惠而浦 (WHR) 2004 Q2 法說會逐字稿

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

Today's call is being recorded.

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

Please go ahead.

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

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

This call and the 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 could be found in our latest 10-Q.

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

Jeff?

Good morning and thank you all for joining us today.

Earlier this morning we reported our second quarter results and I believe we had a good second quarter performance and an operating environment where we benefited from very strong global demand but also an environment that was made challenging by rising material costs, tight availability of material supplies and some transport constraints.

Despite these challenges, we were able to deliver strong year-over-year results.

I'd like to review a few of the highlights of our global performance which was included in the release we made today.

To begin, revenues grew to $3.3 billion for the quarter, which was a record for us in the second quarter, and grew by 9.2% versus last year.

If you exclude currency translation, our revenues grew by 8%.

Earnings per share came in at $1.53 a share, which was a 13% is improvement versus last year.

And our year-to-date free cash flow improved by $125 million.

Which was driven by improved earnings and continued strong working capital management.

In fact, our working capital as a percent of sales came in at 13.2% which was down 1.3 points from the same period of last year.

Overall these results were driven by good performances that we saw in our North American and European operations.

Latin America continued to see strong and growing demand, but also continued to experience significant material cost increases.

Our performance in Asia was below our expectations as we continue to be impacted by a very negative market price environment, in a region where we also had very significant increases in material costs.

But globally we've been able to effectively manage all of these operating challenges, capitalize on the robust demand and to deliver this record-level result in the second quarter.

At the same time, we have continued to invest in our brands to build customer loyalty.

The flow of new and relevant product innovation continues across our businesses around the world, we're making significant progress in expanding and strengthening our global operating platform, which will enhance our competitiveness.

For the first half of the year, revenues grew for the total corporation by 10%.

Earnings per share grew by 11%.

As I mentioned earlier, our free cash flow improved by $125 million.

For the second half of the year, we expect global demand to continue to grow but we expect it to grow at about half the rate that we saw globally in the first half.

We will continue to aggressively manage the material cost and availability challenges that we've seen across our businesses and we do expect to see improvements in both product supply levels as well as the overall transportation conditions.

For the full year, we do expect for revenues to exceed $13 billion, this would be a record for us this year and we remain comfortable our EPS estimates for the year in the 620 to 625 range and finally, as we've previously communicated, we expect to deliver free cash flow in the $400 million range.

I'd now like to turn to slide 5 and provide you some insight on our different regional businesses.

In North America, our operations had a record quarter in terms of unit shipments, revenues and operating profit.

Revenues grew by 6.9% to $2.1 billion and operating margins came in at 10.2%.

Our second quarter margins were negatively impacted by about $8 million in unfavorable currency, somewhat higher material cost increases and higher transportation costs.

We continue to deliver very strong productivity and positive mix changes within our North American business.

We saw consumer demand was very strong in the U.S. in the quarter and grew by 9.3% on T-7 basis and we also saw strong demand for our brands.

Our Whirlpool and KitchenAid brand sales grew by 10 and 8% respectively and we had a good balance of growth across our channels of distribution.

During the quarter, we continued the flow of significant new product introductions and innovations, including a complete new line of Whirlpool branded laundry and the introduction introduction for KitchenAid into the front-load laundry segment.

The Kenmore brand side by side refrigerators we introduced have been a success thus far and we're in the process of rolling those out to all Sears stores nationwide.

We introduced a range of water filtration and water softening products.

We added new products to our line and also significantly expanded our national gladiator distribution outlets across the country.

As was previously announced, we did have major investments in North America, of which about $80 million will fund new products in Mexico and to construct the new refrigeration facility.

Also during the quarter, our largest retail customer Sears announced a very aggressive new off the mall store growth strategy, which we believe will have a positive impact on our major home appliance business.

This strategy includes the acquisition of up to 61 new stores from existing locations from K-Mart and Wal-Mart, in addition Sears has announced plans to introduce appliances into approximately 150 existing Sears appliance and hardware stores.

We're very pleased with this first phase of Sears expansion plans and we expect that it will help Sears to continue to defend its leading appliance retail position.

For North America in the second half we expect the market will grow by about 3 to 4% and we expect to outperform the market based on our current run rates, improvement in our product availability and the demand we're seeing for our new product innovations.

We also expect to offset material in transport cost increases through productivity efforts and the benefits of our previously announced price increases.

Based on these actions, we are on track to deliver another record year of performance in North America.

I will now turn to slide 6 to talk about our European operations, where we had another strong quarter of performance improvement.

Revenues grew by 12% and are up 6% if you exclude currency translation.

Volume grew by 5%, which outpaced the market growth that we estimate to be around 3%.

Our operating profits improved by 52% while operating margins expanded by 1.4 points.

Contributing to this performance is continued strong growth in the profitable built-in segment of the business, where we continue to significantly outpace the industry.

We had a better mix of new innovative products such as our side by sides and built-in microwave ovens and we continue to deliver record levels of productivity, despite an unfavorable raw material market.

For the first half in Europe, our revenues were up 16% or 5% if you exclude currency translation.

Operating profits were up 52% and our margins have increased 1.1 points.

For the second half of the year, we expect industry demand to be in the 2 to 3% range.

We will continue to exceed this industry growth, which will be driven by our launching of a wide range of new products, coupled with our normal seasonal growth, which is always much stronger in the second half of the year, given the weight of products that we sell.

In addition, given the pressure on raw material prices we've recently announced price increases which will become effective in the third quarter on all free-standing products in all markets across Europe.

These actions and continued high levels of productivity will deliver strong operating margin improvement in the second half of the year, where we're at and having record market share levels, we're delivering strong cash flow and as we previously communicated, we expect our European business to be [INAUDIBLE] positive for the year.

I will now turn to slide 7 in Latin America, where revenues for the quarter were up 23%.

In Brazil, economic conditions continued to improve across most key indicators.

Interest rates have remained flat with the Q1 level at about 16%.

We have seen improvements in unemployment versus last year and as a result of a generally favorable economic environment, we saw a significant improvement in demand in Brazil, demand increased 28% in the second quarter versus the year earlier.

And on a year-to-date basis, the market is up 21%.

For the year we don't expect that high level of growth rates but we do expect for the full year overall market demand will grow by about 12 to 15%.

During the first half of the year, our shipments did outpace market growth and we expect this to continue for the balance of the year.

At the same time, our exports from Latin America continue to grow and they grew by 27% in exporting major appliances.

Our second quarter operating profit increased by 8%.

The business was significantly negatively impacted by material cost increases, which increased by about $13 million year-over-year in the quarter and this impact was only partially offset by pricing and cost productivity actions.

For the year we expect to continue to see these material cost pressures but we're still comfortable that with our productivity and our marketplace price actions that we'll be able to deliver a very solid year of improvement in our overall operating profit for the region for the year.

In Asia, which we show on slide 8, we had a number of challenges which negatively impacted our performance for the quarter.

Overall revenues declined by 6%.

The trade inventory correction process in India, which we communicated earlier this year, is taking somewhat longer than we had originally expected, given the competitive environment, but we do expect to complete that in the third quarter.

This will ultimately improve our margins in our biggest market in Asia, which is India, as we eliminate costly inefficiencies of our supply chain.

In addition, we continue to see significant increases of material costs, coupled with a negative market pricing environment, really led to the deterioration of our margins.

Although we had a positive improvement from the first quarter, we still came in at a small operating loss for the quarter.

To address this, we're aggressively accelerating new product line changes to help enable us to improve margins and mix.

We're stepping up productivity and cost reduction efforts across the region.

These actions also include us aggressively expanding our China procurement efforts, building up our technology base and increasing finished good exports from the region to other global sales networks.

Based on these actions we now expect our margins to begin to show recovery in the fourth quarter of this year.

As I mentioned earlier, overall I believe we had a good quarter of results, we have very positive momentum in our North American, Latin American and European businesses.

We're effectively managing a number of significant external operating challenges but we remain on track to deliver this record year of results.

So, with that I'm going to turn over to Steve Barrett to let him cover our financial results in more detail.

R. Stephen Barrett, Jr.: Thanks, Jeff and good morning.

As Jeff mentioned, we delivered second quarter earnings of $1.53 a share, representing a strong 13.3% improvement over 2003.

Moving to slide number 9, I will walk you through our second quarter performance from operating profit to net earnings.

Interest income and sundry expense ended the quarter $3 million lower than last year's results.

This decrease is mainly attributable to the strengthening of the U.S. dollar against the real in Brazil during the quarter, which resulted in currency gains on U.S. dollar export receivable positions within our Latin American operations.

Lower debt levels and an overall lower global interest rate, reduced interest expense from $36 million to $30 million during the second quarter.

Lastly, higher income tax expense results from our improved financial performance and also reflects a higher effective tax rate of 37% during 2004.

Due largely to changes in our global earnings mix.

We believe our overall performance during the quarter, given the challenging global economic environment within which we operate, was strong.

For the first half of 2004, the company has earned $2.96 per share, representing a 10.9% improvement over last year's levels.

Our financial performance was driven by strong portfolio of brands within our North American operations and the continued positive operating momentum within our European businesses.

If you'll turn to slide 10, I'll comment briefly on our cash flow performance.

Second quarter free cash flow after dividends was a negative $85 million.

This represents a $125 million improvement over 2003 results.

The improved results reflect our strong earnings performance and a lower cash outlay for restructuring initiatives, primarily within our European operations.

The timing of tax payments is also having a favorable year-over-year impact.

Our first half cash flow results also reflect the 26% dividend increase announced during late 2003.

Finally, year to date we have repurchased 3.7 million shares of our stock.

This concludes the 1 billion share repurchase program approved by the company's board of directors during March of 1999 and February of 2000.

During the second quarter, the company's board authorized an additional repurchase of up to $500 million.

The company will continue to evaluate future purchases based on market conditions, target debt levels, dividend policy and strategic acquisition opportunities.

Turning to slide 11, I'll speak briefly about working capital as well as some other balance sheet metrics.

Networking capital at the end of June was 1.6 billion, essentially equal to last year's levels.

As a percentage of sales, working capital improved 1.3 points from 14.5% to 13.2% and representing an all-time record second quarter low.

Overall inventory levels as a percentage of sales have increased during the quarter, due to higher export sales, tight supply and availability-driven buffer stock and to support our global operating platform changes.

Overall debt levels have declined about 7% to 1.6 billion and our debt to capital has decreased from 62% at the end of June 2003 to 56% in 2004.

These ratios reflect lower post-acquisition debt and additional share repurchases.

Our interest coverage ratio of 6.2 times reflects our strong operating results during 2004 and has improved from last year's levels of 5.1 times.

Overall, our financial position remained strong and our debt rating remains BBB-plus for Moody's.

Return on equity and return on total capital remain at strong levels of 32 and 17% respectively, but reflect a decrease year-over-year.

The decrease is largely attributed to nonoperational increases in equity over the past year.

During 2003, the Company was required to increase equity to reflect the reversal of an equity charge from pensions taken during 2002.

Additionally, equity was increased to reflect the foreign currency translation impact throughout 2003 as the U.S. dollar weakened against other currencies.

I'd like to briefly comment on our outlook for fiscal 2004 on slide 12.

We anticipate continued strong base business performance in North America and Europe and gradual improvements within Latin America.

Asia's performance is expected too begin its recovery during the fourth quarter.

Consistent with prior guidance, we anticipate delivering about $400 million in free cash flow during 2004.

We continue to expect 2004 earnings to fall between $6.20 and $6.35 per share.

This represents a 5 to 7% year-over-year improvement.

Embedded in this guidance remains 40 to 45 cents per share of incremental restructuring and related costs, which will continue to enable us to evolve our global operating platform and continue to deliver productivity improvements.

Productivity initiatives and pricing actions are expected to help mitigate rising material costs.

Now I'd like to turn it back over to Jeff.

Okay.

To conclude my comments I'd like to provide you with a few insight on my priorities as I've assumed my new role as Chairman and Chief Executive Officer of Whirlpool.

As you all know, Dave Whitwam retired on July 1 after 17 years as CEO of our company.

During Dave's tenure, we at the Whirlpool Group and the number two appliance manufacturer in the U.S. to the global leader in major home appliances.

So as I look at our business today, I believe that Whirlpool has never had as many opportunities before us as we do today.

We have a very strong global operating platform position.

We have the strongest brand portfolio in the industry and today I believe we have a very experienced and talented leadership team in place running our businesses.

My focus and our leadership team's focus is to realize the value creation opportunity that we believe is very significant for our company today.

And we'll do this by focusing on three areas.

The first is to execute aggressively our customer loyalty strategy of building very strong consumer brands, supported by consumer relevant innovation.

The second is to take appropriate actions to ensure that we are at world-class levels of competitiveness in every part of our operations.

And finally, the third is to continue to build the talent and capabilities of our organization to ensure that we have the skills to successfully execute our differentiated strategy around the world.

Our investment plans today are aligned to these strategic priorities and we're committed to delivering appropriate total shareholder returns.

To support this objective in 2004, we've increased our dividend by 26%, we've repurchased $3.7 million shares to date and as Steve mentioned, our board has authorized an additional $500 million share repurchase authorization.

At the same time, we're fully funding our strategy, we're investing in our brands, we're investing in innovation and in our global operating platform.

And while doing this we're still generating very strong levels of free cash flow.

In May, we reviewed with many of you the details of our strategy and total in every region around the world.

And at that meeting, I outlined our value creating objectives that we hold ourselves accountable for with the leadership of this company and there's really three I'd just like to reiterate.

First of all, we expect to grow our revenues between 5 to 7% annually.

We expect to grow our earnings between 10 to 15% anually, and we expect to deliver EVA improvement year-over-year in the top quartile.

Our leadership team is committed and aligned to execute this strategy that we reviewed then and to consistently deliver these types of shareholder value creation goals.

So I'll stop here and I'd like to open this up and take your questions.

Thank you.

Ladies and gentlemen, if you would like to ask a question at this time, you may do so by pressing the star key, followed by the digit 1on your touch-tone telephone.

Again star, 1 for questions or comments at this time.

We'll go first to Sam Darkatsch with Raymond James.

Good morning, Jeff, good morning, Steve, how are you?

Hi, Sam.

R. Stephen Barrett, Jr.: Hi, Sam.

Three quick questions if I might.

First off, Jeff, you mentioned that you expect to perhaps pickup some share in North America in the second half with an industry growing about 3 to 4%.

What are your expectations for the Kenmore line specifically since that's where it seems as though it's been holding you back with respect to share differentials in the first half.

Yeah, Sam.

You know, we've obviously spent a lot of time working on this business.

We have seen some positive trends in terms of the overall performance relative to the marketplace, particularly with the products that we supply to Sears.

But there's really to me two drivers that we expect a more stable market share out of this piece of our business.

First is we have seen trends and expect to increase our balance of sale of their overall business and second of all, I think with the product plans they have in place with the marketing plans they have in place, we expect those to attract more shoppers to Sears and help stabilize that business.

So, really on both those axis' we think we're looking for more stable share in the second half of the year there.

Okay.

Second question, if you could talk about inventories, both your own and in the channel.

With respect to your own inventories, they were up I guess, what, 16% year-over-year?

What were they up in units, Steve?

Do you have that information?

R. Stephen Barrett, Jr.: Well, in total units Sam as a percent of revenue we increased by 6/10ths of a point.

And the increases were across finished goods as well as the raw material.

Three reasons, really.

First of all, as we have developed our export, our transregional sales levels are up significantly year-over-year.

This year we'll ship about 6 million units, transregionally.

That's a 70% year-on-year increase.

The second point as I mentioned is we have seen severe logistical challenges from ocean freight to trucking.

And as a result of that, we have had availability issues in raw materials as well as electronic components.

As a result of that and running at very high rates of capacity utilization, we have built some buffer inventory.

Lastly, the third component, again relates to our global operating platform, our manufacturing transitions as we do transition, you know, we need to build some additional stock as all capacity is ramping down and new capacity is coming on.

So, those are really the three factors driving.

And Sam, from a trade standpoint, we don't see any out of balance right now in trade inventories.

It does vary a lot by product line.

I think if you look at trade inventories in terms of air control products right now, they're probably pretty high because so far it's not been a great season.

On the other hand, certain products like refrigeration there's been a real shortage and we've really been hard-pressed to keep up that.

So, all in all, though, I think if you look in total I think they're in fairly good balance.

Two more quick questions and I'll let others ask.

The transportation constraints that you're referring to, Steve and Jeff, is this more energy cost-related?

Is it more simply volume and logistics related?

And what do you think, if you could calculate the financial impact of the constraints, would have been in the quarter?

Sam, they're really all three.

I think overall just given the environment, transportation and costs in general are higher.

Secondly, we have seen and it was particularly acute in the second quarter, with you know, much higher than expected industry demand with some component availability shortages and then some spikes in orders.

In our commitment to provide availability, you know, we really had to do some extraordinary things to ensure the supply.

And right now, you know, given the overall high demand activity, there are constraints in trucks and rail and globally there's constraints on containers and things like that.

But specifically I would say for example in North America we had about 8 to $9 million of what we would call premium non-reocurring costs associated with dealing with all of these issues.

The balance of that is just -- but the rate cost increases and things like that we've already embedded into our business.

But the premium cost to deal with short-term fluctuations did have an impact on our North American business in the second quarter.

And last question, year-over-year changes in discretionary cost, Steve, like advertising and R&D?

R. Stephen Barrett, Jr.: Right, those have increased, Sam.

You know, in fact when you look at our SG&A number, our SG&A is unfavorable year -on-year and that is completely reflecting the freight and warehousing, the logistics costs.

Which, by the way, globally for us are a $20 million rate impact quarter-on-quarter.

In the areas of brand advertising, what we call revenue generating SG&A, we've increased our spending and certainly increased our spending in R&D, as well.

But on those two we've offset with other costs.

So, to Steve's point, the real increase in SG&A is largely due to the spring warehouse.

And the $20 million impact you said during the quarter?

R. Stephen Barrett, Jr.: On the rate, yes.

Thank you, I will let others ask.

Thanks.

We'll go next to Michael Reotte with JP Morgan.

Yes, hi, good morning.

A couple of questions.

First, looking at your guidance, you have already in the first half, you know, improved on this an absolute level, nearly 30 cents year-over-year on an EPS basis, so, if you look at the second half, basically that's just about all of the basically already get to the low end of your range.

In other words, the low end of your range basically says flat earnings in the second half of the year and I was wondering if that's just simply, you know, being conservative or are there some, you know, given your outlook for a continued, although moderating sales growth, are there some higher levels of charges that you're anticipating in the second half?

And what's driving that low end of the range?

Yes, Michael.

Really three things as we look at the second half.

As I mentioned, we expect demand, although will be positive, will be at a lower rate in the second half than in the first half.

Second of all, we are dealing with around the world higher costs and although we have plans to address that there's still some uncertainty in some of those numbers.

And then the third factor that Steve had mentioned is that we are working on a number of and these are not new.

They've been planned, but what I would call restructuring projects which, depending on the timing of when we complete them and the costs associated with that we have built that into our second half outlook.

So, you know, I guess to your point, you know, given those things we didn't see any reason to change our guidance at this point in time.

Yes, specifically on the North American margin.

Can you give any visibility in terms of whether you expect those margins in the second half to be, you know, flat, up or down year-over-year?

We expect second half -- in the second quarter is typically our lowest margin quarter of the year in North America due to kind of the seasonal nature of the mix of the business.

And in addition this year we had, as I said, about an 8 to $9 million premium, print and warehouse cost, I'm not sure all of that will go away, but we certainly don't anticipate those kinds of costs going forward.

So, absolutely we expect North American margins to be higher in Q3 and Q4 than they were in Q2.

Okay, great.

That's it for now.

Thanks a lot.

Thank you.

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

Thanks, good morning, everyone.

Good morning.

Good morning.

Jeff, could we explore the ability to get price a little bit more?

It sounds like it's a regional thing, you've got costs up in Europe and it sounds like you can get some price in Asia.

You've got costs up, but price down.

Can you kind of just run through the regions and give us a little bit more color on what you're able to do and what the -- you know, why the -- what explains kind of the differences between the markets?

Sure, Jeff.

You know, let me start with North America.

As we previously announced, as we saw cost increases coming into the business at the levels that they came into, we began to take actions earlier this year.

One broad area where we publicly implemented was on all stainless steel products in North America, which we implemented in April 1st on all products, which have stainless steel.

That was a 2 to 2.5% price increase.

And that simply offset the costs that we saw in stainless steel.

We've also implemented in North America a fuel surcharge to help deal with the higher rates on the transportation costs.

And most recently we've just gone out with a price increase on selective models, selective brands for the latter part of this year, so, you know, as we look at this we evaluate our business, evaluate those costs we can control and where we can't control and where we can't control them, we try to recoup them in the marketplace.

In Latin America it's obviously a much more volatile market.

We've had dramatic cost increases there, you know, I think steel has increased by 60% or so so far this year in Latin America.

So there our price increases have almost been a monthly activity in our business and it just has to do with the type of inflation, dramatic inflation we have in raw material costs.

Europe has been, as you know on a very negative marketplace price spiral for the last three or four years much we're seeing signs that's beginning to mitigate, given, again the cost that we saw in both materials and transportations.

We concluded it was appropriate that we take a price increase in Europe and that's why we have announced that and are implementing that in the third quarter.

And then Asia is really, I'd have to break out between China and India.

And although we have the needs there, I would say that's given our position, for example in China being a small player, we based this more on the competitive situation and opportunities with new models and things like that to try to get pricing.

But overall, this is something we manage globally, it's something we manage regionally and something we manage on a local market basis.

Could you also just speak to, you know, your view on kind of the pace of the share repurchase, I guess roughly it took five years to blow through that $1 billion, you have another $5.5 million out there.

Should we expect a little bit faster pace given it's kind of the valuation of the stock and how the cash flow is looking?

Jeff, when we announced that we announced that this would go into our investment priorities based on also our ability to deliver free cash flow and that's pretty much the plan.

You know, I would say that, you know, at today's levels this would be high on our priority list and it will be the determining factor will be the rate that we're delivering positive free cash flow.

Okay, thanks.

Next we go to David Pinkas with KR Capital Advisors.

Yes, thank you very much.

Can you talk a little bit about your current raw material contracts, you know, I saw that, of course, you had reached some kind of renegotiation or settlement with this spot.

So, maybe you could focus on steel but maybe cover any others?

And then also related to that could you just talk about the length of the contracts you have in place?

And if we will be seeing some of those roll off or, you know, roll up to higher prices say sometimes over the next 18 to 24 months?

And I have one other after that.

Thank you.

David, first of all, let me say that the specifics of those contracts, we really don't discuss, but, you know, in general, in our more mature markets, which would be the U.S. and Europe, we typically have contracts for our major purchases and those can range anywhere from 6 months to 3 years in lenght.

And in our emerging markets, Latin America and Asia, given just the structure of those industries, those normally are open market type purchases.

Not for everything, but they're more impacted by I would say the spot market and raw materials than we are in our mature markets.

And then if you think about the number of commodities and components that we purchase, which are literally thousands, you know, there's really no way I can quantify, you know, which ones are, and for what length.

But as a rule of thumb I would say North America and Europe we have pretty good visibility to our cost structure for at least 12 months out.

Given that structure.

And, you know, given our size and the need for predictability with our customers everywhere we can we typically have contracts and, of course, we expect those contracts to be delivered upon and that's really been our approach.

Okay.

And just to follow up a related item there, in '05, I'm sorry, in this year you talked about 40 to 45 cents incremental restructuring and related costs.

And I'm wondering what is on tap sort of for '05 in terms of how you're going to deal with some of these pressures and if you could really say at this point if sort of restructuring related costs in '05, you know, might be flat with this year, up, down, so are there some significant areas that you're looking at today and whether you could sort of discuss that?

Thank you.

Yes, David.

There's probably two broad areas where we are focusing these investments.

One is in our global operating platform, which is supporting productivity, could be manufacturing footprint it could be outsourcing of noncore processes and those type of things.

And then the other would be restructured around head count, SG&A activities and that sort of thing.

What we have communicated earlier this year is that on a go-forward basis, beginning in '04 that these will not be viewed as special charges, we would absorb those within our normal operations, that's what we've done all year this year and will continue to do.

As Steve indicated this year we estimate it to be in the 40 to 45 cents per share range.

We have not finalized plans for next year but we are building that capacity within the scope of our business and, you know, dependent upon our overall business performance and our ability to drive profitability in the business, we would also look to improve that capacity over time, but there's no specific number that we've determined for 2005.

I guess there are some in terms of the broad areas, though, do you see that some of these activities need to step up to deal with price increase you know, just cost pressures or other things?

Or do you see it more like '04?

We don't see any what I would call reactatory changes to what we're doing.

We've really built pretty good robust plans for really the next two to three years and we're focused on executing them faster more efficiently and given what I see right now, I don't see any rang in those plans.

Thank you very much.

We'll take our next question from Laura Champine with Morgan Keegan.

Good morning.

Good morning.

Were the share losses in North America, all due to Sears' share losses in major appliances?

Laura, I would say that that was the big part of it.

We also, in the second quarter, I would say early on in the quarter given some product availability issues that we had we lost some share early on in the quarter in our brands.

And then by June we were fully back on track in recouping that but we did have some brand and share loss early on in the quarter.

Can you provide a little more detail into product availability issues that you seem to be indicating are now resolved?

Well I would give you one big example is refrigeration.

There has been very strong demand for refrigeration.

As you know, in this industry and in most parts of the world, the summer season is obviously the peak and you have to start making production decisions as early as February in terms of what inventory levels you're going to take into the season, as well as what your production availability is during the summer months.

And we did that.

We've seen demand much higher than what we had expected.

That coupled with what we view as a worldwide compressor shortage, which is a major component for that, has really made this a very challenging supply chain.

And then the third dimension for us is we've had great success, particularly in our side by side business, in terms of the product innovation we brought to the marketplace and some of those new innovative products are running two to three times from what we had expect.

So, in the very short-term, meaning May, June, July, we're really operating full out in terms of production to keep up with supply.

But that's one I thinks as we get through July we will be able to level that off and that's probably the biggest single one.

Some of those are good problems.

In Latin America I'm a little confused about whether you took share or not because the press release eludes to faster than industry growth, but the slide presentation says your revenues grew 23% and the industry was up 28%.

In Brazil the market was up 28%.

And in Brazil we did grow market share but in the total Latin American numbers, of course, you've got the compressor business which although was very positive growth, it was 11 and 12%, that's what brings averages down.

Great.

Do you think that the strength in Europe could be to some extent, preordering on the increases that are coming in Q3?

I don't believe that's what we saw through June.

Because we've got 34 different markets where we execute the price increases.

There is slightly different timing in each one of those.

But I don't think there was a big buy-in proceeding this price increase.

Great, thanks a lot.

Uh-huh.

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

Good morning.

Hi, Eric.

R. Stephen Barrett, Jr.: Eric.

I wanted to get a little better insight. 90 days ago I think the outlook for the second half of the year would have been less bullish than it is today.

At the same point in time we've seen your market share, or your market growth, or your growth in the U.S. market underperform the market.

In other words, you've lost share in the first half.

In the second half now you're more bullish about market growth and also about your market share.

What changed?

Or what will change?

Eric, I think you know, within a 1 percentage point, I don't think our second half view is much different now than it was then.

I have to go back and see what we said about it.

But it's not dramatically different.

What's changed about our business and going from a first half where we've losing somre share to a second half where we expecting to recoup some share, is really based on, we've had a number of major line transitions, the biggest one being the Whirlpool brand laundry line.

That came into the marketplace in June.

We underperformed in that category going into that, now that we have it into the marketplace, we are doing extremely well with it so that's one major change.

As I mentioned, we've been constrained in some key categories on availability, particularly in the second quarter that cost us some market share.

And then finally, we've got now complete visibility with not only our plans, but our plans with our key trade partners, you know, we think they have very positive marketing activities, we know they have very strong line offerings.

We have visibility of orders 30 to 60 days out.

So, all of those things together give us a pretty good level of confidence that with some of the issues behind us and transitions behind us, coupled with those plans, that in the momentum we have right now in the business, that we ought to pick up some market share in the second half.

Secondly, I think coming out of the first quarter the comment was made by someone that the price and environment in North America was as good or as rational or as healthy as it had been in quite some time.

Would that characterization still fit?

Have you seen competive transchange?

I know everyone's got the same cost issues, but people have different pricing disciplines it appears.

Can you give us some color on that?

Well, I think certainly what we said then is we had not seen the price erosion this year that we had seen the previous two years and that is true and that continues to be true.

In terms of industry pricing and all of that, I really can't speak to what's going on with competitors, I can only know what we're doing and we do know that we've implemented price increases and are getting them because they're necessary in order for us to have the availability of products.

Great.

Thank you.

And as a reminder ladies and gentlemen that is star, 1 on your touch-tone telephone for your questions.

Again star, 1.

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

Yes, good morning.

Good morning, David.

Just looking at the unit volume numbers you deliver to us each quarter, your unit volume is up 9% year-over-year, the second best year-over-year gain in the past four years.

Your gross margins, on the other hand, on the second worst in the past four years.

And even if we add back the 8 to 9 million it still only takes you to 22.2 to 22.5% performance.

I hear you when you're talking about higher raw materials prices and some of the logistical disruption eruptions and the share issues and things like that, and maybe that's what accounts for it.

But I also just want to be clearer about where we're going with the productivity benefits, that's been a big driver behind your story over the last couple of years.

Is the second derivative turning negative here?

Are we starting to slow down, have we passed the point of inflection and so the incremental benefits from quarter to quarter to quarter are going forward and productivity benefits are getting less and less?

David, in terms of productivity, there is several components.

Our big one is our conversion costs.

Those are at extremely, infact record levels.

One is just material prices which as we talked about going the wrong way.

The third for us is certainly product specification and that sort of thing.

I would say those are going at the rates that they have been and we expected them.

So, you know, in that equation, you know, we've seen increases in material costs and not fully offset by improvements in conversion.

The other part of that equation then is pricing and I spoke to what we've done in the marketplace with pricing.

So, we do expect to see improvements going forward, assuming we are successfull in these actions, in our gross margin.

And in terms of just asset productivity, I mean a big part of this, as well, has been, you know, consolidation of operations around the world and your development of your export business and those types of drivers and I just want to check in on those, as well.

Are we going to be seeing a slow down from quarter-to-quarter there as well?

Or should we just view this as kind a temporary?

We absolutely believe the goals we've outlined in terms of productivity are goals we're going to achieve.

We do have an envirnoment righ now where there's been a major change in material cost.

We're dealing with that, but it absolutely does not change what we expect to get out of our operations from a total cost productivity standpoint.

Okay, great.

The second question has to do with a competitive environment, you know, the second largest appliance manufacturer in the world has announced they they're going to be launching a fairly substantial line of premium price point products here in the second half.

They're going to be putting them out through your principle channel in your KitchenAid brand.

What can you say about sort of the developing competitive situation in premium price point appliances?

Well, certainly there's been a lot more people trying to participate in that segment and I think virtually every major competitor is trying to have an offering.

But then you have to look at what are the components of success in that segment.

And it starts with brand.

You know, I think the case of our KitchenAid brand we have tremendous consumer equity and recognition, strong customer loyalty.

I think that's our most powerful asset in that brand.

The second is true product innovation and there, too, you know, I feel very good about what we're doing and then finally is distribution which includes not only the display of product, but people who call sell.

Typically in those products you're selling a full line kitchen in that so you need people who are knowledgeable in that.

You need a delivery and installation and service capabilities, which has different requirements for this premium product than it does what I call the mass volume products.

And so from that standpoint even with all these, I would say people trying to come into this space, we continue, you know, really exceptional growth rates in our business because I think we've got significant assets across all of those dimensions.

The other dimension in that is the market is growing and so, you know, the fact that so many people are getting into it is bringing more awareness to what's new and different into the marketplace, which is attracting more consumers, and we've talked about this in the past.

We have seen some fairly clear evidence that there is an increasing rate of replacement of appliances due to new things in the marketplace versus, you know, moving or fixed or buying a new house or that sort of thing.

So I think the overall dynamics are positive and then you have to look at your competitive offering in there.

I'd feel pretty good about where we're at vis-a-vis some of the newcomers.

You certainly have a lot of brand strength there.

I wanted to ask you as well about the builder's channel.

I know you do some buisness there.

What are you seeing in your order backlog?

Is there any cancellation activity that maybe wasn't there in the past?

You know, as we've talk in the past, we've got very good visibility the next six months out and we see six months of very robust orders.

That's good.

And finally, just on the compressor business, you talked earlier about it being so tight.

Is there an opportunity there for your Embraco business?

I mean maybe we should get prices higher?

What can you say about that?

This business has been impacted as I mentioned about Brazil in general, where a large portion of our production has been hugely hit by raw material cost increases.

And we have, in fact, already implemented an communicated, the Embraco people have globally priced increases across all of their products, which have already gone in effect.

Good, thanks very much.

Uh-huh.

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

Jeff, I'm just trying to get, you know, kind of to the underlying dynamics of what's going on with share.

I know you're not really inclined to talk about your competitors, but, you know, you've lost some share, GE kind of openly admitted they lost share.

You know, Maytag has blown up.

Electrolux looks like they've lost share according to their press release.

All of that implies that the newcomers are making some headway.

I just wonder if you could kind of comment on what impact you see, you know, the LGs and others making it into the marketplace and what kind of dent they're making into industry market share?

Yeah Jeff, as you look at the share number as we dig down through it, we look at it by brand by product, by channel.

I think that's why there probably more of some product shifts than anything else going on right now.

But we see the same numbers you do from the competitive base.

We don't believe and we certainly haven't seen a structural change.

At least in our business.

We've had some issues that we've had to overcome as I mentioned earlier but in terms of the core seven products, again, I don't see from our business standpoint, a structural change.

You know, I think there is quite a bit of product coming in, imported in the country, not only from the Asians, but from Europeans.

There are more entries as was earlier mentioned in different segments.

So, is I think right now, particularly with a lot of these new entries, they're getting some initial floor space, which I think is taking up a little bit of share.

But I'd have to come to your conclusion is that some of the new entries from Europe in premium segments and from Asia have gotten a little bit of share in the first half of this year.

Where do you think, you know, the industry market share is, of kind of the top 4, you know, you, GE, Maytag and Electrolux?

Still well over 90%.

Over 90.

Maybe even 95?

Closer to that, yeah.

Okay.

Thanks a lot.

We'll go next to Tony Campbell with Dorsett Management.

Yeah, hi.

I just wondering if you could update us on the pension situation?

I'm sorry, could you repeat that question?

Could you just update us on the pension situation?

R. Stephen Barrett, Jr.: Sure.

You know, we really don't have a situation.

Well...

R. Stephen Barrett, Jr.: We have, last year as you know, made voluntary contributions to the pension plan that were not required under ERISA.

And as result of that, we're close on a funding standpoint to being, you know, 100% plus on some of our plans funded.

You know, we've also been able to mitigate year -on- year pension expense as a result of those contributions.

As we look forward this year, we see no required contributions.

Again depending on our cash situation and various uses of cash, we may or may not decide to make a contribution, but if we would do a relatively small one.

One of the reasons that we took the action we did in 2003, is as we looked forward to smooth out and limit required contributions.

And I may have missed this you guys how many shares did you repurchase?

And what was your average cost, please?

R. Stephen Barrett, Jr.: 3.7 million shares from the beginning of this year and the average cost was about -$68.

Okay.

Thank you very much.

Okay, we have time for about one more question, if there's any on the line.

And that final question comes from Michael Reotte with JP Morgan.

Yeah, hi.

I don't know if you hit on this before and I don't want to overstate the share issues in North America.

But if you could just give us an idea if possible on you know, in the second quarter, in North America, you know, roughly what you saw in terms of price and units, you know, for the period?

Unit growth and pricing?

Well, our unit growth and revenue growth was about the same.

So there wasn't, for us our business, there wasn't any dramatic difference.

And you know, you said that KitchenAid and Whirlpool brands grew 9 and 10% respectively.

Right.

So, which brands, you know, were particular underperformers?

Well, I mean there are two groups of brands.

What we supply to Kenmore and our value brands.

Okay, great.

Thank you.

Okay, well, again, thank you very much for joining us today.

We look forward to talking to you next time.

Once again, ladies and gentlemen, that concludes today's call.

Thank you for your participation.

You may disconnect at this time.