惠而浦 (WHR) 2005 Q3 法說會逐字稿

Good day, everyone and welcome to the Whirlpool Corporation third quarter 2005 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 afternoon and welcome to our third quarter earnings conference call.

Our operating remarks will refer to a slide presentation, which is available on our Investor Web page.

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

Please keep in mind that the answers to questions regarding the Maytag acquisition will be limited to the nature of the ongoing regulatory review of the transaction.

Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K, 10-Q as well as to the proposed Maytag acquisition.

Present on the call today is our Executive Vice President and Chief Financial Officer, Roy Templin and our Chairman, President and Chief Executive Officer, Jeff Fettig.

Now I'd like to turn the call over to Jeff Fettig for his opening remarks.

Jeff?

Good afternoon, everyone, and thank you for joining us today.

It was about one year ago today that we discussed with you for the first time that very challenging global material cost environment, which included escalating oil prices and a commodity index which had reached a 30-year high.

At the time, we indicated that we did not expect this environment to improve significantly in the near-term and that, therefore, we were taking several strong actions to address this environment.

As a reminder, at the time, we said first of all, we indicated that we would continue to drive strong levels of productivity across our business operations by leveraging our global operating platform and reducing non-product-related spending.

Secondly, we said we would accelerate the rate of innovation to the marketplace.

And finally, we said we would implement cost-based price adjustments in all of our region markets around the world to help mitigate the material and logistic cost increases which we began to see everywhere in the world.

While these costs continue to remain volatile and still at near-historical highs, the combined actions that we began last year have proven to be effective to date in helping to mitigate these unprecedented increases in material and oil-related costs during 2005.

As you've seen, this morning we released our third quarter net earnings, which were $114 million, or $1.66 per diluted share, which was 12% higher than last year's earnings of $101 million, or $1.50 per share.

Globally, our third quarter sales were at record levels, increasing by 9% to 3.6 billion.

Excluding the impact of currencies, our sales increased by approximately 6%.

And as we'd expected, our third quarter operating profit improved versus last year due to the strong execution actions I referred to earlier.

Included in our third quarter operating results is approximately $110 million of increased quarter-over-quarter material and oil-related costs as well an as increase in restructuring costs, unfavorable currency effects and higher incentive compensation.

Productivity improvements, cost control initiatives and cost-based price adjustments all helped offset these higher costs.

During the first nine months of the year, the Company achieved record sales of $10.4 billion, which increased 8% from a year ago.

And again, if you exclude the positive impact of currency, sales grew by 5%.

And as expected, net earnings for the first nine months of 2005 were $296 million, which declined by 4%, again, primarily due to the significant increases in material and oil-related costs.

Through September of this year, these material and oil-related costs have increased by approximately $480 million, which translates into about $326 million after-tax from year-ago levels, while our net earnings have declined by $13 million.

We do expect positive year-over-year earnings expansion to continue in the fourth quarter and we're pleased with the operational and strategic progress that our Company has made during this period of unprecedented cost increases.

In the U.S., existing home sales, which has been a key appliance demand indicator, continue to be very strong and year-to-date are up over 6%.

Mortgage rates remained low and housing starts remained at very strong levels.

Lower costs resulting from productivity initiatives and our strong cost controls are expected to continue to help offset the higher material and oil-related costs.

The impact from the hurricanes we had here in the U.S. has had a moderate impact on our operations and we're working very closely with some of our key residence suppliers to manage through some short-term availability issues.

But that aside, and based on present current conditions, our full-year earnings per share guidance remains $5.90 to $6.10 per diluted share and we still expect our free cash flow to be in the 250 to $300 million range.

We also continue to expect full year's material and oil-related costs to be at the high end of our previously stated 500 to $550 million range versus a year ago.

Throughout this very challenging cost environment, we have remained strategically focused on our strategy of extending our best costs, best trade and best consumer position around the world.

We've progressed this through our planned acquisition of Maytag and by making investments which help fuel future growth, [free] cost savings and support a cadence of continuous innovation into the marketplace, while at the same time, we're also improving the capabilities of our global operating platform.

So, overall, at this point in time, we are pleased with our progress and delivery in both our operational results and making significant advances in our strategy.

Next on your Internet presentation, I'll turn to Slide 5.

In here, I'll review the third quarter results of our North American business, which delivered record third quarter unit shipments, revenue and operating profit during the quarter.

Overall revenue grew by 10% to $2.3 billion and was driven by continued strong consumer demand for our Company's branded products in innovation during the quarter, which more than offset lower OEM shipments.

Our U.S. shipments of major appliances on a T-7 basis exceeded industry growth, which we estimate was up approximately 3.6%.

On a year-to-date basis, U.S. industry growth, again, on a T-7 basis, is in line with our previous expectation and is up about 1.4%.

During the quarter, our operating profit in North America increased by 14%, our margins improved by 30 basis points, beginning their expansions back towards historical levels, following five quarters of significant material, oil and logistics-related cost increases.

Our North America year-over-year results reflect a $70 million increase in material and oil-related costs and the combination of manufacturing productivity gains, strong cost controls and cost-based price adjustments helped to offset these increases.

Currently, I believe our North American business is executing very well and we're focused on the priorities which we set out at the beginning of the year, which included delivering improved manufacturing productivity, expanding and growing our customer loyalty toward our industry-leading brands and innovative products, continuing to improve our industry position with our value-added trade partners, introducing continuous and relevant branded innovations to the marketplace and, again, making cost-based price adjustments.

Some of the new, exciting products from our innovation pipeline recently introduced to the marketplace are in your Internet presentations on Slides 6 through 10.

Based on current economic conditions, we expect full-year industry shipments in the U.S. to increase approximately 1 to 2% for the year.

Turning to Slide 11, I'll comment on our European performance.

Our European operations delivered record unit shipments and revenue.

We had sales of $811 million, which improved by 4% over last year.

Excluding currency, translations sales were up about 3%.

We saw continuing momentum in the build-in segment of our business in Europe coupled with very strong Whirlpool brand performance across the European markets which drove this revenue improvement.

The general market conditions in Europe remain challenging and industry shipments were flat during the quarter.

Our operating profit of $48 million was essentially flat to last year.

Our overall results reflected favorable mix, strong productivity improvements, lower SG&A as a percent to sales, while we had higher raw material costs and approximately $6 million in costs, one-time costs related to a distribution center fire in the U.K., which negatively impacted results during the quarter.

Based on current economic conditions in Europe, we do expect the full-year industry unit shipments in 2005 to be flat to down 1% for the year.

Next, I'll turn to Latin America on Slide 12, where we had sales of $446 million, which increased 5% from the prior year period.

Excluding currency translation, sales declined by 11% as appliance industry shipments declined 17% during the quarter.

Operating profit, which included productivity improvements, aggressive cost reductions and cost-based price adjustment declined 11% to $15 million, primarily due to lower volume, higher raw material costs and the unfavorable currency.

Based on our current consumer interest rate environment we see there a macro economic conditions in Brazil, we now anticipate flat industry shipments for the full year.

On Slide 14, our Asia business shows an increase in sales of 18% from last year's third quarter primarily due to industry growth and new product introductions.

Excluding currency translations in those regions, sales increased by about 13%.

Our operating profit improved by 52% versus last year as a result of higher unit volume, favorable product mix and the absent of last year's trade inventory adjustment in India, and in the same time, we had cost-based price adjustments in these markets which also helped offset higher material costs.

Based on current conditions throughout that region, we do expect for the full year unit shipments to be in, slightly over 3% for the year.

I'm going to turn it now back to Roy to have him cover our financial results in more detail.

Roy?

Thanks, Jeff and good afternoon, everyone.

As previously discussed, global revenue increased 9% during the third quarter, or 6% after taking into consideration currency fluctuations.

We delivered solid third quarter earnings of $114 million, which improved 12% from last year's levels.

Earnings per share of $1.66 increased from last year's third quarter results of $1.50 per share.

We achieved these results despite approximately $1.10 per share of higher material and oil-related costs.

The Company's results included two non-recurring items.

First, interest in sundry income included a $0.09 per share gain from the sale of a non-core business in Latin America.

And operating income was negatively impacted by approximately $6 million from a European distribution center fire.

Global operating profit for the third quarter increased 11% to $202 million.

These results were achieved despite approximately $110 million of higher material and oil-related costs as well as higher incentive compensation expense, increased restructuring costs, unfavorable currency and the impact from the distribution fire that I mentioned earlier.

Overall, we believe these were strong results given the current cost environment.

Productivity and cost controls continued to be key components enabling us to offset a large portion of the material cost increases.

We continue to aggressively generate productivity improvements throughout our global operating platform and remain focused on our selling, general and administrative expense, which dropped from 15.8% to 15.4% of sales during the quarter despite increased or related logistics costs.

If you turn to Slide 15, I'd like to give you the main drivers of our year-over-year operating profit margin performance.

As we discussed during the last call, we expected year-over-year improvements in our operating profits to begin during the second half of the year.

The beginning of this trend is evident in our third quarter performance.

During the quarter, operating profit and margins showed improvement over 2004 levels.

As I previously mentioned, material and oil-related costs increased about $110 million above 2004 levels, which reduced our operating profit percentage by just over 3%.

As you may recall, it was during last year's third quarter call when we began experiencing the significantly higher material costs.

These higher costs were mitigated by the impact of cost-based price adjustments which contributed approximately $140 million, or 3.2 points to our gross margin.

For the year, cost-based price adjustments have been approximately $380 million year-to-date, while year-to-date material and oil-related cost increases have been approximately $480 million.

You'll note that the combination of favorable productivity and significantly improved SG&A utilization contributed an additional 1.3 points to margin.

While not individually significant, higher restructuring costs, increased incentive compensation expense, unfavorable currency and costs associated with the U.K. distribution center fire, largely drove the remaining change which offset our productivity improvements.

If you'll move to Slide 16, I'll briefly comment on a couple of items below operating profit.

As previously discussed, interest income in sundry included a gain from the sale of a business.

This gain was partially offset by the absence of prior-year interest received on foreign tax settlements and higher foreign currency losses on balance sheet positions.

Overall interest expense was unchanged from the prior year.

Our year-to-date effective tax rate is 32% compared to last year's rate of 35.5%.

The decline reflects the impact from global tax audit settlements, tax-planning initiatives and the overall dispersion of our global income.

Changes in equity and affiliates and minority interests reflect higher earnings in Latin America and reduced losses in Asia.

If you'll turn to Slide 17, I'll briefly comment on our year-to-date cash flow performance.

First, in comparison to the year-to-date results we shared with you last quarter, free cash flow has improved $295 million.

As you may recall, year-to-date free cash flow after dividends was a negative 337 million at the end of June.

Through September, our year-to-date free cash flow after dividends is a negative $42 million.

This compares to the positive $26 million of cash flow we reported last year at this time.

The year-over-year difference reflects planned increases in capital investments in the Company's global operating platform and innovation to support future growth.

Overall, working capital as a percentage of sales of 12.4% improved 60 basis points from last year at this time and was down 130 basis points from last quarter levels, as all working capital categories improved on both an absolute and relative basis from the second quarter.

We ended the quarter with 58 days in inventory compared to 61 days last year and 60 days at the end of June of this year.

Inventory as a percentage of sales of 12.7% improved 50 points from last year and 40 basis points from the end of our second quarter.

Overall, we continue to expect inventory days to end the year below last year's levels.

Receivables also showed improvement over last year's levels, declining 120 basis points to 14.9% of sales.

Versus the second quarter, receivables also declined 80 basis points.

Overall, payables as a percentage of sales increased from the second quarter but declined versus last year, primarily due to reduced production levels in Latin America, resulting from the overall demand levels in this region.

Finally, free cash flow also benefited about $50 million from the planned sale of the non-core Latin American business we discussed previously.

As you can see from Slide 18, our debt levels have declined $152 million from last year, and our debt to capital has improved approximately 11 points from 51.8% to 41.3%.

Our debt is rated BBB-plus from S&P, BAA1 from Moody's and BBB-plus from Fitch.

In closing, our operations delivered strong performance during the third quarter and we remain confident in our earnings and free cash flow guidance for the year.

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

Thank you, Roy.

Let me spend a couple of minutes updating you on the status of the Maytag acquisition.

As you know, both companies continue to run their business independently until closing occurs.

I would like to reiterate a few points that we've made in the past, notably that the results of our due diligence and other analysis reinforce our belief that significant opportunities exist for us to create value for our shareholders, our customers and consumers through the efficiencies and cost savings that we see in combining our businesses.

I'd also like to point out some other things that make this a compelling acquisition for our Company.

First of all, it's a great fit with the strategy that we've been executing for several years now of having the best costs, best trade and best consumer position.

Secondly, we've identified and put out in our S4 statement that we felt, or we believe there were pretax efficiencies in the 300 to $400 million range that can be generated by combining these businesses by the third year following the acquisition.

Third, we have a very strong pipeline of innovation which we believe will enhance the Maytag brands and products for consumers in the marketplace.

Fourth, we believe we do have the financial capacity and certainly the commitment to invest in this business in the future.

And finally, that we have the organizational skills and capacities to successfully capture the efficiencies from this transaction and execute an effective integration.

On September 29th, the S4 registration statement was filed with the Securities and Exchange Commission, and on October 6th, we announced that the anti-trust division of the Department of Justice has issued a request for additional information and documentation material regarding our proposed acquisition.

Such a request is typical in transactions of this nature.

Both Whirlpool and Maytag are working closely with the Department of Justice and cooperating fully with its investigation and we've responded promptly to their requests.

To respect the confidentiality of the regulatory review process, we will not be making comments regarding the content of these requests or about any other details about the ongoing review by the anti-trust division of the Department of Justice.

We continue to expect the transaction to close as early as the first quarter of 2006, following approval from Maytag shareholders and regulatory clearance.

Additional details regarding the shareholder meeting date will be made available by Maytag.

As previously stated, we do expect 300 to $400 million of annual pretax savings by the third year following the completion of the merger.

The efficiencies are expected to come from all areas across the value chain including product manufacturing, global procurement, logistics, infrastructure and support areas.

Achieving these efficiencies will require one-time costs in the capital investments, which we have currently estimated to be in the range of $350 million to $500 million, a majority of which we anticipate will be capitalized through purchase accounting.

We currently anticipate incurring these costs during the first two years following the completion of the merger.

Subsequent to the transaction closing and the completion of our implementation plans, we'll be in a better position to provide guidance on how quickly savings will ramp up and the more precise timing of the phasing of the one-time costs in the capital expenditures.

Before we open this up for, the call for questions, regarding the third quarter, please keep in mind that we will be very limited in any answers to questions regarding the Maytag transaction due to the nature of the ongoing review process.

But at this time, I would like to open this up to Q&A to the audience.

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll go first to Eric Bosshard with Midwest Research.

Good morning.

Hi, Eric.

Hi, Eric.

A couple of questions.

The market share gain in North America was a good step in the right direction.

Can you just give us a little more color on the progress you're making there?

You mentioned that the OEM business was down or was weaker in the quarter.

Just give us a little bit more color within the market share priors and what the expectation or visibility is into that momentum in 4Q?

Sure, Eric.

You know, all year our own brands have been performing very well in the marketplace, we saw an acceleration of that performance in the third quarter.

We continue to have lower OEM shipments, which primarily is to the Kenmore brand at Sears.

That was down year-over-year in the quarter so all of the gains really were made through our own brands in the marketplace, particularly strongly driven by our new product innovation, products that have been launched during not only this year, but last year, so that was very strong performance there.

Again, offset somewhat by the Sears business.

And then momentum within both of those areas through 3Q and what you can tell us in terms of 4Q, is Sears stabilizing?

Is the share gains with your own brands continuing at that strong level of improvement?

Certainly with our own brands, where we have complete visibility, we feel very good about the momentum we have in the marketplace and continue to expect that kind of momentum throughout the balance of the year.

The Sears situation, you know, we really have not yet seen the full impact on the new stores that are coming onstream.

There's about 50 Sears and Central stores coming onstream in the second half of the year.

They'll be up and running by year-end and I believe close to 100 K-Mart store conversions, which, again, we've not really seen much of an impact from those yet.

So, again, we do expect this general trend that we saw in the third quarter to continue in the fourth quarter.

I mean should the Sears new share stores at some point should result in your shipments there to stop the client and start growing, one would think.

Do you have visibility on when that takes place?

Again, very modest improvements this year, but we do think going into next year with the stores up and fully running and then the addition of more stores next year, that's when we'll start to see the turn.

Okay.

And then my second question, in terms of the margin walk, which was helpful to go through again, I guess two things I wanted to understand.

First was the negative 1.3 points on restructuring and spending.

I'm wondering how much money is spent on the Maytag pursuit in the quarter and if that negative 1.3 will continue at that rate or get better in 4Q?

And then also, you gave us guidance on the cost number, basically for the year.

Can you give us some thought if the price should continue at the third quarter pace into 4Q?

Yeah, Eric, let me start with the first part of your question.

With respect to Maytag costs, let me break it out into two buckets, Eric.

The first one is, on our balance sheet we have somewhere in the mid-40s, about $45 million of cost that we've capitalized on the balance sheet related to the acquisition.

Now, with respect to the P&L, we have a number south of $5 million that flowed through the P&L which were cost associated with Maytag that we could not capitalize.

And as we look into the fourth quarter, we think the number will also be north or south of that $5 million number in Q4, as well.

Okay.

And then in terms of the price contribution and that negative 1.3 number in 4Q, can you give us some sense on that?

Well, again, Eric, if you look at our annual guidance, we would assume that it would be relatively flat with the pricing that we had in the third quarter in terms of the overall absolute levels.

So another 110 in the fourth quarter?

No, we were actually --

Excuse me, 140 in the fourth quarter?

In that neighborhood, that's correct.

140 in the fourth quarter.

And that negative 1.3% of sort of the other that hurt you in 3Q, should that number be similar in the fourth quarter?

Well, I tell you, we will spend higher restructuring in the fourth quarter, Eric.

Currency in Brazil, as we look right now in our crystal ball, we are assuming some negative currency again in the fourth quarter in Brazil, and then the incentive comp piece should be less of a variable year-over-year when you look year-over-year quarter-to-quarter.

So, does that net-net mean that that negative 1.3 number stays the same in 4Q or maybe inches up a bit?

It may inch up a little bit.

Okay.

Great.

Thank you.

Okay.

Thank you.

We'll go next to Sam Darkatsh with Raymond James and Associates.

Good afternoon, Jeff, good afternoon, Roy.

Hi, Sam.

Eric just spurred another question in me.

The 1.3, though, that does include the $6 million cost from the fire, and that obviously, won't repeat, so it would still be north of 1.3%, even excluding the impact of the fire?

Well, Sam, you're right.

First of all, the fire will not be in there but, again, you know, as we sit now and estimate where we think it will be, it should be roughly flat overall net-net.

But again, Sam, it's all of the variables that are coming into play here, and the other thing as you look year-over-year is the overall SG&A and so again, as we said earlier, Sam, in the year we thought SG&A as a percent of sales would be down roughly a half a point and we still think that will play out in the fourth quarter, as well.

But this column, there's some reoccurring but there's several non-reoccurring items to your point.

Okay.

Back to my regularly scheduled questions here.

Gross margins in the fourth quarter, it would appear as though you're now beginning to anniversary a lot of these material and oil-related costs and so that negative issue should not be as bad.

Should we begin now to see some real significant gross margin improvements on a year-over-year basis or are there other puts and takes that we're forgetting about?

Sam, directionally, yes, I think your comment about year-over-year changes, certainly on the material side will begin to go down as we started to see in the third quarter, so we do expect some gross margin expansion as Roy indicated, you know, offsetting part of that will be higher restructuring expenses and that exact number will depend on the timing of implementation of projects.

The other big negative we've got out there is currency, which, again, we're assuming it doesn't improve in the fourth quarter based on what we have in the third.

So, but net-net we would expect to see some margin expansion in the fourth quarter.

Okay.

Second question.

I think you're looking to negotiate terms with respect to steel procurement for next year, or at least a part of it, could you give us a sense of what steel might look like on a year-over-year basis?

And I'll wait to ask my next one after that one's answered, I suppose.

Sam, you know, right now we're in the midst of a number of negotiations around the world.

I think that the trends that you see, there has been some moderation, depending where you start from, certainly the spot market of steel.

But again, we're in negotiations for our position for next year as we speak.

Oil is a big variable next year, which affects not only logistics costs but also plastics.

You can look at the forward rates on base metals.

So, you know, there are some pluses and minuses but right now it's really too early for us to give a forecast for 2006 on materials.

Okay.

Next question, and you, Jeff, you talked about this briefly in your prepared remarks.

The progression of the potential savings from Maytag, you've quantified it at 300 to $400 million.

I know the exact quantification or progression isn't clear yet, but if, would you expect a fair amount of that to be realized initially or should we, when we're calculating this, assume a straight line realization of those savings?

Give us a sense directionally as to how the timing of those savings might play out?

Sam, it really at this point, we can't see a whole lot more with respect to the timing of those savings beyond what we put in the S4.

Again, we got about as descriptive as we could get in the S4 and we really can't comment beyond that at this point.

Okay.

Well then you probably won't comment on my next question, then, either.

And this one's kind of like looking a gift horse in the mouth, but the 300 to 400 million at the surface looks perhaps conservative if you figure that you're getting about $4 billion plus in major appliance volume.

The 300 to 400 million assumes that you're going to get somewhere around 7 to 10% operating margins on that incremental volume, which is similar to what you're getting now in North America.

And I would imagine there'd be a fair amount of savings over and above that based on the additional volume.

So would it be fair to say that beyond 2008 the savings and efficiencies continue to ramp or do you think it becomes a more normalized variable margin situation beyond 2008?

Sam, this is Jeff.

You know, to Roy's point, we really are not going to give any further detail or guidance beyond what we put out in the S4 until after we get through closing.

So, you know, I really, we are really limited to what we've already said in terms of providing any more clarity at this point in time.

Okay.

If you have to, if costs continue to accelerate next year, do you feel that you have the innovation pipeline and the equity with your retail customers and such where if you need to come back to the market with further pricing actions, you have that option available to you?

Sam, as you know, we don't speak about any forward-looking plans, but I think that as you look at the four areas that we prioritized this year in a high-cost environment, those will be the same four priorities we'd have, we currently have and will continue to have and until we see a stabilization in that, which is a combination of all of those things that we're working on at any point in time.

Specifically about innovation, that is one area that we can talk about forward-looking because I would say that, you know, our plan to accelerate in the rate of innovation in the marketplace is being executed.

We will have even more new product innovations launched in the marketplace next year than we had this year.

We have very good visibility to that and think it will be a strong driver of our business next year.

Okay, thank you.

I'll get back in queue if others aren't asked.

Thanks.

Thank you.

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

Hi, Jeff.

Hi, David.

Maybe just start on that point with respect to the innovation.

What can you say about your ability to leverage that innovative backlog to refresh the Maytag brand and sort of get it out of its funk?

David, you know, kind of falling back on some of the previous comments we've had in that area, one of the comments we've made is we do believe there's a significant opportunity to revitalize the attractiveness of Maytag products in the marketplace to consumers and the trade partners, you know, across their product lines.

We do believe that we have more than sufficient innovation in our pipeline to offer a unique value proposition to consumers based on this innovation and appropriately differentiate it from our other brands.

I want to be clear on this, the idea is that you can take innovations that are coming out of your new product development process and just introduce them into the marketplace with a Maytag brand rather than a Whirlpool brand or Amana or Jenn-Air as the case may be?

I would say the basis for that innovation is yes, but it would be in a very differentiated way.

Sure.

How long do you think it would take to really meaningfully affect that rebranding strategy?

Well it's not really a rebranding strategy, it's more of a product innovation strategy for that brand.

Or brand refresh strategy.

I would say that, you know, our intention will be to start it immediately and it would, that would be a high priority in terms of where we allocate our focus and resources.

Okay.

And what can you say right now with respect to brand positioning between the acquired brands and what you've got already?

How do you arrange these brands in a sensible fashion for the consumer?

You know, David, really, in that area, other than what I think in one of our previous presentations we kind of outlined some very high level brand positioning statements in which we included the Maytag portfolio of brands.

That's really all the more detail we would be able to share at this time.

What can you say to make people comfortable with the fact that there won't be a conflict or that you can arrange these in a fashion where there won't be a conflict?

I mean that's obviously one of the biggest concerns right now.

I guess, David, I would say that we've been very effective with our current portfolio of brands around the world doing this.

So this, to me this, you know, effective brand management, brand positioning and differentiation is, we believe, the company competency and capability.

And I think if you've the way that we've executed in the marketplace, whether it be in the U.S. or other parts of the world, we do this with multiple brands.

And so we don't see this as a new competency, it's an extension of what we've been doing.

Do you end up creating exclusive arrangements with retailers?

We're not in a position to talk about that now.

Okay.

Just moving on to the productivity stories continues to be very strong as it has been the last few years.

Just, I guess how much more opportunity, how much more low-hanging fruit is there here on the productivity story?

And can you give us a few examples of where you've been able to realize productivity?

David, I'm not sure there's any low-hanging fruit today, but in terms of our ability to consistently drive productivity, we feel very good about that.

You know, again, we, in our terminology, you know, we separate productivity to product-related costs and cost-savings to our SG&A side.

So, on the product-related side, you know, clearly, in this kind of environment, approximately 65 to 70% of our product costs are driven by material.

Uh-huh.

So, we've talked about the huge challenges we've had in the material side of this.

But on the remaining 30% is where we've driven record levels of productivity, what we call controllable productivity.

And we really do this by, we're executing very well our lean manufacturing activities in every facility we have around the world.

We are really focused on our supply chain optimization, as you've seen, and I think in our announcement we mentioned two of these are continued evolution to low cost footprints in the case of this quarter starting production in two new facilities, one in Mexico, one in Poland.

As well as our ability to address efficiencies in our product designs in getting more and more global leverage from those product designs.

So, I don't see that this year from -- is unique in that sense.

What's unique about this year is the, having to offset the level of just pure material cost pricing.

But in terms of capability, and we've articulated in the past that we would expect to drive 3 to 5% productivity, absolutely still remains our target and goal, this year being really abnormal in the sense that material costs clearly have gone significantly the wrong way.

But again, I don't see what we're doing is, you know, unique for this year.

This is an ongoing capability that we expect to drive throughout our global operations.

Well you've done a great job with it.

Final question.

What percentage of your steel requirements is coming due for negotiation in '06?

Well, these are rough numbers, but I think I've indicated in the past it depends really by market and supply base, but about globally, about 60% of our annual steel business is done under contract and about 40% is somewhat subject or at least indexed to the open market.

So, with that in mind, it is, you know, it would be a 60% that's under negotiation.

And typically the full 60% wouldn't come due in any given year.

I guess that's the question I was asking.

It would not necessarily come due in any given year.

And so can you say how much is coming due?

Not given the point of negotiations we're at right now.

Okay.

Good enough.

Thanks a lot and congratulations on a good quarter.

Thank you.

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

Hi, Laura.

Hi.

Sorry if this was already been asked I missed part of the call, but continue to be watching closely the volatility in your Latin American business and I know it's early, but can you talk about maybe directionally what you would expect from the Latin American market in 2006?

Sure.

Sure.

Let me kind of give you a snapshot.

You know, we've made pretty good progress in the first half of the year in Latin America.

There was a significant volume drop-off, if I recall, the first half of the year volumes were up in Brazil by, I think, 12 and 14% in the first and second quarter, down 17 in the third quarter.

Let me provide maybe a little color of that.

Two things happened there.

The bulk, or the majority of that downturn in shipments was not demand-driven but trade inventory driven.

And we've had, really, the two leading retailers in that market decided to reduce the amount of stock they would keep on hand during the quarter and they did.

The consumer market was down, although down, was down much more modestly.

So, we do see the third quarter demand pattern as a blip.

In fact, we're already, you know, believing the fourth quarter will be dramatically better and possibly even positive in the fourth quarter.

So, despite that blip in the fourth quarter, we feel like we are on track for the full year to deliver kind of both sales and profitability and cash performance out of our Latin America business.

So, directionally we feel very good about our business in Latin America and just, again, it's subject to some volatility externally, but in terms of the progress we're making, we think it will be a good year in Latin America this year and we'll build off of that next year.

And can we talk maybe real big picture about the U.S. market for next year, if we're seeing a percentage or two unit growth this year, but had a good Q3, what would your outlook be going into next year with higher energy prices and higher interest rates?

Do you think we'll have a down year or do you think we'll still be able to pull out maybe GDP growth in appliances?

Laura, this is still really early in kind of finalizing our planning process.

Right now I would tell you that our planning assumption for next year is 2%.

We may adjust that before we get to the end of the year, but right now that's about the range we're looking at.

Thank you.

We'll take our next question from Jeffrey Sprague with Citigroup.

Thanks, good afternoon.

Hi, Jeff.

I was wondering if we could explore mix a little bit and maybe actually just to go back, either Roy or Jeff, to the marginal [inaudible] slide on Page 15.

I mean how do we think about the role of mix and volumes in these changes in margin rates that you're showing us here?

Jeff, we did, we had some minor impact from mix, but overall on a global scale, mix really wasn't a key player in terms of the walk forward in operating profit.

So, again, as you began to analyze the pieces, you know, we've tried to separate for you, you know, the impact related to price, the impact related to material costs and then of course, the SG&A productivity.

And so what you're left with is this last column of minus 1.3% and mix is a part of that in that column but it's a very small part.

So, you know, just to clarify, so all the price we're seeing is pretty much could be considered like for like price on similar units as opposed to anything dramatic going on with the consumer?

That's correct.

I mean clearly, I guess in aggregate it did wash out, but I wonder about in Europe.

We heard from Honeywell yesterday and automotive and American Standard two days ago in bath and kitchen that, you know, they're seeing eroding mix in the European consumer.

Everybody's looking for it here, but it seems to be happening in Europe.

Any early signs of that?

Jeff, we're actually not seeing that in our business.

And Roy explained the total, but in Europe, I would actually tell you we had positive mix which impacted margin for us.

Europe is, you know, it's been a weak GDP market.

It's been relatively weak in volume.

Although they've had a material cost increases which they've not been quite to the extent that we've seen in other parts of the world.

We've actually, for the first three quarters of the year, continue to see negative like for like industry price trends.

And again, we had the fire which cost us about six or seven-tenths in the European operating margins, but, you know, we are in this negative price environment.

We are realizing positive margin improvements both through our cost-based price increases and mix.

So, we actually are seeing mix the other way but it's something we're driving on very hard.

Then do you think their mix improvements are a function of, you know, your better representation with the, you know, the kitchen designers and things like that or is it also just broadly general in retail that, you know, the product is allowing you to improve mix?

I would say it's three things.

I think partly is our improvement in built in.

A big portion of this is our new product innovation and the third, I would say, is very strong sales execution focus on mix.

It is not necessarily a general trend in the marketplace.

And just another interesting thought, I mean not to parse your words or how you presented this chart, but it seems like you went out of the way to say cost-based price adjustments.

You know, would that mean to imply that, you know, perhaps we all think about and/or the market forces us to give this price back if costs go down at all?

That wasn't the intention of the wording there.

It was just, you know, we've had a lot of discussions over the last year about this and we have tried to differentiate the like for like mix and that's why we've referred to it as cost-based as opposed the, and break out the mix and put it in the other pod.

But there's, I wouldn't read anything, overly read anything into that.

Okay.

And just finally, any early color on October?

I mean obviously September was good, the consumer's chugging along, but, you know, everybody's looking for that first sign of a little stutter-step in demand.

Anything visible at all?

You know, Jeff, I just refer to the comments I make that we have good sales momentum in the marketplace and we, that is continuing.

All right, thanks a lot.

Thank you, Jeff.

We'll go next to Larry Horan with Janney Montgomery Scott.

Great quarter in a difficult environment.

Thank you.

Question.

You say in the release here, that you inaugurated a new cooking factory in Poland.

Do you mean it broke ground or do you mean it's producing product?

Well, we've got a fairly large Polish manufacturing facility in Wroclaw, Poland and we, in addition to it currently produces refrigeration and dishwashers and we've added cooking facility on to that manufacturing location, which is now producing product.

Okay.

Are there any more plans to move to lower cost areas in terms of manufacturing or are you happy with your footprint as it is?

Well, Larry, we have continued to execute the plan, I think we've showed earlier this year the next factory coming onstream, in what is considered to be a low cost labor market, is Mexico, where we have a new refrigeration facility coming onstream.

That will be the next one.

Beyond that, there are no new factory being built.

We are expanding our capacity and volume in Eastern Europe.

We've got, you know, continue to have good capacity in Brazil.

We are beginning, or shortly to expand our capacity in China for more export.

So, it's really expansion of volume capacities to keep up with the demand that we're seeing in our business.

Okay.

Thank you very much.

And just a reminder, star one if you do have a question.

And we'll return to Eric Bosshard with Midwest Research.

Two things, first of all, in terms of mix, I just wanted to clarify, is the mix experience in North America now positive, neutral or negative?

I'd say it's neutral.

It's continuing the same trend, which has been very positive.

But it's neutral.

If you just look at your branded product what you think the mix--

I'd say right now it's neutral.

Okay.

And then secondly, the inventory situation, do you feel in 3Q or 4Q you're going to be running your facilities at less than full capacity, whatever you might consider full capacity, to manage inventory or is inventory basically getting managed back to where you want it to be by demand trends?

Well, our demand's very good.

And basically, if you recall a year ago, we purposely, due to shortages in certain key components and raw materials, we purposely increased our investment in inventories to provide the right level of service to our trade partners.

And we said through the course of the year we would work that down.

I think you really saw that in the second and third, it kind of peaked in the first quarter.

We worked it down some in the second.

Significant improvement in the third.

So, now we're back to, I would say, a more normal level of working it down to the days of level that we want to have.

We'll end the year with down inventory days versus year-end '04, but not at an abnormally low production level.

This is more, we are now in balance and we think the demand side will take care of the inventory levels.

And then the last question.

The last couple of quarters you've given us a number what you call cost saves, SG&A and productivity saves.

I think it was a $38 million number in the second quarter.

Any sense on that metric, what that number might have been in 3Q and could potentially be in 4Q?

Eric, I don't recall giving that specific metric.

Now, we have combined the SG&A along with our controllable productivity, which is the 1.3% in the walk forward.

And maybe the other point that you may be referring to is, we are, to Jeff's earlier comment in terms of overall productivity, on the non-product side, as we look at our SG&A productivity over the course of the year, we do plan to take four to five-tenths of a point out of SG&A year-over-year, which is somewhere in that 50 to $70 million range in terms of improvement.

And that's despite higher logistics costs?

That's correct.

That improvement would include higher oil costs.

Okay.

And that 1.3%, what is that on a dollar basis?

The 1.3% in the operating margin walk, what's that add up to?

Is that just 1.3% times the sales number?

Yes.

Yes.

Okay.

Great.

Thanks.

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

Yes, just a follow-up.

There's been a lot going on in the premium laundry segment lately and I was just hoping you could give us an update.

We're getting a lot more foreign brands showing up on American sales floors.

We've had three or four foreign OEMs announce either new plant construction plans or capacity increases here in the United States just in the past 30 or 45 days.

On the same token, you've had Maytag kind of slipping a little bit from what we could see through our store surveys.

Can you just talk a little bit about competitive conditions in the premium laundry segment right now and your outlook for 2006?

David, well first of all, I think your description is probably a fair description of the marketplace.

I can perhaps really just comment on our business.

Our overall laundry business, I think when you say premium I think you're talking about the horizontal access products, continues to perform very well.

We just recently, in the quarter as I mentioned, opened our new factory in Mexico, which is producing a more moderate price, horizontal access products, which we're now selling in the marketplace and is off to a great start.

You know, going into 2006, I think we shared with you, and that's going to be a strong focus for us in our new products innovation across all laundry products, across the range.

It is a very dynamic laundry market right now.

A lot of new competitors coming in whether through import or through Mexico.

You know, we expect that to continue but I would just say we're very well positioned with where we're at and our business remains very good.

Uh-huh.

Are you any closer to redomiciling manufacturing on the Duet and the He4t back to the United States from Germany or back to Mexico from Germany?

We don't, we have not really announced or we don't really have any plans if I understand your question right.

Right now we're operating at very high levels of production in all of our facilities.

And we're just now starting up the one in Mexico and that's dedicated to this new, more moderate-priced product.

Uh-huh.

So, there's no plans right now to move the Duet back from Stuttgart?

That's nothing that, we have not announced any plans for that.

We continue to produce significant amount of products in Germany and it's been a great-selling product for us.

Good, good.

Thanks a lot.

I think we have time for one more question.

All right.

We'll take our last question from Filippe Goossens with Credit Suisse First Boston.

Yes, good afternoon, gentlemen, and congrats for the quarter.

I just had one quick question.

With regard to the Jobs Creation Act, have you gentlemen made any announcements whether you would repatriate any overseas earnings?

And whether that would result in any borrowings at the overseas level, please?

We, there are two aspects to the Act.

One is the aspect with respect to our effective tax rate and we estimate that they'll be just south of a half of a point lower effective tax rate impact from the new Act.

From a repatriation perspective, we, at this time, do not have any plans to repatriate earnings as a result of the Act given our cash positions around the globe.

Great.

Thanks very much.

You're welcome.

Well, we're going to conclude there and we, again, wanted to thank everyone for joining us today.

We look forward to delivering a strong fourth quarter performance and sharing, when appropriate, any future developments that we have regarding the Maytag acquisition.

Again, thank you for joining us.

And this does conclude today's conference call.

Thank you for your participation.

You may disconnect at this time.