惠而浦 (WHR) 2003 Q4 法說會逐字稿

Good day, everyone and welcome to the Whirlpool Corporation fourth 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 would like to welcome all of you to our fourth quarter earnings conference call.

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

The 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 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 to this year's GAAP earnings to prior year earnings which exclude certain charges related to restructuring and other activities.

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

A detailed reconciliation of these charges is available at the end of our earnings release and on our corporate web site on the investors page under presentations.

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

David?

Thank you for joining us.

With me this morning is Jeff Fettig, our President and Steve Barrett, our Executive Vice President and Chief Financial Officer.

This morning, we did release our fourth quarter and full year earnings performance.

In that release, I indicated that I believe we delivered solid performance and we enter 2004 with good momentum and performance trends with our businesses.

Let me highlight several areas of achievement.

First, and as we've discussed with you during the course of this year, we were faced with several large head winds that we had to overcome to deliver improved performance.

As indicated on chart two, these included 86 cents per share in increased pension expense and 47 cents per share reduction of the Brazilian DPX tax credit.

As the year progressed, we also had negative currency that impacted net earnings by 46 cents a share and an increased share count which impacted full year earnings by 7 cents per share.

These items negatively impacted full year earnings by $1.86 a share and the fourth quarter earnings by 7 cents a share.

On chart three, despite these negative year over year comparisons, we delivered record fourth quarter earnings with $1.76, up 7.3% over last year's quarter earnings driven by record revenues of $3.4 billion, up 14% from last year.

Adjusted for currency, revenues surpassed last year by 7.2% and exceeded unit sales increases of 5.6%.

This continues to indicate that our innovation and brand and product mix management is leading to expansion with our average sales values.

Total year revenues were at record levels of $12.2 billion, exceeding last year by 10.5%.

Adjusting for currencies, revenues were up 6.8%, and, again, exceeded unit sales, increases of 5.6%.

Full year earnings totaled $5.91 per share, compared to $6.07 per share last year but, again, to deliver these earnings levels we overcame $1.86 per share in year over year negative head wind factors.

Importantly, these head winds are largely behind us and will not impact 2004 performance.

Turning to chart four, other notable performance achievements include driving strong levels of total cost of productivity, we achieved record low levels of networking capital of 10.8% of sales as compared to 11.2% last year.

We delivered strong operating free cash flow of $302 million, which included an after-tax cash contribution of $97 million to our pension fund.

This voluntary contribution lowers the future contribution levels as well as smoothing out yearly pension expenses on the year-to-year basis going forward.

We have improved return on capital to a record level of 18.6%, up from 14.3% last year.

Finally, we reduced debt to a debt to total capital by 14.2 points to 50.9%.

As noted in our press release this morning, these year-over-year performance numbers were compared to last year's core earnings which excluded from last year's restructuring and other one-time charges.

As Tom said and as we have said before, we believe this gives a better view for our shareholders of the underlying year-over-year operating performance changes.

Additionally, we have indicated to you that previously that ongoing restructuring costs would be recorded as a normal part of and included in our regular P&L, not set aside as one-time costs.

Accordingly, during the fourth quarter of 2003, these restructuring-related costs totaled $10.1 million and are included in the record as $1.76 per share performance.

Jeff Fettig will shortly provide the detail around our regional businesses performance and Steve Barrett will provide additional detail around both the P&L as well as the balance sheet.

Before we bring them online, as you think about our company and these 2003 performance metrics, I would ask you to continue to consider the unique strategic direction that we are executing at Whirlpool.

The central direction and the focus of our strategies is all about building significant and differentiated levels of customer loyalties for our brands.

We believe we have significant strengths with our very focused global brand portfolio and this customer loyalty strategy.

The foundation of this customer loyalty strategy is the efforts and results from our work with distinctive and competitively advantaged innovation processes and work and output.

I believe, today, that we are viewed as the innovation leader within our global industry, and throughout 2004, you will continue to see the evidence of this innovation leadership position.

We have built an enviable global manufacturing platform, which we manage in a globally integrated way.

We have both the plans that we are executing and the assets in place to leverage our low wage cost locations assuring a competitively advantaged cost position within our global industry.

We are driving record levels of total cost productivity and will continue to improve upon these record levels of productivity performance going forward.

We continue to generate strong levels of free cash flow, enabling us to appropriately fund our customer loyalty and innovation strategies, investing, expanding and growing our businesses, drive down debt levels, repurchase our shares under our existing Board authorization and increase our dividend payout, as we did with the 26% increase effective for the first quarter of 2005.

Excuse me, effective for the first quarter of 2004.

On chart five in looking at 2004, we have entered it with solid momentum.

Jeff will detail our 2004 industry shipment outlook for each of our markets around the world but within that expected environment, we will deliver solid performance improvements with each of our businesses.

Accordingly and as we indicated in our December press release announcing our dividend increase, we expect full year 2004 earnings to fall within the range of $6.20 to $6.35 per share.

Now, let me turn this over to Jeff for more detailed regional business reviews.

Good morning.

I'm going to begin with slide six, which shows our fourth quarter North American performance.

For the quarter we had a record level of revenues, operating profit and generating very strong cash flow.

Our revenues grew by 7.6%, to approximately $2.1 billion, and operating margins expanded to 11.1%, while still overcoming about $25 million in additional year-over-year pension expense and negative currency impacts.

Consumer demand was very strong for the quarter and grew by about 8% on a T7 basis.

Outer unit volume unit grew by 6% in total and 7% on T7 basis.

We continue to drive revenue increases greater than unit growth which reflects the continuing trend that we see of consumers trading up to strong brands with added value innovation.

As expected, our operating margins in North America expanded to 11.1%, and this was driven by strong volume growth, improving average sales prices and very strong productivity gains.

Turning to our outlook for 2004, we've entered the year with very good momentum in North America.

We're forecasting industry demand to improve by at least 2%, with first half growth rates being in the 4% range and the second half demand being about flat.

On slide seven, it gives you the assumptions which we have behind this forecast and which we base this forecast on.

We're looking in the U.S. at the GDP growth of 4%, a gradual improvement in consumer confidence levels.

We expect interest rates to rise in the second half of the year with fed funds rates expected to increase by three-quarters to one full point.

We are looking at existing home sales being slightly down, off a record level and finally, new home completions are expected to be flat, at a near record level.

In addition, we expect to generate very meaningful revenue growth from a large number of new product innovations that were launched in 2003.

Leading this list is the top selling Duet and Calypso washer and dryers which you can see on slide 8.

The Whirlpool family studio which includes a washer and dryer, along with a drying closet, a wash sink/spa and our personal valet which is shown on slide nine.

This concept has been accepted very well by architects, designers and is being marketed to the new builder and remodeling markets Our Whirlpool branded Polera range, which is shown on slide 10, continues to set the innovation standard in cooking. and our new KitchenAid Briva in-sink dishwasher, which is shown on slide 11, continues to gain growing interest from consumers seeking a space solution for their dish washing needs.

We've also had a great response to our KitchenAid Pro Line for both majors, which is shown on slide 12, and for portables which is shown on slide 13, as well as our new KitchenAid Outdoor Architect series, which is shown on slide 14.

Finally, we expect our new Gladiator Garage Works on slide 15 to grow significantly this year as we complete our national distribution network for this new brand.

Together these, along with several other new branded product innovations to be introduced this year, will enable us to continue to grow faster than the market and expand our average selling prices.

And once again, we are seeing increasing signs that consumers are both trading up and accelerating appliance replacement demand, due to this new innovation.

In 2004, our primary business focus in North America will be around the following areas shown on slide 16.

First, is to expand and grow our customer loyalty towards our industry-leading brands.

Secondly, we will continue to bring continuous and relevant branded innovation to the market.

Third, we'll continue to extend our industry-leading position with all value-added trade and channel partners and finally, we expect to deliver another record year of productivity, despite a rather unfavorable raw materials market.

We expect the results of these actions around the four areas will enable us to grow our industry-leading market share position, overall revenues in North America are forecasted to grow by 4 to 5%.

We expect to deliver operating margins in this 11% range and continue to deliver very strong free cash flow.

Turning now to slide 17, I'll speak about Europe, where we delivered a strong operating results for the fourth quarter.

Revenues grew by 27%, which would be 9% excluding the currency impact which clearly outpaced industry demand which we estimate grew by around 4 to 5%.

Operating profit in dollars increased by 72% or about 1.4 points to 5.5% overall operating margins.

During the quarter, we continue to see some improvement in the overall economic indicators and consumer confidence has edged up in several key markets.

Our performance improvement was driven by strong revenue growth, improving product and brand mix and record levels of total cost productivity which together, combined to offset the continued marketplace price pressures that we have seen all year.

Finally, our European operations continue to make very strong improvements and working capital our overall asset utilization was up and we delivered a strong level of positive cash flow for the year.

As we stated at the beginning of this year, we would focus on four areas to reposition our Europe business to create value in this very challenging environment.

These four areas are shown on slide 18, which were leveraging our strong and focused brand portfolio, expanding our key market leadership, leveraging our global product innovation and driving total cost productivity.

I believe we made good progress in each of these areas.

For the full year, our total business achieved our highest market share ever in Europe, while the Whirlpool brand grew by 6% and remains the number one brand in Europe.

Next, we significantly improved our market position in the all important built-in segment which accounts for approximately 40% of the total market and where in the past, we have been under represented.

We've done this by signing two very important strategic partners, with Akia and Alno.

On slide 19, you can see a brief profile of each of these companies.

Together, these partnerships will enable us to significantly grow our total share of their business and at the same time, enable us to grow as they outperform their respective segments of the market.

There's really several reasons why we are winning European level partnerships with key trade partners.

The first is that we have a single very strong brand that we sell in all countries across Europe, being the Whirlpool brand.

We provide European, or in the case of Akia, a global product range which will meet their needs.

We can consistently service them in every market in Europe and I think increasingly important has been our ability to continuously leverage our global innovation to the marketplace.

On slide 20, you can see just a few examples of our global product innovation that was introduced last year in Europe and now represent our fastest growing product offerings.

Finally, we made very good progress in delivering record level total cost of productivity in 2003.

This record productivity was driven by the benefits of our operating excellence program and continued production migration to our facilities in Poland, Slovakia, China and Brazil.

This productivity enabled to expand our operating margins in an environment where we saw very significant market-priced declines.

In 2004, we expect our European business to continue with this strong improvement.

We're looking for the market demand to grow by about 3% and we'll grow our revenues by 4 to 5% in local currency, or Euros.

We expect to improve our operating profits by 30 to 40% this year, driven by growth, effective price mix management and another strong year of total cost productivity.

These actions, along with the continued improvement, as we've made on asset utilization, should enable us to deliver a positive EVA in 2004 in Europe.

Next, I will turn to Latin America, where we had improvement in both revenue growth and margin improvement versus the third quarter of this year, as demand rebounded due to both government traded inventives, which were launched to simulate demand.

Overall demand in Brazil had declined by 15% through September of this year.

Fourth quarter demand was flat.

On a year-over-year basis, revenues were up 28%, this would be 9% without the strengthening of the Brazilian currency.

This growth came mainly from year-over-year price increases and improved product mix.

Despite these improvements, margins were down 5.5 points quarter over quarter due to the material cost increases of approximately 15% and the negative impact of the strengthening Brazilian currency on our margin for exports.

Today, over 30% of all appliance produced in Brazil are exported and over 70% of all of our compressors are exported.

Therefore, the 20% appreciation that we've seen in the currency year-over-year in the fourth quarter reduced our operating profit in Brazil by approximately 30% Despite the currency impact, however, we do remain competitive or we will remain competitive by exporting out of Brazil and we expect to increase these exports out of Brazil in 2004 and today, we are one of the top 50 exporters out of Brazil with our products.

Looking to 2004, we will continue to have a number of uncertain economic variables that could have a positive or negative impact in our business there.

We do expect to see the overall economic picture gradually improving.

We're forecasting a 5 to 10% increase in overall demand.

Material costs has increased significantly and will not be offset by just productivity efforts alone.

Therefore, we're going to continue to raise our prices in the market place.

Finally, we do expect a gradual devaluation of the currency during the course of the year.

The current consensus of the top six banks in Brazil are forecasting at about a 3.14 average dollar to Brazil currency rate, this would have an impact of reducing our revenues and translation but improving our margins and our overall operating profit.

Overall, based on our current forecast of these economic factors in Latin America for the full year, we do expect overall revenues to grow in the 5 to 10% range and operating profits for the full year to improve by 10 to 15%, based on these moderate improvements in the external environment and our ability to achieve further price increases.

We expect the first half year-over-year results to be down and improvements year-over-year in the second half.

In Asia, which is shown on slide 22, I will now turn to and we had a number of challenges this quarter, which negatively impacted our performance.

Overall, revenues did grow by 6.5%, but were essentially flat, excluding the positive currency benefits.

We continue to see steep market price drops in both China and India.

Additionally we've increased our operating reserves during the quarter to support appropriate levels for inventory and other reserves.

Combined, these changes drove a small operating loss for the quarter.

In 2004, we expect to drive both growth and operating margin expansion in the region.

Our focus in Asia in 2004 is shown on slide 23 and we really are focusing on executing in three main areas.

First, we will continue to aggressively expand our China procurement and technology base that supports our total global business.

This is a growing and very important part of our global operating platform.

Secondly, we'll continue to expand our China domestic sales and increased finished good exports to our global sales networks.

And finally, given the changes which we've seen in market in India, where we have a market leadership position, we've decided to reduce our trade terms and stock levels in that market.

Today, average terms and stock levels are running between 70 to 90 days.

We will reduce these terms and stock levels to about 20 to 30 days, which will enable us to launch new product innovations much more frequently and effectively into the marketplace.

This also will take out some price negotiation pressure out of the system by reducing the overall stock levels and the trade level and, overall, we believe that it ultimately will improve our margins as we eliminate very costly inefficiencies out of our supply chain.

We will do this reduction in the first four to five months of the year.

This will have a negative impact during the reduced volume during this period.

The benefits of these actions will begin to flow through you to our P&L late second quarter onward and for the balance of the year.

Even with the overall changes, again, we do expect the full year Asia revenues to grow in the range of about 8 to 10% and operating profits will improve for the full year after we absorb the full effects of this India trading stocking initiative

To sum up 2004, I will show you on slide 24, we had very strong business momentum in both our North America and European businesses which are our two largest businesses.

We expect gradually improving economic conditions throughout the year.

These regions will drive the bulk of our overall improvements in 2004.

In Latin America and Asia, we have some challenging external and economic factors impacting our businesses.

With the actions we've already put in place, we expect these businesses to show true improvement in the second half of the year, and deliver year-over-year revenue and earnings improvement for the full year.

Globally, we will continue to execute our brand-focused evaluation strategy in all parts of the world.

We are investing to build strong brand supported with relevant consumer innovation.

We'll continue to forge relationships with value-added trade retailers and builders and we'll continue to drive record productivity levels by leveraging our global operating platform.

These are the value creation drivers for Whirlpool and we'll accelerate our efforts in all of these areas in 2004.

So for the full year, as Dave mentioned, we expect to grow our revenues at a total corporate basis by 4 to 5%, we expect earnings in the $6.20 to $6.35 range and we will deliver $300 million in free cash flow after dividends while appropriately, at the same time, in all areas that support the overall strategy.

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

Thanks, Jeff and good morning.

If you move to slide number 25, I would like to briefly comment on four areas as we move from operating profit to net earnings.

First, our interest income and sundry expense is $8 million lower than last year.

This is largely attributable to a change in how currency has impacted balance sheet positions.

Specifically, in Brazil, we did not have the negative revaluation impact we experienced in the fourth quarter of last year.

We also posted slightly higher interest income.

Secondly, you will note that interest expense is $3 million better than last year.

As you will recall, we increased debt during 2002 when we purchased Vitromatic and Polar.

Our strong cash flow during this past year enabled us to reduce post acquisition debt.

Additionally, we also benefited from a lower overall interest rate environment.

Thirdly, income tax has increased year on year by $3 million.

This is due to the combined impact of higher pretax income and the higher overall effective tax rate of 35%, versus 34.5% during 2002.

Finally, equity and affiliates and minority interests improved $8 million versus last year.

This is primarily due to charges we incurred last year, related to a minority interest in an Asian entity, as well as an adjustment related to the integration of Vitromatic.

Overall, record earnings per share of $1.76 was achieved despite the significant earnings head winds that Dave mentioned earlier.

Slide number 26 summarizes our cash flow performance.

During 2003, free cash flow after dividends was $302 million.

This represents a 4% improvement over 2002.

It is important to keep in mind, however, that our free cash flow includes a voluntary after-tax pension contribution of $97 million.

Excluding this contribution, our free cash flow would have increased 38% to about $400 million.

This voluntary contribution enables us to level out projected future pension contributions.

Additionally, this contribution increases pension fund asset returns and reduces overall pension expense in 2004.

We have exceeded last year's free cash flow by $11 million.

As you will recall, last year we had $214 million of cash outflows related to the product recalls and the tax payment against a gain on interest rate swaps.

The absence of these negatives in the current year was essentially offset by our voluntary after-tax pension contribution and the cash outflow for restructuring activities, primarily related to projects announced in 2002.

Working capital cash flow was positive again in 2003, although behind last year's contribution.

Primarily, due to the need to rebuild historically low inventories at the end of 2002.

Cap ex was essentially flat, with last year's levels, while proceeds from asset dispositions increased driven largely by restructuring within our distribution network.

Turning to slide number 27, I will speak briefly about working capital, as well as some other balance sheet metrics.

Our networking capital level ended 2003 at $1.3 billion.

This is equivalent to 10.8% of sales which is 40 basis points better than last year's levels and represents a record all-time low.

Since 1998, when our working capital to sales was 16.8%, we've worked diligently to reduce this major cash investment.

Year-to-date cash on a cash flow basis, as shown in the earlier slide, networking capital has declined $40 million.

Now, within net working capital there's some significant differences in inventories and receivables changes compared to last year.

These changes reflect a very strong December 2002 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 a year ago.

Our 2003 year-end inventory reflects a return to more normalized levels versus where we were at the end of 2002.

Working capital also continues to improve as we continue to work with suppliers to optimize payment terms.

Moving to debt.

Overall levels are down 7% to about $1.4 billion.

As you recall during 2003, we took on additional debt to fund our acquisitions.

We have been able to pay down our debt with strong cash flow from operations.

Accordingly, our debt-to-capital ratio of 50.9% is down from last year's 65.1% reflecting both debt paydown and the past 12 month net increase in our equity base.

Our interest coverage ratio of 5.8 times has improved from last year's strong levels of 4.5 times.

Overall, our financial position remains strong and our debt rating remains bbb from Moody's and Standard & Poor's.

And, since our last call, Standard & Poor's have upgraded our outlook to neutral.

Return on equity and return on total capital shows strong improvement year-over-year driven primarily by sharply reduced restructuring and related expense compared to last year.

Note that equity has increased over the past 12 months, reflecting strong current year earnings currency translation and partial write back of last year's pension-related equity charge.

Return on total capital was also positively impacted by lower overall debt levels and represents an all-time record result for Whirlpool Corporation.

If you will turn to slide number 28, I would like to briefly comment on our outlook for fiscal 2004.

As Dave previously noted, we expect 2004 earnings to fall between $6.20 and $6.35 per share.

This represents a 5 to 7% year-on-year improvement and, as discussed in the past, will include all restructuring costs related to further strengthening, our global operating platform and driving increased levels of total cost productivity and cost competitiveness.

We've also provided for ongoing investments for product innovations and in expanding our brand leadership positions.

We'll also be increasing our capital spending to the range of about $500 million in 2004, in support of our product innovation strategy and our global operating platform activity.

Overall, we intend to deliver around $300 million in free cash flow in 2004, equal to 2003 levels.

Increased earnings and a sharply reduced pension contribution are offsetting a higher level of capital investment and an increase in our dividend payments.

Anticipated uses of free cash flow include further debt reduction and ongoing share repurchase.

Although no major acquisitions are envisioned, we'll also continue to evaluate new business development opportunities.

This guidance assumes the continued positive momentum within North America and Europe and gradual economic recovery throughout 2004 in Latin America.

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

Let us now turn it over to all of you for any questions or comments that you may have.

Thank you.

If you would like to ask a question at this time, you may ask it by pressing the star key followed by the digit one on your touch-tone telephone.

If you are on speaker phone today, please turn off the mute function to allow the signal to reach our question.

That's star one if you would like to ask questions today.

If you find your question has been asked and answered you may remove yourself by pressing the pound key.

Our first question today comes from Michael Regan with Credit Suisse First Boston.

Thanks.

Good morning.

Good morning, Mike.

Jeff, I was wondering if you could just address the incremental margins in North America, which, given outstanding volume, and what you guys said on the third quarter seemed a little disappointing?

Michael, as I mentioned our fourth quarter north American margins came in at 11.1% that was very much in line with what we were projecting for the quarter.

There was really --

But you expected much lower volume.

For the quarter, Jeff.

We were expecting volume about in the 5% range, that's correct.

But, again, 11.4% really, I -- you know I think all of our major indicators for the quarter were in line.

We did get the productivity that we expected.

We did leverage that and ended the year in a good inventory situation.

So, all in all, that was pretty much in line with our expectations.

I'm sorry, I -- you know, after 10% incremental margins in the third quarter, you said that there were -- you did not get the flow through of a bunch of productivity investments that you expected and those would show up in the fourth quarter and you would have exceptional incremental margins in the fourth quarter.

At best I can tell, they came in at about 13%.

So I certainly wouldn't refer to them as exceptional.

I'm just wondering what may have happened that held them back?

This is Dave.

I don't think anything happened to told them back.

Jeff has indicated this came out pretty much where we expected it to come in and, you know, additionally, we talked a lot about the negative pieces that we've had to overcome in the fourth quarter, the pension, 21 cents was largely North America.

So you look incrementally, year-over-year and look at the currency impact in North America which was fairly substantial, again, as you recall, we have products coming out of Europe into the U.S. that impact net earnings so, again, I don't think we talked about it in the last conference call together, about exceptional leverage.

These numbers that were delivered were absolutely within the range of what we had in our profit plans.

And, again, I think the important thing is we'll forward now those negative pieces that our businesses -- specifically the North American businesses have had to overcome.

They will largely be behind us and we'll see the more appropriate kind of leverage that we expect in our business.

Okay and then jumping to Europe, you know, just again another year of some progress, perhaps not as much as you would have expected and clearly, again still well below the operating margin levels that you need, at least by your own calculations, to have this business of cost to capital and continue to invest there.

It gets pushed out another year and we hear that, you know, this business in Europe, earning its returns on capital is somewhere out there over the rainbow.

I'm just wondering, again, how much longer we wait?

Michael, we think we have very strong performance improvement.

Not absolute performance levels but performance improvement by our European business.

Jeff has indicated in the comments that the year 2004 will represent positive EVA performance with our European business and that's the foundation on which we will build from.

So we're pleased -- we're very pleased with the progress in 2003.

We're going to continue to build on that value creation platform.

We will be positive within the EVA standpoint in 2004.

Thank you.

We'll go next to Sam Darkatsh, Raymond James.

Good morning, gentlemen.

A couple of quick questions.

First off, you mentioned that last year's inventory levels were artificially low.

It looks like inventories sequentially are flat with about 8% higher revenues.

Do you feel comfortable with where inventories are, or are we a little bit on the high side going forward?

I'm trying to get a sense of what your factory utilization might be in the next couple of quarters are so?

Yes, Sam, I will take that inventory question.

You know, as you know, we came out of 2002 at about a little less than 10% of revenues and inventories and that was just too low to support our business.

We had an exceptional sales month, drove receivables up, inventories down.

Today, within our 10.8% overall number, you know, inventories are back at about 11%.

Now that compares historically to about 10.7, 10.8, it's just a little bit higher than we would like; however, changes in our business are what are driving that.

First of all, you know, we have had some availability issues here in the U.S. with our Access washer.

As a result of that, we've added a little bit of inventory there.

The single largest effect has been Latin America, however, as I think I have referenced in the past as we increase our exports out of the Latin America, we end up with more products in the logistics systems overall.

It's still the right economic sourcing decision to make, cost of money is very low there, but there's probably $25 million or so more inventory than we would have normally had in the past but we are comfortable with the levels.

Okay and then a couple other questions, if I might.

I just want to make sure that my math was right, Jeff.

You're mentioning operating profits in Europe expected to be up 30 to 40%, with revenues organically up about 4 or 5%.

I guess if my math is right that means that you are looking at about -- operating margins in the 6% range and you are looking at EVA positive.

Does that imply then, that our invested capital base either is or will be reduced and is that how we get the EVA positive, we don't necessarily have to get the 7% operating margin to get there?

Sam, that's exactly right.

We are looking to be in the 6 to 6.5% range.

We've been taking our assets down.

We'll continue and based on that, we believe we'll be EVA positive.

Okay.

Two other quick questions, if I might.

If we look historically at your earnings delivery on an annual basis, generally, you know 40 to 50% of the earnings deliveries in the first half of the year and about 50 to 60% is in the second half, I understand and respect that you are not giving quarterly guidance anymore, I'm not asking for that type of quantification.

If you could help us take a look, because you mentioned that the first half momentum in Europe and North America should be pretty marked, does that mean that the first half earnings delivery should -- should look at -- be weighted accordingly or are we going to see more of an historic delivery in terms of progression?

Sam, it won't be just the market and revenues that drive the earnings.

Productivity drives them.

We may have a stronger first half in North America and Europe on the revenue side, talking industry standpoint, than the second half.

As you know, our productivity always ramps up during the course of the year, so that's positive in the other direction.

All in all, I think you should probably look at something, close to a normal distribution of the earnings.

Okay.

And then final question, if I might, could we talk about the effects of steel?

I know our contracts are generally a little bit longer in length and perhaps are a bit staggered, but a number of folks are reneging on contracts and going more 30 days.

Can can you talk about the what you are modeling for steel impact '04, versus '03?

Yes, Sam.

We do expect steel prices.

They will be higher year-over-year for us.

They do vary around the world for the reasons you spoke of, that we have different contract lengths by market.

Overall, we are expecting increases this year in raw materials.

Having said that, we bake these into our forecast.

We still believe our productivity activities across all the other levers that we have at our disposal, we will still have a record year of total cost productivity.

Okay.

So that the net result will be a positive to earnings if you include the four or 5% productivity that you expect offsetting all the other stuff, is what you are trying to say?

Yes.

We will have a net productivity positive net productivity number in that 4 to 5% range.

Oh, the net productivity will be 4 to 5%, even including --

Including the higher raw material costs.

I understand.

Okay.

Thank you gentlemen.

Thanks, Sam.

We'll go next to Nicole Parent, Banc of America Securities.

Good morning, guys.

Good morning.

I guess, just to follow up on Michael's initial question on the incremental margin, you did indicate that productivity would pick up significantly in the fourth quarter on the third quarter call.

So, I guess I'm just wondering, is there a mix issue when we think of the strength of the builder channel in the third our fourth quarter.

Is the profitability of those sales lower because I think you are gaining some nice share in laundry, which I think is one of the higher margin categories.

I'm wondering if there is a mix issue?

Nicole, we didn't really see any abnormal change in our mix in North America.

You know, again, the margins in the 11.1% was what we were expecting, as there is in any quarter, there are always things hitting good or bad in the quarter.

We did have in North America about a $4 million negative currency hit that impacted our operations.

We do have some higher comp costs due to -- because our stock price obviously is higher at the end of the year and they are based on stock price values.

We have some things like that but, again it was nothing out of what I call the normal type of things you see, good or bad, in a quarter.

Right, but I guess just to the point of volumes came in a lot better than you thought they were going to be?

Well, they came in about 3% better than we thought they were going to be but, again, with some of these other negatives, currency and comp prices, that's basically the wash.

Okay.

And I guess you also alluded to the 11 -- or $10 million, I think of additional restructuring.

I'm just curious, is that flowing through that corporate and other expense line, between segment and consolidated operating profit?

That looked -- that was a lot bigger than I thought and I was just wondering what the driver was in that line?

Yes, Nicole that is where it is.

And I guess, let's see, lastly, just on the guidance range that you framed, $6.20 to $6.35, is there a way to frame what you would do, you know, what the key variables are that I guess, you are most concerned about for 2004 that would enable to you hit the low end of the range, versus the high end or is it largely driven by kind of residential construction?

And/or kind of hitting that European EVA positive number?

It's a combination of everything.

Jeff talked about the economic conditions our outlook for housing in North America and GDP outlook we talk about continuing improvement in the challenging environment in Brazil, the progress we're talking about in Europe, so, you know, again, it's a combination of a lot of things and what would cause us to worry about and think that we'll hit the $6.20, you know it will largely be economic/industry activity in these markets and any potential large swings in currency.

Those are the things, the two major areas I think that would concern us.

Okay.

And one last one.

Just on Gladiator Garage Works how big is that for FY '03? and you alluded to completing the national distribution network.

Could you talk a little bit about that and how much you see that growing in 2004?

Yes, Nicole.

We exited the last couple of the months of the year we were averaging a little over $2 million per month in sales.

We're looking -- and, again, it's still a fairly wide range.

We're looking next year in the 30 to $50 million sales range as we get this rolled out and really starting as a base for that business.

Okay.

And I guess what remains last on the distribution rollout?

Well, number one, is we think the builder and the contract channel is a big market, or appropriate channel for that and certainly, now it's been exposed to them and available only for about six months.

So if you think the cycle time and housing starts and architects and all of that, there's usually about a one-year to 18 month cycle for that to fully kick in.

Additionally, we're setting up a unique channel distribution for ourselves, which is a national network of garage-only dealers that sell other existing garage products.

We're probably about a third of the way through that and finally, with some of the big retailers that are appearing, such as Sears and Lowe's, we have rollout plans for all of their stores in the first half of 2004.

Okay.

Great.

Thank you.

Mm-hmm.

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

Good morning.

Morning.

Two questions.

First of all in terms of market share in North America in '04, can you just again review your expectations for what you can accomplish and what the key drivers are to your market sharer performance in '04?

Yeah, Eric, first of all, you know we look at the market being up 2%.

We indicated that our revenues we expect to be up 4 to 5%.

Some of that you should assume around a point or so will be improving average sales values.

The rest is outperforming the market, which we'll expect to grow 1 to 2% more than the market.

That really is predicated on the areas that we're currently gaining market share and in roads with our brands and we just expect that trend to continue with that and with the additional product innovation because it's growing at a faster rate.

There's nothing that you would look at within the year right now that would be --

No new event.

Okay.

Okay.

Secondly, cap ex is going to be a real big number it sound like next year relative to the last five years.

Can you help us understand where the incremental money is going and sort of the thinking behind that?

Sure.

You should think of the incremental in two main areas.

One is around new product platforms and innovations which we have not yet introduced to the marketplace.

So those programs, some of them have a three-year investment period and so we'll be hitting the, we're either the first or second year of that.

So, there will be more in new product innovation investment and secondly, as we discussed throughout the year, we continue to strengthen what we call our global operating platform, we are shifting production in some parts of the worlds to -- and reducing production in higher cost markets and we are increasing production in some of our more, what we call, low cost markets and with that, is the capital that goes along with that.

And lastly in terms of pension, what's the -- is there any incremental pension or pension benefit in terms of P&L for 2004?

Yes, we're in good shape as far as pension goes for next year.

The prefunding, the voluntary prefunding that we have done has helped us quite a bit there.

In fact, you know, we will not have an increase in that one element of expense year-over-year.

We've also -- and that's based on an assumption of about a 6% discount rate and about an 8 3/4 return on the assets.

There will be no incremental P&L from pension?

There's no expected cash out for pension in '04?

There's a modest amount that we have.

Again this would be voluntary, discretionary on a couple of our small plans but that would be in the range of $15 to $20 million.

Great.

Thank you.

Our next question comes from Michael Rehow with J.P. Morgan.

Hi, it's John Barlowe on behalf of Mike.

I just wanted to ask if you can give us a dollar number on the total cost productivity savings in 2003?

You know, Michael, I think that -- that's a competitive number that we probably don't want to share.

It varies from place-to-place around the world and I think that would get down to details that would have some competitive sensitivities for us.

Okay.

And in North America, you know, it looks like you said your ASPs were up year-over-year.

Is that mainly being driven by mix or pricing?

It's largely a mix.

Okay.

Mix and innovation, bringing products to market where we are getting higher sales outing where there's no reference price points on the floor.

And also, brand mix.

Could you comment on pricing trends during the fourth quarter and also your expectations for 2004?

Are you speaking about North America?

Yes.

North America.

We -- we saw the same continuation, the trend we saw all year in North America.

This was a significant down pricing year in the marketplace.

We estimate average like for like pricing to be down around 3%, which in North America is kind of the high end of the range, which is what we've seen over the last ten years.

We do expect some moderation of that, largely due to the increases that everyone has experienced and significant increases in raw material costs.

So we are looking for a moderation of that on a go-forward basis.

Okay.

And on your corporate expense line, I know it was mentioned before that you had $10 million restructuring costs included in that line.

Were there any other one-time items included there?

No, there were no other one-time items.

The balance of that difference is related to some of our deferred executive compensation expenses which are simply tied to how the market is moving and the market improvement significantly in 2003 created a little bit more expense on that line.

You're talking about the stock price, right?

Yeah, and the overall market as well.

Oh, okay.

Great.

My last question just relates to your balance sheet.

Do you have any goals, specific goals for either debt-to-cap or working capital as a percent of sales for '04?

Yeah.

On debt-to-cap, again, out of that $300 million, approximate free cash flow that we expect to generate this year we're kind of breaking that down about $100 million or so in additional debt reduction.

That would take our number to the 45% or so range and that's a number that we're pretty comfortable with.

On working capital, again, as I said earlier, the 10.8 is a record all-time low.

You know, we hope to make a little bit of improvement on that but based on how our operating platform develops over the course of the year, it won't be very much.

Okay.

And you said you had your $300 million free cash flow broken down, where would the other $200 million be going?

Well, the other $200 million could go in a number of different spots.

We just increased the dividend, so perhaps not there but share repurchase, I think, as Dave mentioned earlier, right now with the stock price up the way it is, you know we're having some dilution there that's pretty painful in the earnings per share line, and so you might envision a couple of million shares up to that, at $70 a share, that would be $150 million or more.

Of course, we're hoping the share prices go a little bit higher but we're hoping to buy it before it gets much higher.

And then the balance of the money that's in there, you know, we're just going to see what develops.

Okay.

Great.

Thank you very much.

We have time for one more question.

And our final question today will come from David McGregor, Longbow Research.

I didn't think I was going to make it.

I was going to ask about the share repurchase program but Steve has just addressed that.

Just let me give some clarity.

We have about $250 million left on the Board authorization.

The original one where we had a billion dollar authorization and, you know, we will look to, as appropriate, remove the dilutive effect of the shares that are caused by the increase in the stock price over the last 12 months.

We still think the stock at this price level is a great buy and there's no apprehensions in buying it back at this level or higher levels.

Okay.

I wanted to just talk a little bit about pricing trends you might be seeing in the low end of the market.

There was a lot of focus on the higher end of the mark and maybe we can talk about the low end.

Also I know you don't break out our mix in terms of higher, versus mid versus lower price points but Can you give us an idea of what the lower end of the market, particularly North America, would represent as a percentage of your overall business.

David in terms of the lower end, I would look to our value brands which largely serve that.

In total, they represent less than 5% of our market share.

They are the smallest portion of our business, if you equate that with the Whirlpool brand, with the KitchenAid brand, with our sales to Kenmore -- or Sears through the Kenmore brand, it is, by far, the smallest segment.

And it is the segment that we control.

We don't take all orders we can get on those units.

It represents a strategic focus within our brand portfolio and we control the amount of participation in the marketplace with those brands

I sense that segment of the market is getting more price competitive.

I wonder if you could talk about pricing trends there?

I would say that's true.

You know where there is really no unique differentiation and no innovation, clearly when I spoke about the average price trend being down about 3% that's for the total.

It's much more severe on the opening price point items where there's really no differentiation.

And how do you stem that?

I'm sorry?

How do you stem that?

Well, for us, it's largely bringing innovation to the marketplace.

And, you know, from a competitive standpoint, we are making the changes in our business, with our global operating platform, with our productivity programs to ensure that we are always competitive at every price point in the marketplace but with that, to create value we believe we have got to bring two things.

One is, brands that represent value to the consumers and that will pay for it and secondly, we've got to bring a continuous stream of innovation, even in the low end and we're beginning to do that with some of our innovation for the masses initiatives.

Okay.

Last question has to do with capacity utilizations it seems that unit shipments continue to grow but on the other hand, you've been shutting down plants worldwide.

So at some point, there's some pressure here.

I was wondering if you can just talk a little bit about maybe capacity utilization rates in the high cost geographies versus what you are experiencing in terms of capacity utilization in the low cost geographies?

I will let Jeff answer the second part.

David, you know, we have talked before with all of you and David, you and I have talked about the capacity expansion you get from productivity.

And I don't remember the numbers off the top of my head but you go back ten years and, you know, today, we're producing 80% more with 20% less manufacturing floor space.

It's productivity that drives that, and that productivity is going to continue.

So, you know, are we running out of space in the plants that we have today?

No but we're also strategically making some decisions on where this manufacturing footprint should be, with what brands and what product categories.

Jeff you might want to talk about the global operating platform piece of this?

Yes, David, what we've been doing for some time now is really evaluating all of our manufacturing locations, everywhere in the world, and increasingly growing the percentage of our business source from places outside the selling region.

We're finding that to be an effective way to significantly improve our fixed asset turns.

We're finding that we can be very competitive from different markets shipping into other markets.

You do have some other exposures such as currency and freight which have you to manage as part of that equation, but net/net, we are increasing our capacity utilization on one hand and on the other hand, we are getting more output per invested capital as we make these changes.

Okay, well we thank all of you for participating today.

Again I just reiterate, we believe we did have a solid record fourth quarter in 2003.

We enter the new year with what we think is solid momentum and we'll continue to drive performance improvements across our businesses.

Thank you very much.

Thank you, everyone, for your participation in today's conference call and you may disconnect at this time.