And we have a plan year by year to systematically increase this to get both competitive products, innovation fast to the marketplace and better asset utilization.

Okay.

I'll leave it for now and get back in the line.

Thanks.

Thank you, David.

We'll go next to Laura Champine with Morgan Keegan.

Actually, this is Anand Krishnan for Laura Champine.

Following up on David's question, can you give a sense of current plan utilization levels at your North American business and what are your expectations for Q4?

Our plant utilization levels in North America U.S.?

Yes.

We think we're currently running someplace in the mid-80% level.

On average, that's about where we should run these plants, the mid-80s to the high-80s and as we look across our total system in North America, we're at that level.

Okay.

And also wanted to check up as to what exactly changed in your Latin American business that drove margins down substantially on a year-over-year basis?

There's a number of things that drove margins down.

One, just demand levels are so depressed.

As Jeff talked in his opening comments, the industry was down from 18% the first six months of the year, the third quarter was down fairly significantly.

Foreign exchange impacted margins.

Material costs are up significantly Brazil.

If you get behind our Brazilian numbers, we've increased pricing in Brazil close to 18% this year and on the other hand, costs have been going up roughly the same amount In that inflationary environment.

So, there's a number of things that are impacting our margins there.

The solution to those, I mean we are doing exactly the right things inside of our business to manage in this kind of an environment.

And the solution clearly is for a recovery on the volume side.

The government programs that Jeff talked about are, in fact, intended to stimulate demand in Brazil, and in a developing country like that, installation purchases are absolutely the key.

There have been virtually none for most of this year.

The government program and if a consumer could get it, as Jeff said it was 100% interest rates it was 6 months to a year outside installment purchases.

The government program takes this down to 2.5% a month roughly and has extended it from 24 to 36 months.

This makes this affordable for the average consumer.

The other thing that's happened, this was on a select group of appliances.

This program is only for the appliance industry, but the retailers across Brazil, in turn, have extended largely this program across the other appliance product categories.

So, as Jeff said, we've seen a significant increase in our order position in Brazil from retailers as they anticipated improvement in demand.

The other thing in Brazil, I think all of you know, our seasonality down there is such that they're in their summer.

It is Christmas season in the fourth quarter, as always the strongest quarter of the year.

Thank you.

We'll go next to Philip Gusen [ph], Credit Suisse First Boston.

Yes, good morning.

Philip Gusen, fixed income research here.

A couple of questions this morning.

Can you perhaps comment on what you're seeing in terms of channels of distribution, more specifically traditional guys like Sears and then the new entrance like the Home Depots, the Lowe's and the Wal-Marts of the world?

More specifically, I'm wondering, as Sears seems to have lost market share last year and announced some new initiative this year to regain that share and it seems their successful, who's losing market share?

Is it the smaller guys that's losing share at this moment?

Yeah, first of all, the trends really have not changed, certainly not in the quarter.

The official retail numbers are not out yet, but our view is Sears continues to be stable.

They have certainly in the last five quarters, they went down and now have stabilized around 39% retail share.

Lowe's continues to grow significantly and they had another big appliance quarter and we think gained substantial share.

Best Buy seems to be stabilized at their level.

We don't have direct visibility to Home Depot numbers.

But we believe they're relatively flat and the other channels of distribution, which represents the balance out of this, is what has declined during this period.

Okay.

And the second question I had, with regard to the $485 million that you have in short-term debt, I presume all of that is either commercial paper or bank borrowings?

Yes, that's right at, I'm happy to add, very low interest rates.

Okay, wonderful.

And I presume in terms of your seasonality, you've basically peaked in terms of your borrowings, correct?

We're on the downward slope.

Yep.

That's what I thought.

Thanks very much.

We'll go next to Steven Simmons with Flippid [ph].

Yes.

I guess I'm a little curious as to, with the dividend, with all the free cash flow that you have now, you've got the product recalls behind you, you've paid down debt, you've I guess historically bought in stock, especially with the tax law changes.

Your payout ratio is 24%.

It seems like it would be very reasonable to assume the dividend could be doubled if you have $350 million in free cash flow next year, maybe it's a little bit higher, throw in another $100 million to shareholders, would still give you plenty of room to take $150 million and buy back the $2 million that were diluted by the options.

Can you just clarify that and maybe some type of timing on when a decision is going to be made?

Clearly, a dividend increase is near the top of our list of considerations in the use of the cash of company.

I can't comment on what level of increase that would be.

It's something our Board would have to make a decision on, based on our recommendations.

But clearly it has moved near the top of the list of the consideration of our Board of Directors.

Is there a timing as to, I mean is there a study that's being done?

Any recommendations to the policy change?

You should expect to maybe see them to consider earlier rather than later.

Okay.

Thank you.

Thank you.

We'll take our next question from Michael Regan, Credit Suisse First Boston.

Thank you, good morning.

Jeff, I wondered if you could just clarify.

You said you expect a full percentage point of margin increase in the fourth quarter.

Is that just North America?

In North America.

Okay.

Just North America?

Correct.

That's off last year's base of 10-9, so, you're saying 11-9?

That's off Q3 base of 9-8.

I'm glad I clarified.

Thank you.

Back to the topic that Jeff Sprague was exploring.

I guess the other way to go at it is if I just adjust North American profitability, in the third quarter for both pension and Mexico, incremental margins were 10%, again on really outstanding volume.

And, it sounds like the biggest issue holding it back there was just this whole notion that productivity's going to be much stronger, kind of in the fourth quarter, than it was in the third quarter.

I guess I'm just looking for some more clarification, perhaps not even for the fourth quarter, but how to think about it for next year as the things that are happening to the North American business competitively, continue to happen next year, as you continue to spend for the product innovation, as price continues to be difficult, and really the only thing that looks like it will be a different variable is volume is unlikely to be as strong.

Or Dave.

Michael, Jeff has indicated that we will have stronger productivity in the quarter, there is no question that we will and we will be up that point.

This North American business has historically been running in that 11% kind of operating margin range.

You should absolutely expect that kind of level of performance in '04.

Again, on a relative basis, I think all of you know that even at the current third quarter levels, it's, in some cases double the profitability of our competitors.

At minimum, it's 50 to 60% above the level of our competitors.

We are making, we think, the right investments in the brand and in innovation.

Quarter by quarter, the timing of those things always aren't perfect.

But we're investing in the brand, continuing to take it forward.

The brands we have.

And, again, this is a business in the fourth quarter that will get very close, back close to its normally high 11% kind of operating margins and that's the number you should expect to see in our North American business next year.

So, is that margin still going to be down year-over-year?

In the fourth quarter?

Correct.

Yes, it will.

I guess the other way to ask the question would be to simply say, well, let's leave productivity off the table for a second.

I've already adjusted all the numbers for Mexico, or for the currency impact and for the pension impact.

It's just a bit surprising that, again, ex-productivity on 12% volume, you've got no volume leverage, or volume leverage was given away somewhere else.

I wondered if you could just describe where it went.

Mexico, the inclusion of that, takes our margins down.

Yep.

That actually bring up the better question.

Can you just give us some sense of what North America, X Mexico did?

We don't --

Oh, yes, you have, Dave.

When we first acquired it, because, again, we have this new big piece of revenue and earnings, we said that we would, for comparative basis, while we had year-over-year, did not have the business and we would provide it to you.

We said at that time, once we lapped that year-over-year difference, that we would not be reporting separately as we never have on Canada, for example, that part of the business.

So, I didn't ask for the numbers, just some sense of directionally what happened.

I'm sorry?

I'm sorry?

Directionally.

Directionally what happened?

Was Mexico volume up or down?

I mean were Mexico revenues up or down?

Did margins get better or worse?

I don't have Mexico here in front of me, but margins did improve from prior year levels and revenues were about flat.

Okay.

So then again that would suggest that if Mexico margins were better, then it means the incremental margins in North America was even a little worse.

So, it doesn't sound like there's any great answer.

Well, other than what we've given you, Michael.

Again, I saw your report this morning.

You'd raised your forecast last week significantly and indicated this was a major disappointment.

And clearly what you and Jeff and I think a number of you rightfully are asking is, where is the leverage on this increased revenue?

Well, we tried to point out in our comments here this morning, what impacted leverage, what are the things that are going to impact fourth quarter improvement in performance.

Again, my view, as I said in the beginning, I view the total consolidated performance as being very strong and we're pleased with the North American performance.

Would we have liked to get better with leverage?

Sure, there's no question.

As we go through and analyze the business and understand where the productivity was versus where it was in the second quarter and the fourth quarter, as we look at the investments we're making in the brands and new products, I'm not uncomfortable with this level of earnings performance in the quarter, even with the significantly increased revenue base.

We have a lot of momentum going in our North American business.

Marketplace momentum, consumer momentum, you talk to retailers today, they will acknowledge that we are the innovative leader in the appliance industry today.

So, there are a ton of things going in the favor of our North American business.

We will pick up a point or a little bit over a point in margins in the fourth quarter with our North American business.

And then we will be operating next year at levels I think that will please all of you.

Okay.

Thank you.

Yeah, Michael, I will just add, too, your comment about fourth quarter, we actually, overcoming all the things we talked about, our expectation is we would return to those levels that we had last year, which was right around 11% in North America.

So, yeah, right, flat year-over-year, despite whatever it is, $25 million of headwinds.

Yes, so the leverage from the business will help us overcome that in the fourth quarter.

And we will have another $22 million worth of extra pension expense in the fourth quarter that we'll overcome.

Right.

Okay.

Thank you.

Thank you.

And we do have a follow-up question from David MacGregor, Longbow Research.

Just to continue on with the fourth quarter outlook.

You're providing a fairly positive outlook on your ability to deliver productivity benefits in the fourth quarter, particularly North America, I thought I'd ask you, what's the risk to your outlook on the fourth quarter?

Aside from, of course, the market slows down the macroeconomic risks.

The productivity numbers in our business are fairly certain, given where we are, we're almost done with October and these kind of project-driven, so we have pretty good predictability on that.

The major risk would be external demand and we gave you, I think, pretty good direction on what we believe it is, but as we see the balance of the year, October is clearly inside most of November, our risk would be, if there was a dramatic change in external demand, which right now we don't see.

Okay.

Let me shift gears here for a second and talk about the builder's channel.

Can you talk a little bit about your experience there in the third quarter?

And what you'd expect for the fourth quarter?

Continues to be very strong.

We both in terms of completions which we supply to, in terms of also our continued growth in market share in that channel.

As we've said before, we have generally 6 to 9 months visibility in advance to that business and currently we're expecting these increases that we've had to date to continue for that period of time, given the visibility that we have.

Okay, good.

Thanks again.

Once again, ladies and gentlemen, to ask a question, that's star 1 on your touch-tone telephone.

And we do have a follow-up question from Jeff Sprague, Smith Barney.

Hi, I just wanted to make sure I fully understand the currency dynamics as they're playing out, we talked about of the issue in other expense and the, you know, what the impact on North America, some of the non-American imports coming in.

But, I mean, I guess can you give us a better sense of what to expect going forward?

And where, precisely in the P&L we should be looking for the impacts?

And I presume the negative 10-cent impact in the third quarter is, despite the fact that you've probably had some positive translation in the quarter elsewhere.

Perhaps you didn't, maybe there's a translation offset in that other line.

So, if you could maybe just piece all of that together for us, I'd appreciate it.

Sure, Jeff.

We have translation and transaction in that number that you mentioned.

We do expect some currency paying to continue in Q4.

The reality for us, we have operations in Europe that export out.

And so as an appreciating cost currency is painful, to those units that import, like the U.K., like Polland, we're a net importer into Polland right now and most importantly into the U.S., with our horizontal access washer.

So we do expect some continued negative transactional effect there.

The strengthening of the Canadian dollar has helped us there.

It strengthened more and they're an importer from the U.S.

That's been offset a bit by the Mexican peso.

The number you heard us quote is about $4 million, that's a net of a more severe hurt from the euro imports on transaction and Canada or Mexico, just partly offsetting that.

$4 million in the U.S.

In the U.S., right.

The wildcard for us in currency continues to be the Brazilian currency, which has showed amazing, if you look at end September, we're at 2.9, 2.95, a year ago it was 3.4, average in the month and it actually spiked up to 3.75.

That's what created kind of this windfall, monetary asset reval.

And we try to hedge some of this, where the cost of hedging is not prohibitive, but that's a bit of a wildcard for us.

Now, the good news is, we expect much less volatility these days with the good things that the government is doing down in Brazil.

But I think in the short-term you can expect that foreign exchange is going to be a net-negative for us in Q4 as well.

And that's factored into our projections.

Okay.

And negative of similar magnitude that we saw in Q3?

Yes.

And just maybe one additional question on European margins.

I think Jeff said Q4 ought to look similar to Q3.

I know you guys are trying to work to a higher rate and I thought we might see you exit the year on kind of a high point instead of flattish.

You made it clear you're dealing with some negative price, but is there anything else to consider there in trying to get a handle on what European margins look like for '04?

Well, first in Q4, what I had said is they ought to look about like they did in Q3.

The only Delta will be we will have a higher revenue base in Q4.

So, we would expect overall operating profit to improve in Europe.

And certainly in '04, we have not finalized our plans, but we certainly would look for substantial improvement going forward Q4, based on the number of things we've already put in place in this year, which is really driving the second half performance we actually would see that accelerate into 2004.

So, do you have 7% in sight for 2004?

We've not finalized any numbers that we want to communicate yet for '04.

Thank you.

We'll go back to Michael Regan, Credit Suisse First Boston.

It wouldn't be a Whirlpool conference call if we didn't talk about that magical 7% number in Europe and it just kind of keeps getting pushed out.

It goes back to the question of, do you need that number to make a business that earns its cost to capital?

But, it's always just around the corner.

When do we make a decision about whether or not that's a business that creates value long-term?

Michael, we'll come back, we're not done with our profit planning yet.

And as we communicate with you next time, we will give you a view on value creation on Europe and the level of performance for next year?

Yes, but Jeff Sprague's point is the right one, Dave.

At this time last year we talked about the momentum going into '03 and then early in '03 we were disappointed and then it should be better late in '03 and we're not going to see it in the fourth quarter.

From a margin perspective, Jeff, I understand, from an operating dollars perspective, but from a margin perspective, we're not going to do it again.

What's going to change?

Why is it going to change?

There are tons of things we're doing in our business, we're driving today in Europe, in the 6 to 7% productivity levels.

Whole new levels of productivity.

As Jeff Fettig has pointed out to you in the past, we have a migration path that's significant and a very aggressive one of moving production from Western Europe to Central Europe.

That's a 15 to 20% cost reduction.

We are ramping up pull prod [ph] as well as our pull on operations.

Significantly we're over a million units, and in the Slovak Republic we will be at a million units and in Polland very shortly.

So, I mean there are those things, there's the restructuring activity that are leading savings and margin expansion.

What we've said to you, I think over the course of consistently this year, we can't control or change this external environment.

All we can deal with is what we can deal with inside our bid.

I think we're appropriately and aggressively dealing with that, and you will see margin results that reflect the actions that we're taking.

Okay.

But your competitors are doing much the same things you're doing and such that it feels like most of those advantages will be competed away in price and a year from now we will have the same discussion as we have for the better part of the past two years.

I'm not sure that I would agree that our competitors are doing all of the same things that we're doing, Michael.

Okay.

Fair enough.

Thank you.

And gentlemen, we're standing by with no further questions.

Okay, well, we very much appreciate your time this morning.

Again, we are pleased with this quarter.

I know that you all do have some questions on the leverage in the North American business.

I hope that we've answered those for you.

We will deliver a record performance in the fourth quarter.

We will have margin expansion and we're looking forward to 2004.

So, we'll see you on the next conference call.

Thank you much.

This does conclude today's conference, we thank you for your participation.

You may now disconnect.