莫霍克工業集團 (MHK) 2002 Q2 法說會逐字稿

Good morning, my name is Gina and I will be your conference facilitator today. At this time I would like to welcome everyone to the Mohawk second-quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you Mr. Lorberbaum. You may begin your conference.

Welcome to the second-quarter Mohawk conference call. I'm Jeff Lorberbaum, president and CEO, and with me, I have John Swift, our chief financial officer.

The second quarter came in at the high end of our expectations with record performances in both sales and earnings. We continue to focus on satisfying the needs of the end consumer and assist our retailers in exceeding their expectations. The second quarter earnings per share were $1.10, a 25% increase over last year. Our net earnings were $75 million, an improvement of approximately $29 million.

The sales for the quarter were 1,228,000,000, an increase of 42% over the same period. The Dal-Tile segment contributed 34% and the Mohawk segment contributed 8% of the sales increase.

This success is a result of strong product offerings, differentiated marketing programs, and efficient operations in manufacturing and distribution.

Our balance sheet continues to strengthen as a result of the cash flow that we generate. Our debt to total capitalization at the end of the quarter improved to 35.3%. We are well positioned financially to take advantage of future business opportunities and to withstand any unfavorable economic conditions which may arise.

John, would you please give our financial report?

Yes, sir. Thank you.

In the quarter, we had a 1.2 billion in sales, up 42%. 33% of that gain was due to Dal-Tile, of which Dal-Tile's internal growth was around 9%. Mohawk's internal growth at the same time was 9%.

If you look at the first half, $2.1 billion, up 28%. Dal-Tile contributed 19% of that 28%, and the remainder was internal growth of Mohawk of around 9%.

If we look at the gross profit percent - excuse me, gross profit dollars, 339 million for the quarter, 27.6% of sales, compared to 25% the previous year. The major positive impact was the Dal-Tile acquisition. Their gross profit percent is higher than Mohawk's. That was offset slightly by the commercial taughtness in some product mix.

If we look at the six-month period, $554 million, or 26.4% of sales, and that compares to 24% in the previous year. The same reasons, again. Dal-Tile very positive and slightly soft on the commercial margins and the product mix was a little soft.

SG and A came in at 200 million. That's 16.3% of sales. That compares to 15.3% the previous year. If we look at the Dal-Tile, that added about 1.8% to the improved - the increase, but it was offset by Mohawk's actually being lower due to cost controls.

$340 million for the six months at 16.3%, and that compares to 15.6. Again, the same things. Dal-Tile does have a higher SG and A, as compared to Mohawk, but Mohawk's is running lower than the year before.

Operating earnings came in at 139 million, 11.3% of sales. That compares to 9.7. If we look at Dal-Tile, that added 1.2% to it. Mohawk goes up four-tenths. And if we look at the six months, 213 million, 10.2%, compared to 8.4. Dal-Tile added about a percent and Mohawk added eight-tenths of a percent improvement in operating earnings during this time frame.

If we look at our interest costs, it came in at 19.4. That compares to 8.2. The reason for the increase was the acquisition of Dal-Tile. The same thing on the year-to-date 26 versus 17.2. And if we look at pretax earnings, it came in at 119.8 million versus 188.4 the year before.

And if we look at the earnings per share, it improved 25%, as we showed in the press release.

If we turn to the balance sheet for a minute, the receivables came in at $580 million. That's 42.6 days. That compares to the previous year of 40.8, a slight increase there in receivables, but down from the previous quarter.

If we look at inventories, 727 million, 4.9 turns. That's a huge improvement from the year before where we were at about 4.2, and also an improvement from the previous quarter.

Payables came in at 634, around 64 days. Working capital came in at 14 cents on the dollar of sales, which is one of our lowest points in working capital.

Again, as Jeff mentioned, our debt to cap came in at 35.3%, so we're very strong on debt to cap at this point. Jeff, turn it back over to you.

Thank you, John. The Dal-Tile strategy is on track with our plans. Our primary goal was to support the positive trends of the Dal-Tile business. In the second quarter, Dal-Tile sales increased 9% over the prior year as both the internal infrastructure and the consumer relationships have been maintained.

Our residential tile products are increasing in sales as we broaden our product offerings. We continue to improve our tile plant productivity and reduce the costs.

Our information technology integration is on schedule, with Dal-Tile financial systems already converted to Mohawk systems. We're on track to complete the next phase of systems integration this fall, which will allow order entry and product movement between the Mohawk and Dal-Tile businesses.

Detailed planning is under way for the long-term operation of sales, marketing, information systems, and product distribution.

The cultures of the two organizations are working well together, and both organizations are initiating creative ideas to maximize our long-term strategy.

The Dal-Tile organization is presently taking over the leadership in the marketing and managing of the Mohawk ceramic tile brands.

Finally, we expect Dal-Tile to contribute about 10 cents a share to Mohawk, of which about 4 cents has been achieved since the merger on March 20th.

The new ceramic plant is on schedule to start up in the second quarter of next year. The site construction has begun, and all the equipment contracts have been signed. Key management is presently being hired and trained.

The Mohawk and Dal-Tile distribution integration is progressing. Limited warehousing and transportation synergies have already been implemented. Some system modifications will begin testing in July.

Our Mohawk brand hard surfaces products continue to expand. We're investing in the sales, marketing, and distribution infrastructure. Customer support for our categories of ceramics, wood, laminate, and vinyl, is gaining momentum. We are expanding the product offerings to satisfy the needs of most of the customers in the marketplace.

The Mohawk brand hard surface products should grow about 80 to a hundred million dollars this year.

The management of the Mohawk segment continues to focus on cost reduction. In the second quarter, all businesses have a lower SG and A percent than last year. Manufacturing continued to improve efficiencies, quality, and safety performance.

Sales grew in both the residential and home product categories. The commercial products have not begun improving as we had hoped. Our commercial customers are being very cautious with expenditures.

Last year's restructuring of our commercial brands and sales force will provide a strong foundation when the commercial business turns around.

On all Mohawk carpet products, we're implementing a price increase. Our significant competitors are supporting the increase. The industry appears to be more disciplined than we have been historically. The net effect of the increase will not be clear for some time.

The carpet margins declined slightly in the second quarter, due to a timing difference between the cost increases and the implementation of the price increase. This lag is typical in a rising environment. Our order rates have shown some softness in recent weeks, but some of it could be due to pre-buying product before the increase went into effect.

As we attempt to predict the fall selling season, the level of uncertainty has never been greater. Due to our fast product deliveries, Mohawk's historical backlog is only about two weeks and provides only limited visibility. We are seeing conflicting economic information, with some forecasters projecting a continuing recovery while others believe the economy is slowing.

The current condition of the stock market appears to be having an impact on the overall economy. Consumer confidence, which significantly affects our industry, appears to be falling. The price of oil is higher than we anticipated, and may affect future costs.

Currently, we perceive the fall less optimistically than we did a few months ago. Based on these unusual combinations of factors, Mohawk has taken a more conservative outlook for the fall and now we expect the third and fourth quarter earnings per share to be 2% to 5% above last year and the total 2002 earnings per share to be 15 to 17% above 2001.

If demand does fall, we have been through these economic conditions several times. The latest was in 2000 when we had even more severe circumstances. We had rising oil prices, increasing material costs, and dramatically falling demand. The management reduced controllable costs, reduced capital expenditures, reduced discretionary expenses, emphasized productivity and cost reduction. And even with that, we expanded the hard surface category and bought back stock.

All of these improve the short-term performance and create a stronger long-term foundation. Again, we will put greater emphasis on all of these.

On the positive side, Mohawk is well positioned going forward. Our flooring products are well accepted and our relationships are getting stronger. We are focused on being easy to do with, and fulfilling our customers' expectations.

Our move from a carpet company to a total flooring company is on course. The hard surface business is expanding and is a fundamental piece of our long-term strategy.

The merger with Dal-Tile is proceeding as planned. Dal-Tile is well positioned in the marketplace. The management group is a strong addition to our organization and is compatible with our culture.

Our management has in place the best controls and infrastructure that ever existed in Mohawk. If the economy and industry are better than we expect, Mohawk's results will also be much better.

We'll now take any questions.

But before we do that, I want to remind everybody certain of the statements made during this conference call, particularly those anticipating future performance, business prospects, operating strategies, acquisitions, new products, and similar matters, constitute forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933 as amended. Forward-looking statements involve a number of risks and uncertainties. These and other assumptions could prove inaccurate, and therefore, there can be no assurance that the forward-looking statements will prove to be accurate. For those statements, Mohawk claims the protection of the safe harbor act from forward-looking statements as contained in the Private Securities Litigation Reform Act of 1995.

Thank you, John. We'll now take questions.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1, on your telephone keypad. We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Sam [Darkash] of Raymond James.

Good morning, gentlemen.

Hello Sam.

Hi, Sam.

Assuming that there may be some future fiber cost increases on the horizon, do you foresee raising selling prices again? And if so, what's your feel for your customers' ability to ingest another price hike?

Historically, every time there's been a raw material increase by the fiber producers, the industry has announced a price increase, so I would assume we would do the same thing. Price increases are never easy to implement, but we would attempt to put it through as I assume we have in the past.

And your feel for your customers' ability, then - your response implies that your customers will be able to take it then, I'm guessing?

I mean they never like it, if that's the question.

You also mentioned on the release you would be interested in share repurchase, quite possibly. Can you help us with what metrics you use to determine at what point you'd be engaged in that practice?

We constantly look at the value of the stock and the effect it's going to have on the shareholders' return, and based on those conditions, we determine how much we should buy or not. In addition, there's other conditions about acquisitions and other opportunities in the marketplace and we have to take all of those into consideration before we do it.

We've never made public, Sam, the parameters which we're looking at. We do go over them with the board of directors but we don't make them public.

Okay. Two more quick questions. I know there's a bunch of people in queue.

Do you see the - the environment at retail as promotional in the second half as it was in the first half and at the end of last year?

Define what you mean by "promotional."

We see a number of promotions being run at the home center level, at the independent dealer level. We saw it a lot the end of last year and the beginning of this year. Do you see those kinds of things continuing or somewhat coming back a little bit?

We consider those normal course of events. Promotions are going on at all points in time, and we believe that the industry will support promotions similar to what we have in the past.

Okay. And last question, do you have a sense of what the length of the pre-buying was ahead of the price increases? A couple weeks? A month? Do you have a sense of how long that length of time occurred?

With all price increases, you have pre-buying, trying to build inventory before it, and normally what happens is, you have a period of time afterward where the order falls off. What's happened is, we would have expected the orders to increase more than they have. Our June period, the shipments are as strong as the whole quarter. What we're looking at is the order booking rate hasn't rebounded as much as we would have expected it to by this time.

Okay. Thank you very much. I'll defer to other folks in line.

Your next question comes from Dennis Rosenberg with Credit Suisse First Boston.

Hello, Dennis.

I have another question about the price increase and the cost increase.

If I recall, when you reported the first quarter, you said that you did not expect a lag effect because of inventory of raw materials on hand and because of advanced notice of the cost increases, so what changed?

I'm not sure we said it exactly like you said. What we expect is that the - the economic environment would have increased enough to offset any lag that was there, and we didn't expect it to have a significant effect on our business. And I don't - I don't recall it said as you have stated it.

At any rate, we still haven't said it had a significant impact on the business, Dennis. We're still putting in place the price increase and the cost increases are - we're still getting some of those also.

Okay. So could you give us some of your thoughts on the gross margin on the core Mohawk business going forward in the third quarter then? Trends?

Gross margin?

Yeah. Gross margin trend sequential and year over year?

We're looking at being in line or . . .

The gross margin, we're looking at being in line with where it's been in the first couple quarters, right now.

Okay. And just secondly, the 2 to 5 - up 2 to 5% seems like a very narrow range, given the large uncertainty that you foresee for the second half. How did you come to such a narrow range?

We worked with the businesspeople to decide on where we thought the reasonableness of the business would run for the two quarters, and that's where we came out.

Okay. Thanks.

That's from their input.

Your next question comes from Harold Rudman of Rudman capital.

I'd like to understand better how much revenue did you lose by not being able to implement the price increase immediately in the second quarter.

How much revenue. I'm not sure how to answer the question, if you want to know the truth. If you assume that we had a 3 to 5% price increase, which would have amounted to about call it an average of 4% - pick a number -

Yeah, but if we would have tried to - I guess Harold the real answer is, if we would have tried to put the price increase in earlier, it wouldn't have stuck. It wouldn't have happened.

But, no, I understand that, but for part of the time, you did - you were able to pass on your cost increase, and for part of the time you weren't able to, and my calculations indicate that probably for six weeks or for five weeks out of the 13 weeks, you couldn't pass it on.

The price increase and the cost increase increases don't all happen instantaneously with each other, which is why it takes some point in time for the whole thing to clarify where it's actually going to end up.

At the same time, you have the future that you have to be prepared for, you know, all the market conditions that happen in between.

But I'm trying to understand is if the average price increase was 4%, perhaps 40% of the quarter, or equal to about 1.6% of the revenues, if I take a 4% increase for 40% of the quarter, you miss that. You didn't get it [inaudible] quarter and if I play with the arithmetic, it seems like that's about 10 cents a share.

So had you not had that and prices are holding, then the second - the third quarter should benefit. Is that a fair statement?

It should, as long as the volume holds up, and I guess we're a little tentative on the volume holding up.

I guess the other side of it, Harold, is that the prices - the cost increases we incurred were not all there on the first day of the quarter. Some of them actually came in during the quarter also.

So it wasn't as though everything was there at the first day of the quarter, either price increases or the cost increases. We did get additional ones during - which we anticipated. We did get additional ones during the quarter.

I understand. You made mention of your working capital, your free cash generation in the second quarter, of 130, 60 of which came from working capital contributions.

I have a rough guess that in the first quarter, it was about 50 million working capital contribution to free cash flow.

Could you give me a rough idea of how much working capital could contribute to cash flow in the second half of '02?

Let's see. We're working on improving the inventory turns in the receivables, but we don't really have a number at this moment that says, here's what we think we're going to do on working capital, mainly because, Harold, the key to all this is what the volume levels with going to be, and how strong the quarter is going to be.

I understand that fully, but if my arithmetic is right, what I did here was I - in the - using your earnings estimates, your net income estimates for the year -

Right -

- and assuming there's no further working capital improvements for the rest of the year, we come up with about 340 million of free cash flow or about $5 a share of free cash flow that you have at your discretion to spend, five dollars a share. Is - according to your estimate is that about right?

Well, according to our estimates, we'd be looking closer to about a hundred and forty to a hundred and fifty million of net income, and then another hundred - about another fifty million of depreciation, and then what happens to working capital, again, it depends on the volume there. There would probably be some generated but I don't know that it would be that much.

Well, I was assuming that you would make the net income that you forecast for the second -

Yeah. So am I.

- with 272 for the year. Net income of 272.

Somewhere - somewhere in that range.

So if I take 272 -

Yeah. But you're talking about second half and then you're talking about the total-year income.

I was talking about the total year, that's right. I'm saying for total year, your free cash flow would approach - so far, you've pulled out a hundred million of working capital, so that the total cash generated - assuming you don't generate any more from working capital, it would be 340 million. Divided by 70 million shares, I get roughly $5 a share.

Right. I'm sorry, I thought you said that was for the second half. I misunderstood you.

No. No, I didn't say that.

Yeah, that's a good ballpark number.

Okay. And then would you be willing to comment as to price ranges that you might think that the economics would change and you would become buyers of the stock?

[inaudible] reviewing those levels - we're constantly reviewing those at any point an in time and all we're looking for is what the return is to the shareholders at the end.

The free cash flow yield of 12% seems pretty good to me. As I understand it, though, you did say that your price increase is holding in the third quarter, and I - it just seemed, from reading your press release, that you were saying, in effect, if the stock market goes down and consumer confidence goes down, then your sales go down. And it just - it may be simplifying the outlook for replacement sales a tad bit.

We're trying to be open with the market [inaudible] and make them aware of everything that we know. We perceive there could be some softness in the replacement business in the marketplace as we speak, and so the next question is, how do you project it forward, and on purpose we spelled out that our actual order view is less than two weeks, so we're assuming that the conditions we see today go forward and we've tried to put realistic views of what that would do in our expectations.

Now, if the economy and the rest are better, we would do significantly better than this states.

Am I correct in assuming that the way the industry economic - or financial economics work are such that if the sales were to weaken or just hold flat, you would probably be able to derive more working capital benefits - that is, greater than what you've done already in the first half - in the second half? Or to rephrase it, the weaker your company's sales, the more working capital you generate? Is that a correct statement?

That is correct. Because the inventories come down and the receivables come down and we generate cash as the volume drops. The volume doesn't go up. Either one.

Well, today is a very rough day for long-term shareholders, and I hope the people that have been renting your stock will come to realize the good work that you're doing.

Thank you, Harold.

Thank you very much.

Your next question comes from Margaret Whalen of UBS Warburg.

Good morning.

Hey, Margaret.

Hi, Margaret.

I have a couple of easy questions. First of all, congratulations on a great quarter, given the environment. I think you really deserve kudos for that and improvements in the balance sheet and working capital are terrific, given the acquisition you're assimilating.

Thank you.

And you know what I really want to understand is the trend in sales right now, not necessarily the price increase but, you know, one is softer than you expected in June, how was the holiday, the four-day weekend over July, where is it right now, can you quantify the decline in your order rates that you talked about?

What's happening is that - let's back up.

In June, the shipments held up similar to as you see them in the quarter because of the pre-buying and it doesn't ship out. It ships out afterwards.

So we're looking at the - the shipments in June being relatively good.

The other thing that's happening is that you have this pre-buying, so that the orders typically drop after that, which they have done, and typically by now we would have expected them to go back to pre-increase levels. And at this point, we are not showing the same sales levels that we had prior to the increase.

So we're assuming that - and we're not sure. We're assuming that it's not - the price increase at this point. That the demand level of the consumers has changed due to the economic environment we find ourselves in. I mean, we have -

Can you quantify how much it has changed? Has it slowed down 20%, 30%, 5%.

Oh, no, no. No, we're talking about small reductions here. These are not huge reductions.

What I'm trying to get to is if you're saying bottom-line growth 2 to 5%, what is the top-line assumption there, and so how much margin compression would we expect?

Historically - at this point, we're only giving out the earnings per share on a future basis, which is how we've tried [inaudible] the marketplace.

Yeah.

And we have not, up to this point, given out future sales estimates.

Uh-huh.

I mean, up to this point, the analysts' have put together their estimates and we have given the best direction we can on the earnings per share, and we think we're giving the most realistic view we can to it.

Okay. And just in terms of the stock, I mean the stock trades at 7 million shares, you've got an authorization for 6 million. Are you in the market today, or have you been over the last couple of weeks?

No, we have not been. There's periods of time which the company can't be trading stock.

[inaudible]

Right. So no, we have not been in the marketplace at this point in time.

Okay. Thank you.

Thank you, Margaret.

Your next question comes from Steven east with A. G. Edwards.

Hello, Steven.

Good morning, guys. With the stock down 20%, I guess I want to follow on Margaret's questioning, because I think it's really important for us to understand how expectations go from 10 or 15% up to 2 to 5%.

If we are looking at your trends, what you're seeing right now, Jeff, are year-over-year comparisons in July actually down right now on the revenue line?

No, because you had a price increase in there too, Steven.

Okay.

So, no, they're not down. What we're looking at, though, is the units are softer than they were before. And, you know, it's a question of whether those units are going to pick up or if - I think people right now are a little reluctant to go out and make - this is a major expenditure, and they're maybe a little reluctant to do some of those major expenditures until they see what's going to happen in their economy and the stock market and the whole thing.

Okay. Okay.

It's a little sluggish right now. It's not really a disaster and we're not going to say it's going to be below prior years. We're just saying it's not going to be as strong as what we thought before.

Okay. So you are seeing up comparisons year over year.

On the cost side, if we look at let's take second quarter as a benchmark, moving forward would you expect your operating margin to at least meet that, or be better than that as you move through? I guess I'm thinking about with the integration of Dal-Tile, et cetera.

Yeah. Again, the integration of Dal-Tile, we've been very careful on, and, you know, we're looking at not causing any problems in the marketplace and to - actually, we're generating earnings or savings that are helping us offset some of the additional costs we're incurring.

The other part is that the - the industry and the business got better in the second half of last year, so the comparisons are harder.

Okay, okay.

That's also occurring differently now.

But you wouldn't - given what you're seeing on the revenue side right now, you wouldn't expect margins to compress from what you saw in the second quarter?

We're expecting them to be similar.

Okay. All right. Okay. That's fine for now. Thanks.

Thank you, Steven.

Your next question comes from John Baugh with Wachovia Securities.

Hello, John.

Good morning. A lot of questions have been asked. I think Harold dutifully covered the cash flow issue.

I guess just simple English: Do you think you got, in a price increase in carpet what raw materials have gone up?

We believe we have put put through an increase. It's not completely clear, as it takes a period of time. We have thousands of SKUs and thousands of customers and it takes a period of time to see what's happening, as well as the reaction by our competitors and making sure that as business softens, that they maintain those pieces. Because we're going to stay competitive in the marketplace.

So we really won't have a definitive answer ourselves for a period of time going forward. We think we have.

Okay. So translating that, if we don't see [inaudible] and others cut prices from here, you think you've covered your cost increase.

And that also assumes that there's not significant increases beyond what we've already received.

Yeah. And I want to touch on that, because it seems to me like energy prices have fallen, it seems to me the economy is softening. What - what specifically are you worried about going up in raw material costs? Is there something that's been already discussed?

Most of our suppliers [inaudible] oil prices to be in the low 20s over time and we now have oil prices in the high 20s and the question is, will they stay there or not. They become much more volatile. Oil prices have - we may have to just live with volatility. So I guess as part of our - we're trying to sit back and anticipate what happens. We're concerned that oil prices are higher than we had anticipated they would be, and what effect that may have in the future.

But there's no - nobody is talking about latex going up or backing going up or polypropylene chip going up now or - nobody - is there something specific being discussed now?

Most of those raw materials you just ran through in a hurry, you know, go to market and they go up in small increments, one time after another. They don't go up and stay at prices. They're market driven. So there's more fluctuation in them than you perceive.

But you've always made the comment in the past, Jeff, that obviously supply and demand within the industry can influence some of these as well, and what you're basically saying is the demand is weakening, so I'm sort of wondering why we should expect it to go up if demand is indeed weakening.

It may not.

Okay.

But it hasn't at this point.

So it's unlikely that we'll get a cost increase and demand weakening?

That would be unlikely.

It would be unusual. As you know, John, it would be very unusual.

You're correct. Usually they would soften together.

Okay. And then comment, if you would, on the commercial marketplace, not just as relates to Mohawk, but also Dal-Tile, and - and was that the mix you were referring to? You made a comment in the margin about mix as well.

The commercial business, we had expected by this time to see more jobs coming back on-line that people would be bringing things forward as confidence gained in the marketplace. And we didn't expect it to be booming, but we expected to see trends going forward. We don't see those trends today that we had expected a few months ago. We assume that with the news corporate America's hearing, that they're going to postpone those expenditures further. So we're taking a conservative look at the commercial business, you know, for the near term.

And the comment about the product mix hurting margins, what were you referring to there?

In some cases, we have different product categories that are increasing that have lower margins and lower costs, and it changes the average margin as you look through it.

So is this in the residential, commercial, both? Are you just basically saying in a tougher environment, a little lower price per unit?

Well, take the commercial. On commercial business, some people are trading down the quality of the product they're buying in this environment. So they're buying lower-priced products than they would have historically, for instance.

Okay.

Yeah, that's in all environments, John.

Okay. Super. Well, congratulations on the cash flow and the balance sheet and the earnings, and we'll see what happens with the economy. Thanks.

Thank you.

Thank you.

Your next question comes from Keith [inaudible] with Robinson Humphrey.

Thank you. You've spoken at length on current trends on the carpet side. I wanted to ask on ceramic tile. How have volumes been, you know, in June and here in early July on the tile business?

The tile business had about a 9% increase during the quarter. We are taking a more conservative view on it, anticipating it's going to slow similarly. It's going to slow, but still be ahead going through the fall.

Okay. And have you already seen those the first couple weeks of July? That slowing?

The bookings rate are less than they were during the prior quarter.

Less than the prior quarter, but still up year over year?

Correct.

Okay. Thank you.

Your next question comes from Cecil coil of home tech styles today.

Hello there.

How are you.

Fine. And you. I was wondering, you know we cover textiles and I had a question about the Mohawk home division. I didn't hear much about it, but what are your future plans with that, and how - what kind of role has that played so far?

The Mohawk home division is made up of rugs -

Right.

- mats, throws, pillows -

Yeah. I know. Bedding.

- bedding and other pieces, small niches markets in there, and we said that it has grow - it was a major part, along with the residential business of our growth that we've had that we are, what - we are look - we expect it to do reasonably well as we go forward. At the same time, we are perceiving that some of our mass market tiers of the product may be more conservative in their inventories going forward. And so, you know, we're anticipating some sales, you know, less aggressive than they have been in the past due to those same conditions in the rest of the marketplace.

Right. Similar to the rest of the market, exactly.

Okay. And are you guys growing in any way? I know you've added some categories over the last year. Is there any more growth slated for that?

Yeah. We continue to look for different growth vehicles within it. We have started in the past couple of years importing products as new categories. We continue to look at other product categories to grow those businesses.

Okay. So it's still an area you do want to keep growing.

Oh, yes.

Absolutely.

Is there a certain category in there that does better than others, that you're going to push?

No, it depends on the period of time or -

No. I mean we -

I mean, I thought area rugs was probably the core of it or something.

Area rugs is the largest piece, but we believe that - I mean, we believe we're the largest rug and mat producer in the country. We're the largest throw producer in the country.

Uh-huh.

And we believe they all have opportunities to continue growing, as well as we would consider other product categories if they made sense.

Okay. So I mean in that division, you know, mass is, you know, giving you I guess a little bit of a harder time.

The what's giving us a harder time.

The mass merchandise customer, I guess. It's been a little more of a challenge there.

Not any more than any of other our customers. I guess the only "yes" response would be Kmart has had some problems there, but outside of them, the other ones are good customers.

We're having trouble with the credit with Kmart.

Right.

Does that count?

Okay. Thank you so much.

Thank you.

You're welcome.

Your next question comes from Matthew Skylar of floor covering news.

Just a quick little question here that you were talking about. Aside from the Dal-Tile part of things, how was your other hard surface business going? I mean, have you - can you break out laminate, woods, the Congoleum vinyl, in terms of how things are going?

Yeah. We have - as we said in the - as I said in the opening remarks, we expect the hard surface business to grow 80 to a hundred million dollars this year.

What is it right now, though?

It closed out last year at 200 million.

It was around 200 million going into this year.

Really. So you expect it to be between 280 and 300 million by the end of this year?

Correct.

Okay. What is - of the three, what is your biggest - what is driving it right now? Are they all three going equal or . . .

Yeah, we're showing growth in all the different categories. Some of them are starting from different bases, but they're all showing significant growth.

Okay. All right. Thank you.

Your next question comes from Lee Cooperman of omega advisors.

Thank you. I appreciate it.

Hello, Lee.

How are you doing.

Excellent.

Good, good. I got some easy questions and one that's not easy, and it may be - it's not designed to be impolite. You guys have done a fantastic job and we're just in an environment where everybody is looking up your tail with a stethoscope.

If - the first question - this is, again, an easy one - what is your capex plan this year and next year, and depreciation this year and next year, roughly?

The capital expenditures this year are slightly higher than the depreciation, and most of that is due to the investment we're making in Muskogee, putting up the - a new floor tile plant that will be about a 60, $70 million capital expenditure which will be operating in the second quarter of next year. We're a little tentative how some of those expenditures of last year will fall in this year or next.

The capital -

The depreciation will be about a hundred million dollars in both years. A little over a hundred million.

So a hundred million each year and for the six months your capex is 47 million, so should we use a hundred million in both years or how would you skew it?

I'm saying depreciation now is what I was commenting on.

Yeah. What would you expect capex -

Depreciation is a little over a hundred million and this year we're going to spend about 150 million this year, and next year it should be back closer in line with depreciation. But I mean some of that depends on when the expenditures in this plant fall.

Gotcha. Okay.

Just a - I don't know if you'd want to respond to this, but just directionally, not magnitude - and again, I have about seven questions and I'm sure it's of interest to everybody, but do you expect to have up earnings next year or would you say the environment is uncertain to make that statement? I mean, I think what the stock is reflecting is not so much a penny here or there as it's reflecting that we've hit the peak of the cycle and it would not be surprised if earnings retrenched next year. Would you say that we don't want to make a comment about 2003 even directionally at this point in time?

I mean we - I don't think we're as pessimistic as the whole world must think we are at this moment. The - you know, we're looking at the present economic environment, saying that the fall looks like today versus three or four months ago less optimistic which, I mean, you have to be crazy not to think so.

So we're taking that into account. We believe the economy is going to pick up and grow at some point.

And it may happen - it may even happen this fall.

But we don't believe that it's a total disaster. We have plans to grow our business in the hard surface business, and we expect the - the economy to do reasonably well over the near term.

So basically, I mean, again, just not talking order of magnitude, I'll leave that for the scientists, but directionally, do you think that whatever you wind up earning this year, you should do something better than that next year?

That is our goal and expectation.

Okay. Fine. Good. Okay. That's good to hear and I thank you for answering that one?

When the repurchase program that - I'm sitting in a remote location, I'm not in my office, but I believe that the repurchase activity that took place was - ended a couple years ago, and I think it was like 2000 or early 2000

It happened as we had approved and still do 15 million shares to repurchase. We purchased about 9 million of them, and there are 6 million still -

Right. That, I know. My question was the 9 million that were repurchased, when did you repurchase and what was your average price?

It was between 1999 and the first quarter of 2001 and the average price was between 21 and $22.

The end of '99 into 2001?

Yes. We bought through that whole period. We re-bought our stock.

Okay. So basically -

Don't hold us identical to that -

No, no, no, no. So at that time you were buying back about three dollars worth of earnings and you paid about seven times earnings or something like that retrospectively. You were buying it probably before - you were buying it earlier than that so you were probably paying seven, eight, nine times earnings?

It was a little less than that, but that's correct.

Yeah. Okay. Fine. Okay. Good, that gives us something there.

Do you guys have kind of a - in most businesses, they're somewhat cyclical in nature, though yours has been a a growth business. There's the concept of trough, normal, and peak earnings. And I'm curious if you have a view on that. I know with the consolidation of the industry, more pricing discipline, that maybe your norm - your trough earning power would probably be higher than the levels, particularly with the Dal-Tile in the fold, that you're in a more difficult environment, you wouldn't expect to get back to the earnings of the mid-'90s, I assume. Is that correct?

I mean, we thought the trough was the last couple of years, if you want to know the truth.

Fine. Okay. So you -

I mean the economy was in a very bad position. I mean, we thought we did reasonably well through 9 last dip.

Fine. So is that to say that you think if things got tougher than you anticipate now, you can earn three, three-and-a-half dollars in a bad environment?

We'll certainly work to maximize our earnings.

Okay.

We don't have a number.

Okay. Well, fine. This is all part of it. And we get to a couple of recommendations in a minute.

Jeff, forgive me for being personal, but, you know, in this rule FD frankly, you can't call companies in between quarters because you just get your blood pressure to go up, when they say well, we can't comment. You know, I have a fab - a high level of confidence in you and the team you've assembled. Around you, there has been for the last year, not an insignificant amount of insider selling but I've taken great comfort in the fact that you and your family have maintained an investment at one time that was knocking the door of a billion dollars, all deserved because you did a fabulous job of running this company. You're a very bright fellow. Can I ask you: Has there been any sales by you or your immediate family or hedging transactions that have not been reported or you're there the way you were there six, twelve, nine months ago?

There have been no sales by the family other than a charitable trust which we keep giving away money, which we have to do.

Gotcha. Okay. Good. Well, keep doing your good deeds.

Last observation I'd make, and I'm not saying you should buy back stock or you shouldn't. My opinion is, given your cash flow profile, that you should, and you should as soon as the 24 hours pass after this call, but I would say that, you know, historically if you look at the returns in the markets, the last like hundred years, the S and P has done about 11% a year, 10-and-a-half percent a year. Of almost 40% of which has come out of dividends. And I say philosophically, given your kind of cash generation and your earnings, that if you're not prepared to spend the money on stock repurchase, the board ought to consider the payment of a meaningful dividend, because I think - I'm capital gains oriented so I don't care about the dividend income, but I'd say for a company earning, you know, 4 to $5 a share, with your cash generation, paying a dollar dividend would be a piece of cake, and that would add some stability to the stock, and so I would look at the philosophically, you know, the last five years, if you sat on cash, you've done better than you've done in the stock market. Not, of course, in Mohawk because you've done a fabulous job. But philosophically, if you think it's inappropriate to buy back stock now because the environment is uncertain, then I would say that the board should consider the institution of a dividend and sharing some of the wonderful success you've been enjoying here with the shareholders. And this is a helpful suggestion. I myself don't advocate capital gains, but I'm saying the unwillingness to buy back stock because you perceive the environment to be uncertain, et cetera, et cetera, I might say I'm jumping around a little bit but looking your balance sheet back in late 1999, early 2000, you're not that materially more leveraged now and you have a more diversified earnings base, so I think the company's balance sheet probably is not weaker than it was back then.

No, it's much stronger. We appreciate your input and we'll take it -

I thank you for your hard work and I'm sorry the market is treating you - both of us so harshly today.

Very good. Thank you.

Your next question comes from Raymond Mathis from Standard and Poor's.

Good morning, gentlemen.

How are you.

Doing well, thanks. I have a couple of quick questions. One regards nylon prices. It looks like nylon prices have come down substantially in the quarter, and I was looking for that to somewhat offset polypropylene price increases. You want to comment on that?

You must be in another world than we're in.

It hasn't come down yet.

I don't know where you're getting it's reduced. Mine are all going up.

They're going up, huh.

Yes.

Yeah.

Okay.

I hope you're right.

Can you give me the names.

Yeah. I hope you're right.

No. I was just looking at some market prices and it looked like they were coming down, and certainly not going up.

Well, we have not seen that yet so I hope you're right and we're going to see that in the near future.

Well, I hope so.

Okay.

And another question regards consumer confidence here. Both in the press release and in the conference call, you've spoken about consumer confidence slipping and how you anticipate that affecting future demand, but when I look at the breakout of the numbers, the consumer confidence for individuals planning on purchasing carpet, in particular, seems to be holding rather steady, and seems to be at or above last year's levels. Do you want to comment on that?

Historically, we tend to track the total consumer confidence level and as it goes up and down, you know, we look for things that try to anticipate our industry, and what we've found is as it goes up and down, the industry sales tend to reflect that, and so as we're looking at the consumer confidence numbers we're seeing and the total economy, it's indicating to us that the short-term direction should be more down than up, based on those things.

I guess the other thing to keep in mind, we're a leading indicator, and when those trends have - you see them going down, we already saw it, so we're just trying to look at the numbers and see which way they're headed and try to put that into perspective. But we really are a leading indicator in the end.

Okay. Very good. Thank you very much.

Uh-huh.

Your final question comes from Susan Mac Laurie with UBS Warburg.

Hi. It's Margaret [inaudible] again. Just to follow up, I know you don't talk about your relationships specifically with your bigger customers, but can you give us an idea of what's going on with the key retailers in that channel in terms of your [inaudible] inventory levels, sales levels, price - or a product that's working, what's not?

Most of the large customers depend on our inventory levels and work from - work from our inventories rather than their own, so there is limited inventory in the carpet business through the structure. And typically we can deliver it in anywhere from 24 hours to a few days, and so there's not a big inventory piece in the middle, on average, in the carpet industry.

But is there any sense right now that they've stopped ordering over the last couple of weeks, maybe six weeks?

What we have is the people that do have inventory, when you announce a price increase, tend to give you orders prior to the price increase, and then use that inventory over some period of time.

Yeah.

And that has been going on. Now, what we're missing is that we don't see the vitality in the order rates that we would normally expect at this point in time, and then with all the other bad economic news, we're assuming that the industry has slowed down.

Do you get any -

[inaudible] of the industry of the industry numbers because we don't collect them anymore.

Sure.

And so we're using all the data points we have to try to guess what's going to happen and we're using very limited information to estimate the future, which is how we have to - it's how the industry always works.

Uh-huh.

The - the unusual part is that there are so many variables moving at this moment. So if makes the projections very difficult.

Sure. Do you get point of sales information from those retailers?

Not in the carpet industry.

Okay. Okay. So you have no idea as to their sales level versus what they're buying?

The ones that stock our inventory are very small numbers.

It's a small - to the whole - the data points we have to get back is really from our salespeople calling on the customers and trying to get a feel for what's going on, but more than that, it is because of the short turnaround, basically most of our customers order it when they sell it, so when - when we see the order rate drop, we have a pretty good indication that the sales level isn't - is slowing down.

Now, the confusing part now is the price increase has made that more obfuscated than normal.

Uh-huh. It's hard to differentiate.

Yes.

All right. Well, I think you're doing a good job, given the situation.

Thank you very much.

Thank you.

Thank you, Margaret.

Are there any other questions.

There are no questions at this time, sir.

Thank you very much. Have a nice day.

This concludes today's Mohawk industries second quarter earnings conference call. You may now disconnect.