惠而浦 (WHR) 2004 Q4 法說會逐字稿

Good day everyone and welcome to the Whirlpool Corporation fourth quarter 2004 earnings release conference call.

Today's call is being recorded.

For opening remarks and introductions I would like to turn the call over to the Vice President of Investor Relations, Mr. Larry Venturelli.

Please go ahead, sir.

Good morning.

I would like to welcome you to our fourth quarter conference call.

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

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

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

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

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

Jeff?

Good morning, everyone, and thank you for joining us here today.

As you know we just recently this morning released our full year and fourth quarter earnings results.

For the full year reported net earnings $406 million, or $5.90 per share compared with the prior year earnings of $414 million, or $5.91 per share.

Sales for the full year increased 8.6% to a record level at $13.2 billion.

If you exclude the currency impact, our sales advanced approximately 6% for the full year.

In the fourth quarter our revenues came in at -- also at a record level at $3.6 billion which represented a little over 8% increase over last year.

Our net earnings came in at $97 million or $1.44 per share, compared to the $124 million or $1.76 per share versus last year.

As expected, and as we discussed on our last call, our net earnings in the fourth quarter were significantly impacted by increases in materials and logistics costs, which together increased by approximately $150 million for the quarter year-over- year.

Earnings were positively impacted by a reduction in our effective tax rate and a small gain on an equity investment.

Clearly, as we've discussed before, we are now operating or have been operating in a volatile global materials environment over the last six months.

And we do expect these conditions to continue as we go throughout 2005.

Based on our current estimate for 2005 we expect material- and oil-related costs to increase an additional $500 to $550 million this year.

As I mentioned last time, to address this issue we focused our actions and resources on four key operating areas, and I would like to update you on those.

First of all as we earlier announced, we've implemented global price increases of about 5 to 10% in all major markets around the world.

The magnitude of today's cost environment requires us to pass on higher prices to our trade partners and consumers.

To date I would describe these price increase initiatives as progressing well and certainly in line with our expectations.

While this is still very early indications and they have been encouraging, it will take a few months to clearly see the full financial benefit that we yield out of these price increases that we've implemented in the marketplace.

The major variable that we see today with the price increase is the product in model mix impact at the consumer level as price points change cross entire product lines.

As price points increase, we believe most consumers will still choose to buy the model rather than just the price point.

But we do expect that there will be some trading down to lower priced and featured products.

This dynamic can have an impact on the mix of our products, and therefore our margins that we make on our overall business.

So in our guidance that we are going to be giving you here today we've assumed that approximately 60% of the price increase will flow to earnings, while the 40% offset reflects an estimate of the negative model line mix that we expect.

Of course it's going to take a number of months before we see clear run rate trends at the consumer level, but we think this is an appropriate assumption at this time.

Overall we do believe that, given the actions we put in place in the marketplace coupled with the strength of our brands and the demand for innovative products, will enable us to fully realize these price increases in the marketplace in 2005.

The second air of operating focus is to aggressively drive controllable total cost productivities, and we will do that to record levels.

We're doing this by taking advantage of our global manufacturing procurement and technology footprint which is already in place.

This continues to provide us with significant opportunities to further reduce our cost structure, and we will continue to invest in our global operating platform during 2005.

We will leverage our current capabilities and we will drive strong productivity gains in all non-material areas.

The third area of focus is to significantly reduce our non-product-related investment spending, and as a result we expect to reduce our overall SG&A as a percentage of sales by between one-half to one full point during 2005.

Finally we are accelerating the rate of new product introduction to the marketplace in order to drive revenue growth and margins, and we will do this by introducing a record number of new innovative products during 2005.

In fact we'll have almost two times the number of new product introductions this year than we've introduced in any single year in the past.

And I will describe just a few of these introductions as part of our regional discussions.

So in total, given the actions I've described combined with our ongoing strategies which help us build differentiated levels of customer loyalty for our brands, we believe we are going to be able to successfully manage through this period of significantly higher commodity prices.

We will enter 2005 with a much higher cost base level, and we anticipate the benefits from the key actions I talked about, including higher prices and productivity, will build and increase throughout the year.

As a result, we expect to have negative year-over-year earnings comparisons in the first half of 2005 followed by strong favorable year-over-year comparisons in the second half.

For the full year, as we communicated, we expect earnings per share to be between $5.90 to $6.10 cents a share and our free cash flow to be between the $250 to $300 million range.

Next in the presentation that you have I will turn to slide seven and begin to discuss our fourth quarter North America performance.

For the quarter we had record levels of unit shipments and revenues.

Revenues growth grew by 5.3% to approximately $2.2 billion.

Reported industry shipments for the quarter increased by 10.7% on a T7 basis.

I think as we look underneath those numbers you'll consider there were two additional shipping days in the fourth quarter this year which we think accounted for about 2.8% of growth.

And we have estimated that there has been some trade buying ahead of U.S. manufacturer price increases although we had very little within our company.

We do believe the underlying industry demand in the fourth quarter is estimated to be more approximately about 5% based on comparable levels to reflect consumer demand.

During the quarter we continue to experience strong demand across our brands and particularly good sales of our new product introductions.

Operating margins were negatively impacted by the significant increases in both materials and logistics to the tune of over $90 million for the quarter.

As I turn to look at 2005 we are forecasting our industry demand by -- to grow by approximately 2% for the year.

The assumptions behind this demand forecast are the following: GDP growth of about 3.7%, gradual improvement in unemployment rates. are anticipating in this forecast further interest rate increases moving up by around 1%, and that existing home sales and home completions grow slightly.

Turning to slide eight, you will see in 2005 our primary business focus in North America, and I would add in almost every part of the world, will be to execute our price increases, deliver record levels of manufacturing productivity, expand and grow our customer loyalty towards our industry-leading brands, continuing to expands our leading position with value-added retailers across all channels, and as I mentioned earlier, introducing continuous and relevant brand innovation into the marketplace.

We will be introducing several new products during 2005 which you can see included in slides 9 through 13, and I will speak about a couple of them.

The first on slide 9 is a brand new product for us.

It's called the Whirlpool Fabric Freshener.

It's a collapsible portable device which both refreshes clothes and reduces wrinkles.

It's an off-shoot of technology that we've used with our Personal Valet.

On slide 10 you will see new stainless-steel KitchenAid Proline Series washer and dryer, almost has appearance of a commercial washer and dryer, the first offering in this segment for the KitchenAid brand--provides outstanding cleaning and I think really is fitting with the robustness that goes with our KitchenAid brands.

On slide 11 you will see our new -- another new product entry for us--the KitchenAid double drawer refrigerator which provides great styling and functionality combined with the largest usable capacity drawers in the industry today.

Slide 12, you will see something that's going to be very impactive on our side- by-side refrigerator line.

It's an advanced refrigerator dispenser which includes many new and useful features for consumers such as being able to have measured fills for sport bottles, for coffee pots and it has nearly twice as fast water flow.

Finally, just another example is on slide 13 where you see a complete new line of high-end built-in Whirlpool and KitchenAid microwave hood combinations which offer 33% more capacity than today's standards.

And I show these only as examples of continuing flow of innovations to the marketplace out of our innovation pipeline, which again, these are just a few and we will be introducing more as we go throughout the year.

Next I want to turn to slide 14, to Europe.

In Europe we did deliver a record quarter in terms of both shipment and revenues.

Sales were $895 million, increased by almost 13% over the prior year.

If you exclude currency translations, revenues grew by a little over 3%.

Appliance industry units were up about 1% to 2% during the quarter and our European operations continues to outperform the industry in realized share gains in key markets throughout the region.

During the quarter we had record levels of productivity, strong SG&A leverage and growth in key product categories including our laundry products and our premium cooking and built-in products, which drove improved operating profit up to $52 million for the quarter, which was up over 20%.

Our operating margins also expanding to 5.8% up from 5.5% last year.

As we discussed last year about our European operations, their focus was really to leverage our strength, a strong brand portfolio, expand our key market leadership position, leverage our global product innovation and drive high levels of total cost productivity.

We did make substantial progress in each of these four areas in 2004 as evidenced by our financial results.

For the full year our European business EVA[ph] was in the positive.

We will continue to focus on these areas in 2005, and in addition have implemented a 3% to 5% price increase which is now fully effective for all free standing built-in products across all channels, all markets and all brands in Europe.

As in other parts of the world, accelerating innovation in the market in Europe is an important focus to drive improved results, and here, too, you will see a couple of examples on slide 16 and 17.

Slide 16 is a completely new line of built-in titanium cooking appliances made of real titanium with anti-fingerprint coating.

This truly is the next truly premium finish that we believe will be successful in the marketplace.

It's very robust and for many consumers more preferred than stainless-steel.

In slide 17, again more expansion into the cooking area.

We are going to be introducing an integrated cooking system for our gas cooktop ranges.

These are a set of tailored range of accessories which really improve the functionality of the appliances.

They really turn them into true cooking systems which facilitate the entire food process in terms of convenience, space and performance.

As we look at 2005 in Europe in terms of market demand, we expect industry shipments to grow modestly, probably we are estimating in about the 1% range.

We will now turn to slide 18 and talk about Latin America, where for the quarter our overall revenues grew by 18%.

On a currency adjusted basis that would be 14%, impacted by the much stronger real.

Overall revenue growth was driven by a about a 5% increase in unit shipments, year-over-year price increases and a significantly better product mix.

As I mentioned appliance industry shipments did increase by about 5% during the quarter, and for the full year industry shipments grew by over 17%.

We have seen economic conditions within Brazil remaining strong during the quarter driven by GDP expansion, lower unemployment and positive real wage growth.

We also have seen that exports and consumer spending also continue to show their positive trends.

Our fourth quarter operating profit was significantly impacted by prices for raw materials and higher freight costs.

During January of this year we implemented--or have already implemented--a 6% price increase in our appliance business to mitigate these higher costs and additionally have announced an additional 6% price increase beginning early April.

We've also made double-digit price increases for our compressors, our entire global compressor operations.

Looking ahead in 2005 in Brazil, for appliances we expect the industry to grow by another 4% to 5%.

Overall in Latin America we do expect a significant improvement in profitability based on our confidence that we will see price increases in that market, and from a significant number of cost reduction activities that have already been put in place.

On slide 20 I'll move to Asia where we had sales of $104 million.

This was about a 9.9% decline from a quarter earlier.

Operating profit was flat with last year.

We did see some slowing in demand in China.

We did conclude the trade inventory reduction plan in India.

And like everywhere else in the world we saw higher costs for materials.

We were able to offset some of this with productivity and cost controls.

In Asia we have accelerated new product line changes to help us drive improved margins and mix in 2005.

Here, too, we have implemented price increases across the region, and we -- in addition to that we are focusing on three additional areas in Asia for 2005.

First we will continue to expand our China procurement technology base which truly does support our global business.

This continues to represent a key productivity opportunity for all of our global operations.

Secondly we will continue the expansion of our China domestic sales and increase finished goods exports from our China manufacturing to our global sales networks.

And finally in India, with this trade inventory reduction behind us and with new products being introduced, we expect to see significant revenue growth in India in the order of magnitude of over 20%.

Based on our current view of the economic conditions in Asia we expect full year industry shipments and demand in 2005 to increase by 3% to 5%.

At this point in time I want to turn it over to Roy Templin, our CFO, to give you some more details on our financial results.

Thanks, Jeff, and good morning to everyone.

As Jeff mentioned earlier, for the year we earned $406 million, or $5.90 per diluted share, compared to $414 million, or $5.91 during 2004.

Our performance reflects a very strong first half in which earnings were up about 11%.

As we discussed in October, our second half performance would be challenged by significant volatility in global product costs.

During our fourth quarter we earned $1.44 per diluted share compared to $1.76 last year.

Overall, operating profit declined $79 million in the quarter.

This is principally attributable to higher material and oil-related cost increases of approximately $150 million.

If you will move to slide 22, I'll briefly comment on a couple of items below operating profit.

Interest income and sundry was $18 million lower than last year.

This is due to a gain on a sale of a partial interest in equity investment, interest income received on prior year tax settlements, and lower losses on foreign currency balance sheet positions.

As a result of the disbursement of global income, audit settlements in the fourth quarter and our tax planning initiated in the second half of the year, we lowered our year-to-date effective tax rate to just under 34 percent; from 35.5% we recorded in September.

We expect our effective tax rate will be between 34 and 35% in 2005.

Changes in equity and affiliates and minority interest reflected lower earnings in Latin America and India.

And lastly, year-to-date share repurchases of 3.7 million shares at an average cost of approximately $68 per share also positively impacted earnings per share in the quarter by approximately 7 cents per share.

As you'll recall, during June the company's Board of Directors authorized a new share repurchase program of up to $500 million.

During 2005 we will continue to balance additional buying opportunities with investments in our global operating platform, innovation projects, our dividend policy and targeted debt levels.

Slide 23 summarizes our cash flow performance for 2004.

For the full year free cash flow after dividends was $241 million.

Lower 2004 pension contributions of approximately $100 million was offset by higher capital spending of $90 million to support our global operating platform expansion and innovation initiatives, a higher dividend payout of $22 million, and higher working capital requirements of about $70 million.

As we discussed with you back in October, our inventory levels were projected to remain somewhat higher as we exited 2004.

At the time of our last conference call our free cash flow projections and the dollar value of our fourth quarter inventory estimates were based on our current projections at that point in time for material and component cost increases.

As we discussed material and component costs for the fourth quarter were higher than previously forecasted, and this has had an impact on our ending inventory balances and free cash flow results for the year.

While the increase in inventories is not structural in nature, inventory balances will remain at elevated levels relative to our prior year periods over the first half of 2005.

If you'll turn to slide 24 I'll speak briefly about our closing balance sheet positions.

Working capital as a percentage of sales was essentially equal to last year's levels.

I believe this was strong performance considering the unprecedented levels of material cost increases, component availability issues, and logistic shortages we faced during 2004.

Future improvements in our working capital levels continues to be a key opportunity for our company.

Our total debt is equal to last year's levels.

Cash flow from operations was used to repurchase stock, fund higher capital expenditures and pay increased dividends.

Our debt-to-capital dropped 51% to approximately 46%.

We entered 2005 with a very strong balance sheet.

And our debt remains a Triple B+ from S&P, Baa1 from Moody's and A- minus from Fitch.

As Jeff previously discussed our earnings-per-share guidance for 2005 is between $5.90 to $6.10 per share.

Our guidance assumes the benefits of price increases, productivity improvements and lower non-product investment- related spending offsetting higher material cost base.

Our guidance includes higher restructuring costs related to the expansion of our global operating platform, an effective tax rate between 34 and 35 percent, and higher pension expense of approximately $10 million.

We plan to deliver free cash flow between $250 million, and $300 million.

Overall capital spending is expected to be between $500 and $550 million, pension contributions are estimated to be approximately $50 million, which are in line with 2004 levels.

And we expect overall levels of working capital to be lower to support overall business.

Before I turn the call back over to Jeff I would like to make a comment on our Sarbanes-Oxley 404 status.

Our organization is currently wrapping up the closing phase of our review of management's controls over financial reporting.

We've executed our plan on schedule and at this point do not expect any exceptions to be reported in our Form 10-K filing.

Jeff, I will turn the call back over to you.

Okay.

Looking ahead as I discussed previously, we are facing an unprecedented material cost environment, and we do expect that to be with us throughout 2005.

I think we've quickly adjusted to this environment by implementing appropriate price increases globally, more aggressively driving higher levels of controllable productivity.

We've put in place plans to reduce non-product-related spending, and we've greatly accelerated the introduction of new products to the marketplace.

The advantage that we gain from our established global operating platform, our strong position with added- value trade partners, combined with our very strong consumer brands and our innovation capabilities, I believe positions us well to succeed during this challenging material cost cycle.

Going into the year we feel that we are well prepared to address this environment.

Our key actions are deployed and in place, which gives us confidence that we will be able to grow our business this year, improve our earnings despite the over $500 million cost hurdle we face, and deliver a strong level of free cash flow.

I'll stop here and open this up and be happy to take any of your questions.

We will take our first question from Jeffrey Sprague of Smith Barney.

Good morning, everyone.

If we could explore price a little bit, it sounds that your guidance would actually imply that pricing gets better as the year progresses, and I guess what I worry about and I'm sure others share the concern, is that actually everyone seemed to move in unison up in January.

So, it seems you can argue that January is as best as it gets and market forces kind of work to erode that.

I don't know who cheats first, so to speak.

But we are seeing some big rebating out of a couple of your competitors already.

So can you just address that core concept that price gets better from here instead of maybe getting worse off this higher January level.

Yeah, Jeff, sure I will.

First of all I think we have to look at different markets of the world.

I think you are probably referring to the North America U.S. market.

In terms of my comment on getting better, I think really we have implemented this and it was effective in January on shipments.

What really we are looking to see now is going to be the run rate on the pricing which we are getting in the invoice, versus the model mix which is going to take a few months to fully see transpire in the marketplace.

And it is our expectation, given where we've invested our support in the marketplace around advertising, around incentives, around training, that with these new products in the marketplace, that our ability to continue to sell the right models at the right prices will get better as we go through the quarter and into the second quarter.

So that's really what I meant when I was referring to getting better as we go through the year.

So it's more around maybe there is an initial negative reaction to price, but you think you can improve the mix as you work the channel.

Is that the way -- ?

I think as all -- in the U.S. for example, as all products went to new price points you also have a retail sales force out there that has to be well-trained.

Because if they are used to selling, for example, a $399 washer and that washer is now $449, there is a certain amount of, not only training but incentive and point-of-sale support and so on.

So, again, we spend a lot of time on that.

We are managing that very carefully.

But we do think that over the next couple of months we will see a good realization of that .

And then coupled with the fact that we are bringing a significant number of new product introductions to the marketplace which will have better margins.

Could you also address just how your costs -- your cost outlook is structured?

In other words, how you've been able to protect yourself contractually against possibly further increases and/or to what extent can you benefit from declining materials costs if that in fact kind of played out later in the year.

Jeff, in terms of having contracts in the markets where it's, number one, possible, and prudent, we have six- to 12-months contracts on all of our critical materials.

That's largely in North America and in Europe.

And as we spoke last year in markets like Asia and Brazil there is much less of an opportunity to have that.

It's more of a spot market for all materials.

So in those markets we are subject to the ups and downs.

Within this guidance, though, we took, I won't call it a conservative view, but we took a view that there could be some variation in these costs and we've incorporated that into the guidance.

So our view today is we have an appropriate estimate for costs.

But we do have some room to, I would say, to certainly try to improve that.

But the unknown is the same unknown as we had last year--is, what is going to happen to the fundamental commodities and in particular oil?

But we are assuming that both for things like steel and with oil, we built them in at a fairly high cost level.

And then just one last thing and I will pass it, how visible is this piece of this 50 to 100 basis points of SG&A that you are going after?

And can you give us a little color on what that is?

First of all it's very visible.

That's part of our business in terms of everything from support and organizational structure to our logistics costs to our fundamental infrastructure and spending and investment in the brands and that sort of thing.

We have, again, last Fall put in place very clear plans in every part of the business, every part of the world to drive this down.

In the kind of environment that we are at we are making some tough choices on where we spend our money, and we fully expect to have as a percent of sales to drive that down, as I said, a half a point to a full point.

We measure it every month so we know exactly where we are at.

Actually just one more quick one, is there any options expense imbedded in these numbers?

There is, Jeff.

We've got just a little over $5 million of projected option cost imbedded in the estimate.

Thanks very much.

Thank you.

We will go next to Sam Darkatsh of Raymond James.

A couple questions.

First let's talk about North American market share.

I'm a bit perplexed at the amount of your growth rate versus the industry.

You mentioned AHAM, the industry had a couple of extra shipping days.

I'm pretty sure you guys had the same calendar, though, that AHAM does.

We saw Maytag lose a fair amount of share on major appliances, we saw that Sears came out in Q4 and said that they gained some market share which helps you disproportionately.

You guided back in October that your market share would improve in Q4.

And I'm also confused as to why the prebuying wouldn't have affected you guys as much based on the fact that you guys are raising prices as much if not more than everybody else.

So you would think that there would be at least as much prebuying with you folks.

Can you help reconcile all that stuff?

Sure Sam.

First of all, our share in the fourth quarter was up fairly strongly from Q4 versus Q3, but on a year-over-year basis it was still down some.

Second of all, to your comments of reconciling some of the reported data from some of our competitors and also some retailers, I would tell you there is some disconnects right now in the marketplace between what retail -- retailers' sales are and what some of the industry shipments are.

We have a number of data sources we are trying to reconcile.

So I would just leave it at that right now.

There is some -- it is hard to reconcile those numbers.

But overall we did lose a moderate level of market share in 2004.

We did improve in the fourth quarter.

We are fairly confident that we are going to have a stable market share position, if not improving, in 2005 based on a number of factors including commitments that we have in the marketplace.

So that's basically the color I can provide you.

So on a year-over-year basis your share will be, or your growth rates will be stable to, in excess of sell in rates that we can see?

Will be stable to slightly up.

Okay.

Second question, you are giving, I guess what I would describe as a pretty tight guided EPS range for 2005 despite the fact that every 1% in net realized prices is very significant to the bottom line.

Can you help us with the wide swaths of sensitivity to that number and why you felt comfortable giving such a tight range?

Sam, probably the best way for me to describe that is--if you take out Q4 run rates coming out of the quarter and take what we are going to do to improve those operating margins.

First we move in the SG&A improvement, and secondly on the nonmaterial productivity levels, which we have high levels of confidence in, we will be able to improve upon those margins.

The two big issues clearly are cost increases and our price increases and ability to recoup that.

We have assumed in this, and we have detailed plans for it, that we believe that our pricing in 2005 will offset our material cost increases in 2005.

And that's where the, to your point, that's where the variation would be.

But right now we feel good that we've got a good handle on cost.

We have put some significant actions in place, supported with plans to help make them successful on the price increases.

And that's why we are confident enough to give this kind of guidance.

Third question.

I think if I took my notes down properly when you had your prepared remarks, you mentioned that your free cash flow in the fourth quarter was below expectations because you had additional materials pressure that you didn't foresee.

Assuming that I read that or heard that correctly, I'm confused as to why that would be as well.

I mean you had -- when you gave guidance or when you last spoke to us formally in the end of October or so, oil prices have since come down.

And steel prices, although up obviously considerably year-over-year, were also, came off a little bit and a lot of other commodity prices did.

What was the negative variance in terms of your surprising, your own expectations internally.

I am going to let Roy answer that--but in terms of free cash flow I think he was referring to working capital and inventory.

Let me turn it over to Roy and let him explain that.

Sam, let me comment on that.

If you'll recall we were projecting at the end of Q3, we thought our cost increase would be about $100 billion.

And, of course, it turned out to be about 150.

And so that really hit us in two aspects with respect to our free cash flow.

One, lower operating profits of course, which generates cash, and the second area and the key area, was our inventory.

And if you look at our inventory balances, Sam, year-over-year were up about $360 million.

And then looking at just absolute dollars for now.

Now there are, there are really four buckets that make up the majority of that increase.

The first one is translation, which was about 25% of the increase.

The next three buckets which make up about 60% of the increase are, one, just simply higher costs in our inventory base--as we went back and looked at last year's inventory levels versus this year and adjusted for costs.

The second big piece is just simply volume support for the higher volume levels.

And the third piece is, and we talked about this at the end of the third quarter, was inventory that's in our pipeline as we do more transregional shipments across the company.

Those three buckets, and probably in the right order, ascending order there, Sam, are about 60% of the increase.

Now the thing that we monitor, of course, is inventory days.

Because you get the higher cost in your cost-of-goods-sold base and the higher cost in your inventory base.

We did come down about 2 days in terms of inventory days when you look at Q3 to Q4.

So a little more on inventory than what you asked but I think it's important to kind of frame that up, because that was the key variable for us in terms of our free cash flow miss.

It was more inventory and not necessarily input cost that surprised you?

Exactly, Sam, that's correct.

I apologize for hogging the call but I have two more quick questions.

First off, back in the analyst day you mentioned that you may be instituting or at least thinking about instituting a new dividend policy in which you'd be, instead of raising a dividend once a decade or so, consistently raising it on an annual basis perhaps as much as 10 to 15%.

Any thoughts on that, Jeff?

Sam, we did talk about, I think we went almost 15 years without raising a dividend until last year--and what we said that they would be considered more frequently in the future.

To date we have not made any different decision for 2005.

And last question, Roy, what are you assuming for restructuring costs in '05?

You said it would be higher but do you have a sense of directionally where that might be?

You know, Sam, we had a run rate in the fourth quarter of about $9 million.

And I think that run rate is probably a pretty good estimate for next year.

Somewhere in the $50 million range.

Thank you much.

Next, we'll move to Eric Bosshard with Midwest Research.

Good morning.

A couple of questions, first of all as you think about -- I guess as I look at your guidance for essentially flat earnings in '05, I want to make sure I understood you right.

You are talking about price increases being equal to the cost increases.

If that's the case, do you have confidence in these SG&A saves and other saves, because if that's the case then you have 2% unit growth and some modest share gains that the earnings ought to be up more than that in '05.

What's wrong with my assumptions or my thoughts there?

Eric, when I -- first of all when we talk about price increases, this -- think of it as the margin impact of the price increases.

We do think that that will roughly be equal to the cost increases this year which would be the same 500 to $550 million magnitude.

We have very strong confidence in our ability to get our SG&A down.

And we have very strong confidence in our ability to drive productivity in all areas except the materials which we factor in in the $500 to $550 million area.

So, in terms of what we call controllable costs, I would say we have high confidence.

Okay.

Second question, in terms of price, can you talk about what the price increase that you saw in the fourth quarter was, and be more clear on what you are assuming in '05?

I understand that, I think you said 60% you'll keep and 40% will get diluted with mix.

Can you tell us what the numbers, what those certain numbers are in '05, and then tell us what was accomplished in '04.

'04, Eric, we took a number of small increases in a market like North America last year on stainless-steel and selected other things.

Those did come through throughout the year.

And we had some benefit.

In Europe we began implementing the free-standing price increase in the fourth quarter, but you have to think of it getting -- that was a roll-out , so we've got less than probably a percent in the fourth quarter.

In Latin America I think we got 3% pricing in the fourth quarter.

So it really varied around the world.

In total, in the fourth quarter it was a small number.

It was probably no more than $40 million.

The major price increases -- again, these were things we did well before we saw this whole material cost issue in August and in September.

These other price increases were already in the works so to speak.

The major price increases we have everywhere in the world went into effect in the beginning of January, and they are of a completely different order of magnitude of what -- anything we did in 2004.

And again we think they will yield at least $500 million in pricing in 2005.

In terms of the material cost increase that was 150 in the fourth quarter, can you give us a sense of what that looks like in the first and second quarter?

I know it's 500 to 550 for the year but is it a comparable number in the first and second quarter and then as comparisons change in the second half the numbers change.

Can you give us a sense of that?

Sure.

If you think about it, it's actually proportionately more in the first and second quarters year-over-year because in Q3 this year if I recall, the increase we had was $60 million, in Q4 it was $150 million.

So just -- so as you think of that, that's built into our base so it's another $500 million to $550 million on top of that.

So on a quarter- over-quarter basis it's going to be much higher -- more highly impacted in Q1 and Q2.

When we get the 4Q then the numbers should in theory be zero incremental.

Or the delta will be much smaller.

Okay.

And then lastly, you spent $250 million on share repurchases in 2004.

Can you give us a sense of, is that the pace you are going to continue at in 2005?

Eric, we will -- we look at share repurchase investments and we do, as I said in my script, we balance that--first, it's all predicated on our free cash flow generation because we will by shares out of free cash flow.

But we will balance that in 2005 with our other investments in the business, our final dividends payout as well as our targeted debt levels.

So at this point that's really all we are comfortable with saying.

Thank you.

We will go next to David MacGregor at Longbow Research.

I realize you haven't provided first quarter guidance, or if you have I missed it, but is there any way you can give us some sense of the impact that the first quarter price increases would have on your first quarter?

David, for the full year we are talking about a little bit over $500 million in pricing which would equate to roughly around 4% margin improvement due to pricing.

That's fairly spread throughout the year although it could be slightly lower just in the start up in the first quarter.

But it's -- you ought to assume it's close to being equal per quarter.

The cost increase -- we are coming off the run rates of the cost increases in the fourth quarter, in addition have our new cost structures in place literally at the beginning of the year.

So our cost basis is going to be significantly higher.

So I think you can conclude out of that, we would have down margins in the first quarter because of that.

Okay.

Thanks.

I guess the controllable productivity, and we talked about productivity before, controllable productivity seems to be a new term.

Just to be clear on this, can you quantify the expected economic benefit of controllable productivity in 2005?

David, simply put, when we tack about total cost productivity that's basically our entire product cost.

And of that, 65% is material.

So when we talk about--to a certainty agree it is a new term because we are trying to separate and identify those areas outside of material that we have -- can control, it's the 35% of our product costs that are not directly material related.

So within let's call it a conversion cost.

Right.

You focused on productivity within that fraction?

Right.

One of your competitors on a recent conference call indicating that retailers are starting to ask for better margins, putting pressure on the trade for better margins--could that have been a contributing factor to the margin weakness in North America in this quarter?

No.

We -- this is not a new phenomenon.

I think every retailer make his choice on vendors and brands and suppliers based on not only the absolute percent margin that they earn, but the velocity of the turn of those products.

And I think the fact that we have the kind of share we have in the marketplace, the fact that we have the position with all the leading retailers we have in the marketplace, simply is because they earn a good return off our brands.

And so we don't see any issues or changes there.

Just still on this competitive issue, we are seeing more foreign brands working their way into the North American market.

I wonder if you could just talk a little bit about how that's impacting Whirlpool's competitive position with respect to retailer relationships?

I don't know that really it has impacted our position with retailer relationships.

I mean certainly we have more competition in the marketplace which is just another part of the competitive mix.

Our offering -- first of all our brands are very well demanded by consumers.

Our scope of our product line offering is superior to anyone in the industry, and -- but I think most importantly, we certainly are leading the industry in bringing true new product innovation in the marketplace.

So we feel really good about where we are at.

We think we will grow our business with the key trade partners that we sell today.

We think their business will improve as retail outlets next year.

So we are feeling pretty good about that right now.

Just seems that these foreign brands are trying to gain a position on a limited amount of North American national floor space--that they are going to compete on the basis of gross margin return on investment to the retailer.

And I can't see how you can avoid getting caught up in that fray.

Well, we don't do that at a skew level, we do that at a total business level.

And again that's nothing new, and I don't think the new competitors you're talking about are -- there are more of them, that's certainly true, but it's no different than existing competitors.

We have to give retailers a good return on their investment and that's why we get the business we get.

Last question, you rolled out pretty impressive queue of new products there, You guys deserve a lot of credit for the new product introduction work you are doing, but can you talk at all about the extent to which that's going to contribute to revenue and profits, Can you help us with some sort of quantification?

Last year, and we measure this religiously every month, we had from what we call products that meet our innovation criteria, which we discussed before in the past.

We have had well over $200 million in new revenue growth from those products.

We think this year it will be, with the things we are bringing to the market this year it will be even more than that.

It could be as much as 50% more than that.

So it is a really good part of our growth story.

And with it usually come these higher margins, so it's a good mix improvement to our business.

But that's the order of[ph] magnitude.

Can you talk at all about profitability?

As I said, they generally, as we bring these products to the marketplace, have a higher margin, which would imply good profitability.

Thank a lot.

We will go next to Filippe Goossens at CSFB.

Can you refresh our minds again in what your debt target is for the current fiscal year, please.

Yes.

We ended the year, Filippe, at $1.4 billion in debt.

And we don't see that debt level changing much in 2005.

That was about a 46% debt to capital.

What do you see your debt to cap moving over the medium term, please.

We see it moving down over the medium term but not by a significant amount.

Then just going back to your initial comments on contracts for raw material prices in North America; can you just refresh our minds whether your suppliers have the ability through the contract terms to implement surcharges?

We don't really discuss the specifics of these contracts.

Every -- it depends on what type of supply base it is, whether it's raw materials or whether it's linked to other commodities or oil, but it would be hard to give you a specific answer on that.

Then with regard to the Jobs Creation Act, are you guys planning to repatriate any earnings this year?

We are investigating that , Filippe, as we speak.

And we look at repatriation of earnings every year, but we are looking at it with respect to the Jobs Creation Act and what benefit we might have through those repatriations.

And then my final question.

Given the state of the industry, do you expect any consolidation to happen in the U.S. over the next number of years among manufacturers?

Clearly with this material cost cycle that we are going through right now it's pressure to everyone in this industry globally.

And I think companies, different companies will react different ways from it.

But clearly if they can't, company's can't recoup these material cost increases, then that would probably lead to some level of consolidation.

And what might your stance be, would you be a participant in that or--?

Our -- This doesn't change our stance.

Our strategy is not based on consolidation or acquisition.

Having said that we've always taken the view publicly that we would always opportunistically look at any acquisitions which would greatly enhance our business.

That really hasn't changed.

We'll take our next question from Anand Krishnan, Morgan Keegan.

My first question relates to your pension plan.

I just wanted to get an update on the status of your pension plan.

Okay, do you have any particular questions, Anand, in particular?

In terms of the underfunded status, just trying to get a magnitude?

Sure.

Pension expense in the current year--I will just give you a flavor for kind of the key pension criteria.

Pension expense in the current year was about $90 million.

We see that increasing about $10 million to $100 million next year.

Part of that increase, Anand, is coming from a lowering of our discount rate.

We had a discount rate of 6% this year.

We see that rate in the next year at 5.8%.

That's going to drive about half of the increase in pension expense year-over-year.

From a funded perspective, our two largest plans are in excess of 100% on an ERISA-funded status.

Our next two largest plans are over 80%.

If you look at just kind of the absolute dollars, the fair value of our assets versus the PBO, when you pick up our balance sheet you will see that that delta is about $300 million unfunded.

Okay.

Great.

And second -- secondly I had a question related to total cost productivity.

I know Jeff briefly mentioned about expanding China procurement technology base.

Can you provide some additional color on that?

Yes.

In terms of our overall productivity, we continue to execute all the things that we've put in place and shared with you with regard to our global operating platform--which includes increasing the percent of our production from low cost countries around the world.

That continues to grow.

In terms of deploying and consistently utilizing practices such as Six Sigma and lean manufacturing in all of our facilities around the world, and we are getting great benefit out of that.

We are increasing the total buy of our global procurement increases ever year, and we will make more increases next year.

Part of that is moving in purchasing more supplies out of low cost countries, China being one of them.

We doubled the amount of purchases out of China last year.

We will continue to grow aggressively our supplies out of China for our global operations this year.

So those fall across a number of different things.

But on the nonmaterial side, we had a record level of controllable productivity in 2004.

We will exceed that in 2005.

And that's basically from our ability to drive more efficient conversion in all of our factories and lower overall manufacturing cost base.

Can you update us as to what percentage of your production is from low cost locations, both in terms of competence[ph] and also sourcing[ph] products, and also what are your targets going forward for '05 and beyond?

I believe -- as we look at this on a global level, and again we define -- for us the low cost countries are Mexico, Central and Eastern Europe, Brazil, India and China--I believe we finished -- we're right around 34% today and that's increasing a few percentages ever year.

It varies by the -- by part of the world, but every year it is increasing.

Thanks a lot.

Good luck.

Next we will go back to Jeffrey Sprague with Smith Barney.

Thanks.

I just wanted to follow up, I guess to one of these prior questions about price-cost dynamic.

If price and cost are offsetting kind of at a -- I don't know if you characterize it as a margin dollar or margin -- basically margin dollar basis.

If I look at the SG&A, if you get that, that's 60 to $1.30, 60 cents to $1.30.

If you get 2% revenue growth and variable margins in the 25% range, that's another 60 cents.

But then you got pension restructuring and options that might detract 50 or 60.

But it seems like if you can execute on the things that you can control, then really the number could be higher.

So I'm just really wondering if I'm missing something or you, you are really hedging on the price here, or there's something else that we are just kind of not factoring in when we go through that exercise.

Jeff, at a macro level I think you are thinking about this in the right way.

I don't -- we are not over-estimating or under-estimating; we just -- our, again our guidance is kind of right in the middle of where we think we should be able to deliver.

Back to your comments about controllable versus somewhat non-controllable.

The SG&A, and as I mentioned, between a half a point to a point is controllable, and we have the ability to adjust that throughout the course of the year.

Our total cost, or controllable total cost productivity is that one, is the 35% of product cost non directly-material related.

And there is a certain tolerance there.

I mean the number isn't exactly predictable but we have very, very good confidence that that's going to be a positive contributor to our margins.

And so getting to go where our guidance is, again the simple way to look at it is that we are able to grow our margins from those two areas based on our Q4 run rate, and our challenge is to make sure we offset all material costs in 2005 in pricing.

And for every one of those things there are bands of outcomes, but we try to stay pretty much right in the middle.

And I was also just wondering, it's always sensitive to talk about your retail customers, but Sears reported same store sales today up .8 and they are talking about auto and garden and tools driving that , so that means appliances is clearly negative.

I haven't seen the number yet, but what color can you shed on that?

Is there a little bit of a fight going on digesting these price increases or anything else you can add to that?

No.

In terms of the Sears business, first of all, I think if you look at their run rates at the balance of last year, that we saw a good stabilization and actually some improvement in Sears' business.

And certainly our business to Sears and the mix of products was improving.

I haven't seen their final reported numbers from January, but I think their appliance business was on track with their plans.

Again everybody who is selling our goods has executed price increases[ph] in the marketplace.

We monitor this daily and weekly, and we really -- we have not seen any consumer impact from this, and overall with our key retail trade partners I think we are feeling pretty good about their business for this year.

Okay.

Great.

Thank a lot.

We will go next to Michael Rehaut at JP Morgan.

It's John Barlow on Mile's behalf.

Just wanted to ask about the North American margins.

If you could give us sort of what your expectation is for 2005, and during which quarter in '05 would you expect to be up year-over-year?

You mean in terms of the overall margin?

The margin percentage in North America, yes.

Well, certainly we are -- we had a very good first half of the year in North America, and we were heavily hit and you saw that in our Q3, Q4 result.

I believe, and I don't have it in front of me, but I believe our exit margins in North America in Q4 were 7.6% or something like that, which is extremely low for us.

It certainly is within our expectation to get our North American margins near to or back to double-digit margins, and we've built our plans around that .

Okay.

I think we have time for one more question.

We will go to Sam Darkatsh with Raymond James.

One more quickie if I could.

Jeff, you mentioned last year that one of your initiatives was to get more efficient with your capital spending, CapEx in particular.

And we are seeing '04 and now '05, a larger spread between CapEx and depreciation than we've seen in about a decade.

It's not necessarily interrelated, but how should we look at your capital spending plans going forward, since obviously driving cash flow has got to be a primary focus of yours and much of your investor base.

At what point do we begin to see CapEx and depreciation more in line with each other or is there another way to look at it?

Sure, Sam.

We have stepped up--consciously stepped up--our capital spending and think of us of us in this $500 million level.

Two things from that, one is we are funding our GOP and we are building a number of factories in low cost countries right now.

We see that happening over the next couple of years.

Secondly, we are dramatically increasing both the amount and the rate of flow of new product innovation in the marketplace, which we think is absolutely the right thing to do with our capital.

We've reduced the amount of capital significantly.

We are doing things -- on traditional things, maintenance of business, fundamental basic productivity, cost of quality, while still delivering even better numbers of quality and productivity.

So we did -- but I would also add that our business is a lot bigger.

On a percent to sales basis I believe our rates are actually going down in terms of what we are spending.

So all-in-all we feel pretty good about where our current level, around $500 million of capital is.

We don't see that dramatically changing in the next couple of years.

We feel we are going to continue to get more and more out of that.

So that's what you ought to be thinking about in terms of where our plans are.

And the $50 million in restructuring, Roy, expected or so for '05.

Generally speaking, how would that break out from a region perspective?

Are we pretty much -- is it just going to be internationally or how should we look at that?

It will be some domestic as well as some international, Sam.

And it really varies by project over -- at any given period of time.

But I think for 2005 it is North America, it's Europe and a little bit in Asia.

So it would be roughly commensurate with your -- with your mix, with your business mix?

Not necessarily.

I don't know exactly.

Again, it varies from year to year based on -- we rank the highest-return projects first on any given year, anywhere in the world, and that's how we do our funding in that area.

So there isn't necessarily a direct consistency between the size of business.

Okay.

Thank you.

Well listen.

Again, thank you everyone for joining us today and we look forward to talking to you next time.

And that does conclude today's conference.

Again, thank you for your participation.