莫霍克工業集團 (MHK) 2003 Q1 法說會逐字稿

Good morning, my name is Christie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Mohawk Industries First Quarter Earnings Release Conference call. All lines have been placed on mute to prevent any 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 then the number one on your telephone key pad. If you would like to withdraw your question, press star then the number two. As a reminder, this call is being recorded today, April 17, 2003. Thank you. I would now like to introduce Mr. Jeff Lorberbaum, President and CEO.

Good morning, welcome to the Mohawk First Quarter Conference Call. With me I have John Swift, our CFO, who will give the Safe Harbor statement.

Thank you Jeff. Certain of the statements made during this conference call, particularly those anticipating future performance, business prospects, operating strategies, acquisitions, of new products, the impact of the military conflict, and similar matters constitute forward-looking statements within the meaning of Section 27a of the Securities Act of 1933, as amended. Forward-looking statements involve a number of risks and uncertainties. These and other assumptions could prove accurate, and therefore there can be no assurance that the forward-looking statements will prove to be accurate. For those statements, Mohawk claims the protection of the Safe Harbor for forward-looking statements as contained in the Private Securities Act litigation of 1995.

Thank you. John. In the first quarter, business conditions were weak. The industry was affected by geopolitical circumstances, low consumer confidence, the war with Iraq, and high oil prices. Spending on large discretionary items seems to have been impacted greater than the overall economy. In addition the weather affected specific areas of the country and reduced sales further. We expect the current conditions to improve later this year. Presently we're managing the controllable aspects of our business, and are adjusting to the environment as it changes. We believe our results for the quarter are good, given the conditions, but we're striving to improve and deliver better results. Mohawk sales for the first quarter were approximately $1.1 billion, and earnings were about $42 million dollars. The earnings per share were 62 cents. John would you give the financial report, please.

Yes sir, as Jeff indicated sales $1.1 billion dollars, up 25%. Major impact there was Dal-Tile acquisition. If we pro-forma Dal-Tile in for the quarter it would have actually been down 2%. But there were two extra days in 2002 for Dal-Tile and 1 for Mohawk. If we look at on a pro forma for days, the sales were actually flat period to period. (Inaudible) came in at $275 million dollars, that’s 25.3% of sales. Last year was 215 or 24.9% of sales. The improvement there, actually, was fully the impact of Dal-Tile. SG&A $197 million versus $140 million last year. That is an increase of $57 million, that has to do with the acquisition of Dal-Tile. If we look at it on a pro forma basis, the SG&A last year was $198 million. Mohawk segment actually reduced by $5 million dollars during the quarter and the Dal-Tile segment was up $4 million, primarily having to do with the placement of samples for customer residential products, and, also residential sales force. Operating earnings $78 million dollars, 7.2% of sales compared to last years $75 million, 8.7% of sales. Net income $42 million versus 43, and earnings per share, as Jeff had indicated, 62 cents versus 77 cents last year. Our receivables came in at $541 million. If we look at last year there was a $45 million dollar federal tax rebate, receivable included in the numbers. If we exclude that and look at the number of days receivable. We had 31 days receivable this year versus 33 last year. Inventory came in at $762 million. That’s up $60 million. Primarily the hard surface growth required to us have more inventory there. Our returns came in at 4.3 turns. Working capital at $655 million dollars. In relation to sales, that's 15 cents on the sales dollar, and our debt to capital was reduced from 39% last year to 29% this year. Jeff.

Thank you. This has been a difficult environment for the carpet and home products. Our carpet products are mainly utilized for remodeling and are a leading indicator of the economy. Sales are influenced heavily by consumer and business confidence which has been very low. The lower sales volumes in soft-flooring products have resulted in unabsorbed overhead costs. This combined with higher raw material cost and more aggressive product promotions negatively affected our gross margins. In carpet we are implementing a 5-8% price increase to cover the rising raw material costs by the end of the second quarter. We are also focused on reducing our controllable costs, which include labor, selling, general and administrative expenses, and managing our capital expenditures. Our commercial carpet products have shown some improvement over last year, and may be indicating the start of a slow recovery. Our home product sales for the quarter reflected the slower retail environment, as well as reductions in inventory by some of our customers. Some new product introductions were postponed from the normal time. They are now ordering to satisfy customer demands.

Presently, we don't see any indications of a quick rebound in the industry. The war with Iraq has impacted business, but it's difficult to quantify specifically it's effect. The new residential construction business is continuing to be the best channel. The carpet price increase has resulted in normal pre-buying, and is obscuring our view of the present sales levels of our customers. Raw materials and energy prices have continued to impact our cost. Our carpet raw materials have increased in advance of our price increases. Our Mohawk and Dal-Tile hard surface products continue to grow. As in the past, the hard surface product categories are outpacing carpet sales.

In hard surface products we are increasing inventories to our expansion and provide high service levels. The new ceramic plant continues on schedule to start up the end of the second quarter. In the first quarter start up costs are about $1 million. And in the second and third quarter the startup cost will be about $2 or $3 million each, and we should break even in the forth quarter. By the end of the year we should be running at about 75% of capacity. We expect ceramic going forward to be a (inaudible) area in flooring and our position to increase our share. We continue to invest in sales personnel, marketing, new products, and our distribution system.

In the short term, it is difficult to predict the economy, retail sales, selling prices, raw material costs, and energy costs. We are anticipating that carpet price increases, normal seasonal sales improvement and costs containment will improve the second quarter. Based on these factors our second quarter earning forecast is from $1.05 to $1.15.

We believe the present business conditions will improve in the fall of the year. Economists expect the overall economy to improve after the war ends. We expect a rebound in demand, such as we experienced following the terrorist attack on September 11th. In addition, if oil prices contract as expected, combined with increased carpet prices, we anticipate improvements in sales and operating margins in the second half. In the 2002 Fortune 500 list of the U.S. corporations, Mohawk moved up to number 361 from 455. Additionally, Fortune ranked Mohawk 18th for growth and profits over 10 years. The Wall Street journal ranked Mohawk number one for performance its furnishings and appliance category. Floor Covering News awarded Mohawk the best overall carpet manufacturer and the best overall ceramic manufacturer at the 2003 National Floor Covering Show. Over the past five years, Mohawk has become a total flooring supplier, developed strong brands and efficient production and distribution structures. Today about 30% of Mohawk’s sales are from hard surface products, with our market share continuing to increase. As the U.S. economy overcomes today's uncertainties, we expect our diversification strategy to deliver solid results. With that, we’ll take questions.

At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone key pad. In order to allow fair access to all participants, management requests that you please limit your question to one primary and one follow-up. In you have an additional question, you may re-enter the cue by pressing star and the number one. We'll pause just a just a moment to compile the q and a roster. Your first question comes from Stephen East with A.G. Edwards.

Good morning, guys. A couple of questions around the price hike. Is it fully implemented, is it all the way across the board in residential and commercial, etc?

Let's see. The price, increase is being implemented, and as we go--when we say implemented at all points in time it is a process, not a moment in time. There's the timing of shipments, pre-buying and commitments that we have, so it's a process of putting it in, rather than a second in time.

Okay. Jeff, if I were a retailer and wanted to call today, would it be implemented on this particular order?

Yes.

Okay. What all are you seeing? Has promotional activity slowed down any in relation to that, or where do we stand with it?

Our industry always has a slow first quarter, and the industry always uses promotions in order to try to give incentives for customers to buy more-this is typical. In addition with the slower environment there's a little more promoting going on. Most of it, we, as an industry, try to have, for limited periods of time, or limited product pieces, in order that it's not an ongoing detriment to the business. There's slightly more promotions going on now, but not unreasonable based on the economic conditions.

And then last one on raw material trends, if we just look at -- are you seeing any of the raw materials come back yet, or are you seeing the body language of the suppliers that you think it's going to be coming down pretty soon? What's your feel for what's going on there?

Actually, materials are actually just being increased, pieces that are still going up. So you're looking for it to already to start slowing. We don't see that at the moment. All the material costs that we have are up. You know, the major pieces are resin, fiber, backing, and latex, and they're all increasing and we haven’t seen any retreat.

Okay. Do you think --

Your next question comes from Errol Rudman (ph) with Rudman Capital.

Good morning.

Good morning to you. I just wanted to distinguish, when you said promotional pricing, what you meant by that is what you just said in the prior question that you always have promotional pricing at one point or another, but that doesn't preclude you from actually implementing a price increase?

Understood correctly.

And do you think the pickup in the second quarter in terms of units-the margins eroded for quite a bit for old Mohawk in the first quarter. Do you think the price pick up will more than offset a possible continuity of low level of sales? So that the margins could be restored?

We're not predicting that the margins, in our estimates, will go back to the historical level in the second quarter, based on our estimates that we've given out, I think that’s the question.

But we are saying the weather will be better than it has been in the first quarter, it’s been pretty bad. So we have some improvement from weather, but --

Did we answer the question?

Your next question comes from Keith Hughes with Robinson Humphrey.

Thank you. Jeff on your comments on commercial, you know, talking to other folks in the channel, and most people are not as positive as you are. Are you seeing something share gain, or, you know, you're doing better main stream versus specified? Could you sort of clarify what's going on?

We're not exactly sure of the share gain. If you look at our industry numbers, you can only use them for directional pieces at any given minute, just like we have. The periods change the way people turn in information, it's really a general direction. We have invested heavily in the last couple of years of in restructuring our commercial business and realigning it to different channels, and changing the management, and we've put a lot of things in place. I think that we're in a position to do better than the marketplace, based on what we've put in over time.

Okay. Thank you.

You have a question from Shahin Shahin (ph) with Mohawk Industries

Okay. I want to congratulate you on the great results and your control of costs, and your continuing work to improve sales and margins, and do all the other things you're doing. In answer to some of the questions of the commercial business really looks good, and the high-end business as I understand it, of Custom Weave, is also doing very well, so I hope you don't mind that extra information there. Thank you for the great job you're doing.

Your next question comes from Dennis Rosenberg with CSFB.

Thank you, guys. Could you discuss the sensitivity of the various raw materials to oil price decreases? How quickly will they reflect it when we look at resin backing and latex. Fiber, I would think, probably wouldn’t be that sensitive back on the way down.

Oil prices are an indicator of the cost over time, but they can and do go in opposite directions. As they have in the past, and will continue based on supply and demand and other factors. So oil is just a piece of it. There are many pieces between us and the oil head, and over time, it will have a reference to where it's going, but also the competitiveness of the different supply streams that go through. So it's correlated, but not directly.

Okay. Are there any changes in the number of days in any other quarters this year, versus the year ago quarters?

Yeah, there will be in the fourth quarter, Dennis. As we said, there is one less day for Mohawk in the first quarter, we’ll pick up that day in the fourth quarter.

And what about Dal-Tile?

Same thing for Dal-Tile. Dal-Tile would be the inverse. No-well, Dal-Tile is one day.

Okay. Thanks.

You have a question from Sam Darkatsh with Raymond James.

Thank you. It's actually Budd Bugatch substituting this morning for Sam. On the price increase, Jeff, do you have any idea how much retail pre-buying there might have been to impact the quarter?

It's difficult to tell. We get a spike in orders, and then it tends to have a decline in the next few weeks, and until it gets -- as a matter of fact, even after it's over we're not sure of how much when and which period as we go through it, so it's difficult to see.

And no way you could quantify what that spike might have been? Was it a 2-3% spike over where you thought it would have been?

Well, you have two pieces, one you have the order and the other, you have the shipments-they don't align.

But they are within, what, 7 to 10 days of each other, typically?

Well, in some cases they postpone them a little longer. Now we do things to promote getting them out, but it's not as black and white as you would like to have it, but we really don't have the answer. We are trying to understand what our customers' business is like, and because of this pre-buying and the shipments that are going on, we can’t really use the data that we have to conclude as much as we would like to.

Okay. Thanks.

You have a question from Joel Hayvard (ph) with BB&T Capital Market.

Good morning. Wonder if you could give us an update on the Dal-Tile full line gallery, the program that I believe last time I asked you, you had in place in Dallas and Atlanta I wondered if y'all had expanded on that, and what the plans for that would be based on the performance at those two locations that I'm aware of currently.

The locations you're speaking of are basically set up to make for specifications, and to assist our customers in specifying our products in the different market places. We are opening one more of them. I don't know the timing of it at this moment. But they are helping us create specifications in the market place. It's a nice environment to bring the customers into and we help then select products of ours and specify them.

So that one additional – do y'all have a location decided on that?

To tell you the truth I don’t remember where it is sitting here, I should, but I don't.

But it’s one more that’s definitely in ’03. And I take it from that that y'all are pleased with the performance, but we could probably envision that as maybe a location per major metro area.

You have to have a certain size marketplace to utilize it in or the costs are too high to go forward.

Okay. Thank you.

You now have a question from Laura Champine with Morgan Keegan.

Good morning. Do you anticipate a similar price increase for Dal-Tile, and if you do, what's the potential timing for that?

Dal-Tile has actually announced a price increase of a smaller amount, to pass on some of the energy cost that they have, as well as some of the import costs arising as the dollar value has changed in different parts of the world.

Okay. Thank you.

You have a question from John Baugh with Wachovia Securities.

Good morning. My question is on inventory, it went up $84 million from the year end to the end of the first quarter. Could you, John, break out how much of that it was hard surface, and how much was carpet, and in the carpet figure, tell us how much of that is raw materials versus finished goods?

We don't have the exact numbers with us. The majority of the amount is in hard surface inventories boasted on the Dal-Tile side and Mohawk side, is the biggest chunk of it, then most of it is in raw materials, rather than in finished goods, as we let some of the inventories rise more than we would have because of the price increase.

Okay. Maybe I'll follow up and get specific numbers. And then on nylon, specifically, I know you're on Lifo accounting, won't the nylon costs being higher in the second quarter than the first quarter, and, you know, try to quantify that for me.

I'm not sure what you're saying, John, you're right they will be higher.

The price increase is being implemented to offset them

So you're counting on -- what -- you announced 5-8. What do we need to get in pricing to offset the anticipated nylon increase that we're going to see in the second quarter to have a wash?

We’re expecting that's what's going to happen with the price increase. I mean it's part of the price increase -- you're just looking on nylon. Everything we've touched has gone up. Primary, secondary, latex, chemicals, energy costs--I mean everything is going up and the increase is to cover that. Some of that price increase we've been absorbing already, and some of it we haven’t been. Some of it is just being implemented in April. So the two together, we expect to get the majority of the price increase, and it should be offset by the other pieces.

Okay. Thank you.

You have a question from Chris George (ph) with Omega Advisors.

Good morning, you noted that you repurchased 492,700 shares during the quarter. Could you please tell us the average price?

You know, I don't remember that off my -- the top of my head. I don't have it here. It would have been in the $54 range as I recall, $55, something like that.

Okay. Thank you. We'll follow up to get a number later. Thank you.

You have a question from Arnold Brief (ph) with Goldsmith and Harris.

I'm not sure where your going to go with this, but you've given us a an earnings estimate for the second quarter, could you give us a sales estimate for the soft side of the business. Obviously (inaudible) with the seasonal pick up, I’m wondering whether 3-5% sales increase for the quarter would be a decent model, for the soft side.

We don't give out a sales number. We give out the earnings per share estimate, and that's all we give out. Our sales estimates are never right, neither are our operating margins, if you want to know the truth. What we have built into the estimates is our expectations of the implementation of the price increase, offset by the cost increases, and we believe it represents our best guess of what's going to happen.

Okay. From memory, I'm not sure that I'm right on this one, but I don't have my notes in front of me from the last conference call. But I seem to remember in the last conference call that you had indicated a loss of about $46 million dollars in start up expenses for the new Dal-Tile plant in the first half of the year then break even in third quarter, profit in fourth quarter, and break even for the plant for the year. The numbers you just gave today would indicate a continuing loss in the third quarter, and a loss for the year, I would think. Has there been any change, or am I wrong?

I think what we said was -- and to tell you the truth, I didn’t have all the numbers at the time. What we said was we expected somewhere around a $5 million dollar loss in the first half. What we said this time is the loss in the first half was going to be somewhere between $3 and $4 million in the first half, and that —the third quarter-- part of it is going to be pushed out into the third quarter due to training and start up, and most likely the plant will only be at about a 50% level or less during the third quarter, so we’ll have all the overhead and expenses in the third quarter, and not enough sales going through it, because it's still ramping up. We expect by the fourth quarter for it to break even. I think the statement was the last time, that we hope to have the thing not losing money in the second half of the year, and we basically just refined the numbers a little better, and we expected to break even in the fourth quarter, and spread out the start up costs from the first half a little into the third quarter.

So it's progressing basically more or less as you hoped? Maybe a little slower, but more or less as you hoped, nothing unexpected happening then.

It's right on schedule.

Someone asked about the average price, it was between $46 and $47 on the repurchased stock.

Your next question comes from Andrew Sidoti with William Smith Company.

Good morning, gentlemen. A quick question. Could you discuss a little bit your experience when you bring Dal-Tile to your retail customers, your ability to kind of get shelf space there, and just an idea of how that is progressing?

We are -- in this year, we've introduce add higher end tile line to do better with it, as well as their core line. In addition we are introducing a Mohawk branded ceramic line to also offer to the retail customers. We are coordinating our sales efforts between the two sales forces of the Mohawk hard surface sales forces, as well as the Dal-Tile. We are bringing the total product line to the large users, and presenting them an offering that covers both product lines to satisfy their total needs. The many retailers are trying to expand their ceramic business in the marketplace, and we are bring them a broad product line that covers top-to-bottom of all their needs, and we also offer stone products, natural stone products in the collection, and we can cover every need from top to bottom.

So is it fair to say that they are sort of accepting this total floor covering concept?

Yes, we are selling more hard surfaces into the market place, and a lot of it is driven by the consumers. The consumers are using more product categories in their homes, so when they come in, they are looking for broader product categories as a business, and we are trying to assist them in fulfilling those needs to their customers.

We have a question from Barbara Allen with Natexis Bleichroeder.

Thank you. The Dal-Tile penetration into the residential segment has been going on, I think for a couple of years?

Right.

And I wonder in you could update us on how much you have achieved. In other words, for your plan-relative to plan, have you penetrated 25% or 75%, just some sort of general level there.

I don't have those numbers. If you go back a couple of years ago, Dal-Tile did a larger business in the commercial business than they did in the residential business.

Right.

And the commercial -- and the residential business made up a much large share of the total market place leaving us a lot of room to grow. We have in the last two or three years broadened the residential product offerings dramatically. We've improved the styling of the products, we’ve offered both better quality products and more price competitive products. We have improved the service level by being able to deliver products to the customers faster. We have broadened the number of sales people that are calling on the market place. In addition, we have added salespeople to the Mohawk brand side, also selling ceramic. We are coordinating calls on customers between both sales forces to the large customers in the market place, to leverage our relationships with the customers. I don't have a specific number to identify customers, though, if that's what you want?

Well, I guess I was thinking of it in terms of geographic expansion, and it doesn't sound like that's how you approached it

By geography, no, we are doing it more on a national basis and we are putting more people in all areas of the country.

Okay. And I may have missed this; is the cut order carpet business the best indicator of, shall we say, improving consumer confidence, and if so, what are you seeing in that area?

The answer is, yes it is, because it's more directly related to the sales. I don't have the numbers to give you sitting in front of me, though.

It sounds like you haven't seen any noticeable up-tick in those types of orders.

Part of the problem is that our internal definitions of cut order are broader than what you're defining them as, so I can't give you a specific answer, because ours encompass a much broader piece than you're asking.

Okay. Thank you.

Your next question comes from Margaret Whelan with UBS Warburg.

Good morning, folks. And I might have missed this if you mentioned it already, but the 8% gross in Dal-Tile, could you give us an idea of what is units versus pricing there, please.

I think it's almost all units. I think the pricing may be down slightly.

Is that because of mix with residential, or is that a trend because of demand?

If you look over the pricing of ceramic, it has declined slightly, you know, over the last five years that I've been watching it continuously, and it's following the same trends, but basically it’s not significant to the numbers you ask.

And then second thing just for John, somewhere you been repurchasing shares in April?

We had the window closed at this point, Margaret. It opens up I think two days from today, so we have not in April.

Okay, thank you

You have a question from Errol Rudman, with Rudman Capital.

Just a follow up. Can you tell us, like the Dal-Tile 8% increase, what percentage, or was there any contribution to that from you introducing Dal-Tile into your residential base?

The Mohawk branded hard surface is under the Mohawk segment.

Okay. But you are cross-selling Dal-Tile into your residential basis; is that correct?

We are just beginning to sell Mohawk manufactured products through the Mohawk sales group. The products that we're selling in Mohawk for the most part today are being imported from other suppliers.

Okay. So Dal-Tile hasn't been -- the 8% is just purely Dal-Tile. You haven't introduced it into your customer base?

The sales that go through the Mohawk sales forces are included in the Mohawk segment as they have been historically. They're not intertwined.

Thank you.

Your next question comes from John Baugh with Wachovia Securities.

Yeah, I just wanted to touch on the first quarter. I think you went from a 13.5% operating margin in the fourth quarter, to 5, and if I looked at ‘01 to ‘02 I think it was more like a 300 basis point drop. Could you quantify or break out between absorptions, between promotions, between raw materials, where that impact was felt?

We're not prepared to break it out for you by each piece.

Would you rank them?

Yeah. The biggest impact was in the absorption. That was pretty heavy for that first quarter.

You left off the raw material increases.

Yeah and the raw material increases would be also spread deeply amongst those other things.

So you would rank promotional pricing as the least.

No, maybe third.

Of those? Okay. Thank you.

You have a question from Dennis Rosenberg with CSFB

I would like a clarification on your answer to Errol Rudman. When you're selling Dal-Tile brand tile to your independent carpet retailers, now, isn't that -- doesn't that show up as Dal-Tile sales?

What happens is the segments are set up as we were running the businesses when we bought Dal-Tile. In Mohawk we had a hard surface business that was sold under Mohawk brands by Mohawk salespeople. Those inventories and sales and margins show up in the Mohawk segment which crosses not only ceramic tile, but also laminate, wood, and vinyl, and the business stays as it was historically. The Dal-Tile business is as it was historically, reflecting the sales of the Dal-Tile salespeople through their channels.

Have you leveraged Dal-Tile sales into Mohawk's channels to any great extent?

It is helping them increase their sales. Whatever is happening is showing up in their side of it. At the same time, you have with Dal-Tile -- the commercial business has been under pressure like everyone else’s commercial business, so the ceramic business is growing, offsetting whatever is happening in the commercial segment to their business.

Okay. Thank you.

At this time there will be no further questions. Do you have any closing remarks?

Thank you very much. Have a nice day.

Thank you for participating in today's conference. You may now disconnect.