惠而浦 (WHR) 2005 Q4 法說會逐字稿

Good day and welcome to the Whirlpool Corporation fourth-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 and Corporate Controller, Mr. Larry Venturelli.

Please go ahead, sir.

Good morning and welcome to our fourth-quarter earnings conference call.

Our opening 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 answers to questions regarding the Maytag acquisition will be limited due 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 and 10-Q, as well as to the proposed Maytag acquisition.

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

Jeff.

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

As you know earlier this morning, we released our full-year and fourth-quarter financial results.

For the full year, we reported a record level of net earnings, which came in at $422 million or $6.19 per diluted share, which compares to our prior year earnings of $406 million or $5.90 per diluted share.

Revenues for the full year increased by approximately 8% to $14.3 billion, which was also a record level.

Turning to fourth-quarter results, which were also at record levels, we had revenues up at $4 billion, up about 9% versus last year.

Our net earnings were $126 million or $1.83 per diluted share compared to last year's fourth-quarter earnings of $97 million, which translates into $1.44 per diluted share.

Finally, our global operations delivered $412 million in free cash flow, which we in '05 reported after dividends in comparison to last year's level of $241 million.

In total, we are very pleased with the results that we have delivered in an environment that we have described during the last year as extremely challenging.

I will remind you that since the latter part of 2004 and through 2005, we incurred material and oil-related costs of approximately $850 million.

These costs remain at near their 30-year highs.

It was about one year ago where we stated that to address this environment we would focus our efforts at Whirlpool in our plans in four areas to overcome this extraordinary cost cycle and those areas were to implement cost-based price adjustments, to drive controllable, which we define as nonmaterial total cost productivity, to significantly reduce our nonproduct-related investments and importantly accelerate the rate of new product innovation to the marketplace to drive revenue growth and improve margins by introducing a record number of new consumer-relevant innovative products to the marketplace.

Our 2005 results reflect the benefit that our global organization achieved by successfully executing plans in all four of these areas.

The results enabled us to overcome the significant negative effects of this material cost cycle that we've seen for over the last year and a half.

For 2006, we see a continuation of the external environment that we saw last year.

At a global level, we have underlined our assumptions, which you can see on slide number 4 and we see unit demand growth globally between 2 to 3%, material price increases up to $100 million, which I would again remind you that is on top of the $850 million of increases that we have had over the last year a half.

We expect our major currencies to be relatively stable at today's current levels and we expect to see continued aggressive expansion of major global appliance companies and further consolidation of regional local appliance businesses.

So within this global operating environment, we will continue to focus on executing our brand value creation strategy, which is aimed at building our position as the best brand in consumer position based on our global portfolio of brands and our pipeline of innovation, developing our best trade position by meeting and sorting their needs across their total business activities and finally by being the best cost and quality producer in the world by leveraging our global offering platform.

In 2006, we are focusing very specifically our plans and efforts in four areas, which I show on slide 6.

The first is to continue to accelerate new product innovation to the marketplace, which again we believe will drive significant revenue growth and margin improvement.

Secondly, we will drive total positive total cost productivity by further leveraging the capabilities of our global operating platform.

Third, we will control our spending by reducing overhead and infrastructure costs while at the same time increasing our investments in consumer-related activities.

And finally, we will continue managing our overall mix of business to improve our markets.

After a record level of innovation that we introduced in 2005, we will greatly surpass this in 2006 and bring the most impactful innovation to the market in our Company's history.

We expect that sales generated from this new innovation in 2006 will account for over $1 billion in revenue this year.

Given our current business momentum and the successful execution of the plans, as I have outlined here, we expect full-year earnings per diluted share to be in the $7 to $7.25 range.

Additionally, we will continue to drive strong focus on cash generation and expect free cash flow, which beginning in 2006 we will report before dividends, which is more the norm in the business community and we expect this to be in the to 465 to $515 million range and Roy Templin will discuss that later on.

Both estimates are based on our current business structure and do not reflect any impact of the pending Maytag merger.

I'll have comments later on about the Maytag merger.

Joining me here today for the call are Dave Swift, our President of our North America business;

Mike Todman, our President of our International Business and Roy Templin, our CFO.

At this point in time, I'm going to turn it over to Dave Swift for his comments about North America.

Thanks, Jeff and good morning.

As seen on slide 9, Whirlpool North America had a record fourth quarter in terms of unit shipments and revenue.

Revenue was up 12% from a year earlier to a record $2.4 billion.

We experienced strong demand for our new product innovations during the quarter.

Industry unit shipments of major appliances were up 5%.

For the year, the Company's unit shipments of major appliances approximated industry shipments, which grew by 2%.

Strong consumer demand for branded products, particularly the Whirlpool and KitchenAid brands, drove our performance during the quarter and for the year.

North America delivered strong financial results during the quarter as operating profit improved 36% to $226 million and operating margins improved 1.6 points to 9.2%.

We have executed well during 2005's exceptionally high material and oil-related cost environment and have mitigated the impact of the heightened cost environment through cost-based price adjustments, productivity gains and strong cost controls.

We have both managed through this cost cycle and maintain focus on our strategic objectives, which includes the continued development and delivery of new innovative products.

As you'll note on slide 10, since 2001, we have consistently allocated additional resources including capital, R&D and people to support the development of our global innovation capability and product pipeline.

On slide 11, you'll note that our global innovation pipeline in terms of potential sales value has increased from $1.3 billion in 2003 to $3.3 billion in 2005 significantly surpassing our internal goals.

We are excited about our 2006 innovation story. 60% of the products in North America that we shipped in 2005 will be replaced by new models by the end of 2006.

We are currently rolling out the largest new product launch in Whirlpool history with the introduction of an entirely new laundry line.

You will see on slide 12 the products that make up this exciting new line.

The Whirlpool brands revolutionary new Cabrio washer and dryer offers a 4.5 cubic foot capacity in a top-load washer design, handles the equivalent of three laundry baskets in a single load and significantly reduces dry time through a combination of the washer's ultrafast spin speed and the dryer's AccelerCare system.

The Cabrio saves 50% more energy and water than a conventional top-load washer.

Whirlpool brand Duet Sport and Duet Sport HT models are smaller versions of the popular Duet front-load pair with a six point suspension to reduce vibration and noise.

Like the Duet pair, they use less than half the water and energy of conventional top loaders.

Whirlpool brand Classic top-load washer and dryer have been designed with new technology to simplify cycle selections, ensure optimal wash temperature and built-in sensors to monitor wash water.

The dryer's AccelerCare system dries clothes as fast as the washer cleans them.

On slide 13 is the first built-in French door bottom freezer/refrigerator from KitchenAid, which offers the largest capacity in the built-in category with a freezer on the bottom configuration.

On slide 14, you see one of our newly launched product innovations, the Whirlpool Gold Velos SpeedCook oven.

This oven delivers four ways to cook in a single appliance combining the capacity and performance of an oven with the speed of a microwave.

Consumer response to this new Whirlpool innovation has been fantastic and demand has quickly exceeded supply.

On slide 15 is the KitchenAid Dual Fuel Convection Range with Steam-Assist.

And steam cooking is a feature usually available only to professional chefs now in KitchenAid.

In addition to innovation, we have strengthened our operating platform.

During 2005 we began producing front-load washers out of our new Monterey, Mexico facility and are in the process of completing our new refrigeration plant in Ramos Arizpe, Mexico, which will be producing products later this year.

Turning to our outlook for 2006, we are forecasting industry demand to improve by approximately 2% to 3% for the year.

For 2006, the assumptions driving our demand forecasts are number one, a GDP growth of 3.4%, number two, mortgage rates averaging around 6.4%, number three, moderate declines in housing starts and existing home sales and four, unemployment rates up slightly.

And as you can see on slide 16, the basic outline of our 2006 business focus is accelerating the rate of new product innovation to the market, increasing already strong customer activities to support our brands, delivering strong levels of controllable productivity and increasing cash generation.

Now I'd like to turn the call over to Mike Todman, President of Whirlpool International.

Thanks, Dave.

On slide 17, let's turn our attention to Europe where revenue of $849 million declined 5% from the prior year period but adjusted for currency translation, sales increased approximately 2%.

Annual revenue increased to a record $3.2 billion, a 3% increase over last year.

Unit volume exceeded industry growth during the quarter due to strong Whirlpool brand performance and continued strong performance in the Company's built-in business.

Industry volume is estimated to have been flat to down 1% during the quarter.

For the year, industry volume is estimated to have declined between 1% to 2%.

Operating profit of $46 million declined 12% for the quarter.

Excluding the impact of currency, operating profit declined approximately 2% from the prior year period.

Results were positively impacted by higher volume, productivity gains and asset sale and negatively impacted by higher incentive compensation and unfavorable currency.

During 2005, Europe delivered significant improvement in free cash flow through better management of working capital.

Turning to 2006, based on the current economic conditions, we expect industry unit shipments to increase approximately 1% to 2%.

On slide 18, you'll note that our European business focus during 2006 is going to be continued improvement in our manufacturing productivity and reduction of overhead costs, two, utilization of global product innovation to accelerate the pace of new product launches, three, improve the overall mix of our business to improve margins and four, continued focus to increase cash generation.

As in all parts of the world, accelerating innovation to the market remains an important focus to drive results.

One example of new product innovation in Europe is shown on slide 19.

The Whirlpool Blue Touch front-load washing machine features a new full height control panel with a central push button control area and LCD technology for full feedback.

The Blue Touch model was named United Kingdom's fabric care product of the year for 2006 by Get Connected magazine.

Turning to Latin America on slide 20, sales of $580 billion increased 22% from the prior year period.

Excluding currency translations, sales increased approximately 8%.

Appliance industry unit shipments were estimated to have increased 1% during the quarter and 2% for the year.

Operating profit of $56 million improved significantly during the quarter.

Fourth-quarter results included $23 million of export tax credits.

But excluding these credits, operating profit more than tripled as cost-based price adjustments and aggressive cost reductions more than offset higher incentive compensation.

For the year, our Latin American operations operating profit doubled to 127 million and operating profit margins expanded over 2.5 points.

As indicated on slide 21, our focus in Latin America during 2006 will be on one, manufacturing and supply chain productivity, strong cost control, margin realization and acceleration of our innovation launches.

Two examples of new product innovation in Brazil are included on slide 22.

The introduction of a new Brastemp washing machine reinforcing the brand's leadership in the mid market segment and offering antibacterial and antirust characteristics.

And the introduction of the new Consul Bossa Nova cooking range features four internal burners and a stainless steel cooktop on it and other first to market practical features.

Based on the current consumer interest rate environment and macroeconomic conditions in Brazil, the Company anticipates industry unit shipments to increase 6% to 8% during 2006.

On slide 23, Whirlpool Asia's fourth-quarter sales increased 6% from last year's results primarily due to the positive impact from new product introductions and improved product mix.

Currency did not have a material impact on sales during the quarter.

Operating profit improved significantly in India, the region's largest market, during the quarter reflecting the success of new product introductions, cost controls and improved product mix.

Overall, regional operating profit declined during the quarter impacted by higher material costs across the region.

For the year, operating profit improved 10%.

Slide 24 shows our primary business focus in Asia during 2006.

One is to accelerate new product launches, two, to expand China procurement and technology, three, to improve our manufacturing cost position and productivity and four, implementing structural overhead cost reductions.

Based on the current economic conditions, full year 2006 industry unit shipments are expected to increase 5% to 7%.

In closing, we will continue to leverage our global operations in the upcoming year.

Our production from low-cost countries increased to approximately 40% during 2005 up from 35% in 2004.

Our target is to source approximately 50% of our production from low-cost countries by 2007.

We will achieve this goal through actions like new production facilities, as Dave mentioned in Mexico, the opening of our new cooking factory in Wroclaw, Poland and leveraging our global purchasing opportunities and technology resources in low-cost countries such as Eastern Europe, India, Brazil and China.

Now I would like to turn it over to Roy Templin for his financial review.

Thanks, Mike and good morning, everyone.

As Jeff previously discussed, 2005 was a record year for Whirlpool in terms of unit volume, sales and earnings.

The Company delivered higher sales, increased operating profit and higher net earnings while also absorbing unprecedented material and oil-related cost increases of approximately $535 million.

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

We executed well the plans we established entering 2005 to aggressively generate productivity improvements throughout our global operating platform and reduce our selling, general and administrative expense, which dropped from 15.8% of sales last year to 15.3% in 2005 in line with our expectations.

It is important to point that the production in SG&A is inclusive of higher freight and warehousing expenses driven by elevated oil costs.

As we have been discussing with you all year, we expected to begin realizing year-over-year operating profit improvement during the second half of 2005.

We began experiencing this improvement during the third quarter and gained additional momentum during the fourth quarter.

The fourth-quarter improvement in year-over-year operating metrics was strong as net sales improved 9%, operating profit in absolute dollars improved 34% and our operating profit margin improved by one full point as a percent of sales.

Our net earnings of $126 million improved 30% above last year's fourth quarter.

If you'll turn to slide 25 I would like to highlight a few key transactions and changes within our fourth-quarter operating profit performance.

Overall, operating profit in the quarter was 5.5%, up one full point as a percent of sales.

As highlighted in our release this morning, there were some key items that both positively and negatively impacted our operating margin.

These items were the recognition of export tax credits, net gains on the sales of assets and properties, which are primarily the result of our executing our global operating platform strategy, increased incentive compensation and higher restructuring expenses.

Absent these items, our operating profit margin run rate would be slightly higher than our actual Q4 rate of 5.5%.

Now let's turn to the categories between operating profit and net earnings.

First you'll note that interest income and sundry expense is $40 million higher than last year's reported results.

As a reminder, last year's results included a gain on an equity investment, which totaled approximately $9 million and included interest income from tax settlements.

Based upon our quarterly review of active litigation across the globe, we felt it was prudent to take a fourth-quarter charge to increase our litigation reserves by $21 million.

The litigation reserve charge was the key driver of the higher level of sundry expense in the fourth quarter and when coupled with the above accounts for most all of the year-over-year change.

Also during the fourth quarter, as required by generally accepted accounting principles, we finalized our effective tax rate for the year after taking into account our actual global dispersion of income, results from global audit settlements from around the world and global tax planning.

Based on this review, our effective tax rate for the year was lower than previously anticipated driven largely by the final global dispersion of income and greater than anticipated benefits from our tax strategy actions.

Our final 2005 rate is 28.6% and as required of the accounting rules, we made the adjustment to reflect this annual rate in the fourth quarter.

On a year-over-year comparable basis, the net of these two significant items below operating profit, which again are the increased litigation reserves and a lower effective tax rate, reduced the year-over-year comparison by roughly $0.05 per share.

If you'll move to slide 26, I'll briefly comment on the key drivers of our fourth-quarter operating margin improvement.

Material and oil-related costs increased approximately $55 million above last year's levels and reduced our operating profit percentage by about 1.5 points.

Cost-based price adjustments contribute about $130 million or 2.6 points to our gross margin.

Favorable productivity and improved SG&A as a percentage of sales also contributed 1.5 points to margin.

The remaining change in margin primarily reflects the higher incentive compensation, increased restructuring expense and some increase in engineering costs to support new product innovation, which were partially offset by export tax credits and overall net gains on the sales of assets mentioned earlier.

If you'll turn to slide 27, I'll briefly comment on our annual cash flow performance.

Strong cash provided by operations of just under $900 million improved about 11% for the year.

Capital spending to support our global innovation efforts and expansion of our global operating platform was essentially equal to last year's levels.

As we discussed last quarter, our cash benefited about $50 million from the planned sale of a non-core Latin American business.

Overall, free cash flow after dividends of $412 million increased 71% from the $241 million reported last year.

Turning to slide 28, overall working capital as a percentage of sales of 9.4% represented an all-time low for the Company and improved 150 basis points from last year at this time.

Improvements in inventory and accounts receivable drove the record level.

If you look at our inventory, you'll note that we ended the year with 51 days in inventory compared to 59 days last year and 58 days at the end of September.

Inventory as a percentage of sales of 11.1% improved 180 basis points from the prior year.

Receivables also showed improvement over last year's levels declining 90 basis points to 14.5% of sales.

You'll also note that our debt levels have declined by $170 million from last year and our debt to capital has improved by over five points from 45.7% to 40.3%.

We exited 2005 with a very strong balance sheet and sufficient levels of liquidity in preparation for the upcoming year.

As Jeff previously discussed, our earnings per share guidance is between $7 to $7.25 for 2006 without taking into account any effects of the proposed merger with Maytag.

Our guidance includes higher restructuring costs of up to $100 million related to the expansion of our global operating platform and an effective tax rate, which will approximate to 2005 rate.

The impact from the new accounting requirements related to stock option expensing is expected to result in about a $7 million reduction to our earnings in 2006.

We expect our SG&A as a percentage of sales to remain at 2005 levels.

We will experience higher launch costs associated new product introductions during 2006.

However, these costs will be offset by reductions in general and administrative infrastructure costs.

We will be making one change to our financial reporting next year.

Historically, we have included outbound freight and warehousing within SG&A.

The gain in 2006, all freight and warehousing, will be classified in cost of goods sold.

Slide 29 provides you with the historical reclassification for freight and warehousing between SG&A and cost of sales.

Turning to cash, we plan to deliver free cash flow, again as Jeff mentioned earlier, before dividends in 2006 of between $465 million to $515 million.

We have assumed 500 to 525 million in capital spending in this guidance.

In closing, our operations delivered strong performance during 2005.

Our balance sheet is strong and we are well-prepared strategically, operationally and financially entering 2006.

Now I'll turn the call back over to Jeff.

Thank you, Roy.

I would like to make a few comments about the status of our Maytag merger.

Overall, we continue to make progress on all fronts in completing the steps to close this transaction.

On December 22 of last year, Maytag shareholders overwhelmingly approved the merger, almost 98% of shares loaded were in favor of this transaction.

We have fully staffed our merger integration team and with the appropriate legal protocols, we're making very good progress in developing our plans to ensure an effective integration and to achieve the expected benefits.

Lastly, we continue to work with the Department of Justice to expeditiously gain their approval to proceed with the merger.

As we have previously stated, we have fully complied with the second request for information.

We have also agreed, based on their request for more time, to extend the period for closure until February 27, 2006.

Overall, we have remained highly confident that competition would not diminish in any product category in which we compete.

This position is confirmed based on the realities of the appliance industry dynamics.

Whirlpool and Maytag are working closely with the Department of Justice and we continue to cooperate fully with its investigation and respond promptly to its inquiries.

We remain on track with our acquisition plans and continue to expect to close as early as the first quarter of 2006.

This transaction will translate into better products, better quality and service as well as other efficiencies, which will allow us to offer a more competitive, wider range of products to a much broader consumer base that will be procompetitive for consumers.

Before we open up the call for questions regarding the fourth quarter, please again keep in mind that we will be very limited in our answers to questions regarding the proposed Maytag transaction due to the sensitive nature of where we are in this process.

So let me just summarize our call today.

We're pleased with our 2005 results and the value that was created for our shareholders.

Based on the planning assumption that we've outlined here, we are very excited about the opportunities which we see in 2006 and we have clear focus on our plans to enable us to deliver earnings per diluted share in the $7 to $7.25 range, again excluding any effect of the Maytag transaction.

And finally, we remain highly confident that we will close the Maytag transaction and we are making very good progress in preparing for a rapid and effective integration.

At this time, we'll open this up for questions and look forward to getting questions from you.

So operator, if you'd go ahead and do that.

(OPERATOR INSTRUCTIONS).

Eric Bosshard, Midwest Research.

Congratulations on a great quarter.

First on pricing for 2006, what are you expecting in North America and then in regard to any price increases, what are you expecting the mix to do in 2006?

Eric, as you know, we don't comment about price increases until they have been made public in the marketplace.

You know what I would say is that we do believe globally we have opportunity for margin expansion.

I think a big driver of our margin expansion will be in two areas in 2006.

First, based on our new product innovation that we are bringing to the marketplace in all parts of the world and secondly in the area of productivity, as I indicated, we do expect to have additional material price increases.

But on the other hand, we expect that our productivity efforts will enable us to overcome those and so from both of those dimensions is where we see our primary drivers of margin expansion.

I apologize.

This is actually [Mark Koznarek] stepping in for Eric.

In terms of marketshare gains, what are your expectations for 2006 and then where did you see the most significant marketshare gains in 2005?

Mark, are you talking globally or --?

Specifically North America.

This is Dave Swift.

First of all, as I said in my remarks, we experienced very good share gain in 2005 in our branded business.

We continue to expect going forward with the launch of innovative products that we have that we should expect to see strong momentum in our brands.

One final question, regarding Europe, can you comment on why you expect the Europe market to improve in 2006 relative to 2005?

Yes.

In Europe right now going into 2006, we're seeing improvement in consumer confidence largely driven really out of Germany.

We are beginning to see some turnaround in Germany and I think, as you are aware, so goes Germany, so goes many of the other markets in Europe.

And so we are beginning to see some upswing.

Now it is still modest and we are only forecasting about a 1% to 2% improvement in the market.

Sam Darkatsh, Raymond James.

A couple of housekeeping questions.

The Brazilian export tax credits, the $23 million in incentives, is that the long-awaited return of the [BPX] credits or is that something different?

Sam, it is the BPX export tax credits.

There was actually a court ruling -- well, first let me back up -- as you know and as we have disclosed in our prior 10-Ks and 10-Qs, we have suspended recognizing any BPX tax credits pending a court ruling in terms of whether or not they would be applicable going forward.

And there was actually a ruling in December that was favorable in that regard and so we did recognize $23 million on the appliance side of our business in the fourth quarter for export tax credits.

So then would there be an ongoing credit then.

This wouldn't be a onetime thing then.

Is that correct?

Sam, let me remind you of a couple of things.

One, if you look at the disclosure we made really I guess over the last couple of years, we have credits remaining on the compressor side of the business.

Now if you look at our current situation, currently we do not have any ability to monetize those credits.

Having said that, Sam, we are in the process now of looking at a number of options that would enable us to monetize some if not all of those credits in the future.

So your guidance of $7 to $7.25 does not include any further credits from this BPX arrangement?

It does not.

That's what I was trying to get clear on.

Secondly, Roy, the allowance for uncollectible accounts was down on a percentage basis of gross.

I think this is my perpetual question with you guys but did that affect bad debt expense in the quarter on a comparative basis or were there other issues there?

It did not.

I know we have talked about this a couple of quarters and you are right.

I think it changed like $31 million year-over-year.

We had $30 million in the current fiscal year of write-offs of bad debts that were previously reserved.

And so there is no P&L effect from that.

We also had about $6 million of reduction in the reserve simply as a result of currency movement and more specifically the euro.

And then we had about $5 million for the year in actual bad debt expense, which was a charge against the P&L over the course of the year.

So no, there was no distortion in any run rate capacity in terms of bad debts.

Two more quick questions if I could and these are clarification questions.

You mentioned that you are expecting higher restructuring costs in '06 versus '05 and you gave $100 million.

Is that $100 million incremental or overall versus '05?

Meaning you had, what, 50 or $60 million in restructuring in '05, does that mean you're looking at $160 million or just $100 million for next year.

100, Sam, and again that is an approximate number but it is approximately 100 million for the year.

Last question if I could.

Your unit shipments were up 3%; your inventories were down 7%.

I am guessing there were some fixed costs under absorption as a result of you drawing down your inventories.

This is total back of the envelope, pull out of the (indiscernible) on my behalf.

It looks like from my math that is about maybe a $20 million impact on Q4 results.

Is that how I should look at it or how should we look at the underabsorption on this?

I guess your thinking would be accurate.

I mean we did draw down inventories, which has an impact on our conversion rates and we saw that pretty much around the world.

But it is also normal that we draw down inventories in the fourth quarter, just the seasonality nature of our business.

I do not have the number of what that would be off the top of my head in terms of the conversion savings.

But conversion costs would have been negatively impacted by a lower level of production, which was the gap between inventory and sales.

Well done, gentlemen.

Thank you.

David MacGregor, Longbow Research.

Congratulations, gentlemen on a great quarter.

I was wondering if you could go back over something you covered in your prepared remarks that you went over rather quickly.

I didn't get the full impact of it but it has to do with the new product development initiative.

At one point, I think the observation was made that it would amount to 1 billion -- new products would represent 1 billion in revenues.

Then later in your remarks you talked about 60%.

I'm just wondering if you could go back over that again and maybe drill in a little further for us, provide us a little more granularity on how that ties back in with your financial performance.

Let me give you a couple of perspectives.

First of all, as you know, we track very consistently every month what our innovation pipeline we believe is valued at in terms of revenues in the marketplace.

And this is a critical metric for us that we have part of our overall operating performance.

Based on that and I think if you recall slide 10 that Dave Swift showed, we showed a chart in there of how we have changed our resources and ultimately our capabilities over the last four years and how we are deriving more projects, which meet our very tough innovation criteria.

Then from that, those translate into projects, those translate into our pipelines and then we also track what the annual new revenue growth is based on those innovation projects.

And the comment I made about 2006 was that -- a couple.

One is we showed you that our pipeline at the end of '05 had about $3.3 million of estimated future sales in it.

We will harvest some of those projects in 2006 and beyond and for 2006 we said that revenues attributable to these new innovation projects will exceed $1 billion in new revenues.

And typically part of the innovation part of that is brand new growth.

Some of it is substitution but in general, it has increased and I have made the statement before, it has increased our overall growth rate by several points a year.

The second thing I would mention is that typically we have higher margins on this new innovation and certainly as they became fully exposed to the marketplace, we're able to drive margin improvement from that.

And then lastly, the 60% comment that you made was actually what Dave Swift was talking about in North America where we said that we will have replaced 60% of the models in 2006 versus what we sold in 2005, which give you an idea of the rate of change in our product renewal, including the new innovation projects.

Your new product development processes are pretty well structured and you've talked about that before and it is very quantified.

What do you assume when you are investing in new product is the internal rate of return or ultimately the potential margin benefit?

What is the net margin lift you expect to get off, particularly in the replacement maybe?

It varies by project, David, but basically I think -- you may not remember our innovation criteria for innovation to meet our innovation guidelines.

In other words, be qualified.

When we talk about innovation, it has got to meet strict criteria.

First of all, it has to be a unique solution for consumers not currently available in the marketplace.

Secondly, it has to be sustainable.

In other words, not readily copyable if you will, which brings in design capabilities, intellectual property, things like that.

And third, it has got to have superior returns to our shareholders.

So although this varies by project in total, these innovation projects have higher margins than our current business profitability.

Great.

Well it sounds like a strong new product development for '06.

Thanks very much.

Good luck.

Laura Champine, Morgan Keegan.

David, if I heard your comments right, I think you kept share or held share in 2005 as a whole in North America.

Does that imply that you gained share on a unit basis in North America in Q4 and if so, what drove that?

We had very strong performance in our branded business in 2005 in general and specifically in 2005 fourth quarter we did gain share.

Do you foresee any changes in your channel that could impact share in 2006 and I'm thinking specifically of the Sears expansion of appliances in the former Kmart locations?

Well Sears added quite a few stores in 2005.

The Sears Essentials, they added about 90 stores or 50 stores and then they also expanded appliances into existing Kmart stores.

Their plans for 2006 are not yet finalized so we're not in a position to comment on that but we are encouraged to see Sears on a promotional advertising side increasing their investment in the business and we think that is going to be important for that channel.

And then lastly, could you break out the $31 million in restructuring charges that you took in the fourth quarter, where that money went?

Laura, as you know, we typically don't talk about individual products in terms of our disclosure.

Let me say it this way.

It was in fact in every region around the globe and there was a more heavy weighting in Asia and Europe in terms of cost in the fourth quarter.

I would also add generally speaking, it is true in the fourth quarter, the large majority of this restructuring falls into one of two camps.

One is to support of our global operating platform, which is get the product (indiscernible) manufacturing efficiencies and the other one is fixed cost reduction and that is virtually where all those expenses fell.

One other point I do want to remind you just for clarity and think you probably already know this but we do classify all restructuring and corporate versus pushing it down into the regions.

And since the '06 restructuring expense looks like it will be much higher than it has been in years, can you give us a little granularity as to where that is focused and why the increase in '06?

This is part of the plans we have articulated in terms of our global cost competitiveness.

You know again we have been consistently building the capacity every day, every week, every month, every year make the needed change in the business to ensure our future competitiveness.

We have a very clear and I think we've talked about this before, three, five and seven year global operating plan to talk about changes that we need to make in different part of our businesses.

But again the bulk of this is all going towards and in some cases manufacturing relocation and then the other is fixed cost reduction.

And we -- the increase is completely in line with our operating plans.

We are doing it in a very planned forward-looking process.

We're trying to not do this in what I would call a reactive mode because that is generally the most expensive way to do it.

We are doing it in a proactive forward-looking mode where we ran down investment on the front end, we take care of the restructuring, we make the changes and we move on.

So this is really very consistent with the strategy we've had in place now for three years.

And could you give us ballparks on what regions -- say is it 60% Europe.

Can you talk about it qualitatively like that?

Over time, it is everyone.

In any given year, it changes based on -- we have got in our pipeline a number of projects that we're working on.

Of course under accounting rules and timing and so on until we have completed these rules and met all those requirements and we are always evaluating a number of these at the same time.

So I can't really tell you -- other than you will probably see it in all parts of the world.

But it is not necessarily in any given time period weighted in one part of the world versus the other.

Michael Rehaut, JPMorgan.

Just first a question on the North American sales and then I just have some more financial modeling questions.

You mentioned about the branded leading the growth.

I was wondering if you could give us an idea if the OEM business in North America grew and what you expect for that in '06.

I think first of all, we feel very good about where our branded business has gone.

I think the innovation that we have launched clearly has continued to take hold and we expect that going into 2006.

As it relates to the challenges, I'm assuming when you talk about the OEM business, you're talking about the Kenmore business.

There are issues that they have well-documented.

Some of the challenges, we feel they are absolutely taking the right steps to improve the relevance to consumers with what they have done with their new store openings.

They have put in place we think a very aggressive strategy and appropriate strategy as it relates to the promotional advertising and we saw the business that we supplied to them rebound in the fourth quarter and we feel we have good momentum with that as we go into 2006.

But as far as can you tell us did you have sales growth, was it down slightly and how does that compare to the growth rate in the past couple of quarters?

Last year in 2005 we were hurt in our business, OEM business, to Kenmore and largely offset that weakness with the strength of our branded business.

And in terms of the quarter, I just want to understand there are obviously several gives and takes here and if I am understand it right, the tax rate and the higher sundry and other expense netted out to about a $0.05 per share gain.

Is that correct?

That's actually a $0.05 per share loss, Michael.

And then you also had a lot higher corporate expense than we were looking for.

I was wondering if you could talk about that.

Michael, I think that the biggest change in the corporate comp was incentive compensation.

As we talked earlier about the higher incentive comp, if you think about where we were coming out, kind of the year-over-year comparables, we were in a downward trend with respect to our balanced scorecard metrics coming into Q4 last year.

Whereas in the current year fourth quarter, we were actually in an upward trend with respect to the balanced scorecard metrics, which then caused a higher year-over-year comp comparable than what we would traditionally run.

And of course in addition as we previously stated, we also have higher restructuring charges in the fourth quarter, which fall in the corporate expenses.

Looking forward into '06, this corporate expense, which I guess is also reported in the other eliminations line, what do you expect that to be and also on the tax rate, you are looking for again a 28-ish percent number.

I was wondering if you could give me a little more specificity there and how that falls across.

Is it going to be even throughout the quarter?

Michael, let me -- you've got two questions there.

Let me start, the first question you asked about sort of corporate run rates going into next year.

I think the key item in terms of year-over-year change next year will in fact be the restructuring because as you can see in our financials, we ended the year this year just under 60 million and we are planning to have about $100 million of restructuring next year.

So you ought to expect that increase in the run rate next year.

Now to the second part of your question on the tax rate, the answer to your question is yes.

That is our best estimate as we sit here today in terms of what we think our global rate will be for the year.

Now as you know, the accounting rules basically require us every quarter to use our best estimate in terms of what we think the annual rate will be and we adjusted that annual rate on a quarterly basis.

But the short answer to your question is yes, that's what we anticipate for the entire year.

And one final one here if I could just on Europe.

Excluding the $12 million gain, you did have I guess I calculated about 180 basis point margin contraction.

What is your outlook for '06 and what are you trying to do to get that back up to a 5% or 6% plus type of operating margin business?

First of all, let me just give you a perspective of the fourth quarter.

Even though we did have that gain, that was largely offset by currency and higher compensation costs in the fourth quarter.

So our run rate going into '06 really is a wash on those two items.

So we are expecting that in '06 we will continue to see improvement in our margins of the business and we are expecting, assuming that the external environment is what we have stated, about a one full point improvement in our overall operating margin.

Jeff Sprague, Citigroup.

A couple of questions maybe for Roy.

First, your walk on slide 26, Roy, for the quarter, can you kind of give us the numbers around that for the year?

How we kind of play it out on the price cost and other key items?

Sure, I sure can, Jeff.

Think of it in these terms.

For the year, gross material and oil-related costs had the impact of reducing our operating profit by about 3.8 points, so a 3.8 point reduction.

Our cost-based price adjustments had the effect of increasing margins by 2.9 points.

Our productivity and our SG&A leverage together improved operating margins by about 1.5 point and the other column, as you know, we have got a run rate of about -1 for the year.

It ended up being -0.8 of a point, which will reconcile you back into the year-over-year delta.

And I guess I am just not totally clear on why the tax rate is so materially lower.

I mean it doesn't look like a geographic mix of profits changed that much except maybe Latin America.

Is it the expectation that Latin profits are higher in '06 that really is driving the tax rate change or is there some other kind of tangible difference we can sink our teeth into?

Jeff, I think it is really three pieces.

One is dispersion of income.

But the second piece, if you look at what we had projected for our rate for the year versus where we finally ended up, the most significant item that drove that reduction was the work that we have done around our global tax strategy.

We launched an effort about 18 months ago to better if you will balance our taxes relative to our earnings on a global scale.

We actually took some specific actions late in the fourth quarter, which enabled us to get more benefit from that strategy that what we were anticipating up through the third quarter of this year.

Now as we look out into next year, we are anticipating that we will continue to get that higher level of benefit into next year and so that is a key part of our overall guidance next year and was the key item with respect to our ability to reduce the rate from Q3.

I think the important point is that we do view this 28% to 29% rate as a sustainable rate as we look forward in terms of the next couple of years.

And can you just also give us a little more color on legal?

Does that kind of true up or put to bed your best guess now or should we expect anything else there as we look into 2006?

Well it does in fact true up.

As you know, Jeff, under the accounting rules, we look at our portfolio and we have a bunch of individual items.

For those that don't have a precise number, the accounting requirements have us actually booked at the low end of the range.

And so the answer to your question is yes, this is our best estimate of what we think all litigation costs would be but we are subject to change in facts and circumstances going forward and it could be higher or it could be lower than our current estimate as we learn more over 2006.

And I may have missed it but does pension income or expense play in any meaningful way in the '05 versus '06 delta?

No, it doesn't.

In fact pension expense is roughly flat year-over-year.

And then just one kind of final one for Jeff.

Can you just give us a little color on how to think about kind of the negotiations, the dance that goes on with DOJ here in the sense your comment that we agree to postpone possible closing until February 27.

I mean is that kind of -- in essence, I don't know how voluntary that agreement is.

In fact, I mean do you think you can go ahead without a clear green light from them or really what should we expect to play out as you come up on that date?

I really can't give you any more details other than the February 27 date is an agreement that we and Maytag agreed to based on our request from the DOJ.

We are working constructively and cooperatively with them in the process to allow them the time to do their job.

We are fulfilling on our side requests very rapidly with the information they have wanted.

So beyond that and beyond what we have said in previous statements, there is nothing new I can add to that.

Fair enough.

Thanks a lot.

That concludes the question and answer session for today.

At this time, Mr. Fettig, I will turn the conference back over to you for any additional or closing remarks.

Well again we do appreciate and thank you for joining us today and we look forward to talking to you at our next call.

Thank you.

Ladies and gentlemen, that does conclude today's conference.

Thank you for your participation and you may disconnect at this time.