莫霍克工業集團 (MHK) 2002 Q3 法說會逐字稿

Good morning. My name is Jason and I will be your conference facilitator today. At this time I would like to welcome everyone to the Mohawk Industries third quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question-and-answer period.

If you would like to ask a question during this time, simply press star and the number 1 on the telephone key pad. If you would like to withdraw your question, please press star and the number 2 on the telephone key pad. Thank you. I would now like to turn the call over to Jeff Lorberbaum, Presidentand CEO of Mohawk Industries Inc. Mr. Lorberbaum, you may begin your conference.

Thank you. Good morning. Welcome to the Mohawk Industries third quarter conference call. I'm Jeff Lorberbaum, President and CEO of Mohawk and with me I have John Swift, our CFO. John, could you give the safe harbor statement, please?

Yes sir. Certain 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 lien of section 27A of the Securities Act of 1933.

Forward looking statements involve a number of risks and uncertainties. These and other assumptions could prove inaccurate and therefore, there could be no assurance that the forward looking statements will prove to be accurate.

For those statements, Mohawk claims protection under the Safe Harbor for forward looking statements as provided in the Private Securities Litigation Reformat of 1995.

Thank you, John. Our third quarter results were better than we anticipated three months ago. We stated in the last conference call we believed the economy was slowing along with consumer purchases of flooring products. We reflected these sentiments in our expectations long before most of the market recognized the economy was slowing.

We continued to operate Mohawk in a conservative fashion, balancing the short- term expectations with a consistent long-term strategy. Mohawk had in effect most of the new governance policies long before the rules changed.

These included an independent board, independent audit compensation committees, a code of ethics, no off-balance sheet financing, no loans to senior executives, no conflicts with our accounting firm. We continue to understand we're employed by the shareholders of Mohawk.

Mohawk's long-term strategy is to be a North American company that provides all flooring types to every channel: to fully participate in the commercial, residential, and new construction market supported by our trucking and logistic system as well as our distribution partners.

Today, we have the number one or two position in all our major product categories which include carpet, ceramic, rugs and mats and throws. Even though the immediate future of the economy is not as strong as we would like, we are well positioned to prosper when it strengthens. Our strategic move to become a total flooring company is progressing as planned with approximately 30% of our revenues and profits coming from hard surface products today.

We continue to look for acquisitions in both hard and soft categories which will position Mohawk as a supplier of choice. Our third quarter net earnings set a record of $81 million, a 46% increase over last year. The earnings per share were $1.21, a 15% increase over last year. The sales for the fourth quarter were $1 billion 224 million, a 35% increase over last year.

Our balance sheet continues to strengthen with our debt to capitallization falling to 33% this quarter. After purchasing 1.1 million shares of Mohawk stock, we generating an additional $75 million in cash. John, would you please give your financial report?

Yes sir. Net sales for the quarter, a billion two-hundred and twenty four, up 35% as Jeff mentioned earlier. Dal-Tile internal growth was 2%. Mohawk was 2%, a grand total of 4% internal growth for the company.

If we look at the nine month three billion three-hundred and nineteen million, up 30%, Mohawk up 6% for nine month, Dal-Tile up 9%, total company internal growth up 27%. If we look at gross profit, came in at $340 million, 27.8%. That compares to last quarter of 27.6%, and last year of 24.2% with Mohawk stand alone.

On a nine-month basis 894 million at 26.9% compared to 24% a year before. SD&A, $198 million, 16.2% compared to 127, or 14%. That compares, by the way, to 16.3% SD&A net sales in the quarter before. If we look at a nine month, at 538 million 16.2% and 383 million the year before.

The EBIT came in at $142 million, 11.7%. That's up from last year from a 10.2, and up from last quarter which was 11.3. If we look at the segments both Mohawk and Dal-Tile had better gross profit and lower SG&A for the quarter compared to the second quarter.

On a nine month basis we came $356 million or 10.7% of net sales. Our interest expense came in at $16 million, compared to 7 million. The increase in interest had to do with the acquisition of Dal-Tile.

On a pretax basis, $125 million and on net earnings $81.6 million which is a 46% increase over 2001 of 55.7 million and a nine month basis $200 million of net earnings compared to 129 or up 55%. EPS, $1.21 compared to $1.05, a 15% increase. On a nine month basis $3.13 compared to $2.44, up 28%.

As we explained in the press release, we had a favorable impact from Dal-Tile of about a nickel. We had share improvements between a penny and two pennies because of our share buyback and Mohawk had about a nine-tenths improvement. Included in that, since last year, we had good will write offs that were not in this year's numbers and that accounted for a penny improvement there.

If we turn to the balance sheet for a minute, we have $570 million in receivables over 42 days. That compares to last quarter of $580 million in 43 days. So, we have improved our receivables. Last year we were at 432 million or 43 days. Inventories $742 million, 4.8 turns compares to 4.8 turns the year before.

Our Cap Ex came in at 27 million compared to depreciation of 25 and our payables at 6.81 to 69 days. We're looking at debt to cap, as Jeff had mentioned, was 33% compared to 34% last year this time. And 35% last quarter so that is also improved. Strong cash flow: $75 million positive cash flow.

Jeff, let me turn it back over to you.

Thank you, John. We are pleased with our record results this quarter, given the slower economic condition. Sales growth in all areas but home hard surface slowed this quarter.

Our commercial product continue to feel the pressure of reduced capital expenditures by the business community. Both our residential and home product sales slowed as consumer confidence reduced purchases and our large home customers became more conservative with their inventory levels. Some raw materials continued to rise in the third quarter, as our suppliers tried to recover their increased cost.

Given the present conditions, we believe raw material costs will remain stable through the first part of next year through the pressures of supply and demand. The carpet price increase was implemented by the industry in the middle of the year. It has allowed us to maintain our carpet margins, even in this difficult environment.

We continue to focus on maintaining our market share, improving our brand value, reducing our cost structures and exceeding our customer's expectations. Our distribution system continues to be enhanced to support all our flooring products.

We are implementing new systems to improve our delivery time and information while increasing the efficiencies of our logistics system. We have consolidated our high-end carpet sales and marketing by combining the marketing of Karastan and Custom Weave Carpet into a residential fashion carpet group. At this time, we've moved the rug products under the Mohawk home group to maximize the distribution of our rugs and home products to all retail channels.

These changes have already been implemented through our organization. I'm very pleased with the progress of our ceramic strategy. The sales continued to grow about 9% in the third quarter.

We have successfully kept the positive momentum with both the customers and employees of Dal-Tile. We are developing an infrastructure to support the Dal-Tile, American Olean and Mohawk brands.

The system integration to move ceramic products to any Mohawk customer is being implemented on a regional basis. The integrations of financials, pay roll and legal are being completed. The product and marketing management of all ceramic has been consolidated under Dal-Tile.

We are encouraged with the performance of the Dal-Tile business and the contribution to our results. The prospects for the products are good as we expand into additional retail channels. We are confident in the long-term strategy of being a leader and leading supplier of all flooring in North America.

Our group continues to get stronger and improves the controls and measurements of our business. New building construction continuosly expands the amount of flooring needed to satisfy the market each year.

As the economy recovers, the residential flooring will rebound and postponed replacements will be purchased. Whatever flooring our customers use in the future, Mohawk will be ready to satisfy their needs. We'll now take any questions.

Operator, if you make it available for questions, please.

At this time, I would like to remind everyone, in order to ask a question, press the star and number 1 on the telephone key pad. We'll pause for a moment to compile the Q&A roster. Your first question comes from John Spa of Wachovia Securites.

Hey, John.

Just a couple things, quick. One, average price you bought the stock in?

$46.

And, Jeff, could you discuss a little bit, you touched on the integration of Dal-Tile systems. How far are we away or where are we in the process of one truck going to a retailer and having everything, padding, the carpet, ceramic, the vinyl to wood on it?

We are implementing it on a regional basis. Most of the Dal-Tile customer base picks up from their distribution points around the country so the first process is to be able to ship product of tile on our trucks and in one region we have already started moving product across it.

This has been done by enabling the two systems which are still separate to talk to each other and then move it on the same truck so we have the ability to do that from a system point now, and we're implementing it piece meal across the country.

So you might be done nationally complete end of next year? What's the time frame?

It should be done in the first half of next year to be able move product across the different regions.

Okay. And I assume units of carpet year over year in the third quarter were negative and I'm assuming builder was up, resident was down, commercial was down, can you comment on that assumption?

We're having the industry does not have industry data at this point so we have to go more on qualitative information from our suppliers. We believe that the industry was down based on what they've told us, and you're correct that the new construction business is better than the replacement business and the commercial business is down.

Basically flat.

Your units were basically flat?

Right.

And your average dollar per unit year over year was the carpet?

I don't have that here, John.

It was probably up.

I imagine it would.

Thank you, so much.

Your next question comes from Laura Stampain from Morgan Stanley.

I was wondering what top line assumptions went into your Q4 guidance and if you can talk qualitatively about what sales trends you are seeing early in Q4?

The sales trend, I guess on a commercial, first of all, the sales trends are difficult to read and the reason is last year we had the terrorist attack and we believe that pushed some business from the September-October period out into the future. And so the comparisons are hard to interpret.

We are seeing some improvement in the commercial business, we believe, and seeing more of the same in the residential businesses that we're looking at and information we are getting back from our retail partners is that retail is soft and we believe that when consumer confidence picks up it will have a significant effect on the whole industry.

We anticipate, another way of saying it is the daily sales will be lower the first quarter because of the seasonality in the business, as usual. We're not thinking -- last year it was very slow, because of weather and the recovery from 9/11. We don't anticipate that happening... but it may happen. We may get fine weather. Who knows.

Okay. Also Cap Ex was a little bit lower in the third quarter than I expected. Can you give sort of your best guess where it falls out at the end of the year?

We are looking at 130-135. Depending on when Muskogee comes in. May be in the third versus the fourth quarter. But, if the all do it in the fourth quarter, it may be around 130-135.

We have a lot of commitments from the plants and we don't know exactly when they are going to fall.

Okay. And lastly, if you could comment on the pace of your buy-back and what you think we should model for diluted shares for Q4.

We ended the quarter at about $67,310,000. What we look at is our capital expenditures, our acquisition opportunities and debt paydown and buying back stock and figure out which is the best way to go at that point in time. No stock buyback at this point. We may do it and we may not.

Okay. Good quarter.

Thank you.

Your next question comes from Pete Hodges of SunTrust Robinson Humphry.

Two questions, first on the integration with Dal-Tile. Do you have the structure of how you're going to go after the independent retailers sort of set up now trying to get some of these cross sales as we go into '03 or are we still working on the marketing and sales aspect as we integrate?

Yes. We basically have a plan that we're going to operate with three brands.

The three brands are American Olean going to the distribution customers and then we're going to use both the Dal-Tile and the Mohawk brands to go after both the commercial and residential businesses and use different products and marketing with each of the groups to maximize the business.

And heavy lifting on the Dal-Tile and Mohawk brands, is that now or the beginning of next year?

We're in the process, as we speak, of putting ceramic tile out to all the various regions. Have not prior to now, we do not have ceramic tile in all the regions. Just been in about three of the regions, we are in the process of rolling it out to the other regions as we speak as fast as we can get it out.

When do you think that will be rolled out?

By the end of the year is the goal.

And will you use surfaces as a kickoff for the two combined companies together?

We're going to continue marketing under both brands. Like in the carpet business, we have multiple brands to help maximize the distribution and segregate our customer basis and we're going to continue doing that. In some cases they'll actually both be calling on some of the same customers.

Okay. And you made a comment earlier on commercial, is that specified or main street?

The specified business, it's been declining and it looks like it may be improving a little. Hard to tell again because of the terrorist attack last year is really making the interpretation of last year's numbers and this year's numbers hard to do at the moment.

You had big project wins or is it across the board?

We are seeing some more activity than we saw in the prior months. It's not enough to tell you there's a rebound going on, if that's the question.

Okay. And the previous issue we talked about, in marketing to Mohawk and Dal-Tile, will you have separate groups in the larger cities but maybe relying on a Mohawk rep in a smaller city to sell both product lines? Is that kind of the general structure?

What will happen is Mohawk will call on all of the residential retail business, and the Dal-Tile group will basically just call on the larger residential retail business. And then we're working on a strategy to maximize the two of them together through the new construction business.

Okay.

And in some cases the both may call on it and in some cases they may create a combined effort.

Okay great. Thanks, very much.

Your next question comes from Dennis Rutheford of CSFB.

Good morning, Dennis.

I have a few questions on Dal-Tile. Why is the tile business so much stronger than the carpet business given the economic environment?

The residential tile business, historically, was growing at about 5 to 6 percentage points greater than the carpet business was, so on that historical trend, they both slowed down.

I believe that we are gaining share in the marketplace because of our improved product offering that we've done as well as our service level which we believe is superior to the marketplace. The combination of these things are allowing us to take a share in the marketplace.

Historically Dal-Tile had a much smaller share of the residential business than they did of the total industry which created opportunities to grow and they've been working toward expanding this for a significant period of time and we think we are bearing some of the fruits of those efforts.

Your previous guidance was 10 cents for this year and we were modeling 3 cents in both the third and fourth quarters. You came in with 5 cents, does this imply that the increase this year is bigger than originally expected and can you provide us with guidance for next year?

We are still working on next year, Dennis. Yeah, it would appear that we are going to be picking up 2 cents in each quarter better than we had thought. We are very encouraged with Dal-Tile.

And, finally, could you update us on the capacity expansion there?

Certainly. We're on track with the start-up of the plant in the second quarter. We have -- the building is going forward.

The equipment is all on order.We have people training with our partner in Italy on the same equipment and in the process of looking and hiring people to support the plant and we have a plan laid out of how to start out a plant on what products through the start-up phase to support it as we go forward.

Thanks, a lot.

Your next question comes from Sam Kotag of Raymond James.

Good morning. Most of my questions have been answered. Just a couple of clarifications if I could. For your fourth quarter earnings guidance ,your implications of $1.17 to $1.21. I think I understood you by saying that the trends would be a little bit softer, I'm guessing you mean sequentially from the third quarter, are you assuming accelerating -- or a year over year percentage basis, are you assuming accelerated trends?

Oh, year over ?

For instance, you're at 3.8% internal or pro forma in the third quarter, are you assuming that at least 3.8% pro forma growth in the fourth quarter despite the more difficult comps?

Something around there.

Okay, I wanted to make sure I was clear on that.

Something like that.

Last question, you talked a little bit about the re-configuring of Karastan, separating the rugs and the carpet business, can you talk a little bit about what factors played into that strategy to be made?

Sure. We had two small sales forces calling on a similar customer base both selling high end carpet.

After examining it and looking it over, we determined that by combining the two, we could give each of the accounts more attention and give to the areas where we had voids in coverage with the two sales forces because both sales forces, the majority of the business were in the same areas. By putting the two together, we could give better coverage and broaden out the distribution. From a product standpoint, it also allows us to present a more comprehensive high-end product line to our customers by presenting them in a total fashion by the same sales group.

Okay. Thank you, very much. Job well done in difficult conditions.

Thank you.

Your next question comes from Barbara Allen with [INAUDIBLE].

Good morning, you all. I have one question, and that is does it seem odd to you as it does to me that the carpet industry which is in large measure a commodity business was able to hold price increases even as apparently volumes were weakening? Am I wrong to interpret it that way or do you have an explanation for it?

If you look over the last five or six years, you will see a trend toward more discipline in the marketing of the products through the marketplace, and you will see that we've gotten better at passing through cost increases as an industry, and we believe this is just where the industry stands today and the players understand that either we pass them through or we all stick together.

If you look at 2000, Barbara, you'll see the same thing. The units were down yet selling prices were actually up in that year in the industry . What's happened with the public companies that do respond to shareholders, they are trying to maintain and improve their profitability.

Okay. In terms of a number 3 player in the carpet industry, does that situation seem to have stabilized. In other words, are you not able to take more market share from them?

It does appear that he is improving the decline in his business, which you have to do in order to maintain a business. It can't go on a free fall forever.

Does that mean it's getting harder to take share from them?

It's getting harder to take share from everybody.

I think they were a bit of a Patsy last year it seems like. I wondered if they were stabilizing. Thanks a lot.

You're welcome.

Your next question comes from Lee Subermen of Omega Advisors.

Thank you and good morning. Two questions. One you kind of answered but I wonder if you could elaborate. You made a comment in response to a question regarding stock repurchase this year. Is that your present intention? If your business performed exactly in line with expectations, stocks stayed around $50 a share, no surprise to the economy, would you assume your resources would be diverted elsewhere in the fourth quarter?

I think the question was, what is the model for the shares and our answer was that we don't have a difinitive number of shares that we purchase at any moment at a pre-planned amount we are going to spend if we look at it on an ongoing basis and depending upon all the circumstances which we have to balance. We decide that on an ongoing basis. I don't want you to read in more to it than that.

But lets try to be a public forum so you don't have to worry about too much public disclosure, assuming that your budget continues along the lines andyou anticipate no radical change in the price of stock, $4.8 million roughly shares left in the organization, what kind of time frame would they be brought back in or you don't have any idea?

We continue to look at the opportunities. We have the shares available to purchase and we will consider what to do on an ongoing basis.

Cash is certainly not a problem for us, Lee. We don't have a problem in the debt structure, it's just when does it make sense. We are looking at different things as we go into next year.

Second question, Home Depot, a while ago, announced the acquisitions of three relatively small companies. What's your take on the long-term significance of those acquisitions to flooring activities?

Home Depot strategy is to find ways to grow their business and increase their top line. They are looking into the professional purchaser of product as an opportunity to grow. This looks like an attempt to delvel into that side of the business in the flooring industry. I assume they are going to understand what they are doing and decide how it's going to help them on an ongoing basis over the next year.

We believe that we are an excellent supplier to them and to the industry and whatever their position going forward, we hope to benefit from it and hope it fits them in moving forward in what whatever they do along with the rest of our customers.

Do you run the risk of having a short term problem with the acquisition of Dal-Tile in Home Depot's eyes?

We do not sell residential customers direct. We sell through retail and on the other side we sell to contractors and they have purchase contractors and they would be a customer we would like to maximize our business with.

Uh-huh. Thank you. Good luck.

Thank you.

Your next question comes from Margaret Wheelan of EBS.

Congratulations on a great quarter. Two clarifications. You said in your prepared comments that [INAUDIBLE] it would be stable until the first part of next year? Is that the first half or quarter?

I think all we were trying to say is, based on what we know today, we don't see any reason to believe that there will be an increase as far as we can see. I don't have a view any further than the first part of next year. Doesn't mean it will go up.

Appears it would come down if the Iraqi situation is resolved, no?

You also have the oil prices, raw material prices and the supply and demand. All of those things are very difficult to project today. All we were trying to say was in the short-term we do see any of those things creating a price move.

Are you able to quantify how much raw material price are up compared to last year?

I don't have that. There are so many variables in it, pieces going up, pieces going down, pieces going sideways along with different costs that we really don't quantify those numbers.

I would say overall they are up.

Overall they are up.

Yeah, but a couple of percents?

We really don't quantify that.

Okay. And the second question in the press release you told about completing the first phase of the Dal-Tile integration. You have a game plan and if so, how many phases are in it?

The longer term plan is to have a unified information system which allows us to operate the distribution system as a single entity to move products to all places to be able to assist all customers with all product types through the system and give information to coordinate all those together. Presently, we are operating on two totally separate systems and the long-term goal is going to be to have a single one to do that.

Okay.

The marketing side we are moving forward. We already consolidated the leadership of the marketing so we have a single ceramic marketing group so we can create a total coordinated position between the different brands to reach all the different channels in the marketplace.

So it's pretty much going along as expected.

Actually going along better than expected.

Okay. Thank you.

Your next question from Steve Arly of Arly Capital. Actually it's Andy Schaffer. Good morning.

Hi, Andy. Good morning.

I wonder if you could brake out the gross margin of Dal-Tile separately and the nine months ending September?

The operating margin is in there.

SG&A piece that is we don't break them out. What's happening is that a little by little there are more and more pieces being done across the businesses and we are going to have combined functions and the further along we get, the more combined they are going to get to satisfy the different businesses.

Presently both groups are less than they were last year. We reduced them both and hope to continue doing that and become more efficient as we go forward. Like with other previous acquisitions, over time, it will be hard to differentiate where one stops and the other starts as we move forward.

If you compare to the second quarter, you see both the gross profit was up and the SG&A was down and that was for both businesses. They were down just a little bit, a change in both of them, both favorable. And you'll see it on the EBIT line when you look at that.

Your next question from Steven East of A.G. Edwards.

Good morning guys. Just a couple of cash flow questions. Do you have a debt to total Cap market assuming you don't make acquisitions?

We are below where our historical level has been and it continues to improve. We think we're in an excellent position based on where the marketplace is for both acquisitions, stock buyback and considering if the marketplace goes through some turmoil, we believe we are positioned correctly for this moment in time. On a long-term basis, we would normally have -- we would be on the low side where we expect to be.

Okay. If I made an assumption that there were no acquisitions in 2003, I mean your cash flow you could take your debt to total cap down in the low 20s.

I guess what I'm wondering, I wouldn't think you would want to be there so I'm trying to figure out do you start to look at a dividend, do you look more aggressively at share repurchase? You sort of have a high quality problem there if you assume that you didn't have something at that particular time.

Your assumption that we wouldn't do acquisitions. I mean, our goal is to find candidates that fit our structure and at the right value. Our first goal is to find acquisitions that make sense and assuming we can't find any, we would look a,t in the short-term, stock buybacks.

We are constantly talking to potential candidates. That's ongoing possibilities for axises is what I was thinking.

I assumed so. I was just wondering if you didn't have them where your cash flow would go.

We have to look at where our opportunities were.

Okay. And 03, do you have a rough idea where your Cap Ex spending will be?

We are working on that. The estimate is somewhere in the de-appreciation level.

Okay.

Maybe slightly more or less which I wouldnt at $120-150 million range.

All right. Very nice quarter, guys. Thank you.

Your next question comes from Pamela Wilson of W.L. Ross.

Thank you. In the commercial area you saw more activity. Could you elaborate a little further and tell us whether or not that activity came in any sector, government, educational or across the board?

It's really more an instinctive field. Because what happens is, we don't have enough data to be specific. I think what we are trying to say is it appears for the moment it may have bottomed out. We are not cognizant enough say it has improved dramatically.

We are hoping that it will but we don't have enough data to say what it appears in the past few weeks is that it doesn't look like it's going down further.

Can you tell whether or not you are taking market share?

Since there are no industry numbers, we really don't have a feel different from anyone else. We spent the last two or three years restructuring our commercial business, realigning our brand and restructuring the sale the forces. We believe we are positioned to improve our position within the commercial business as it picks up.

Thank you.

Your next question comes from Arnold Reeves, Goldsmith Harris.

You indicated in the release that hardwood flooring is 30% of your business. We said hard surface, not hard wood. I'm sorry.

Hard surface. What percent of the business now would be rugs and textiles? Obviously, as you get away from carpet, the internal growth rate improves and that's part of the mix growing faster than the carpet business?

Yeah, its about 10-15%, in that range.

10-15%?

Depending on the quarter.

That's for rug and textile?

That's just rug.

We call it all "home." That's all one group for us.

That includes the package. Anecdotally, could you give us -- just discuss a little bit what your experience is when you bring Dal-Tile to your retail customers, your ability to get shelf space, their acceptance of your product and the willingness to put other products on the shift and put Dal-Tile on and so forth?

The goal is to move to our retail partners a lot of whom are moving into the ceramic industry. Many of them have limited positions within the ceramic business and very limited contact with the industry.

So our goal is to bring to them not only ceramic but also the other hard surface products and help them improve their sales and share of the flooring business.

As you see in the industry, they are using different hard surfaces more broadly in the residential business than they did ten years ago and what there is, is a move for our customers to support the total needs of the customer, and we believe we are leading our industry in attempting to consolidate both at retail and total flooring sellers and we're looking to support them as a total flooring supplier and make it easier for them.

What I'm looking for is really not too many companies in your industry that are anywhere near your position. Just one or two privately owned companies. Are you seeing at retail an enthusiastic acceptance of a floor covering -- total floor covering concept or do they still like to pick off specialty producers? What's going on there?

We started two years ago introducing a hard surface line under the Mohawk brand. Basically started with very limited volume. We set out with a goal that over five years under the brand, we would do $500 million.

We should exceed the $300 million rate this year, so we are gaining support for our hard surface products through the brand strategy that we have. None of this takes into account any advantages we have using Dal-Tile today.

So there's no question in your mind that the concept of a total flooring supplier is readily and eagerly accepted by the marketplace?

I believe you're going to see over the longer term that our retail customers are going to be total flooring providers and I believe you're going to see a limited number of large flooring suppliers that are going to bring most of the products to the marketplace and you're going to see a consolidation of flooring across the different categories by very few players.

What are the implications of the successful implementation of this strategy to your acquisition program? I would think you are creating companies for sale because of their unability to do what you are doing.

We believe that there are companies that see this beyond ourselves, that they are looking for what their long-term strategy is going to be and how to determine how to participate in the marketplace. We have, you know, we are interested in companies that are involved in the flooring business, and all types of flooring products of all the hard-surface types.

Our first move with Dal-Tile, which we believe we purchased the leader in the flooring -- in the ceramic business. They have the best distribution in the business and the widest product offering in the business, and we believe we are going to help finance them to grow it further as well as to maximize their distribution through channels that they didn't participate greatly in. It's our goal to look at opportunities and other categories to do the same thing.

Okay. So you mention acquisitions a few times. Dal-Tile integration is far enough along there that you're back the marketplace-there looking?

We always look. We usually are talking to several candidates at all points in time. Very few of them occur, though.

Thank you.

Your next question comes from Arol Ruddin of Ruddin Capital.

Good morning. Hi, how are you?

Excellent.

I wanted to understand, talk a little bit about the proportionality. Am I correct in assuming that maybe 20% of the total company sales now are in commercial and may be another 20% of the total sales would be over to new housing?

The new housing part, we have a very difficult time in identifying. They use the same products as the rest of the marketplace. Our customers buy the products and in some places they go to both and we can't tell where they end up.

We believe the industry is somewhere in the 25-30% range as an industry and we believe that we are probably typical of most of the industry but we don't have definitive data to support that.

And without industry statistics, obviously difficult to tell whether your share is increasing or gaining. But you have made statements in the past that you feel your sales and replacement should grow at least two times the rate of GDP?

Is that a fair summary? So my question really relates to next year if our GDP is up -- I don't know, 2-4% to pick a range, wouldnt be reasonable to assume that the roughly a-6 % as a range of total sales in replacement should be you believe double that rate?

Our goal is to increase our share in the marketplace every year and we attempt to do that across all businesses as an industry it gets more difficult to do that. If we look at it on a long-term basis we are approaching somewhere under 5 billion.

In order to keep growing we have set the structure aside to look at the total flooring industry which is about$19-20 billion and our goal is to keep increasing our share in the total flooring business and that includes carpet and the hard surfaces and we believe that the industry will sustain our growth rates for the next five years by enabling us to grow within that whole pie.

I see. I didn't understand your answers in the two prior questions. Working actual -- capital has been drawn down. Is it possible to draw it down further as sales increase or have you reached peak levels of efficiency and I have a follow-up question.

It's going to be more difficult to keep reducing the working capital as we go forward as we improve the turns of inventory. We'll reach some point where it becomes more difficult and we keep striving to do that but it's going to be harder and harder to keep doing that.

If I look at the quarter, we're at 13 in working capital to sales dollar, that's about as strong as we've about in relation to working capital. We're going to work to stay there. I'm not sure we'll improve over that one.

I didn't really understand your answer to one of Lee's questions about your representing competition to Home Depot and other large box retailers. Could you go over that relationship and any disruptions that you think might develop or are lessening in one direction or the other?

I think our answer was that we don't perceive we are a competitor to our customers. That we are trying to assist all our customers in improving their business. That we have some customers that typically act as contractors to the new construction business and we try to support them.

We have other customer that historically have done most of their business in the residential replacement business and we try to support all groups and don't see that we have a conflict with our customers.

Okay. And looking at next year, do you feel that your pretax margins can improve as Dal-Tile is put through or distribution network and roughly what percentage of Dal's distribution is handled by the old Mohawk distribution network, what percentage do you think Dal-Tile could represent as time goes on?

The big opportunity is not on the cost side but on improving our share and marketplace.

Second from that is the new plant that we are putting up is being built to compete in the mild to higher range product categories where historically there have been more margins. The big opportunity is in growing the sales and margins and all the ceramic and especially in the higher end product categories. On the distribution side, we continue to look for ways to create efficiencies but that's going to be minimum to the whole.

Any other questions?

Your final question comes from [INAUDIBLE].

Good morning. Thanks for the statement. I wanted to follow-up on the question, I guess I was curious in terms of a customer, is Home Depot a favorable customer or are they tough to deal with in terms of pricing? The reason is they acquired three distributors that are direct to the home market and I was curious is that going to cause disruption in that distribution market if they get more aggressive in terms of distributing products?

I'm not sure I got -- you asked two or three questions and I got confused in the middle of them.

It's really tied to the other one. How good of a customer is Home Depot? Are they good to deal with?

Start off with Home Depot. Home Depot is our largest customer, and I don't have any large customers that don't have high expectations and requirements and it's our goal to fulfill the needs better than their other alternatives.

In terms of margins versus some of the larger replacement dealers, any better or worse?

I can't give specific information about specific accounts.

Okay. I guess the other question was in the last quarter, they acquired three retailers who are direct to -- I guess they are focused on distribution direct to the new home.

We call those contractors.

And the acquisition of the three contractors, is that going to become more disruptive in that market for the new home market for you guys or going to be a benefit?

It has to have a disruptive effect on the marketplace because their goal, I assume, is not to stay with three but to have a national distribution network in order to increase their business through that distribution channel. So how they proceed and what they do should have an effect on the industry assuming that they go forward with it.

We plan to be the provider to them as they move forward.

You don't see it as being a problem through your channels?

I mean, it's another competitor in the marketplace and it does disrupt the marketplace as it happens. We suspect there would be disruptions here, also.

Okay.

And may get advantages out of that, too.

Is there a difference in profitability between the new home market and replacement market?

Historically, the new construction business is lower margin because a focus on a large part of it is focused on opening price point base-grade products and the industry has historically sold those at lower margin.

Okay. Thank you for your time.

You're welcome. Any other calls?

I have a question from Raymond Mathis from [INAUDIBLE].

Good morning. I have a question regarding commercial segment. Now there's a lot of, for example office space, a rising amount of vacancy and seeing construction decline still.

Do you usually see a pickup in your demands as leasing improves or as construction improves? What's the catalyst? What are we looking for in [INAUDIBLE]?

In our business, we give more in the replacement side of the business than we do in the construction business. In our business it would more relate to the leasing and use of the property and existing properties. But we dohave a business in the new construction also.

That's good news because that will lead the way. I have another question regarding your cycle times. Now that so many people are moving out of apartments and buying homes, I'm wondering is this going to effect your cycle time for replacement demand, do homeowners keep their carpet longer than landlords that have to replace them every time a new tenant moves in?

I would actually say it's the other way. Usually the landlords have to replace it every so many years in order to keep it up and they tend to buy lower-quality products. In the residential basis, they tend to replace it when they move in, they do more replacement. In this cycle, the unusual part is if the existing home sales have held up reasonably well except we haven't seen our replacement business follow that as we have in past cycles and we believe that it's related to the consumer confidence in total.

We believe the best indicator is consumer confidence because our product can be postponed, the purchase of it. It doesn't have to be purchased. Usually there is product on the floor and the consumer can postpone it if they are uncomfortable. We believe the best indicator of ours would be an up tic in the confidence level of all consumers.

Potential improvement on both my questions. Thank you very much, gentleman.

Any other questions?

Your final question from Andrew [INAUDIBLE].

Hey, Andrew.

First of all congratulations on a good quarter in a tough environment.

Thank you.

Just want to get an idea on the size of the opportunity with Dal-Tile. Of the roughly 18-19,000 independent retailers, what do you think is the potential market for Dal-Tile. What percent of that retail system could you sell Dal-Tile products to?

There is a trend towards that distribution channel moving into that. We have some people that are very good at it today and some who aren't into it at all and everywhere in between. I believe it's probably easier to look at the whole industry. The industry is about a $2 billion industry. We think we have slightly under 30% of the industry and the question is can we grow our 30% to 35-40%.

I see. Any ideas like how much tile currently gets sold through that independent retailer channel at this point as far as a dollar figure?

I don't have it off the top of my head but we can get you a number.

Thank you. The last question is more of a macro type of question that would be most businesses somewhat cyclical in nature, your business has been a growth business for several years, often what people look at as a trough, a normal and peak earning, curious if you had a view where you might be in that particular type of setting?

Normally the troughs fall -- you have the troughs in where the economy bottoms out, and if you look at our earnings in the last few years, we had peak earnings in the bottom of the economy. I'm not sure I have a number.

I don't think we're in a booming economy right now, I would say.

Okay. Fair enough. Thank you.

At this time, there are no further questions.

Thank you, very much. Have a nice day.

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