Date: Thu, 18 Dec 1997 00:15:43 GMT
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"Why Invest in Maytag?"
Leonard A. Hadley
Chairman and CEO
Maytag Corporation
New York City, October 30, 1996
For the past three years, I have delivered a consistent message to the financial
community about Maytag's strategy, its strengths, and its future direction. Today, I'm
here to tell you the message isn't changing; Maytag is. We are stronger today
financially... we are stronger competitively... and we are stronger organizationally than
we have been at any time in the 1990s -- and by many measures, stronger than we
have ever been.
Someone once told me: "If you always do what you always did; you'll always get what
you always got." At Maytag in the past three years, we have not done "what we always
did" -- nor will we do things "as we always did them" during the next three years.
- We will continue to drive change in the financial, competitive, and organizational
structure of the corporation.
- We will continue to bring new perspectives to our businesses and brands.
- And, we will continue to bring in new leadership and talent... explore new ways to
invest for growth.... and deliver results.
Since I became CEO in 1993, we have put a number of stakes in the ground publicly
that told you of our intentions:
- We said we would re-focus the organization on its core business strengths.
- We would improve our return on assets.
- We would improve Maytag's overall financial structure and discipline.
- And we would do all of this in order to build a platform for growth that will deliver
superior earnings and create superior value for shareowners.
We know that's a race without a finish line. But, we also know we have put together a
track record that says we are well on our way to establishing that platform for growth --
a platform from which we can deliver superior results. Here's the evidence of our
actions:
- We sold poorly performing businesses in order to focus and invest in better ones.
- We pushed capital expenditures to record levels in order to back new products
and models in all of our brands.
- We reorganized our major home appliance business to improve customer service
and reduce our cost base.
- We dramatically reduced our working capital requirements.
- And, finally, we restructured our balance sheet, gaining the flexibility and financial
strength to raise the dividend... to repurchase 10 million shares... and to re-invest
for growth, the most recent announcements being Hoover's expansion in North
America and our joint venture in China.
- The proof is in the numbers: Since 1993, in our core business performance in
ongoing operations, we have doubled our return on assets...doubled our return
on sales...doubled our earnings-per-share...
- Yet, to my disappointment, Maytag's investors have only been rewarded with
about 30 percent improvement (total) in stock price appreciation for that
performance.
Over the past three years, we have accomplished what we had set out to accomplish.
The steps we have taken to reshape our business and financial portfolios are aimed at
delivering results and building a platform for growth. We are delivering results. We are
positioned for growth. So I would like to pose a simple, straightforward question...
Why invest in Maytag?
Stronger Financially
First, invest in Maytag because the corporation is financially stronger than it has been in
a decade. We have restructured our balance sheet and improved measurably our
financial strength and flexibility. During 1996, we have reported the benefits of Maytag's
improved financial condition in every quarter: Substantially reduced debt, interest
expense, a lower tax rate, and fewer shares outstanding.
This now becomes the financial foundation from which to move forward. Maytag's
financial strength and flexibility once again afford us choices in how to compete and how
to use our cash flow to grow. To invest in our existing businesses. To invest in new
business opportunities. To return value to shareowners through dividends and share
repurchase. These are strategies we have used during the past 12 months and
strategies we will continue to consider.
Balanced Earnings Stream
Second, invest in Maytag because we have built a balanced earnings stream that cuts
across four very different industries with four very different sets of purchase decisions:
Major home appliances. Floor care. Commercial laundry. Cold-drink vending. As a
corporation, we have built a business mix that is not dependent on one set of economic
dynamics. Home appliances and floor care are consumer purchase decisions -- and
very different decisions, at that. Commercial laundry and vending equipment are
business investment decisions. As a result, today more than 40 percent of the
corporation's earnings stream is not dependent on purchase decisions for major home
appliances.
- Maytag's customer list adds further balance to our earnings stream. Our largest
customers include premier names in American business and retailing: Best Buy,
Crosley, Circuit City, Coca-Cola Enterprises, Fleetwood, K-Mart, Lowe's, Maytag Home
Appliance Centers, Montgomery Ward, Sears, Wal-Mart. This group accounts for over
30 percent of our total corporate volume, and that trend has been steadily upward in
recent years.
- Maytag's stable of brands and brand positioning adds a final element to our earnings
stream. We manage premium brand names that are synonymous with the product
categories in which we compete: Maytag laundry; Jenn-Air cooking; Hoover floor care;
Dixie-Narco vending equipment. Brand position puts us in a preferred position with
customers -- and consumers.
Maytag's balanced earnings stream, the diversity of our business mix, and the strength
of our brand and customer set, all contribute to the steady earnings performance we
have shown over the last 4 years.
And that leads to the third and fourth reasons to invest in Maytag: The industry
fundamentals are more positive than commonly thought; Maytag's position in the
industry is stronger than commonly thought.
For many investors, Maytag is too frequently labeled as a relatively small manufacturer
of major home appliances. So we tend to fall in an investment category that considers
our industry "consumer durable-cyclical," dominated by much larger players, and
quickly out of favor if macro-economic indicators suggest any slow-down. It's also an
investment category that tends to put a price/earnings cap on our stock at a substantial
discount to the S&P 500. Like most conventional wisdom, that's worth a closer look.
Positive Industry Fundamentals
The major home appliance industry is much less cyclical than conventional wisdom
suggests and certainly less cyclical than traditional "consumer-durable" industry
perceptions. Total shipments of core five white goods since 1984 have been
consistently stronger -- and considerably less volatile -- than during the period from
1970 to 1983, which truly was a cyclical period. This lack of peaks and valleys in the
industry of 15-20 percent has allowed for solid, single-digit growth in unit volume. While
the industry's growth rates may not excite investors, the industry's growth stability
provides a business environment in which to generate very positive cash flows -- which
we believe is the real basis for driving shareowner value. It also provides a business
environment in which the rate of change to fixed asset capacity is modest and the
opportunity to achieve high rates of factory utilization is attractive. As an example, we
have doubled our return on assets since 1993.
A number of factors have combined to flatten the large peaks and valleys in the
industry's performance and growth tracks.
- The economy has been stable, growing modestly. Equally important, major
home appliance sales in this country are not as closely tied to housing starts as
was once the case: While new housing starts have remained within a range
around 2 million a year for the past 25 years, in that same time period appliance
shipments have grown from 20 million units annually to over 30 million. And for
Maytag, our "builder" business is only approximately 10 percent of revenues --
heavily Jenn-Air and Magic Chef.
- More critical to our business are housing resales -- which now exceed housing
starts 3:1, compared to a 1:1 ratio 25 years ago. This drives the replacement
market for major home appliances, which is key for us, and which is a much
more stable market than relying on "first time purchases" or new housing starts.
Replacement buying is driven by high saturation rates from home appliances and
by demographics - especially the baby boomer generations. Our two upscale
brands, Maytag and Jenn-Air, have strong appeal to "replacement" buyers, who
maintain a more stable presence in the market than do "price" buyers.
- And, finally, the industry peaks and valleys have smoothed because appliances
are a very good buy. On an "hours worked to purchase" basis, all core five
product categories are 30 to 50 percent less costly than 25 years ago. The
purchase decision is not as "major" as it once was, which makes purchase
deferral in minor economic hiccups less likely.
Parenthetically, while details vary, these same factors have smoothed floor care
industry cycles just as dramatically since the early 1980s. Changes in product design
have contributed to an even more dramatic cost reduction than in major home
appliances. Now, a purchase decision for a vacuum is approximately one fourth a
major appliance -- virtually an impulse buy for many consumers.
So, today, the underlying fundamentals in the major home appliance industry are more
subtle than jumps in housing starts or modest shifts in long-term interest rates. The
industry's growth rate has been strong and stable. That growth has been driven by
housing resales, replacement purchases, demographics, and product affordability -- and
the confidence with which consumers view the economy.
Stronger Maytag Position
Maytag's position within the home appliance industry is also stronger than the casual
investor may recognize: we can compete with the larger players in the industry
because we have competed, and done so successfully.
- In just the past 10 years, we have grown from a minor player in the industry to
become the number three producer in major home appliances - behind Whirlpool
and G.E. Maytag has gained more position than anyone else in the industry. The
total industry pie is larger, and we have a much larger piece of that pie. We
believe the major home appliance industry is moving toward two tiers in
marketplace impact and in profitability. We have every reason to expect to
remain in that top tier with the two very large players.
- We can compete in this industry because our business strategy for success in
home appliances is uniquely suited to Maytag, to our strengths, to our stable of
brands-- and decidedly different from our competitors'. We are a North
American-focused, premium brand corporation, with a balanced earnings stream.
We do not embrace the 'global' concepts promoted by Whirlpool and Electrolux --
and embraced by many in the investment community. Our strategy is not global;
it is growth -- which means exploiting opportunity profitably. Maytag Corporation
does not aspire to be all things in appliances to consumers in all markets around
the world. We do aspire to be a growth company.
- Growth for Maytag will result from the right investments in the right markets with
the right products in our core competencies -- wherever those opportunities might
be. But we will not grow if we have to compete in high cost, fragmented markets,
where competition and the cost of gaining market presence are both brutally
intense. After all, that's why we divested operations in Europe and Australia:
Hoover Europe and Australia both lacked the critical mass, and the product and
brand offerings; the markets were fragmented and offered only limited growth.
And both businesses were relatively high cost producers.
- Debating different strategies is healthy. It can provide insight into a corporation's
success and potential for success. But in our view, assuming one strategy has to
fit all is not healthy. Different strategies can be successful. Maytag's strategy is
different. And our difference is a large part of why we compete in this industry so
successfully.
Positioned for Growth
Finally, invest in Maytag because we are positioned for growth.
In major home appliances this year, we have reorganized what used to be two separate
businesses into one organization to manage Maytag, Jenn-Air, Magic Chef, Admiral,
and our private label brands. We are positioned to grow in ways we could not before.
Hoover is headed for a record year in 1996, driven by new product introductions, model
mix, and expanded distribution. The Hoover brand continues to rank among the top ten
most widely recognized brands of products for the home. And we continue to leverage
that brand recognition with new products and strong national advertising support.
- Hoover introduced more than five major new products and revamped dozens of
models this year. The rate of new product introduction at Hoover will slow in
1997; but the effect of those new product introductions will continue to be felt
throughout next year -- and drive growth. To push that momentum, we are
currently investing $7 million to expand manufacturing capacity for our highly
successful and profitable SteamVac line of extractor products. The SteamVac
is the most successful new product ever launched at Hoover. That new capacity
will be on line for 1997.
- We also are investing $47 million to expand Hoover's manufacturing facility in El
Paso, Texas, and to drive future growth in that business. This will add new
Hoover products to be launched late in 1997. The products will incorporate new
technology and new design, and will reinforce Hoover's leadership among floor
care retailers and consumers. And the investment will provide a lower-cost
manufacturing platform for the new product in an industry that is tremendously
cost competitive.
- We expect Hoover's full year revenues and earnings contributions to continue to
be very strong in 1997.
In our other business lines, I would remind you that Maytag is a market leader in
providing laundry equipment to owners of self-service coin laundries throughout the
U.S. and Canada. Our commercial laundry business is a healthy revenue and earnings
stream outside major home appliances, but certainly within our franchise core
competencies. Early next year, we will introduce a new Maytag horizontal axis washer,
which will play a big role in the commercial laundry marketplace where energy and
water costs are key overhead expenses.
In cold-drink vending, Dixie-Narco's performance this year has been disappointing. The
reasons include shifts in the vending industry to the popular 20 ounce containers, rather
than the more traditional 12 ounce cans. Orders for traditional 12 ounce can venders
dropped sharply; manufacturing costs for newer model venders were higher than
anticipated; and the glass-front cooler market has been weak, especially export sales.
But we expect Dixie-Narco to deliver improved results in 1997. Traditional vender sales
look stronger. And, Dixie-Narco has developed a modified version of its traditional
vender to accommodate larger-sized containers and to complement both the traditional,
single-sized vender and Dixie-Narco's top-of-the line multiple-sized vender.
Finally, we are positioned for growth in China. Last month we announced a $70 million
investment over three years for a joint venture in China. This investment is focused in
two product lines that we know well and can manage well -- laundry and refrigeration. It
also is an investment in a powerful brand name -- RSD is among the ten best known
brands in China.
This venture was carefully researched -- with analysis for a year. We focused narrowly
to find a growth opportunity that had real potential, but also carried acceptable risk. We
found that refrigerators and clothes washers were the product categories with the
greatest opportunity. We also found that the market in China offered the largest
opportunity for growth in those product categories in the world. The market is larger
than that of India, Russia, Brazil, Indonesia and Mexico combined. In addition to growth
potential, China posed fewer entry barriers to the market, yet offered the opportunity to
achieve a strong competitive position, relative to existing manufacturers.
And finally, we found Maytag and RSD are very similar companies. Both have quality
reputations that are distinguishing characteristics. RSD is a leading laundry products
company that aspires to become a full-line manufacturer -- just as Maytag has done.
RSD is a proven performer with a low-cost operation, a focus on a strong, nationally
known brand, and a well-developed nationwide sales and distribution network -- all
critical in serving consumers throughout China. Clearly, in our view, the joint venture
offers the potential for tremendous growth and a significant revenue and earnings
contribution that will add even more balance to Maytag.
So, Why Invest in Maytag?
- Invest in Maytag because we are financially stronger. We have demonstrated
our ability to restructure and to manage our balance sheet. That discipline will
not fade. We will continue to fine tune the financial engine. It is a proven method
for driving financial performance and reaching our financial targets: Double-digit
growth in earnings-per-share; above cost of capital returns in each business.
- Invest in Maytag because we have built a balanced earnings stream, with brand
and customer preference.
- Invest in Maytag because we are a unique but strong performer in an industry
that is stronger and less cyclical than conventional wisdom suggests.
- Finally, invest in Maytag because we are positioned for growth... but more
importantly positioned for profitable growth... because we have invested for it...
and because we have built the leadership team to deliver it.
There is a lot of excitement at Maytag Corporation. Today, Maytag is stronger
financially, competitively, organizationally. We are positioned for growth. We are
delivering results. Tomorrow, we will define ourselves increasingly as a corporation
supported by a balanced earnings stream... with great brands... great products... great
customers... and great financial discipline.
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