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issue: January 2006 APPLIANCE Magazine

54th Annual Appliance Industry Forecast: North America
Weathering the Storm

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by Jill Russell, Associate Editor

After accelerating slightly in 2004, the U.S. economy is working hard to rebound from a record hurricane season in 2005 and successfully maintain a positive momentum in 2006.

Anticipated to carry on and moderate on a slightly dampened note, the 2006 economy will do so on the positive foundation and year-end results of 2005. Already experiencing a slight slowdown prior to Hurricanes Katrina and Rita, the 2005 U.S. economy certainly had its share of ups and downs due to the stormy weather that battered the U.S. Gulf Coast in the late second and early third quarters.

The end of 2004 showed signs of growth, expansion and optimism-and much of that was seen throughout 2005, among mixed indicators. Gross domestic product (GDP) was forecast to experience a steady increase, the housing trend continued at its heightened pace, unemployment rates remained consistent, and consumer confidence buoyed up and down. When a string of hurricanes slammed into Florida and the Gulf states, uncertainty set in and growth temporarily stalled before returning to its previous pace by year's end.

Prior to the hurricane season, the U.S. economy had already entered a slight slowdown, according to The Conference Board, as energy prices were driven up due to increased demand and uneven supplies. Leading economic indicators fell 0.2 percent in August, and dropped further with a 0.7-percent decline in September, only to rebound with a 0.9-percent increase in October. Following suit, consumer confidence also fluctuated up and down due the hurricanes' wrathful whirlwinds. According to University of Michigan's (U-M) Index of Consumer Sentiment, confidence waned in August to 89.1 from its previous standing of 96.5 in July. The scale then posted its lowest rating in more than 12 years to 76.9 in September. The rating posted another record in October when it declined further to 74.2-its lowest level in 13 years, according to U-M. The massive decline was said to be a result of higher energy prices and interest rates combined with future job uncertainty. Then, following prices at the pump, the index rebounded to 81.6 in November as gas prices fell to its lowest levels since June.

While consumer confidence waned, industrial production and the manufacturing industry also felt their share of ups and downs as Hurricanes Katrina and Rita were throwing punches-and successfully bruising-the country's financial health. The devastating storms, amid a record number of tropical storms and milder hurricanes, delivered a massive blow to the economy when they disrupted energy supplies, including gas and oil, in the Gulf of Mexico. Industrial production posted its largest decline since 1982, falling 1.3 percent in September. The decline was much larger than the anticipated drop of 0.3 percent, but the sector bounced back in October with a 0.9-percent increase, according to the Federal Reserve.

Also adrift in the wake of Katrina, durable good orders ebbed and flowed. On the upside, orders for durable goods surged 3.9 percent in August-the best in a 3-month period-due to fears of short supplies. The increase was short-lived as orders declined 2.4 percent in September, and then quickly bounced back 3.7 percent in October. As consumer spending steadily increased another 3.9 percent in the third quarter, posting 55 consecutive quarterly increases, spending on durable goods increased 10.8 percent in the period. Business spending also increased 2.3 percent in the third quarter, laying a stable foundation for the rest of the year and the beginning of 2006.

As of press time, advance figures from the Department of Commerce forecast third-quarter GDP grew to an annual rate of 4.3 percent. Unemployment rates remained stable-hovering around an average 5.0 percent, according to the U.S. Department of Labor. Additionally, the Federal Open Market Committee Reserve raised interest rates for the twelfth consecutive time to total 4 percent, the highest level in more than 4 years. Despite the potential impact of the hurricanes, the Federal Reserve is expected to continually raise rates. "While these [hurricanes] unfortunate developments have increased uncertainty about near-term economic performance, it is the committee's view that they do not pose a more persistent threat," the Fed said in a statement. Analysts say the Fed will continue to raise rates to 4.5 percent to 5 percent to simply adjust to economic growth until it reaches a neutral level-neither stimulating activity so that inflation kicks-up, nor slowing activity down.

Bracing for the Wake

In the wakes of Hurricanes Katrina and Rita, 2005 U.S. GDP is forecast to grow 3.6 percent, lower than 2004's growth of 4.2 percent, but higher than 2003's 2.7 percent and 2002's 1.6 percent growth. And after the 3-year run, 2006 GDP is expected to experience a small slowdown compared to that of 2005,
and is anticipated to grow 3.4 percent due to rebuilding efforts in the Gulf area and falling gas and oil prices. The annual growth increase is somewhat attributed to the rebuilding efforts, which is expected to impact federal spending by $100 million during the next 3 to 4 years, and in overcoming a full line of obstacles in 2005, the next year is expected to moderate evenly, but continue to grow in 2007 at a rate of 2.8 percent, according to U-M's annual economic outlook.

This, however, doesn't mean that the hurricanes' wrath won't be felt at all. According to Ken Goldstein, an economist with The Conference Board, 2006 will certainly feel the chill left from Katrina's whirlwind, which will keep the economy fluctuating throughout the year. "We are ending the year on a cold note, and we are going to continue in that vein," he said. "Consumers are nervous, consumer spending is dampened a little bit, and that is going to continue." The cold note will continue throughout much of the first half of the year until the rebuilding efforts from the hurricanes swing into high gear, resulting in an uneven year, Goldstein said.

U-M's research supports the analysts' consensus. Saul H. Hymans, director of the Research Seminar in Quantitative Economics at U-M, said the rebuilding efforts from the hurricanes will push GDP to 4.1 percent in the first quarter of 2006 and 3.6 percent in the second quarter, but as building slows throughout the second quarter, GDP follows form and falls to a meager 2.4 percent growth rate in the second half of 2006. "The acceleration in the first quarter of 2006 reflects...a step-up in production for inventory, plus the growing impact of rebuilding efforts in the Gulf region," he said. "The growth rate dip in the second half of 2006 reflects a combination of a slower
pace of inventory accumulation...[and] a sharper decline in residential building."

U-M's annual economic forecast also indicates that, with core inflation on the rise, interest rates will increase to help curb inflation from accelerating further. The university's research suggests that rates will continually rise until early 2006 where they will hold for a few months before rising again throughout the third quarter. Additionally, the Federal budget is expected
to expand in the first half of the year due to hurricane relief aid, before achieving an even balance in the second half.

Additionally, U-M's research does indicate a healthy employment picture for the next 2 years, as jobless rates are forecast to fall to 4.8 percent in 2006 and remain steady throughout 2007. While the housing sector is anticipated to experience a slight dip from its record-breaking streak, fluctuating indicators and rising interest rates will carry 2006 on the rocky waves of Katrina and
Rita during the start of this year to an even, moderate pace by year's end.

Deflating, But Not Bursting

After waiting out an anticipated burst, the U.S. housing industry bubble is deflating, but at a steady pace that is still expected to help the economy and appliance industry maintain momentum in 2006. According to a panel of economists at the National Association of Home Builders' (NAHB) Construction Forecast
Conference, the housing market will suffer a slight recession in 2006 compared to its record levels in recent years.

After maintaining an annual rate above 2 million units for the fifth consecutive month in August, housing starts boomed with a 3.4-percent increase in September.
The strong increase came after Hurricanes Katrina and Rita swept through the southern U.S., destroying an estimated 356,000 homes in Louisiana, Mississippi, Alabama, and Texas-nearly 12 times as many homes than in any previous natural
disaster in U.S. history, according to the American Red Cross. With building still incomplete from the hurricanes of 2004, Katrina's aftermath left homebuilders with added demand that helped spur September's increased numbers. However, after the wrath of the storms had finally died out, the housing industry also lost steam as starts in October declined 5.6 percent. Full-year housing starts are expected to total 2.032 million in 2005.

With a deflating market already starting to take affect, it is forecast the housing industry will not achieve record levels again this year, but will still continue at a strong pace. David Seiders, NAHB chief economist, forecasts 2006 housing starts to total 1.94 million units, down 4.5 percent from 2005. "It appears that housing starts and permit issuance hit their peaks during the third quarter and that housing market activity has begun to cool," he said in a statement. "This cooling down period should extend into 2006, but not lead to a major contraction in the housing markets."

Even with a proposed tax reform threatening to reduce homeowner tax reductions and raise housing costs, the remodeling market is also maintaining its pace and is expected to continue into 2006. An important indicator for the appliance
industry, the remodeling market is also expected to slow, but only moderately.

NAHB's Remodeling Market Index (RMI) indicated that third-quarter 2005 remodeling results receded from last year's levels, but remained in the positive growth range. Surveyed from more than 500 remodelers, the current remodeling conditions index declined from 52.4 to 50.9, with the future expectations index declining from 52.8 to 51.8. According to Seiders, the small dip is one of moderation and the rebuilding efforts from the hurricanes will increase the index in 2006. "A massive amount of equity in the hands of homeowners bodes well for this segment [owner-occupied housing versus rental housing] of the remodeling market down the line," he said in a statement. "Furthermore, remodeling activity will be stimulated by recovery from this year's unprecedented hurricane damage."

The Northern Shores

Although Canada's growth was expected to closely match that of the U.S. in 2004, growth instead measured in with only a 2.9-percent GDP. However, with an increase in exports and increased confidence, consumer and business spending is anticipated to keep the Canadian economy at a steady and even pace into 2006.

After revising 2005 third-quarter GDP to 3.6 percent, up from the previously 3.1 percent growth, the Bank of Montreal (BMO), in its North American Outlook, anticipates a 3.1-percent increase in the fourth quarter to round out 2005 with a total growth rate of 2.9 percent. Based on a housing industry that is running close to record-breaking levels, and a strong export sector buoyed by the Canadian dollar's appreciation, 2006 GDP for the region is forecast to reach 3.5 percent, equal to that of the U.S.

As Paul Ferley, assistant chief economist with BMO and Harris Bank, told APPLIANCE, "The bounce back in growth is a reflection of the Canadian economy being restrained less from the high-value of the Canadian dollar. We've had a sharp run-up in the value of the loonie that has had an impact in terms of dampening growth this year [in 2005], but we feel that restraint will ease in 2006 and we will start seeing slightly stronger growth." As in 2005, business investments in the manufacturing sector are anticipated to be a leading segment in 2006, due to the Canadian dollar's increase in strength. The Organisation for Economic Co-Operation and Development (OECD) says that business investment will continue to accelerate due to high company profits and business confidence, to further spur the manufacturing sector. This, combined with low unemployment rates and increases in disposable income, is expected to result in a 3.4 percent growth in output for both 2005 and 2006.

As the Canadian dollar appreciated more than 8 percent in 2004, the Bank of Canada is expected to raise rates, as the organization said in its Monetary Policy Report, to "further reduce monetary stimulus." Analysts anticipate rates will gradually rise by quarter-point increments until April 2006 and finally end at 4.5 percent by the third quarter, where they are expected to remain until 2007. As consumer spending is forecast to remain steady, the Canadian appliance market is also forecast to experience steady growth.

According to the Canadian Appliance Manufacturers Association (CAMA), in its Industry Trends and Forecast report, the country's major appliance segment grew 8.3 percent in unit shipments in 2004 and is forecast to grow 3.3 percent in 2005. The CAMA core appliance segment, which includes refrigerators, ranges, washers, dryers, and dishwashers, is forecast to grow 2.5 percent in both 2006 and 2007, up 1.5 percent from previous forecasts.

Continuous Durability

A strong and stable segment of the overall U.S. appliance industry, the major appliance segment posted higher-than-expected results in 2005 and is anticipated to remain positive into 2006. The Association of Home Appliance Manufacturers (AHAM) forecasts 2005 unit shipments to increase 0.8 percent over 2004 and reach 79.9 million units. The number is 3 million more than the original forecast of 76.9 million for the year. The "AHAM 6," a product grouping that includes washers, dryers, dishwashers, refrigerators, freezers, and freestanding and built-in ranges, is anticipated to increase 1.3 percent from 2004 to total 46.7 million units in 2005. As of press time, October year-to-date shipments (the most recent data available) totaled 66.5 million units, with the AHAM 6 accounting for 37.7 million units. Total shipments were only up 0.3 percent over 2004, but indicate 2006 will follow suit with another positive year.

As the U.S. housing industry remained steady with strong housing starts and remodels, appliance producers and industry analysts expect the white goods segment to remain positive into 2006. Research firm Standard & Poor's anticipates consumer demand for appliances will remain strong due to low interest rates combined with increased homeownership rates. "In an otherwise difficult operating environment, the continued buoyancy of the housing market bodes well for appliance and furniture manufacturers," Amy Glynn, an analyst with Standard & Poor's Equity Research Services, said in a statement. "With Americans buying bigger homes than ever, including increasing numbers of second residences and investment properties, demand for durable goods is being boosted as homeowners are obliged to fill them with appliances and furniture." However, the segment is forecast to slow down compared to recent historical years in terms of year-on-year growth.

The projected rate and duration of the slowdown varies according to different analysts. Rising interest rates, increased energy costs and reduced savings will negatively impact the major appliance segment, according to Aaron Smith, an economist with research firm Economy.com. "Rising interest rates will close the refinancing spigot and slower house price gains will reduce the appeal of tapping into home equity to finance consumer spending," Smith told APPLIANCE. "Because a good chunk of refinancing cash is used for home improvement and big-ticket purchases, spending on appliances will suffer." Smith said that although overall spending in the appliance segment will be down, some demand will be spurred by the rebuilding efforts from the hurricanes, but will then decline due to lower spending as the hurricanes' negative impact outweighs the positive. This will ultimately result in a strong but much slower year than previously experienced in the past 2 to 3 years, according to Smith.

Others agree that demand will be erratic in the hurricanes' wake. Goldstein from The Conference Board believes the decline in demand will give way to a surge in spending starting in April 2006 before declining again in the fourth quarter. "If folks are concerned; if the consumer does start to really turn cautious, the first thing they are going to do is put up with that old refrigerator for one more year," Goldstein told APPLIANCE. "With that, the appliance market could be one area that feels the impact of a softer consumer market."

To help offset decelerating demand, manufacturers will focus on the replacement market to maintain positive results and introduce new products in the high-end product segment, where negative impacts on consumer spending are felt less compared to the low- to mid-end segments. "Demand for high-end products is holding up well in the face of record gasoline prices, given that higher-income households devote only a small portion of their budgets to energy consumption," Smith told APPLIANCE. "However, the high cost of developing these new technologies, smaller gains in the household wealth going forward and a growing supply of high-end products in the marketplace will reduce the appeal of devoting more resources to such lines over the next few years."

To compensate, U.S. manufacturers are working on reducing costs, increasing productivity and investing in innovation, and are doing so by way of mergers and acquisitions. Additionally, foreign-based companies with U.S. subsidiaries are strengthening their positions in the marketplace with continued investments and product introductions.

Major Moves Emerge

With second-quarter earnings in the red due to increased material and oil-related costs, Whirlpool Corporation reported it was back in the black with third-quarter earnings of $114 million, compared to $101 million in the same period in 2004. Year-to-date earnings totaled $296 million compared to $309 million in the same period in 2004. Sales in the quarter period reached a record of $3.6 billion, a 9-percent increase over the same period in 2004. Year-to-date sales were also up, totaling $10.3 billion, compared to $9.6 billion in the same period in 2004. Whirlpool North America reported record results as revenue increased 10 percent to $2.3 billion and unit shipments of Whirlpool's T-7 product segment (which includes washers, dryers, refrigerators, freezers, dishwashers, ranges, and compactors) increased 3.6 percent, exceeding industry levels. As of press time, the company expected 2005 shipments to increase an estimated 1 to 2 percent, on track with AHAM 6 forecasts.

According to the company's third-quarter financial results, Whirlpool continued to face escalating material costs in 2005, but strategic steps first taken in 2004 and throughout 2005 resulted in an overall profit. According to Jeff Fettig, chairman, president and CEO, in an Oct. 20 conference call, the actions included increasing productivity, leveraging the company's global platform, reducing non-product related spending, accelerating the rate of innovation to the market, and implementing cost-based price adjustments. "Our North America year-over-year results reflect a $70 million increase in material and oil-related costs and the combination of manufacturing gains, strong cost controls and cost-based price adjustments helped to offset these increases," Fettig said.

With approximately 65 to 70 percent of product costs being driven by material costs, which are forecast by the company to reach $500 million in 2006, a major part of Whirlpool's plan to increase branded products included its pending acquisition of fellow Midwesterner, Newton, Iowa, U.S.-based Maytag Corporation. Maytag, reporting a net loss of $18.2 million in the third quarter compared to net income of $7.5 million in the same period in 2004 and a year-to-date loss of $7 million compared to an income of $5.1 million in the same period in 2004, announced it was to be acquired by private equity firm Ripplewood Holding LLC for $14 per share before Whirlpool and Haier America Trading LLC placed bids for the company. After a bidding war that ended with Whirlpool's offer of $21 per share, the final transaction-a deal worth $2.7 billion-is set to be complete by the end of the first quarter in 2006.

Maytag's overall financial results bounced back and forth between red and black throughout 2005. The company reported that despite net losses, third-quarter sales increased 6.5 percent to $1.26 billion, compared to $1.19 billion in the same period in 2004. Year-to-date sales also increased 2.9 percent to $3.66 billion, compared to $3.56 billion in the same period in 2004. Despite the uncertainty between sales and income, the company said its appliance segment produced positive results in the third-quarter. Home appliance sales for the quarter increased 6.7 percent to $1.2 billion from $1.1 billion in the same period of 2004, due to increased sales in the laundry and refrigeration product segments, and Jenn-Air(r)-branded products. Maytag's floor care unit continued to post negative revenue results, in spite of increased shipments, which it blamed on poor product pricing and offering.

Even with increased sales, the proof stood in the company's bottom line and Maytag Chairman and CEO Ralph Hake said the company's manufacturing overcapacity was a concern as declining demand and increased material costs negatively impacted results. "Despite the top-line sales successes, our excess manufacturing capacity in some product categories continues to worsen as consumer demand shifts to our products that we source from lower cost manufacturers," Hake said in a statement. In an attempt to save costs, Maytag announced it would close a laundry facility in Florence, South Carolina, U.S., saying it was underutilized, and shut-down a Hoover production line in North Canton, Ohio, U.S. to shift work to lower-cost plants in El Paso, Texas, U.S. and Juarez, Mexico. Maytag is no longer providing any earnings guidance, but Whirlpool said it believes there is "a significant opportunity to revitalize the attractiveness of Maytag products in the marketplace to consumers," and expects the acquisition to be a profitable one.

While continuing to juggle material costs and manufacturing capabilities as it did in 2004, Electrolux reported a positive third quarter 2005 and boasted a record year for product introductions in both its Frigidaire and Electrolux ICON(tm) lines. The company reported third-quarter net sales increased 8.5 percent to $4.1 billion, up from $3.7 billion compared to the same period in 2004. Electrolux also reported positive results in North America, as shipments increased 4 percent to $1.2 billion, compared to $1 billion in the prior-year period. The increase included a 13-percent rise in its major appliance segment and the company says it expects some growth in 2005, especially in floor care, compared to that of 2004, but anticipates higher material costs and components to impact results. To minimize the effect, Electrolux said it would continue to invest in product development. In line with the plan, the company will introduce a new line of dishwashers in 2006 and announced plans in 2005 to expand its dishwasher plant in Kinston, North Carolina, U.S. After introducing 50 new products in 2005 and doubling business in the ICON line, Electrolux said it will expand the line further with induction cooking and built-in products in 2006. As for the Frigidaire brand, the company will introduce a line of "Best-in-Class" built-in products, which, according to Keith McLoughlin, president and CEO of Electrolux Home Products for the Americas, will feature several industry firsts.

The company said the continuous stream of product introductions is part of a larger four-layer success strategy for 2006. McLoughlin said the foundation is ensuring high quality, the second layer is a stream of new products, the third is brand continuance, and the fourth is developing strong relationships with retailers. "I think broadly we always talk about staying focused on the basics. Get the quality right, get the delivery service right and then build on that with new products, brands and strong channel partnerships," McLoughlin told APPLIANCE. "It is easy to say, but the trick is executing those things." Although tricky, Electrolux plans to outperform not only its competitors but also itself in 2006. In fact, the company has so many new products coming out in the upcoming year, McLoughlin said it will be launching between four to six new products each month for all of 2006.

Self-proclaimed to be the fastest growing appliance company in the U.S., Haier America Trading LLC said it plans to enter more products categories in 2006, with introductions to include new features and designs at affordable prices. Additionally, Haier said it plans to open a new research and development center in South Carolina, where it already produces top-mount 18- and 21-cubic foot refrigerators, and 18-cubic foot bottom-mount refrigerators. According to Michael Jemal, Haier America CEO, the investment in the center will be in addition to the $126 million the company has already invested in the state in years past. Agreeing that the major appliance industry will see growth of 2 percent in 2006, the company's planned products for 2006 include a new top freezer refrigerator line featuring condensers that reportedly never need cleaning, dual upfront controls, Energy Star ratings, and a warranty that is said to be five times longer than competitors'. Other products include upright frost-free freezers with foamed-in-place cabinets and doors and tall-tub direct-feed dishwashers that feature a dual motor design. As for 2006, the company has an optimistic outlook. "Consumers and dealers alike are looking for innovative products and features with stylish designs at affordable prices," Lenny Paul, vice president and general manager of Major Appliances Business Group for Haier, told APPLIANCE. "Haier seems to have hit that sweet spot."

Clashing Climates

The North American cooling industry is heating up regarding shipments, while the heating industry is feeling a chill. In the U.S. and Canada, air-conditioners saw solid gains and heating appliances reported moderate declines.

Another record-breaking year is set for 2005, according to the Air-Conditioning and Refrigeration Institute (ARI), as U.S. shipments for central air-conditioners and heat pumps are set to pass 8 million. According to the most recent data, year-to-date shipments through October 2005 for central air-conditioners had reached 5.6 million units, up 12 percent from October 2004. Heat pump shipments for the same period had increased 10 percent from October 2004, reaching 1.8 million units. In Canada, commercial year-to-date shipments through September of commercial and residential air-conditioners increased 2 percent to total 31,715 shipments and 12 percent to total 251,831 shipments, respectively.

While overall shipments are on the rise, the U.S. 13 seasonal energy efficiency rating (SEER) taking effect on Jan. 23, 2006 and an upcoming phase-out of hydrochlorofluorocarbons (HCFCs)-including R22 refrigerant-by 2010, is expected to a hit shipments with a slight to moderate decline in 2006, but increase dollar sales due to higher product costs.

With the new SEER standard causing equipment to increase in both size and cost, companies worked throughout the year to ready innovative products for 2006. York International Corp., Unitary Products Group, known for its colorful and collegiate-logo inspired outdoor units, developed a new indoor coil technology to meet the standard while keeping footprint to a minimum. York, recently acquired by Johnson Controls in a deal worth $3.2 billion, said the new coil technology will be featured in the company's latest Mini Cube system.

To make sure its sales channels are prepared for one of the largest changes in the HVAC industry, Andy Armstrong, director of marketing for North America, said York started educating distributors in the second quarter of last year. "A large portion of this material is focused on the dealer's selling proposition to the homeowner, and educating the homeowner not only about efficiency, but about all the aspects of a home comfort system," Armstrong said. With sights set on a knowledgeable distributor base and another strong housing market, York says it is expecting a strong 2006. "Due to the new energy efficiency standards, the price will increase per unit, therefore, increasing the overall sales in dollars," Armstrong told APPLIANCE.

Due to the record-level of shipments, several companies experienced strong results in 2005. Both Carrier, a unit of United Technologies, Corp. (UTC), and Lennox International reported revenue increased 17 percent and 20 percent, respectively. Consequently, both were optimistic in their outlook for 2006 as UTC raised 2005 year-end estimates by 17 percent and Lennox by 26 percent. According to Lennox, 2006 shipments will be spurred by the 13-SEER standard. "We believe the movement to 13 SEER will be a net positive for our company and the industry," Bob Schjerven, Lennox CEO, said in a statement. "We will be ready with a competitive range of products when the regulation takes effect."

Also benefiting from a record-breaking year is Rheem Air Conditioning, which also said its record shipments were helped by 13 SEER. However, the company is anticipating a minor decline in 2006. According to Ed Raniszeski, director of market development and communications, "The industry witnessed a record year due to above-average summer temperatures, the hurricanes, inventory build-up of new optimized 13-SEER products, and unprecedented surges in 10-SEER orders, as many contractors and distributors built stockpiles of lower efficiency, lower priced models for installation in 2006." Raniszeski told APPLIANCE, "Stockpiling in 2005 will impact the 2006 air-conditioning market causing a mild downturn in manufacturer orders and production output, unless North America experiences a repeat of extreme high temperatures seen from Canada to Florida in 2005."

Almost the reverse image of the cooling segment, the heating industry experienced a slow market. The Gas Appliance Manufacturers Association (GAMA) reported that as of October 2005, year-to-date U.S. shipments of both gas and oil warm-air furnaces were down an estimated 16 percent compared to 2004. The water heater segment also cooled year-to-date, as residential gas water heaters were down 3.6 percent and residential electric units declined 0.7 percent. The commercial segment posted considerable losses as gas water heaters fell 14.7 percent compared to 2004 and commercial electric water heaters dipped 3.6 percent. Canada's market was close to that of the U.S., with year-to-date residential furnace shipments declining 8 percent. According to APPLIANCE magazine research, the 2006 water heater industry is staged for slight growth in both the residential and consumer segments.

With a new mandate taking effect this month in the residential sector, 30-, 40- and 50-gallon gas-fired, power-vented water heaters must meet the second phase of the American National Standards Institute (ANSI) standard for flammable vapors ignition resistance (FVIR). As of press time, the standard was expected to affect shipments, but only slightly. With the third phase of the standard, which includes all other high-capacity 60-, 65-, 75-, and 100-gallon water heaters, overall growth for 2006 is forecast to be slightly positive.

Houseware Profits Big and Small

As housing starts went up and down, so did the 2005 small appliance market. Company financial results varied widely, mergers and acquisitions were completed and production facilities and product lines were revamped.

After alternating months of growth and declines throughout the year, the segment reported a slight overall gain. According to the most recent data as of press time, AHAM's Portable Appliance Business reported mixed results for its segments. AHAM reported that as of September 2005, year-to-date shipments for cooking and food-processing appliances were only up 4.2 percent compared to 2004. The group's air-treatment segment also showed mixed results as shipments were down a considerable 17.6 percent compared to 2004.

Following the shipment trends, small appliance and personal care makers saw their share of ups and downs as well. One of the stronger players in the segment in 2005, Jarden completed its purchase of The Holmes Group, a deal valued at $420 million, and more than tripled its third-quarter sales to $938 million from $245 million in the prior-year period. Reporting record results, Jarden said sales increased 268 percent to $2.2 billion in the first 9 months of 2005 compared to $602 million in the same period in 2004. Producing record results throughout the year, Jarden said its success was due to its diverse product offering, which includes the Crock-Pot(r), Mr. Coffee(r), Oster(r), and Sunbeam(r) brands. "We remain focused on driving organic growth and improving margins by investing in our brands and developing innovative, compelling new product offerings that meet the needs of our consumers," Martin E. Franklin, chairman and CEO, said in the company's fourth-quarter statement.

Also experiencing positive results, especially in the North American market, was Group SEB. The France-based company reported sales for the first 9 months of the year totaled an estimated $1.9 billion, up 5.8 percent from last year. The company said its North American sales increased 29.1 percent, supported by its line of Rowenta irons and Krups coffeemakers and espresso machines.

Despite success for some, other players reported declines, as Applica Incorporated said third-quarter sales were $139.6 million, down from $182.9 million in 2004 and year-to-date sales were $368.5 million, down from $466.1 million in 2004. Salton, known for its line of George Foreman(r) electric grills, reported sales for its first quarter for fiscal 2006, the most recent data available, were down to $148.4 million from $204.7 million the prior year. Both companies have taken steps to reduce costs, ranging from plant closures to product line sales, and are hoping for improved results for 2006.

According to the International Housewares Association's (IHA) 2005 State of the Industry Report, companies are planning to focus on cost-cutting while continuing to invest in product development. Phil Brandl, president of IHA, said in the report that the housewares industry in 2006 will reflect "continued cautious optimism" and that the consumer base for sales is out there. "Despite the fuel price increases...consumer appetite is generally good-particularly for innovation and newness, with a premium on products with enhanced style and design improvements," he said.

Cleaning Up After the Storm
With steady new homeowner and remodeling rates, U.S. consumers continued to invest in equipment to keep their yards and landscapes trimmed and proper and demand for outdoor power equipment will also vary by category throughout 2006. According to research firm Freedonia, global demand for lawn and garden equipment is expected to increase 5 percent annually through 2009, with North America capturing 65-percent of the market. As reported by the Outdoor Power Equipment Institute, Inc. (OPEI), major growth will hold off until 2007, while 2006 is forecast to under perform in the consumer equipment category, and post moderate growth in the hand-held and commercial equipment segments.

The OPEI forecasts overall shipments of hand-held products, including hand-held blowers, backpack blowers, trimmers, and chain saws, is forecast to experience slight growth of 1.8 percent. For 2006, the segment is anticipated to decline 4.4 percent, with another decline of 1.6 percent set for 2007, ending up at 11.4 million units.

Consumer equipment is also set to decline, although slightly at 0.7 percent in 2005 and an additional 2.0 percent in 2006. Walk-behind power motor shipments, forecast for a 2-percent increase in 2005, are expected to decline 2.7 percent in 2006. However, rear-engine riders, which remained flat in 2005, are forecast to grow 4.5 percent in 2006 and an additional 9.2 in 2007.

Commercial turf walk-behind mowers, despite a strong performance in 2004, are forecast to dip considerably by 13.3 percent in 2005, but jump up slightly with a 2.8-percent increase in 2006. Commercial turf riding mowers, said to be the most dynamic product category in the outdoor industry, are forecast to grow 5 percent in 2005 and then show double-digit growth in 2006 and beyond.

Mixed Skies Ahead

Rebalancing in reaction to a bout of stormy weather, the 2005 appliance industry is riding off the waves of a previous solid year. Major players in the industry ramped-up innovation, and some invested in new facilities and equipment, while others relocated production, and some did both, to report overall solid results. In 2006, as companies are expected to continue to struggle with increased material costs, solid sales performance will allow companies to keep their heads above water.

Set for positive results, the 2006 appliance industry will do so in spite of varied indicators that include slowing housing rates, increased interest rates and a slight wavering in spending. With a strong year behind us and a slightly positive year ahead, the foundation is set for a strong 2007.


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