莫霍克工業集團 (MHK) 2002 Q4 法說會逐字稿

Good morning. My name is Carol, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Mohawk Industries fourth quarter earnings release conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, press star, then the No. 1 on your telephone key pad. If you would like to withdraw your question, press star, then the No. 2 on your telephone key pad. At this time, I would like to introduce Mr. Jeff Lorberbaum. Sir, you may begin your conference

Thank you. Welcome to the Mohawk 2002 annual conference call. I'm Jeff Lorberbaum, CEO. With me is John Swift, our CFO. John, would you please give the Safe Harbor Statement?

Yes. Certain statements made during this conference call, particularly those anticipating future performance, business prospects, operating strategies, acquisitions, new products, the impact of potential military conflict, 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 would prove to be accurate. For those statements, Mohawk claims the protection of the Safe Harbor Act for forward-looking statements as contained in the Private Securities Litigation Reform Act of 1995.

Thank you, John. Mohawk has completed another excellent year despite economic circumstances that have impacted the economy and the industry. We've achieved this by focusing on the basics, concentrating on execution, investing in our people, and meeting our customers' needs.

The most significant change has been the acquisition of Dal-Tile. Its performance has exceeded our expectations. We have accomplished our goal of moving from a carpet company to a flooring company. About 30% of our sales now come from hard surface flooring, we’re strategically positioned to be a leader in the $20 billion flooring industry.

Our net earnings for the fourth quarter 2002, were $84.2m or $1.25 per share, a 13% improvement. Our net earnings for the year were $284m, or $4.39 per share, a 24% improvement. During the year we generated $550m in cash flow from operating activities. The cash was used for the Dal-Tile acquisition, capital expenditures, and stock repurchases. Our people have, again, shown their ability to manage through a changing economy and make Mohawk an industry leader. John, could you give our financial report, please.

Yes, sir. If we look at the quarter, we had an increase in sales of 34%. There was one extra day in the fourth quarter. Without that, it would have been around 33%. If we look at Mohawk, it was up, without the extra day, it was up about 1.7%. If we look at Dal-Tile without the extra day, it was up around 9%, 8.5%. Turning to the year, up [33.1%], with Mohawk being 5.2% up and Dal-Tile sales being up 9.4%.

Margins came in for the quarter at 28.5%. This was an improvement over last year when it was at 24.6%. The biggest impact on the margin percentage was the Dal-Tile. We also had lower maintenance utility and other material costs and favorably impacting the margins for the quarter. For the year-to-date, 27.4, versus 24.2 in the year before. Again, the biggest impact there was the Dal-Tile. Had a very favorable impact on the margins.

SG&A was up from 13.7 in 2001, up to 14.9 in 2002. The biggest impact was the impact of Dal-Tile. It does run at a higher SG&A. We did have some cost reductions favorably impacting that. On a year-to-date, 14.7 up to 15.9%. Operating earnings came in nicely at 10.9%, versus 13.5%. The biggest impact, there again, was Dal-Tile. On the year-to-date, 11.5% on operating earnings compared to 9.5% the year before.

Interest expense for the quarter came in at $26.6m. That included a $10.7m hedge write-off that had no cash flow impact. It now takes the hedge, the $100m hedge down to an interest rate of 2%. Without that hedge, it would have been about a $16m interest charge. We also had other expenses of $6.6m, which is disposal of equipment, obsolete equipment that we had. On the pretax number, it came in at 10.8% for the quarter in relationship to sales.

We go to the net income. We had $84m of net income versus $59m the year before as Jeff mentioned and that's a 42% increase. The earnings per share at $1.25, versus $1.11 is 12.6%. On a total year basis, $4.39, the best year we've had in the company's history, versus $3.55, up 23.7%.

We turn to the balance sheet, the cash flow. Very strong cash flow. We had debt reduction during the quarter of $125m. On a total year basis, our debt did go up by $343m. That was one source of cash. We also had operations, net income, and depreciation add about $386m to our cash. We also had working capital added about $164m of favorable cash flow. That came from receivables and inventories and payables.

If we look at those categories, receivable days actually came in as 39 days compared to 42 days the year before. The major improvement there was in the Mohawk with quality of receivables improved during the year. We also had payable days improve from 58 days of payables in 2001 to 64 days. Again, the biggest improvement there was in the Mohawk segment.

If we look at the uses of that cash we had capital expenditures of $112m. The acquisition of Dal-Tile had a use of cash of $717m and a stock repurchase of 64m. Our debt to cap came in at 29%, which came in very strong for the year-to-date.

One thing I wish to make everyone aware of. In the first quarter of 2003 there will be one day less than the year before. That will be picked up in the fourth quarter 2003. Jeff, let me turn it back over to you

Thank you. Mohawk achieved many milestones in 2002. The acquisition of Dal-Tile was the most important and made Mohawk the largest flooring company. It extra strategically moved us to a total flooring supplier where we can participate in the higher-growth, hard surface businesses. In addition, we successfully offered our first public bond with an investment grade rating which was oversubscribed.

The goal of continuing the growth of Dal-Tile and maintaining the enthusiasm of both the customers and employees was achieved. Integration of many Dal-Tile administrative functions was completed. Ceramic product management and marketing has been combined. Warehouse and logistics is progressing, and a combined ISS system is being designed for implementation in 2004.

A new facility to make premium porcelain tile is being erected for startup at the end of second quarter of this year. We are expanding our natural stone offerings in floor tile and countertops, a Mohawk ceramic brand for residential is being introduced around the country with both floor and wall tile in a new display system.

We continue to refine our sales force structure to meet the needs of the customers. Our high-end carpet sales force was restructured. We created a separate premium rug sales group. We expanded our commercial national accounts group and are coordinating the efforts of the Mohawk and Dal-Tile sales groups.

The value of Mohawk and Karastan brands continue to increase. The awareness and trust by retailers and consumers continue to improve. Our marketing programs, which assist retailers and merchandising, advertising and training, have expanded both in new features and participation. We've introduced new software so consumers can see Mohawk products pictured in their own homes.

We've also introduced many new products and innovation in the carpet. A new Perfectly Soft collection offers a broad range of styles and a luxurious feel. A new consumer benefit called Forever Fresh eliminates odors in the home and is co-branded with Odor Eaters. A new backing system offers better performance features as well as a differentiated visual appearance. We introduced [Everset] technology, which resists almost all stains and extends the life of our commercial products.

Mohawk hard surface continues to grow and expand, both the sales and distribution infrastructure have improved significantly. We have added products which have brought new innovation and styling to our ceramic, wood, laminate, and vinyl products. These categories should continue to grow significantly.

The industry continues under pressure with the residential replacement and commercial businesses still being affected by the economy and consumer confidence. The carpet industry had another year of about 1.5% negative growth in dollars. The first half of last year was improving, and the second half slowed with the rest of the economy. Fourth quarter fell more with the December carpet industry declining 3.5% in dollars from the prior year. We believe the consumer and businesses will temporarily continue to postpone purchases and the industry will get weaker until the resolution of the Iraq conflict.

At this point, we're not anticipating a dramatic change in the industry trends. Because of this uncertainty, we're giving a broader range of guidance for the future. Our expectation for the first quarter is 0-6% increase in earnings per share above last year and second quarter to be 3-10%. We believe there is substantial pent up demand that will increase the industry sales as the economy improves. There are announcements of raw materials going up by our suppliers and a carpet increase. The amount and timing has not presently been finalized by our suppliers. We will support the increase, which the industry needs.

Mohawk is poised to capture a greater share of the flooring business. Our managers understand the business and the needs of our customers. They have maintained excellent controls in response to the changing economy. Our balance sheet is in a great position. Our debt continues to fall, resulting in a debt to capitalization ratio of 29%. This allows us to take advantage of any opportunity that might arise. We continue to look for acquisition that is meet our criteria. Purchasing our own stock remains a viable alternative. We've had strong financial checks and balances in place for years, and are confident in the integrity of our reporting. We operate our business in a long-term view which position us well for the future. If the economy grows as expected, Mohawk should have a good year as industry sales rebound. Our suppliers, employers, and customers have contributed to making this a record year for our shareholders.

With that, we'll open it up for question.

Yes. At this time, I would like to remind everyone, in order to ask a question, please press star, then the No. 1 on your telephone key pad. If you are using a speaker phone, please pick up the handset before asking your question. We'll pause for just a moment to compile the Q&A roster.

Sir, your first question calms from Stephen East from A.G. Edwards.

Good morning, Stephen.

Good morning, guys. Outstanding quarter, my gosh. On this quarter though, what are you seeing volumes quarter to date? How are your costs looking, let's say, compared to fourth quarter, that type of thing? The third one, your Mohawk margins were outstanding in the fourth quarter. How sustainable are those ignoring the seasonality part of it?

Well, you asked about two dozen questions. Let's start out with -- you know, 2001 we came out of the terrorist attack, and the industry from probably late November through the first quarter and part of the second quarter probably had the best sales improvement for that period of time than any ones I remember in the past. So the comparisons are much higher in the industry with a state of improvement with along with economy and consumer confidence.

Now, we're at a point where it's the opposite. We perceive the economy slowing down, consumer confidence is at a low point. And that just the opposite is happening. Where it was improving, it's now weakening. We believe it's going to continue weakening until we get over this thing. On the other hand, we haven't put in our projections of total disaster for anything occurring as we look at it

Okay. If you look at your volumes on the soft surface side, are you all actually running negative comparisons quarter to date?

I mean, in December it was negative. It's gotten weaker since then.

Okay. On the cost side, are you seeing anything meaningfully different fourth quarter to first quarter? I'm thinking more on the raw material with the oil and all that.

The suppliers -- the information is still coming in at this point. The suppliers, some of them have announced increases. They have not all announced them. We believe they're all going to announce price increases affecting all the different product categories and the prices and costs for all the different products we make at all price points are going to rise

Okay. You think you'll be able to pass that through in your normal fashion or do you have a lot of resistance there?

One of my competitors has already announced his intention to raise prices. We believe that if the increases come through like we expect, that they should be passed on to the customers.

Okay. Then, last thing, anything unique going on at Mohawk, on the Mohawk side, with the margins and all of that, anything we shouldn't expect to happen again?

In the fourth quarter, we're doing everything we can to reduce costs because we know times are tough. We've done things to aggressively manage costs. We keep postponing expenditures. Some of these things you do once, you can't keep doing over and over. We have positive variances that show up. I think you shouldn't look at more the total margin over the year, but the problem really isn't that at all. The problem is short-term volume. It is, basically, based on the industry and the economy. That's the real question for the next six months

Okay. All right. Great quarter. Thanks.

Thank you, Stephen.

Your next question comes from John Baugh with Wachovia Securities.

Good morning. Congratulations on a super quarter.

Thank you

I just wanted to explore, if I'm doing the math right and you do 80 cents in the first quarter, that would imply that operating profits on a year-over-year basis would have to fall about 7%, is my calculation, given where your interest expense is now. If that's true, and I know you didn't put out a revenue guidance. What would revenues have to be? Would they be flat? Would they be down in light of where costs are going for operating profits to fall to, I think, $98m, that would equate to 80 cents a share.

Okay. I guess, John, one of the things to keep in mind, there's going to be fewer days in the first quarter. If you're comparing back to the fourth quarter. There's going to be fewer days than the year before. So we have less days coming in. The carpet industry, as Jeff indicated, is soft at this point in time.

I thought you said one day. Are you saying plural days?

If you compare the fourth quarter, it is plural days. If you compare it to the fourth quarter last year, there is one day. There is one day less in the fourth quarter and about three days less than the fourth quarter.

Okay. And then what would be -- I hear your commentary. I want to make sure I understand it correctly. You were saying for the month of December your business in carpet was negative year-over-year? I know you said for the quarter the industry is off 3.5. Did you say your business was off year-over-year in the month of December in carpet?

We really didn't say. I mean, basically, we were in line with the industry.

So you're saying your results in carpet for the industry for Q4 were down 3.5%?

That's what the industry data indicates.

You were in line with that?

Correct.

Okay. And what would be your expectations on the Dal-Tile side, which has been running pretty close to 9% year-over-year every quarter? Will that go all of a sudden flat or negative in the first quarter? Is that baked into your assumption?

The assumptions have that all the businesses are declining in volume. We don't give out specific pieces by each one. They are all declining. Using that number, we came up with the estimate of profit of 0-6%

You referenced stock buyback as a possibility. Obviously, business is slowing you're going to generate even more cash, it looks like. What should be our expectations on that versus just keeping your powder dry for some acquisition opportunities down the road?

The acquisitions are the number one goal of the business to do and/or put investments in the business. We're putting $60m in a new plant in Muskogee, Oklahoma, to manufacture tile. So those are the primary objectives. Assuming we get to a point where we can't find those and we want to put the cash somewhere else, the objective is to buyback stock, assuming it's at reasonable values based on adding value to our shareholders

Okay. And the last question would be, what costs specifically have you already seen go up? I know we're looking at fiber increases from the vendors. What to date has gone up and how material has that been?

Call the costs are moving. Energy costs, other material costs are moving. What, health care costs. We've had -- in two years we're probably somewhere between 35 and 40% increase in the health care costs. Everything is going up. All the materials we're using as well as some of the basic overhead costs. Then we have that combined with what we perceive as lower volumes in the short term. The positive, again, is our industry tends to be the first one to slow down because consumers can postpone the purchase of our products, and this tends to give us -- we also tend to be the first to pick up. On the other side of this comfort that we all have in the economy, we perceive there's a large upside as the economy and consumer confidence comes back.

The commercial side of the business, we believe -- I mean, it's at the bottom now for three years. At some point the businesses are going to have to continue investing and upgrading the facilities. We believe that's in the future, too. If you ask us today, we would say the end of the second half. But who knows.

I'll defer to others. Thank you.

Your next question comes from Keith Hughes with SunTrust Robinson Humphrey.

Hello, Keith.

How you doing? Two quick questions. First, Jeff, with the nylon producers, do you think you'll look at an increase on branded and unbranded nylon here in the next month or two?

I believe that everything is going to go up. We're just at the initial stages of this. So I can't give you any specific data.

Okay. Polypropylene, we're already seeing the increases, correct?

You’re correct.

Would you be willing to share with us a magnitude on the polypropylene side?

There are public documents can you get. I don't have the numbers in front of me. It would be in line with the industry.

Switching over to commercial, have you seen any up tick there at all in the fourth quarter, any movement of any variety?

We thought we were seeing some, but it's too hard to tell. We thought we were seeing some projects put off. Businesses are really scared of the future. I'm not confident to tell you that -- I think it's bottomed out at this point. I'm not confident to tell you it's headed up.

Is there any -- has there been more pressure on pricing in commercial, or has that bottomed out as well?

No more than we've been having.

All right. Thanks for your help.

Sir, your next question calms from Laura Champine with Morgan Keegan.

Good morning. A couple questions. John, what sort of effective tax rate should I model for next year? Do you have any tax credits left?

Not at this point. Model it at 37% for the moment

Of the $60m you mentioned in porcelain facility start-up costs, how much of that expense will come out of Q1?

That wasn’t start-up cost. That was the investment in the equipment.

Okay.

That was capital expenditures. I think off the top of my head, if you don't hold me to it, the first half it’s probably going to be $4-6m of expenses in the first half.

Okay.

Start-up will start at the end of the second quarter and be coming up through and the goal is to cover the costs and we probably won't see any significant positives until next year because we have to get it operating at certain levels to get it positively helping us.

Gotcha. Thank you.

Your next question comes from Andrew Sidoti with Wm Smith & Company.

Great quarter.

Thank you

Good morning, gentlemen. I have a couple questions here. Number one, the Dal-Tile integration, just wondering how far along you are with your goal of having a unified information system that would allow you to operate just one distribution center – or one distribution system.

What happens, in order to get to that point, we actually have to integrate the total systems of both businesses, and they have laid out plans in order to get there, but, I mean, it's going to be sometime in 2004 before we get a unified information in the system. The goal, more than doing it quick, is not to disturb it too quick. Many businesses have been ruined by throwing together systems. We're going to take our time and implement it on a piece piecemeal basis make sure we don't interrupt the business.

Just to jump around, on the buyback, what was the average price you bought stock at?

$50

Okay. And any rough idea where your CAPEX spending might end up in 2003?

The budget that we planned, that we approved was about $160m, of which $30m of it was going towards the investment in the tile plant. Based on what we know today, I would guess we would be closer in the $130m range. Depending on business, it could be more or less significantly either direction if the economy changes.

Okay. And I guess my last question would be, given the talk about changing the tax rules and your balances strength, would you consider paying a dividend at some point?

Our goal is to maximize the shareholders' value. If paying dividends will do it, we will do it

Fair enough. Thank you.

Your next question comes from Margaret Whelan with UBS Warburg.

Good morning, folks. Well done. Most of my questions are answered. The only thing would be left about the Oklahoma facility. Are you stalling the roll-out of the plant at all because of the slowdown in business?

No.

It's just taking longer. I thought that was a 4Q roll-out originally?

No, never.

What was your original plan?

It never was planned for that.

It could be my mistake. What was the original plan?

Second quarter, second quarter. Now, you may be going back to some point, before we bought them, Dal-Tile may have had different plans. When we got into negotiations, they didn't move ahead with the plans. You may have some --

That could have been it. Okay. So second quarter. There's no delay.

It hasn't moved.

Is there a chance that might negatively impact the gross margin as you get it up to speed?

The goal is not to-- the plant that we're building, I mean, we have built in about a $4-6m expense in the first half doing that one. The question is how fast it comes up. Our expectation is it will come up fast enough to cover the costs in the second and third quarter. Long-term, the plant is designed with the best equipment and highest styling available, and our goal is to be able to make more of our higher price merchandise that we've been buying from other people and expand our higher-end business so that we hope that it's going to increase our margins, not decrease.

Yeah, but just in the short-term, you said you're already managing at about $6m potential drag?

In the first half.

First half. Okay. The other thing, Jeff, we're coming up on the best housing industry we have seen. Why is there pent up demand out there?

In the carpet industry, the new construction is only about, I don't know, 25, 30%

Yeah.

So it's the other 70% that's the problem.

So because it's been a drag for the last two years, you think there's pent-up demand?

Not on the new construction

Yeah. I understand. The 5 million existing homes sold each year?

Yes.

Thank you.

Your next question calms from Dennis Rosenberg from Credit Suisse First Boston.

A few questions. On the start-up cost of $4-6m, when you said once the plant is up, you expect to cover the costs. Do you expect to just cover the expenses that will be incurred in the second half, or do you expect for the full year to break-even?

I'm not sure I've looked at it that way at this moment. I don't remember the exact numbers, to tell you the truth. The goal is to make it accretive during the year. It depends on how quickly we can get the equipment up and running and how fast we can move the production through it. There are so many variables that you're beyond the tolerance of giving exact information at this point. If everything goes smoothly, it will be accretive in the fourth quarter. If it doesn't, it will be pushed out

Okay. I'm not sure whether you understood my question. It's going to cost you $4-6m in the first half. Do you think you'll be able to offset that $4-6m in the second half?

That would certainly be our goal, Dennis. We're not sure at this moment whether we're going to or not.

Okay. Jeff, you commented that all the businesses were slowing down. The way you put it, it sounded like Dal-Tile sales are going south. I don't really think that's the case. Could you elaborate?

No, what I've said was we assumed that our volume, the business is going to slow down from whatever rates they're at, it's going to slow down, is all I said.

Okay. So what you're saying is you don't think you could maintain the 9%, but you're still expecting significant growth?

I think there would be something wrong with me if I anticipated increases looking at the economy and what's going on in the near term.

But you're talking second derivative, not first derivative?

I don't understand that.

I'm not sure what you're saying.

You're saying -- if Dal-Tile goes at 9% in the fourth quarter, you're assuming a lower rate of growth in the first quarter?

Right. You're correct.

That's what I wanted to clarify. And then, finally, given that things are slowing down and the war with Iraq has not started, why would you expect the second earnings growth to be better than the first earnings growth?

That's a good question. We're assuming that sometime before the end of the second quarter it's going to -- something is going to happen. We're assuming that it's going to get better, but our crystal ball is no better than yours.

I guess, Dennis, the other way to say it, we don't know what's going to happen in Iraq. If the bullets start flying, those forecasts we gave you are off the table. We're assuming in those forecasts there is no war. That doesn't have a war scenario in it. We're assuming general economic conditions. They're showing improvement in the second quarter and third and fourth from all the economists I've seen. That's what's in our forecast currently.

Okay. Great.

Your next question comes from Earl Rudman (ph) with Rudman.

Hi.

Hello.

I need an accounting lesson. Did you -- you indicated that your cash flow, working capital was about $164m.

Yes.

Your press release, I have trouble coinciding it. The thrust of the question is less spending time on historic accounting, but how much are you planning if the sales continue weak for the year, this year. What kind of contribution can we see coming from working capital decline? To help better understand that, can you tell me how it happened last year and, with weak sales, how much could working capital generate this year? You know, I would assume that with strong sales working capital would do nothing.

Yeah. As I indicated to you, we did get a favorable impact from the working capital. It depends on how far down the sales go, what's going to happen to the receivables and inventories. We have seen --

Let us walk you through last year's numbers again.

We had about $893m that we had available for cash in -- hold on one second here.

We put the papers up.

We had $284m from net income and $102m as I indicated from depreciation and $164m from working capital. That's what Jeff was talking about, is this $500m we were getting from the operations. We also borrowed $343m is what we're saying. I'm not sure where your confusion was. We borrowed $343m. If you look from the beginning of the year to the end of the year. That gave us about $890m that we had available. Of that, we spent is $112m for CAPEX and $700m for acquisitions and $64m for stock repurchase.

Now, what happens on the working capital, if the business falls off, yeah, there will be a generation of money from the working capital. If we look at our working capital right now in relation to sales dollars, it's 14 cents of working capital for every dollar of sales, is where we're running currently. One way of looking at it, if you're going to take the sales down, you get around 14 cents of favorable working capital reduction as the sales go down.

Okay. That's helpful. Jeff indicated about prices that public documents show there are price increases. Could he help us tell us where those public documents are?

They are documents -- I can get some. They are put out -- there's a polypropylene one. I believe there's a nylon one. The nylon one really doesn't track industry too well. There is a very limited number of companies that control it. It really doesn't relate directly to the carpet industry. The polypropylene one. There is an industry piece. We can get you the name of it. I don't have it here

In your press release, you indicated that hard surfaces are 30% of sales. So is that -- I would assume that's a fourth quarter rate?

Yes.

So should I take 30% of 1.2 billion?

Yeah, that's correct. That's about 300 million.

If I do that, John, I get 360.

Uh-huh.

Dal-Tile had 283 in the fourth quarter.

So Mohawk is around 80 million.

Exactly. So that tells me that Mohawk sales were down about 8% in the quarter in carpet and that, I'm assuming, that the sales rate for Mohawk's hard surfaces mimic Dal-Tile's?

No. No. The other thing, you're coming off a much lower base. The carpet sales, actually, were about flat, somewhere in there, for the quarter.

Okay. Now, my associate said in the past when price increases occur, there's pre-buying. Since Shaw, that well known competitor of yours has announced price increases, we would assume there would be some strength added to the first quarter from that effect?

I don't understand how pre-buying improves the first quarter

Because if the price increase occurs, depending on when it occurs, it might -- if it occurs in on April 1, people might decide to boy in the first quarter. If it occurs tomorrow, they possibly have enough time and it will all fall --

You're talking about my customers buying. I thought you meant us buying raw material

No. I meant your customers buying from you.

It's hard to tell. With the sentiment where it is today, I don't know what anybody's going to buy.

You brought up the point, which I thought was an excellent point, that a small percentage of your sales are increasing and the rest are in the replacement market. And those aren't doing well. Could you share with us your thoughts as to what variables you look at as industry participants that would give you a better feel for when it changes, other than the cash register?

The pieces that I think -- in the replacement business, consumer confidence is a major show. I really believe that our business -- if you go back, you can recall in July 1 of last year, we said the business is falling off. What happened is they announced consumer confidence a week or two later. Consumer confidence fell dramatically in June. I think that we move as quickly as the consumer confidence does. I think they're moving together. The residential business is following the new home sales, new construction starts, and the commercial business is following the business expenditures. I mean, that's -- I think they're all relative to those.

Uh-huh. So, basically, for the last couple of years, there's been a small variance. You wouldn't describe what's gone in the fourth quarter and the year-to-date as out of the band that you've experienced within the last two years. In effect, we've had a quarter to 30% of the company of sales being strong and, as you say, 70% has been weak. Maybe we're being paid to wait now very handsomely.

It is following -- the consumer confidence is at all-time lows in I don't know how long. You probably know better than I do. People are not spending money. The only piece having any vitality is the new construction.

Okay. So at some point I would very much appreciate you letting me know how we can follow price increases through these public documents.

All right. We'll get the information to you.

Is it your expectation that in the past year price increases have held well and that your margin improvement indicates that you have been more than able to offset increases in the raw material costs? Is there any reason why you would expect this pattern not to continue?

That's the goal. It appears in the last few years the industry has been able to achieve that. I think the only codicil to it, I would say, in the short term, there's timing differences which could impact it.

We thank you very much and appreciate your answering our questions.

Thank you.

Sir, your fix comes from Arnold Grief with Paul Smith and Harris.

A few questions. I'll ask them one at a time. So we don’t have to repeat them.

That's good. My memory isn't too well.

It's been a long morning, I bet. Dal-Tile, one of the programs you had for that company was to move them successfully into retail and to your retail distribution, getting more shelf space on the flooring business from your customers. Can you give us an idea how that's progressing and what kind of incremental volume you expect to generate from the new plant?

Yes. The marketing piece is that we are allowing the two sales forces in residential. They had some business in residential and remodeling business. We're allowing them to continue what they're doing and we are now in the process of putting out a Mohawk branded ceramic piece that they are managing the product categories and merchandising for us. We are trying to coordinate the efforts in marketplace in order we don't have conflicts as we do that. Our goal is to walk into a significant ceramic user and actually have them selling both the Mohawk brand and the Dal-Tile brand side by side, and we also have a third brand that goes through distributors that's called American [Olean]. It would be to have a significant portion of this whole business because we bring value to him.

On the commercial side of the business, it is more relating relationships and jobs. We are communicating and getting better at coordinating -- calling on the end use customers when they have projects going and specifying our projects together and that process is gaining strengths as we go forward

Where are you in the process? Are you starting to see some momentum building for the res did not shall level for the tile business?

The reason that Dal-Tile is doing well is they are expanding their residential business. If you remember, a major part of the business was coming from the commercial business. They're in the same commercial business as the rest of the world. So the growth is coming from the expansion of the residential business.

Could you give us some idea of percentage of sales, how residential is progressing?

I don't have those numbers with me

Ballpark, just so we have an idea of magnitude?

We show a quarterly increase of 9%. Dal-Tile. 9% increase. You can assume that the contract business is shrinking.

Right, what was the residential portion when you acquired it?

As a total of -- proportion to what?

Dal-Tile's total sales.

Probably in the neighborhood of around 50%. Maybe a little less.

Okay. The incremental volume from the new plant, that could be what?

About -- I think it's going to add 15% to the capacity. But you can’t use that to --

You need more dollars because of the high price.

Correct. But we also use -- we buy from manufacturers from around the world. So we're actually selling more than we're making. We utilize the world marketplace to buy product also. We're one of the largest importers of ceramic tile in the country.

Some may be a substitution, in other words.

Yeah. It's a swap. The major play isn't on volume. It is on margins.

The goal is to keep growing the business. Our goal is to grow the business, is not shrink it

For a period of time we may be doing a substitution.

Okay. The rug business, can you differentiate on how it's performing versus carpet, and how much total rugs and mats, whatever your non-carpet business, excluding Dal-Tile. Out of the hard flooring your rug and other soft products accounted for last year and how they're doing relative to the carpet business?

We don't break them out specifically. The business is growing. They have expanded their share in the core businesses. We continue to improve our competitive position in the marketplace, and we are continuing to invest in automation in order to lower our cost structures. Within that business, we're the largest rug and mat manufacturer in the country. We're the largest throw manufacturer in the country.

We are also building an import business where we're buying products from around the country and importing them and selling them through our distribution, through relationships and expanding our relationships with overseas suppliers as we speak.

Would it be fair to say even in this difficult period, if you put the hard flooring and your rugs and mats together, well over half your business is still growing, even in this difficult period? And it's just the carpet business that's dragging and carpet business is becoming a smaller percent of total? Fair conclusion?

I think so. I don't normally look at it under those -- you've put it together differently than I normally look at it. But I believe that the carpet business is shrinking and the other businesses are growing.

And the carpet is probably under half your business, then? No comment?

Close

About half.

Maybe a little more.

And, finally, you indicated uses for your cash. The one that was noticeably absence, obviously, acquisitions, capital expenditures and stock buyback. Would you put stock buyback before debt retirement?

It depends on the timing. Right now we paid off our short-term debt, which is why we got rid of the hedge. We had to write-off the hedge. The long-term debt, we have difficulty paying off at the moment. In the meantime, we still believe that acquisitions are a significant opportunity. We want to make sure we have the capital available to do what we need to

Okay. And, finally, and I'll get off. Your assumption there is a pent-up demand is a reflection of two things, I would think. The trend in cut orders, which I'm sure is down in this environment. That's the first to go down, the first to come up.

Secondly, the fact that replacement housing has been so strong for the last three years but carpet sales have not been. Can you differentiate between when you make that conclusion there's a pent-up demand? How do you differentiate between the fact that carpet is losing share, while hard flooring and rugs are increasing, versus the possibility there is a build-up and pent-up demand in carpet because of the strength in-housing?

I believe it because if you look at last year when we came out of the terrorist attack, the industry did significantly better as consumer confidence was rising. –And my belief was that was caused by the change in confidence, and people were starting to redecorate their homes, which they postponed.

In addition, which is not immediately felt, you can't forget the commercial business, which is off dramatically over the three-year period. Companies are going to have to invest in their facilities. Both of those are going to return.

Thank you very much.

Your next question comes from Stephen East from A.G. Edwards.

I thought we got rid of you

You tried. On the interest expense, on the hedge, John, how would we see another charge come through? You said that you may have more in the future. What would have to happen?

You could have either one. These are accounting entries, not cash flow. If interest rates go up, then we actually got a favorable impact. All you're doing is hedging. The shorter the period of time, the less it's going to be. It's two factors here. What happens to interest rates. That will have an impact and how long does that hedge have to go. That will reduce over time. I don't see interest rates changing or 2 or 3% in a quarter. It could be a quarter percent or something like that. If that's the kind of impact, it's going to be very minimal impact on the hedge.

Okay. Is this -- what is this tied to?

The short-term rates.

I mean, a Euro, [lie bore]?

[Lie bore].

Okay. It is. Okay. And then the other thing, if we looked at first quarter of '02 and restate is it as if the merger occurred in the beginning of the year, what would the earnings have been last year?

I don't -- we do look at it that way. A couple pennies, a penny or two.

78, 79 cents?

Right.

Thanks a lot.

Your next question comes from Sam Darkatsh from Raymond James.

Good morning. Most of my most, gosh I hope so, have been answered.

We do, too, Sam.

Two quick questions. Your SG& A was about $18m lower sequentially than the third quarter. What would a reasonable run rate be for that going forward?

If you look at the annualized numbers over time. There’s some timing things but -- We've cut back on some expense that is we could postpone because we didn't like the way, the year was working. If you keep trying to control cost, you have to look at it more on an annualized basis.

So the 179 level might be unrealistic if we model that going forward?

Yes.

Okay. Last question would be, you mention hard surface as a percent of your sales by year end was about 30%.

The quarter, Sam.

I'm sorry. By the end of the quarter. I apologize. About 30% of total sales. What is your goal for the end of '03 to have that percentage reflect as a total sales?

I don't have that number to give you. Our goal is to grow the businesses, get parts, to look at acquisition candidates in each piece as well as internally grow the pieces. We have by product, by brand, by distribution channels, we have goals. I don't know what they are here.

Would it be unfair for us to assume you would look to grow your ex Dal-Tile hard surface business by a factor of, say, 50% or so?

Ex Dal-Tile business. I think that's going to be difficult to do at a 50% rate. It's one thing to do at a 50% rate when it's a $5m business.

We're going to do as best we can. We do have some plans but don't want to get into those at this point

I got you. Thanks, again.

Your next question comes from Clay Letdower (ph) from KCM.

Good morning. Hopefully, I'll be the last guy here. I have a question for you. In your press release you talk about the creation from Dal-Tile being better than expectation, 12 cents since you've had it. That equates to about $8m on the bottom line. I'm just trying to have a better understanding of what type of hurdle rate. It seems like it's not a stellar return on amount of capital and stock going into purchase Dal-Tile. I want to try to get a better understanding of that

I think you're looking too short term. You are looking at nine months worth of efforts. The reason Dal-Tile was strategically valuable to us, was it enabled us to create a move from a carpet company to a total flooring business, and the question is how are we going to grow our business over the next five to ten years? If you stay in the carpet industry, we're going to have a difficult time with the share we have, continuing its growth over the long term and meeting needs of the shareholders.

What we had to do was get in the hard surface business which are probably growing 6-8% a year, where the carpet business is growing GDP of around 3%. We have low shares. It enabled us to move to this long-term strategy of becoming a total flooring business. The question is, can we get to 35% of the $20 billion as a total industry? And that's why extra strategically it is important. The faster growing part of that industry is the ceramic business. The largest piece is the ceramic business. It puts us in position where we think we can grow it dramatically and use it as a spring board to help us grow the other businesses.

I don't know if you disclosed this. Is the DD&A that’s attributed to Dal-Tile roughly $3-4m a quarter? Is that kind of the range?

Yeah. It would be around $20m for the year

$20m for the year?

Right.

All right. Thank you.

Thank you.

Your final question comes from Lee Cooperman (ph) with Omega Advisors.

Hello, Lee

I didn't think I would make it.

Good morning. I thought you were sick.

No. I've been fronted in right from the beginning. I must have fat, slow fingers. Anyway, I got housekeeping questions and my typical philosophical question. I will go through them quickly. What were the actual shares outstanding on December 31?

67 million, roughly.

Okay. Secondly, I heard the answer on CAPEX. Depreciation and amortization, what would we be budgeting for this year?

$105m.

I heard you right -- from the stand point of your free cash flow, acquisitions seem to be a number one priority. Number two is stock repurchase. Debt reduction, we don't have flexibility unless you go long bonds and dividends you will watch how the tax laws evolve. In terms of acquisitions, without identifying them, obviously, what kind of capital could that consume given what you are on your wish list? Without identifying, are we talking a couple hundred million?

It is all over the place. It depends how many and which ones.

It could be, potentially, big dollars.

Large ones and small ones.

In the aggregate, it could be potentially big dollars?

Always.

The other expense item in the fourth quarter, I don't know if I missed it. Did you identify it?

The other expenses is a disposal of obsolete equipment where we got rid of some equipment that we're no longer operating. It was old, worn out, and wrote it off the books.

Gotcha. I don't know if you want to comment on this. This reading the comment this morning of the [pundits] that follow you. We have one guy saying 440, one guy saying 470 and one person saying 485. In the order of magnitude, do you anticipate using your crystal ball, which I understand, as you always say, Jeff, is no better than my crystal ball. Would you expect to have an improved year in 2003 or is that up in the air?

In the short term we anticipate it up. We anticipate the first half worse and the second half better. Given that, you can see we anticipate up. That doesn't take a disaster scenario into account.

Okay. Lastly, probably most important question. You and your board, when you make a determination to buy stock back and you pay $50 in the fourth quarter much you have to have a conceptual view of what your worst case earnings would be, your normal earnings in a typical year, and your peak earnings. My guess is we have peak earnings for now. What do you think, just to help us all out, what normal earnings are?

And the reason I raise the question because we've had a big explosion of earnings in the last years, from 260 in 1999, 308 in 2000, and 355 in 2001 and in the year we just ended 439. Do you think that improvement earnings still puts you in an area where you are normalized? If we had a tough year, given the concentration in the carpet industry, given the change of your mix, getting into hard surfaces, that this company should earn, I don't know, pick a number, $3.75, 4 bucks in a tougher year? Do you think there would could be a more dramatic erosion in profitability?

Before you answer that, obviously, it is something you have to have in mind because you guys have been terrific in handling your repurchase program.

That's so many questions in one. You take a worst case scenario, hell, it could be anything. It could be zero. It could be negative. That's not what we work for. Taken another way, take our $50 stock price. If you look at it and say 15 multiples is a reasonable multiple over time, you need, what, $3 worth of earnings to support it.

Uh-huh. You think your stock price is discounted. You may or may not see that decline of earnings given the balance and strength. In the business it pays to buyback equity?

We think so

Good luck. You did a fine job for shareholders.

Thank you very much. We appreciate everything. Have a good day.

Thank you for calling.

Gentlemen, do you have any closing remarks? Thank you for participating in today's teleconference. You may now disconnect.