惠而浦 (WHR) 2004 Q3 法說會逐字稿

Good day everyone, and welcome to the Whirlpool Corporation third quarter release earnings 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 Fulcrupp (ph).

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

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

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

During this call, we will be making forward looking statements, to assist the 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 10Q.

Now I would like to turn the call over to our Chairman, CEO, and President, Jeff Fettig, for his opening remarks.

Thank you for joining us here today.

As you know, earlier this morning we released our third quarter results.

And globally, I believe we delivered solid results in what I would describe as a very challenging operating environment.

For the quarter, revenues came in at 3.3 billion, which is at a record level of 6.6% versus last year.

We continue to see a strong global industry growth, but growth rates did slow somewhat as expected in the third quarter, versus the very strong levels that we saw in the first half of the year.

EPS came in at $1.50 per share, which was up 1.4% from last year.

EPS was negatively impacted by a 10% decline in operating profit, which was offset by a lower tax rate and lower shares outstanding.

Our year to date precash flow improved by $50 million, driven by continued strong working capital management handling (ph) or pension contributions versus what we had last year in the third quarter.

During the quarter we did see significant increases in material costs and in particularly in oil-related costs.

The challenging materials market we have seen has been escalating all year.

Through the first half of the year we were able to offset these costs through strong levels of productivity, selective price increases, and the margin benefits from our new innovative products that have been successfully introduced in the marketplace.

During this third quarter we saw the commodity index in a 30-year high, and oil prices rose by over 34%.

Rising oil prices have significantly impacted our business in two areas.

First, in materials such as resins, plastics, and foam that we use in our products.

The other impact is in our logistics cost.

In total, for the quarter we had approximately a $60 million higher cost in materials and logistics costs versus the same quarter last year.

We also continue to see some shortages in increasing lead times for some key raw materials and components.

These shortages have increased our supply-chain cost and inventory levels needed to support our product availability requirements.

These factors in total combined resulted in this 10% decline in our operating profit for the quarter.

Looking ahead, we don't expect this environment to improve significantly in the near term.

We therefore have taken several strong actions to address these issues.

First, we will continue to record levels of productivity across every part of our business operations.

Secondly, we've announced price increases in virtually all markets around the world.

These price increases are on average in the 10% range, and appropriate given the material and logistic cost increases we are seeing around the world.

Finally, we are accelerating, or are continuing to accelerate the rate of innovation that we've had in terms of introducing this innovation to the marketplace.

We've seen a very positive acceptance in the market for consumer relevant innovation, and we will continue to invest in this area which has had a positive impact on our business.

We believe our actions in total will enable us to overcome these significant cost increases, but the full effect of these benefits will not be fully realized until next year.

As a result, we now expect our full year EPS to be in the 5-85 to 5-95 range, versus our previous gains of 6-20 to 6-35.

And also forecasting our precash flow for the year to be in the $300 million range.

I'll now turn to our Regional operations, starting with slide 6, and talk about our North American operations, which delivered a record quarter of unit shipments and revenues.

Revenues grew by about 2% to 2.1 billion, and operating margins came in at 9%.

Our third quarter operating margin was negatively impacted by many of the things I mentioned earlier; significantly higher material prices for metals and oil-based commodities, higher oil prices in freight capacity constraints also led to significantly higher rates for transporting materials and finished products.

Combined, these 2 factors reduced our margin by 1.8 points, operating profit points, versus last year.

Price increases, productivity, and lower spending offset about 1 point of the impact of these higher costs, leading to a net margin reduction of about 8/10 of a point.

For the quarter, consumer demand was strong in the U.S., and grew by about 5.4% on a T7 basis.

We continue to see strong demand for our innovative products and brands in the marketplace.

Availability issues on things like stainless steel, electronic controls, and other items combined with transportation capacity issues and stronger demand than expected on some products, did have an impact on our product availability, which did contribute to a lower level of market share.

We're now seeing improvements in our overall availability, and expect market share to improve during the fourth quarter.

In the fourth quarter we do expect industry growth to continue at a strong trend at about the same rate that we saw in the third quarter.

Material prices and transportation costs are expected to increase from third quarter levels.

We estimate that in North America these costs will be $50 million higher than in last year's fourth quarter.

These costs will be partially mitigated by strong levels of productivity and cost controls, but overall will negatively impact our operating margins.

As I mentioned earlier, we've announced price increases, and in the U.S. these price increases are effective January 2, and will generally range from 5-10% in order to offset these higher material and transportation costs.

At the same time we've announced we will be raising our manufacturer's suggested retail prices, and our minimum advertising prices for all brands and all products in the marketplace.

Given the magnitude of the raw material, the oil, and the logistics costs increases we're incurring, we believe these price increases are appropriate for this environment.

Moving to slide 7, talking about our European operations where we continue to deliver strong operating improvement during the quarter, our revenues grew by 11.2%, which is up about 2% if you exclude the currency effect.

Volume growth was slightly ahead of the market growth, which we estimate was around 1%.

Our operating profits improved by 31%, and our margins increased by 9/10 of a point.

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

We had strong sales of our newly introduced products in all categories, and we continue to have strong growth in areas such as side-by-sides and built-in microwave ovens.

Our cost containment and continued record levels of productivity also had a major impact on our results.

For the fourth quarter of the year, we expect industry demand to grow in the 1-2% range, and we expect to continue to exceed industry growth.

In Europe, we have implemented a price increase of 3-5%, which is now effective in all markets for all free-standing products.

At the same time we've announced the 3-5% price increase for all built-in products, which will be effective the first of the year.

These actions and continued high levels of productivity will offset higher material costs and we do expect to deliver improved operating profit during the fourth quarter as well as a record market share level and strong cash flow generation.

As we previously have discussed, we expect our European business to be EVA positive for the year.

I'll now turn to slide 8 and talk about our Latin America regions where revenues for the quarter were up 32% on both the recorded and a currency-adjusted basis.

In Brazil, the economy continues to strengthen with GDP growth now estimated to be between 4.5 and 5%, and it's been driven by strong exports and increasing domestic consumer spending.

As a result, its overall favorable economic environment appliance demand increased by 26% in the third quarter, compared to last year.

On a year to date basis, industry demand has increased 23%.

We do expect growth to continue in the fourth quarter, but overall for the year we expect overall market demand to grow by about 15-18%.

During 2004 our shipments have outpaced market growth and we expect this to continue for the balance of the year; additionally, our export volume from Brazil continues to grow and is up over 25% of the major appliances on a year to date basis.

Our third quarter operating profit increased by 24%.

On a year over year basis operating profit was negatively impacted, also in Brazil, by significant price and transportation costs in the order of magnitude of about $31 million.

This impact was offset by pricing actions implemented throughout the year, and aggressive cost reduction actions.

We expect material cost pressures will continue during the fourth quarter and into next year, and we will continue to drive our strong productivity and marketplace price actions to offset these increased costs.

In Asia, which is shown on slide 9, we will continue to work through a number of challenges, which negatively impacted our performance during the quarter.

Overall revenues declined by 12%.

As we previously have indicated, we have been executing a trade inventory reduction program in India during the course of this year.

The program was essentially completed during the third quarter and going forward we expect the benefits of this to be faster speed to market for our new product introductions and to gain greater and significant efficiencies within our supply chain.

In addition, as you heard throughout the other regional discussions, Asia is also facing significant increases in material costs.

To address this, we are accelerating our new product line changes to the marketplace to enable us to improve our margins and mix, we've stepped up productivity and cost reduction efforts across the Region, and we also expect to benefit from price increases we've initiated to help offset the impact of these higher costs.

Based on these actions, we expect profit margins to begin to show recovery during the fourth quarter.

At this point, I'd like to turn it over to Roy Templin.

Roy is our new Chief Financial Officer.

He previously was our Vice President Corporate Controller before taking over as CFO on September 1.

Roy brings a great deal of operational and financial experience to this position and he is a great addition to the Whirlpool executive leadership team.

As Jeff mentioned, we delivered third quarter earnings of $1.50 per share, representing a 1.4% improvement over 2003.

Year to date EPS rose to $4.46, 7.7% higher than last year's results.

These results reflect a very strong first half where earnings were up about 11%.

Using the slide panel I'll walk you through our third quarter performance, from our operating profit to net earnings.

Interest income and sundry (ph) expense into the quarter $3 million lower than last year results.

Interest income is higher in the current quarter in part due to interest received on a settlement of a prior year tax payment in Brazil.

Our interest expense declined $2 million, primarily due to lower debt levels in higher interest rate countries.

During the third quarter, we adjusted our effective tax rate from 37% to 35.5% on a YTD basis, which was a function of our global mix of earnings, tax plan implemented during the quarter, and prior year audit settlement.

Finally, earnings were positively impacted by share repurchases.

YTD, the company has repurchased 3.7 million shares.

We believe our stock is undervalued at current price levels, and continue to evaluate buying opportunities, balancing such with investments in our core operations, our dividend policy, strategic acquisition opportunities, and targeted debt levels.

If you'll turn to slide 11, I'll comment briefly on our cash flow performance.

Third quarter precash flow after dividends is $26 million.

This represents a $50 million improvement over 2003 results.

The improved results reflect our year to date earnings performance, lower pension contributions, and lower cash outlays for restructuring initiatives, primarily within our European operations.

Results were partially offset by higher working capital investments.

Turning to slide 12, I'll briefly speak about working capital, as well as some other balance sheet metrics.

Networking capital at the end of September, was $1.7 billion, up modestly from last year's levels.

As a percentage of sales, working capital improved 1/10 of a point, from 13.1% to 13.0%.

Overall, inventory levels as a percentage of sales, have increased during the quarter.

This increase is primarily due to a higher investment in inventories, to improve availability to our trade partners, and support higher volume levels.

In addition, the increase is also associated with higher costs of materials and components, an increase in transregional shipment activity, and seasonal inventory builds.

While the increase in inventory is not structural in nature, we anticipate maintaining somewhat higher inventory levels until we see more stability in key component availability and transportation capacity.

Strong cash flow from operations has allowed us to reduce overall debt levels by 4% to $1.6 billion, and our debt to capital has decreased from 58% at the end of September 2003, to 52% in 2004.

Our interest coverage ratio has increased from 5.4 times, 6.1 times, reflecting improved operating results during 2004.

Overall returns on equity capital are in line with our expectations, as our financial position remains strong.

Our debt rating remains BAA1 for annuities, and BBB+ from S&P.

At this point, I'll turn the call back over to Jeff.

Just a few closing comments.

Clearly, as you have heard in our comments today, we are facing an unprecedented external environment.

Rapidly rising material and oil-related costs, as well as material and transport shortages.

This has challenged our business, and pressed our operating margins during the quarter.

We have adjusted this environment by aggressively driving levels of productivity, implementing appropriate price increases, and accelerating the rate of new product innovations in the marketplace.

Our global operating platform, coupled with our strong consumer brands and our innovation capabilities provide us with the necessary tools to overcome these types of challenges.

I believe this will enable us to deliver a solid year of results in 2004, and position us well going into 2005.

I'll stop here, and at this point in time we'll open this up and take the questions that you have.

Sam Darkatsh with Raymond James.

I've got a few questions.

First off, the fact that this price increase, particularly globally, I've got to think is pretty much unprecedented in this industry, or at least in modern history?

Do you expect there to be either a fair amount of prebuying ahead of time or heavily, heavy promotions by retailers in Q4, which may mitigate some of the positive aspects of the price hike at least in Q1?

At this point in time I'd like to turn the call over to Roy Templin.

Roy is our new Chief Financial Officer.

He previously was our Vice President Corporate Controller before taking over as CFO September 1.

Roy does bring a great deal of operational and financial experience to this position, and he is a great addition to the Whirlpool executive leadership team. but in Brazil and Europe these price increases are already at the marketplace.

So backing up particularly to the U.S. in that question, I certainly think there will be some prebuy before the price increase.

I don't think it will be dramatic, simply because our trade partners of today don't have warehousing capabilities anymore to do a lot of prebuy.

If I were to quantify it, it would probably be in the 2 to 4% range, probably maximum, in terms of what might be pulled into December versus January.

Well, first of all I can't really comment on what our competitors will do.

I only know the impact that these costs are having on our business, which really determine the magnitude of this price increase, after the aggressive productivity actions that we've taken.

But, you know, your comment about these being unprecedented, that's true, it's also an unprecedented material cost and logistics market.

With orders of magnitude of increases that have never been seen, certainly in the last 30 years that we've been tracking this.

The other dimension, which is the reason why in the U.S. we raised our manufacturing suggested retail prices and our minimum advertising prices, is we do believe that these increases at least from our suggestions would be reflected at the consumer level.

There are simply not enough of, certainly margins in our business or in any trade partner that I know, that can absorb these kind of increases so that would be our recommendation.

Of course as you know every retailer has the right to price at whatever level they think is appropriate.

A couple more quick questions and I'll get back in line.

Roy, the tax rate going forward, you said 35.5% would be the annualized rate for this year but how should we model tax rate in '05 and going forward?

You know, Sam, you probably ought to just model based on our current rate.

Again as you know we, the 35.5 is our best rate of the annualized rate this year.

And as we look into the future we see a similar type of rate going forward.

Of the 35.5, not the 32, right?

That's correct.

The 32, Sam, was simply the adjustment needed to get the year-to-date to 35.5.

That's a good point.

And then I saw $5 million in restructuring in the quarter.

Near term or intermediate term plans for restructuring expenditures, what are your thoughts there?

Yeah, Sam, we've, year-to-date we've spent about 12 million, 10 to 15 million but somewhere about $12.5 million range, and we now anticipate for the full year it will be probably in the $20 million range-- total restructuring costs this year.

Michael Rehaut with JP Morgan.

On the performance in North America, I was wondering if you could perhaps go into a little more detail with regard to what you saw in share losses, and you mentioned that you had some, some constraints in the supply chain that hurt product availability.

I wanted to know if you believe any of the performance also is related to share losses at Sears within the retail segment, given your exposure to Sears, or if any of the share loss is perhaps also as a result of continued inroads by imports?

Sure, Michael.

You know, first of all we did indicate our business was up 2%, the T7 market was up 5.4.

So given that, we did lose share if you calculate that's a little over a point a share.

Certainly availability hurt us in the quarter.

We have a significant number of unfilled orders that we did not get shipped in the quarter because of these product availability issues.

These are getting largely resolved.

We are in a better position today than we were any time during the third quarter, so that is certainly a big part of it.

Certainly the other part or another piece of it that you mentioned, Sears as you've seen has lost some retail outlet share, and given our position in there we certainly lost some share because of that.

But I would say the availability issue and some other things that I believe that we've put plans for in the marketplace, coupled with our new product introductions, we feel fairly confident that we are going to be able to get this turned around as we go through the fourth quarter.

And just drilling down on that a little bit more, so you don't feel that imports were a factor as well?

It was more availability and Sears in that order?

Yes.

And can you break down, I'm sorry, for the revenue growth of 1.8%, how that was between price and volume?

Roughly it was, ASE might have been slightly higher but within 10, so roughly equal.

Each about 1%?

No, revenues were 1.8, so units would have been slightly below that.

Right.

And in terms of the price increases in Brazil and Europe, you said they were already out there, and those average 10%, you said?

No, in Europe we announced and have implemented through the third quarter a 3 to 5% price increase on all free-standing product, and we've also announced a 3 to 5% increase the first of the year on all built-in product.

And the difference is simply how the businesses work.

The built-in product is largely on an annual contractual basis, so that's why we are waiting for the first of the year there.

In Brazil, we have announced double-digit price increases in the fourth quarter.

The only thing I would say on that if you look through the course of this year, we've raised prices already several times during the year, and this is just the next price increase which has been announced.

And anything in terms of '05 right now, with your outlook on how was it proposed, if you are able get all the price increases, if you expect between price increases and productivity, would that roughly offset higher steel and logistics costs at this point, or is it too early to tell?

It's certainly, Michael, for us it's too early in the process for us to give any 2005 guidance.

We are working through our plans.

We are in the midst of negotiation for our both our costs and some of our pricing for next year.

We are in the midst of negotiation for lowering our costs and some of our pricing for next year, but in principal, to your earlier point, it is our intention that these costs will get passed through pricing along with aggressive productivity on our part.

So your goal at this point is that you are going to try and roughly have the pricing and productivity to roughly offset the higher costs?

Well, again, I really can't give any 2005 guidance but that would be our intention, yes.

Jeffrey Sprague with Smith Barney.

A few issues-- I guess first just to clarify on response to the earlier question about realized price in North America.

So, Jeff, you're kind of implying there's maybe 10 or 20 basis points of realized price in the third quarter?

Is that-- I didn't understand what you said.

Jeff, go ahead with your next question, we will give you a number here in a moment.

I'm wondering, I mean we've heard a number of price increases, kind of, through the course of this year.

I think smaller, and in particular products and stainless steel, can you give us a sense of how much price you've attempted to get so far this year?

Sure.

What we've done as the year played out, we took in April a 2.5% price increase on all stainless steel products.

When nickel first went, had the dramatic increase that it had.

We began to see the logistics costs increases, and we began to put on a $2 per unit fuel surcharge, here in the US, and lastly, late in the summer as we saw shortages and much higher costs in our refrigerator business, we implemented a price increase in that, too.

As we went through the fourth quarter, and we, again I'll get the number for you in a moment in terms of the percentage, but we are achieving those price increases.

But as we went through the third quarter and saw the magnitude, particularly now with all the oil related costs which were driven as oil broke through $40 per barrel and it's kept arriving and stayed there, off rising, obviously a lot of materials were in oil.

The logistics, it's clear to us, that these selective price increases would not at all be sufficient to offset the wave of costs that were being incurred and that were coming, and that's when we went back in and made some conclusions about 2005 and determined an appropriate overall across-the-board price increase of the magnitude that we did.

You ought to think of probably the elective price increases that we took overall probably equated to about half a point of margin.

Half a point of margin or half a point of price?

Half a point of margin.

Across the full line.

Across the North American.

I also want to have a little bit more understanding on the availability issue.

I guess just the one thing I'm a little perplexed about is, given your size and importance in the industry, I would think you would be able to get components as good or better than anyone, so wouldn't those issues have been impacting everyone in the supply chain, and can you really comfortably equate those to share loss dynamic?

I think first you have to look at the materials where there were shortages.

Stainless steel is a good example.

We have a significant amount sell more stainless steel products, given anyone else in the marketplace, given our product line and brand, and that sort of thing.

So obviously I think everybody was impacted by it, but given the proportion we sell, we most likely were impacted more than anyone else.

The second is, things like electronic controls, we went from 8 weeks to 24 weeks.

And again, the proportion, given that we sell a higher mix than most of the market, we have more of these types of items in our product.

Thirdly, in certain categories, like side by side refrigerators which we've had tremendous success on, the issue there is that, given the nature of the refrigeration business, you have to make decisions early on in the year about the growth rate levels.

And we undershot it.

We performed significantly better than we expected.

Therefore, we were short in the peak summer seasons because we were simply maxed out on production.

You put all those things together, of which most of those we have recouped, it had a material impact on our market share.

And on the pricing for North America, other than January 1 or 2 being kind of a clean date, I mean is there really some trade reason for waiting?

I mean the pressures are very visible and tangible, you've put price in the market selectively through the course of the year.

Why aren't you banging the market with this stuff immediately?

Fundamentally because we thought it was very important that the beginning of the year was the right time, because that's when model line changes are made.

That's when prices and floors are remerchandised.

That's where annual trade partner plan to sells are put together.

And given this was across the board and of such magnitude it wasn't a tweak.

For us, it's a fundamental change upward in the positioning of the price points of our products.

And given that you also have to work with lead time advertising, which a lot of our big retailers are, at least 3 months out in terms of doing that.

And so to do this the right way, to do it the way that would make sense in terms of putting together a merchandisable selling line to give plenty of lead time with our trade partners for them to adjust their plans.

That's why we chose to do it as early as we did.

But the earliest we felt we could successfully execute it across the board was the first of the year.

In Europe it looks like your revenues strongly outperformed I guess the industry growth which I think you put at about 1%.

Could you give us a sense of really what your units were, maybe a set that I missed, I'm discussing you had very positive mix in Europe with the success in the built-in.

Maybe you could give color around that?

First of all you have to take the currency impact out.

X currency.

X currency we were basically 2%.

We were above the industry but not materially.

We did have good mix.

We talked about, we are growing very rapidly in the built-in segment.

That's actually a lower average selling price segment, but a much higher margin and profitability segment.

We are very happy with our growth there and we are gaining market share there.

The free-standing side is basically flat, and we have, as we are growing the rest of our business, we have backed away for very low priced low margin product.

There are a number of factors moving but the net effect is we are selling a better mix and margin of product.

David Macgregor with Longbow Research.

Jeff, you had in the last press release talked about specific actions to deal with this environment, and you cited higher levels of productivity in all your operations, price increases of approximate 5 to 10%, and thirdly, accelerating the rate of innovation.

I guess at this stage of the game, end market demand seems to be a little bit stronger if you look at the AHEM (ph) numbers than people anticipated.

If we assume that's relatively constant, we assume that raw materials environment remains relatively constant as well, then it all boils down to your ability to execute on these three drivers.

I was wondering if you can go back and drill into these a little bit further, give us a little more granularity on what is achievable?

And it might be helpful, given sort of people's understanding of the discussion so far on this call and pricing, if you spent maybe a disproportionately large amount of your answer on the higher levels of productivity.

Thank you.

Let me start with productivity, David.

As you know very well there's many drivers of productivity.

The one area that obviously is causing all the problems is material price.

So that, that piece of the productivity equation we've already talked about the magnitude.

It is going up.

So then you have to look at all the other levers that you can influence.

To give you an idea, material costs price by themselves is about 60% of the total productivity equation.

So to a certain degree you can set that aside.

Internally we can deal with the other 40% through a number of things.

One is specification of our products and making improvements on basically taking material content out, which we are doing and will do more, which has to do with allocating more engineering and resources to those activities.

But that is a very big lever for to us take out cost.

The second is the things we've been doing in our conversion cost.

I think you've seen the work that we've defined within our global operating platform.

We've had tremendous results in that.

This is basically the conversion cost within our factories around the world.

To give you an idea we are having the best year we've ever had this year; 50% higher than any other year that we've had and we will do even better next year.

And that's used by using such techniques such as six sigma (ph), lean manufacturing and basically getting the global leverage off our operations.

So that piece of it is going very well.

Then the next piece I would say is our global operating platform, and the manufacturing footprint changes that we've communicated that we continue to move ahead with.

In North America we announced we are moving ahead and making great progress in our facilities in Mexico.

We've just completed the closure of our Canadian facility and our two U.S. cooking factories.

We continue to ramp up our Polish factories.

It will be almost a 2 million unit factory next year, and all the things that we have previously described.

So I feel very good about our ability to drive to or continue to drive at record levels of productivity on the nonmaterial price portion of that.

I would also add that we are not stopping there.

We are also going to all the other spending within our business and we set some pretty strong targets in terms of cost reductions versus this year, across all the other parts of the business.

So that's basically the productivity.

The pricing, if you have a specific question about that, I would be happy to try to answer it but I think I just described the pricing activities that we are taking out.

The third is increasing the rate of innovation in the marketplace.

We have, in the last 3 years, we have brought out over 25 truly unique what we would define as innovative products in terms of something that does not exist today in the marketplace.

We will double that rate in the next 2 years and those plans are already in place.

These products are coming through our pipeline.

We have a detailed launch schedule in 2005 and 2006.

And so basically already in place, and we are going to continue to execute those plans.

Just on the launch schedule how much of that over '05 and '06 is high-end or premium price point product versus lower end?

I would say the majority is right at the middle of the market.

At the middle of the market?

Yes.

Maybe I'll ask the question a different way, how much of that is under the KitchenAid brand?

It will come in under all brands, but I would say this would be more of Whirlpool and in the case of what we supply to Kenmore, Kenmore Brand.

Just going back to the productivity, is it possible-- that all sounds very encouraging-- I was wondering if it was possible to put some numbers on these for us, and also if you can talk in terms of the geographic territories, how much of the productivity improvement do you expect to achieve in North America versus Europe versus Latin America?

If you can break it down for us that way that would be helpful.

David, I would say it's, I mean North America given its proportion in the total will obviously be the biggest piece of that.

I would say North America-- probably 90% of all that would be North America and Europe.

You are not running into diminishing margin availability on these productivity improvements?

No.

In fact we are increasing the rate of improvement on a number of these.

Although I would say on those same measures, this year we will have record, again non material price portions, record total cost productivity in every region in the world this year.

But just because of the numbers, North America and Europe are the lion's share of that.

David, at this point in time we will quantify that as we give our guidance for 2005.

But I think, I don't think it would be appropriate for me to estimate those numbers right here today.

Okay.

Can you talk about just the quarter just completed then, can you put a dollar number on it?

I know you've sort of touched upon it from different angles, but if you could just make it one number for us it would be a lot easier?

Your question is, what is our non-?

What is the dollar productivity benefit that offset a number of these other negative developments in the quarter just complete?

David, I would say total conversion productivity for the quarter approximated $25 million.

40% of the cost base (ph).

Laura Champine with Morgan Keegan.

Good morning.

The cost pressures are happening at a time of very strong industry growth and I did note that relative to last quarter you raised your North American shipment expectations from the year from 5 to 6% growth to 8% growth.

What is driving that better shipment growth than you expected in North America?

And how sustainable would you guess that it is?

Laura, as you know, the market has outshot our forecast every quarter so far this year by probably anywhere from 1 to 3%.

I think we looked at I think in the last call we thought Q3 would be 3 to 4% and in fact it was 5%.

And earlier in the year it was a little bit more than that.

There are a number of factors going on.

We talked quite a bit about housing.

Housing is only a small piece of that.

It's about 20% of the total appliance market.

But it's been very strong.

I believe our builder, our contract channel business was up almost 10% in the third quarter.

And it's been strong all year and that's a business we have visibility out between six and 12 months and we don't see any big slow down but we do expect that will start leveling off.

Certainly we have seen for now almost 4 years now an increase in household purchases towards improvements in the home and I think that's carrying a lot of the, continues to carry a lot of the replacement business right now.

And finally, at least in our business, there is no question innovation is driving acceleration of replacement product before it actually wears out and we see that, if we look at our duet washer sales and many of our KitchenAid products people are buying them because they want them.

I think all of those elements to a degree will continue, but I don't expect to see the kind of industry growth next year that we've seen this year.

We haven't finalized that, but sitting here today we are sitting it's more in probably the 2 to 3% range.

Okay.

And can you quantify some of your costs as a percentage of sales in the third quarter?

I'm thinking specifically can you give us raw materials, energy and logistics costs as a percentage of sales on the third quarter?

The absolute increases were in total approximately $60 million.

The material side of that is about 35 million.

And the logistics side of that is about 25 million, just a little over 25 million.

Can you give us as a percentage of sales what those costs represented for you this quarter?

We had 3.3 billion in sales and $60 million so--

I see the increase, but on a total absolute basis, how large is your raw material expense as a percentage of sales?

As a percent to sales it's roughly 40%.

As a percentage to cost, it's about 60%.

Got it.

That's just raw materials, right?

And components.

Eric Bosshard with Midwest Research.

Can you provide two things, first of all a little bit more color on steel?

You've talked a lot about oil and logistics but can you talk about steel costs, and what the '05 experience might look like relative to '04?

Sure.

In broad terms, first of all our steel situation varies everywhere around the world.

I would say in, I take markets like Asia and Latin America, we fundamentally are in the market at all times.

So we are exposed to what I would call current market rates.

In Europe, typically we have 6 to 12 month contracts, we are going through the balance of this year as we expected and we are in discussions for steel next year.

In the U.S., we have a large majority of our steel, not all but a large majority of it under contract throughout the year.

And there, too, we are under discussions about the future and what those steel prices will be.

We don't, beyond that I can't really give you any more specifics about those numbers.

In terms of the '05 impact of steel, is the incremental steel expense in '05 going to mirror the incremental expense that you are dealing with in '04?

Are you going to have a higher burden from incremental steel costs in '05?

What should we be thinking about at this point in time?

I know you're in negotiations and you don't know, but what should we be thinking about in terms of that issue?

Well, I think it really, Eric, will depend on the negotiations we are right in the middle of.

And I would, those are very, as you can imagine, sensitive negotiations and it's not appropriate I comment on that right now.

But it's safe to say that the contracts in place in '04 shielded you to a degree from the spike we've seen in spot prices in the last 120 days.

Oh, sure, absolutely.

Okay.

And then secondly in terms of the inventory situation, inventory grew at 4 times the rate of sales growth.

And I understand the supply issues that you had this year but why should we not be concerned about inventory resulting in lower operating rates in coming quarters?

Again, a couple of kind of perspective points and then I will talk about the key variables that drove our inventories up.

Again overall working capital levels as a percent of sales are actually down relative to prior quarter, prior year.

In terms of the magnitude, again, the biggest bucket of increase is around availability.

And it's refrigeration availability in Europe as well as just overall key component availability where we built some of our raw work in process around component availability.

The second biggest piece is related to volume given our year-to-date volume increases, and the third piece is the transregional shipment activity is up significantly from end of year and year over year.

That's also a pretty significant piece for us.

And then the next bucket is just flat out cost increases that we've experienced and just having higher levels of cost within our inventory base.

We really do not do this as a structural change but we have said that we will have some buffer stock in the near term as we try to work through some of these key component availability issues.

So you're suggesting that these higher inventory levels are going to be sustained going forward for a couple of quarters?

Yes, that's true.

I think you ought to look at that as probably over the next 2 or 3 quarters we made a decision to invest in higher inventories given the what I would call issues that we've had in our supply chains in times getting components and product.

The last question, back to pricing, which has been beaten like a dead horse here, why do you believe that the pricing experience in 2005 would be so much better than what was experienced in 2004 in this industry?

In other words, I know you didn't try to push a 10% price increase this year but it seems in this industry when anybody tried to push an increase there was severe push back.

Why is that going to be different in January, '05?

I think you can even extend it further back than that.

The simple answer is I don't think this industry has ever seen the order of magnitude of cost increases in shortage and shortage issues with both materials and transports that we have seen for most of this year and we expect to continue for next year.

Again, it is of such order of magnitude and again I can't speak for anyone else, I can only say for our business, that it certainly cannot be offset through productivity even though we are running productivity at record levels.

I don't think that was fully visible this year.

I think everybody certainly starts at a different place.

But it also goes back to what dramatically changed in the third quarter, and as oil shot through and stayed above $40 per barrel that impacted a wide variety of costs which are having big impacts certainly on our business.

So I think the simple answer to your question is we've never seen a materials market like we are seeing right now.

Tony Campbell with Northside Management.

I was just wondering, there's been a little concern about the situation at Sears with the new merchandising manager and I wondered if you can give us some clarity as to your relationship with Sears on a going-forward basis?

There has been no change with our relationship.

We had a strong relationship for 93 years and it's very strong now and we work well together.

Thank you very much.

We go next to Sam Darkatsh with Raymond James.

Hi, again.

Two or three more quickies.

The change in free cash flow, then, for the year, Roy, is it entirely a combination of slightly lower earnings expectations as well as the incremental inventory build or is there anything else in there.

No, Sam, those are absolutely the two key components and it's pretty well balanced between those two components.

Then help me with -- I don't want you to, if you'd like to I certainly won't stop you but I am not going to hold your foot to the fire with respect to next year's cash flow expectations but one would expect that some of that $200 million delta would be pushed into next year in terms of free cash.

I guess my question is, is CapEx for next year, you did mention that you're a bit capacity constrained particularly in I believe you said fridge.

But also in the analyst meeting you said you were going to try to be better allocaters of capital with respect to CapEx.

Any changes in your thought process with respect to capital allocation for next year?

I would answer this.

Again there's a lot of moving parts and we don't have all the final decisions taken on yet for next year.

But just in principal it would be our expectation to run this business to produce a appropriate level of free cash flow.

And that, there's a lot of factors involved there including capital, and our objective will be to manage all of those and deliver an appropriate level of free cash flow.

Quick question, then, how much of Europe is free-standing versus built-in, generally speaking?

About 60, 40.

60% free-standing?

Right.

And am I looking at this correctly, when, since it appears as though fridge is the primary issue with respect to the availability of stainless and some of the electronic controls, and because refrigerator is a considerably higher price point product than other major categories, that explains the vast majority of the difference between the 1-8 that you did in revenues in North America and the 5-4 or 5.5, whatever, that we saw in at least core units of shipped, is that the way to look at it?

I'm not sure it is, Sam.

Once again, we had, I would say, our most significant issues in side-by-side refrigerators which we're overcoming, but we did have some issues in other product categories like cooking products, and a number of even laundry and dishwasher products which had the electronic control lead time issues.

So I would not say it's only, it was only refrigerators, it was also, it was also some other products.

The material availability constraints you mentioned have abated for Q4, or are they in the process and you will be fully stocked for Q1, what's the time frame there?

They are much better right now and we think by the end of November we will be at our overall availability rate that we would typically want to be at.

So theoretically, by the end of November, your share would be more quote, unquote normal excluding any channel alignment issues?

Yes.

We go next to Jeff Sprague with Smith Barney.

A couple other things, just looking at price in Asia on the slide it kind of mentions price pressure but I think, Jeff, in your remarks you said you were pushing some price in Asia.

I just wonder if it's inherently more difficult to get price in Asia, if you could give us a view of what the Asian competitors are doing?

Yeah, Jeff.

Again I would go to 2 or 3 parts of Asia and India because that's fundamentally a stand-alone.

There have been significant in same store as everywhere material cost issues,.

We have seen some changes in the overall market pricing, which had been going down very aggressively for about two years.

That trend has now stabilized and now we are starting to see it go up.

China is a little bit of a different story.

China I would say we've had both price compression and dramatic increases in material costs.

So the margin line going the wrong way in the market both ways.

And then all the Aussie-owned (ph) countries and Australia, they are in what we have announced and done our philosophy is to pass through price increases.

We are somewhat more of a niche player in those markets, and generally are successful in doing that.

And I was also just wondering if Roy could update us on on pension, if we can walk through bottom line item, a lot of companies thought they would get more help on the discount rate exiting '04 and looking into '05 and other dynamics, can you give us a view on the status of the plan on a funded basis, and what if any is your preliminary view on the P&L and tax and pension in '05?

First, to talk about '04 we still plan for pension expense kind of net/net to be pretty well flat with '03.

We did talk about in the release, you're correct, that we had a little bit higher expense.

Part of that was due to we had to amortize, we amortized losses which are the differences between the actuarial assumption and actual results.

We had some distributions in one of our smaller plans in the quarter, which triggered a recognition of some of those losses.

So we took that in the quarter.

Otherwise we would have been pretty well flat with where we were in the prior quarter.

I think the second part of yours is funded status, let me get my notes here, Jeff --, funded status for our larger pension plan, about 130%, about 111% in the Evansville plant is what our projection is right now.

Comfortably overfunded in the key plan.

From an ERISA (ph) perspective, that's correct.

Is there any, you know, kind of arcane accounting issues to think about looking into '05 as impacts the P&L given discount rates haven't moved up, et cetera?

Not that we're aware of.

David Macgregor with Longbow Research.

Just on your raw materials procurement for 2005, I guess the risk or the concern here would be that you lock into contract arrangements on your supplies for '05, and then those raw material markets kind of rollover and you're locked in at higher prices and you've got kind of a legacy issue that you have to deal with through the balance of the year.

Are you inclined at this point to take a view on what's happening in these end markets and maybe buy a little more spot and a little less contract and maybe if that is your view that prices are coming off and if they are not they are going to continue to go up, buying a little more contract, a little more spot, I guess what I'm trying to get at is there going to be a change year over year in terms of the proportion between that portion of your cost structure that's locked in versus what you are prepared to take at risk?

Right.

Well, David, that's a great question.

That is typically the discussions we have every day throughout our procurement organizations because all those questions are valid.

The simple answer I would say is that this really does vary by commodity by region.

And we will, and we make all of those decisions that you just described, short, long and so on, so forth.

But let me just kind of back away from there.

In principal, where we have, what I would call year long type of pricing structures we try to lock in our costs.

And we have margins that are less constrained by that.

We would typically go up and down with the market.

So I can't really give you a specific answer to your question because all the points you brought out are probably all being explored and we will have some combination in each and every one of those, and again, it varies by region.

Just while I have you on the phone, maybe we've kind of beat up the raw material issue here, can were we talk a little bit about the export story, you talked about briefly with respect to your comments on working capital, but can you give us an update on advances you made there over the past quarter?

I see the press release today recently about expanding your investment in Ohio, looks maybe the duet is coming to Ohio.

Can you talk a little more about what's positive there?

I would just say that the plans we've talked about all year really in general I would say we are exceeding our expectations from an export standpoint.

We talked about Brazil which has become a very good export base for us.

Their exports are up about 25%.

I mentioned duet which the washer comes out of Germany and goes all over the world where, we are fundamentally at capacity all the time there.

Europe is a big exporter to both Asia and other parts of the world.

And, of course, Mexico is increasingly an exporter (indiscernible) into the U.S. and other parts of the world.

Overall, our plans our GOP plans as we talked about and we just are continuing to execute.

Overall, I would say we are ahead significantly versus last year in terms of growing what we call our transregional sales, which is produced in one region, sold in another.

Probably the most concerning factor in that whole arena has been ocean freight, which is again, part of this global logistic supply chain issue where there have been constrained and significant cost increases.

That's probably the one thing for sure that we've seen this year that does impact some of these economics.

Just finally maybe you could talk a little bit about how you reinvest back in the business?

The free cash flow story continues to be pretty good.

Your CapEx is going to be up a little bit, you talked about that.

You are buying back some stock.

What are your thoughts on reinvesting in the business and growing longer term including the possibility of getting back into acquisitions?

Well, fundamentally our investment criteria has not changed, and we've outlined really the 4 criteria the way we look at it.

That could change over any period of time, but it has been pretty consistent over the last several years.

First is to fund our strategy and reinvest in the business.

I think you see that in our capital spending and our product development expenses and our brand investments.

Second has been to reduce debt.

And we have been very comfortable with the progress we've been making on reducing debt.

The third area is return to shareholders which certainly through dividend increase or share repurchase which obviously we've been very active in both this year.

And then as we said all along, strategic acquisition for things that make sense to fit into our business.

It certainly is on our radar screen.

But there has really been no change or is no current change in our investment priorities.

So given where you are in the cycle what is your latest, thinking of in terms of where would you like to get debt?

We are starting to get fairly close.

Let me have Roy get in.

Given the maturity levels and the capital that we've got, we are now about 51 percent, capital structure.

We are about 52% right now.

We are very comfortable with these levels, particularly when you look at debt at the absolute level, but on a longer term basis we have said we would like to probably have the debt around 40%.

40%.

Then you talked about strategic acquisitions.

Where do you see gaps in the model now where something might make some sense?

There is really nothing specific.

I think if you look at the last two we made which is Mexico and Poland things that fit very nicely into our global operating platform and bring with them good market positions, those are probably the types of ones we've been looking at.

Michael Rehaut with JP Morgan.

Just a couple quick questions on the, on the fourth quarter outlook.

I just, quickly what share count were you at at the end of this quarter for to us use for the fourth quarter?

Our average shares outstanding Michael were about 67.6 million in the diluted calculation.

But that was the average and you've bought shares during the quarter?

We did.

We bought a negligible amount of shares during the quarter, that's correct.

Secondly just a little bit more broadly, you said that you had this quarter at 60 million delta in material and logistics costs.

The fourth quarter you're looking for a 50 million increase year over year?

No, that was only for North America.

Globally on that same comparison we expect to have about $100 million delta.

Okay.

And of the, so 50 million of that 100 million in the U.S.

And what was that number of the 60 million, what was that number for the U.S. in the third quarter?

It's about 40 million, 38 million probably.

38 million?

Yes.

Okay.

And in terms of the 25, 35 split that you had mentioned of that 60 million, and the 35 was raw materials, can you give us any further visibility in how much of that was steel versus resin related materials?

Not a direct break out.

I would just say that the biggest change that we saw in the third quarter, and the biggest delta really for us was in oil-related products, which are plastics largely speaking.

Those mostly plastics.

Well, thank you everyone for joining us today.

We look forward to talking to you next time.

And ladies and gentlemen this does conclude today's Whirlpool corporation third quarter earnings release conference call.