莫霍克工業集團 (MHK) 2003 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Mohawk Industries third quarter earnings release conference call. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this call is being recorded today, October 17, 2003. Thank you. I would now like to introduce Jeff Lorberbaum, President and CEO of Mohawk. Mr. Lorberbaum, you may begin your conference.

Thank you. Welcome to the third quarter Mohawk conference call. With me I have John Swift, our CFO. John, would you please read the Safe Harbor statement?

Certain of the statements made during this conference call, particularly those anticipating future performance, business prospects, operating strategies, acquisitions, new products, the impact of 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 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 Litigation Reform Act of 1995.

Thank you, John. Mohawk's business continued to improve during the third quarter. Our strategy of becoming a total flooring supplier continues to enhance our performance. The economy continued to be gaining strength. Our third quarter was a record in sales, net income and earnings per share. Net sales for the third quarter increased 6 percent to 1.3 billion, with net earnings of 91 million and earnings per share of $1.36, both 12 percent ahead of last year. John, would you please give our financial report?

As we look at sales -- 1.3 billion, up 6.4 percent from the quarter before. On a nine month basis, $3.6 billion, up 9.5 percent. As you may recall, we acquired Dal-Tile during the second -- excuse me, first quarter of 2002. If we would have owned them for the whole year, the nine months would have been up 2.7 percent. Gross profit -- $365 million, up 6.9 percent for the quarter. And on a nine month basis, $980 million, up 9.3 percent. SG&A -- 205 million, up 3.9 percent versus 198 million the quarter before. And on a nine month basis, 612, up 13 percent. Operating income -- $159 million, 12.2 percent of sales. That compares to 144 million quarter last year, up 11.7 percent. And on a nine month basis, $368 million, 10.1 versus 10.8 the year before. Interest and other, down 14 percent, up 15 million compared to 16. And down 10 percent of 40 million on a nine month basis, compared to 45 the year before. Earnings -- $91 million, up 12 percent. That compares to 82 million year before. And if we look at the net income on a nine month is $208 million, up 3.9 million compared to 200 million.

Going to the balance sheet now for a moment, we'll look at cash. We actually have cash on the balance sheet as we have paid off all our floating debt. This cash will be used for the Lees acquisition that we'll be making during the fourth quarter. Receivables -- 603 million, up 5.8 percent less than sales, and 42 days of sales and receivables. Inventories up 830 million -- excuse me, were 830 million, up 11.8 percent. This was up primarily for the hard surface and also increasing business levels during the quarter -- required us to take up the inventories. We had 4.5 turns of inventory. Payable -- 689 million, 67 days. That's an increase from 64 days the quarter before. Debt -- 789 million, down $157 million from the year before same period. And debt to cap at 26.5 percent compared to 33.3 percent. Jeff, I'll turn it back over to you.

Thank you. Our soft surface product sales have begun to improve. The majority of our sales are in the retail redecorating category, which has not been as strong as the new home construction area. We feel an improving economy, increasing consumer confidence, a recovering job market will have a positive effect in the future. Improvement in pricing and cost control favorably affected our profitability, but aggressive promotion and product mix changes have had some dampening effects. We continued to put greater focus on a new construction market. We've implemented a specialized sales group to enhance our position in the market. We continued to develop our Portico (ph) brand builder program to assist homebuilders and contractors meet the needs of their customers and improve their businesses.

Oil and gas prices remain high and have affected our costs and those of our suppliers. Soft surface raw material pricing is not expected to change in the fourth quarter. Our home product sales also improved during the quarter, with expanded product placement and higher retail sales. Our hard surface sales continued to expand as our product line strengthened and service levels improved. All our product categories are growing, as our sales and distribution capabilities expand. Our inventory increase is primarily in our hard surface products. The higher inventory is to improve our order fulfillment rates and product expansion to support our expected future growth. Some price increases were implemented in the quarter in vinyl and wood to offset higher costs. Additional price increases in wood are being planned for the fourth quarter.

The Dal-Tile business continues to expand as we broaden our product offering, improve delivery times and expand our residential penetration. All the Dal-Tile distribution channels increased sales, to achieve a 13 percent growth above the prior year. We've implemented a new information system in some Dal-Tile manufacturing plants. The total conversion for Dal-Tile will not be complete until sometime in 2005. The new tile plant in Muskogee is running and startup costs should be about $2 million in the fourth quarter. The capability of the plant is tremendous, and is producing high-quality, high style porcelain tile. We expect it to take several quarters before the plant reaches its potential. Our people are meeting the challenge of starting this large, complex plant, while matching existing products from other facilities. We're making sure to maintain our high-quality standards.

During the third quarter, we integrated the two acquisitions we made in both our rug and stone categories. All the functions of both have been integrated and we are focused on improving the sales and profitability of both. The acquisition of Lees is on track to close in the fourth quarter. The financial systems should be integrated soon after closing. Plans are being developed how to maximize the strategies that have made Lees successful. We are encouraged by the strength of the management team and will continue pursuing the value-added marketing approach with the Lees organization. We expect to enhance our total commercial business by providing our customers a broader offering to satisfy their requirements. We believe that Lees will be slightly accretive in 2004.

The Company has seen improving trends, though there is still some uncertainty in consumer confidence and employment statistics that continue to be lackluster. At this time in the fourth quarter, the earnings forecast range is from $1.32 to $1.40. For the second time this year, Mohawk Industries has been recognized for its commitment to sustainability and superior green manufacturing practices. The Company was presented with the 2003 Environmental Leadership Award, given by the Georgia Chamber of Commerce.

We are confident in our long-term business strategy. The sales improvement in all product categories during the quarter was encouraging. The overall carpet industry is improving, though the retail replacement business has been constrained by consumer confidence. Most expect oil and gas prices to fall in line with historical levels in the future. Our hard surface products continue to gain share and reinforce our total flooring strategy. This category will continue to be a long-term growth area for Mohawk.

With that, we'll take questions.

(OPERATOR INSTRUCTIONS). Michael Rehaut, JP Morgan.

On your outlook over the next quarter or two for carpet demand, I was wondering if you could comment on a couple of aspects that may or may not factor in over the next quarter or two, in terms of your expectations. One, what you are doing with surfaces and dropping out of the participation there and setting up your own schedule of meetings across the country? And two, how, if any, the change in the commercial markets -- if there has been any -- what you're seeing there and if you expect any improvement to help out the demand on that side?

On the surfaces, you are correct, we have withdrawn from the national marketplace. We are having regional markets around the country. We have about half a dozen what we call very large ones, and then a number of smaller ones to make it easy for our customers to visit us. We are ahead of our schedule last year in bringing products to the marketplace and being prepared to ship samples to our customers. So we think we're in better shape. Our goal is to be able to spend more quality time with each customer. For those of you who have been through the marketplace, you are aware that we have so many people and it's so crowded that it's difficult to spend time putting together plans and decisions with our customers. And we believe we will be more effective at doing that in these smaller, more localized environments. The other questions about the commercial business, if the commercial business still lags behind -- that the higher end of it, which the corporate spending is still -- has not rebounded. We see some improvement in the lower price points, but we're still waiting on the commercial business to rebound.

It's not still going down, but it's not going up considerably.

In terms of the surfaces, is it just too hard to say whether or not that, given better one-on-one type of exposure, that that might provide a little bit of a boost? Or are you just -- it's too hard to tell?

We believe that the action will improve our position with our customers, but translating that to something else is difficult at this moment.

Keith Hughes of Robinson Humphrey.

Two quick questions. First is, we've gone into October; have you seen any kind of different trends across your business from what you saw in the third quarter, better or worse?

We perceive that it continues to improve slightly. Again, the economy today is not in straight lines so it's difficult to project forward. You don't see this dramatic change that's consistent from week to week, so it's difficult to project, but it does look like the overall economy is improving.

As a follow-up question, once we get Lees into the mix at the end of the year, in terms of sales and marketing, will it still run independently of your other commercial offerings, at least at the beginning?

We are still developing the plans. Our plan is to maintain the management structure that's there and for them to maintain the sales and marketing that they have had over the period. We are trying to decide how we can improve that as we go forward and how we can get synergies, but we are going to start out with the two things as they are, and most likely keep them separated into one group that's selling value-added products -- which they have spent their historical time doing -- and the other doing what it's done. So we don't have any plans to collapse the sales and marketing directions of the two groups.

I assume that would mean in terms of compensation plans there won't be any significant change, (inaudible)?

There are no plans to change any.

Laura Champine, Morgan Keegan.

Can you comment on year-over-year sales and earnings trends currently at Lees, at what assumption you've made, relative to demand trends, for that acquisition to be slightly accretive in '04?

Hold on one second.

We're not sure what we can and can't say since we really don't own the business at this moment in time.

Right, that's our problem.

-- (inaudible) we're trying to figure out.

Can you comment on your assumptions for '04 trends and whether that would be -- would represent an improvement over current trends?

Our present direction is that we're expecting the commercial business to improve in general and their business to improve along with it. They are in the higher end part of it, and it tends to take a longer time to react. It tends to -- on the front end of the cycle it tends to run a little longer, and on the back end of the cycle it tends to take a little longer to pick up, because a lot of it is in the larger jobs and newer construction areas of it.

Is it possible to give me sort of an order of magnitude, how much their business would have to improve next year to be slightly accretive?

(inaudible) huge improvement. They are still working on their plans for next year. We just made some mild assumptions, conservative assumptions on what the growth would be.

But it wouldn't take any kind of huge rebound is what you're telling me?

No, it would not take a huge rebound.

Sam Darkatsh, Raymond James.

While we're on Lees I guess I will ask this one first. Any plans on running unbranded fiber through Lees, or are we going to keep it branded for now?

It's really -- we're really not planning on changing the Lees direction. We believe that Lees has a niche marketing strategy of value-added with all the pieces that they've used, and we're going to continue with that. The question is how can we use the assets we have and they have to expand the product category they have and vice versa, to see if we can create product categories for the Mohawk group that have different value-addeds and different product categories to expand our whole business.

Okay, second question. We saw your primary competitor is in the process of trying to acquire a piece of a smaller competitor. Within that acquisition is -- the factory built manufactured housing carpet market. Do you see that as a possible opportunity for you folks to explore, given their share situation and other holdings of their parent?

If it goes through, they will end up with a very large share of that business. It takes, in some cases, some unique equipment that we don't have, and historically we haven't entered it. In the future, we always continue reevaluating different parts of the business.

And one final question, if I might. Fiber costs with oil prices coming back up of late, one service is saying that polypro is up a few pennies. Is that what you are seeing, as well?

The polypropylene market bounces around from week to week and month to month, so what we are planning is basically no substantial change in the raw material prices through the fourth quarter, at this point.

From the current levels?

Yes.

John Baugh, Wachovia Securities.

If I'm not mistaken, you're operating margin by division Mohawk this third quarter was up 11 -- was 11.2, up from 10.5 percent last year. Certainly last year's fourth quarter, you had a very strong Mohawk division, as well as total corporate, operating margin. I believe you were north of 13 percent on the carpet, or the Mohawk division. Help me with the variables, because to get to the number you are guiding to for fourth quarter, it would imply that operating margins would be down fairly substantially. And I know there are a lot of variables; I think you had one extra day last year. But sort of walk me through the rationale there, since all you give is the EPS; you don't give us revenues or any of the margin components.

Last year, I believe what happened is there was some softening in the oil prices coming in. There were some promotions going on by our raw material suppliers. The market seemed to be firming up a little bit, so we had a good quarter. This year, we don't perceive that a lot of those things that occurred last year are going to happen. We see that the oil prices are remaining high. We see that there is more promotion going on in the marketplace as we go through. We also are bringing some of the costs from the markets and product development back into the fourth quarter, as we move ahead a little faster than we did last time, because of the marketing piece.

So the shift in surface, for example, to the regional shows, would move up some expenses in the fourth quarter that might have otherwise fallen in the first quarter? Is that fair to say?

That's true.

I apologize if you covered this, I wasn't on right at the start. Within the Mohawk division, which was up I believe 4 percent of revenue, could you speak to the components of it -- home -- which include rugs -- and then the hard surface piece of Mohawk, relative to the carpet piece?

All the different product categories improved during the quarter. In the rug business, we gained some product placements with major -- or rug and home product placements with some major customers, as well as some of the retailers had some higher sales on existing pieces. The carpet business improved with the new construction area improving more than the total. The majority of our business is in the residential replacement business, which still hasn't -- isn't as strong as we would like it, which is causing a lot of the promotions by our competitors and ourselves which were meeting in the marketplaces to compete. The hard surface piece -- we break out the largest part of it, which is the Dal-Tile business. The other side continues to increase. I think we're having in that and product categories -- I would guess the wood and ceramic pieces are increasing more than the other categories.

Last question relating to that, were your units of carpet sold in the third quarter up year-over-year, flat, down slightly?

I don't have that in front of me, I apologize. I think it was up slightly.

Andrew Sidoti, William Smith & Co.

Just a couple of questions. One back on Lees Carpet. I know it's early up, but on the pending acquisition, do you have a ballpark idea of what the annualized cost savings may be from combining those two businesses together, kind of what your thoughts are there?

We are just developing those questions. The teams are together, making plans, and we're trying to decide. At the same time, we're going to add cost as well as -- where there will be some cost improvements, there are also going to be some additional costs, as we have to put the systems together, for instance, that we are going to putting some investments -- we don't have all the information but we believe that they have constrained the business, and we're going to have to put some investments in that they have postponed in order to bring it back up. And then we are going to be looking for how to manage the entire business as a whole. We expect to have to make investments in order to get there, and move it from what it is and figure out how to get more synergies out. We believe we are going to be making some investments in order to improve both businesses.

Okay. But you to expect it to be accretive in 2004? You don't really -- you don't really view it as a turnaround situation?

No, we don't. You can look at their numbers, Andrew. They are reported separately by Burlington. They are a great company.

And then on the -- the last question would just be -- and I may have missed this -- if you have bought back any stock during the quarter? And if so, at what price?

We have not.

We are using our cash for the Lees acquisition at this point.

Steve Searle (ph), Conning Asset Management.

One question. With respect to the Lees transaction, in your press release you make reference to your bank lines being sufficient being sufficient to finance it. I was wondering if longer-term you had plans to (inaudible) fixed income or equity capital markets to term out some of that?

We already -- we have no floating debt today, so that would be our only floating debt. We have about 790 million of fixed bond rate debt right now, so I don't think we need any fixed. We need some floating we can pay down. We generate a lot of cash, so that plans to be floating.

With respect to Lees, can you give some preliminary guidance? In terms of the of the CAPEX needs, you referred to them needing some investments for '04?

We're just developing all those plans as we speak and we really can't -- what we have to do, they had capital planned, but the question is, given that we now have the assets of both companies, all those plans have to be reevaluated and determined if one or the other has assets to help each other. So it's too early to answer that.

Did you have preliminary '04 CAPEX guidance, excluding Lees for your (inaudible) --?

Not Yet. We are working on it at this point.

Mark Johnson (ph), Principal Investment.

My questions have already been answered, thank you.

Michael Rehaut, JP Morgan.

Just on the fourth quarter, John, I was wondering if you could just tell me what you're thinking about in terms of interest expense? And also, in terms of the Dal-Tile margin, is that -- do you expect that to -- you were down 10 basis points year-over-year in the third quarter. Given that you expect roughly the same amount of start-up costs -- I think you said 2 million versus 2.5 million last quarter -- do you expect the margin to show similar contraction? And also, going forward into '04, what are your expectations for the start-up costs on the new plant?

I'm looking at a margin of -- in the third quarter of 15.7 versus 15.8 the year before.

Right.

Where's the contraction?

That's what I didn't see, Mike. We're pretty much even with those costs, we're pretty much in line with last quarter.

Yes -- I said down 10 basis points; so not a lot, but that was the driver of -- if you didn't have the start-up costs it would have been up, so I was just --

We're not smart enough to (indiscernible) 10 basis points. We're still working on it, but it should be in line there somewhere, around 15.5-15.9% 5 -- somewhere in that range. Product mix can change it somewhat slightly, so it depends on what happened to product mix.

And start-up costs in '04?

Our goal is to be about breakeven in the first quarter, but the plant is a very large plant. There's a lot of people being trained, there's tremendous complexity going on. And under the assumptions that we'll be able to match the products from existing plants as quickly as we need to and that the people's knowledge base will increase, we're expecting to be at a breakeven, plus or minus a little bit, in the first quarter.

Okay, thanks. And interest expense for the fourth quarter?

You know, it should be in line with the third quarter. It depends on when we close on Lees, which is going to add some interest expense in. But it should be pretty close to the third quarter, probably.

And whatever comes on because of Lees is from your bank line, so it's a minimal rate?

Correct.

(OPERATOR INSTRUCTIONS). Paul (indiscernible), USAA Investment Management.

I was wondering if you could just step through some of the line items on the cash-flow statement, please? Working capital, for example?

I'm not sure what you are after there.

I believe in the release you gave depreciation and you gave CAPEX, but I was wondering if you could give, for example, deferred taxes and changes in working capital accounts -- I think are usually some of the key ones that show up on your Qs?

Hold on just a minute, I'll pull that out. You can get it right off our statement if you wanted to, but we do have it here. We're looking at the changes in receivables, now this is for the quarter, was down -- excuse me, was up 22.7 million. Inventory is up 24.6. Payables and accounts and accrued expenses were favorable by 27.2 million. And then all of the other items, you get to about 101 million. You can find it right off the balance sheet. We'll be putting out the Q in 2 weeks, but those are basically the numbers.

Arnold Brief (ph), Goldsmith & Harris.

Arnold Brief. Could you describe the impact of -- I would assume with the effort of going into the -- taking Dal-Tile into retail, that the retail business will be growing more rapidly than the commercial? (multiple speakers) that have on operating margins?

Let's just make sure we define retail. It means that what we're doing is we're going into the retail replacement market and expanding our business in the residential side of the business. We have no intention of becoming a retailer.

No, no. I understood that.

We want to make sure everybody else understands it.

What's the impact of that have on operating margins? In other words, are those margins higher than commercial?

What's happening is that it's -- because we're going more into it, we are improving our mix a little bit. And we're selling some higher priced, higher value-added product categories. So it's helping our average price a little bit. On the other hand, the cost of getting to that marketplace and other things, it costs more to do that. But we have about -- don't hold me to this -- I think around a 25 percent share of the residential business, which is much larger than the commercial business. So we have a lot of room to improve within that category. And a major reason you hear us talking about our inventories, we have made a conscious decision to increase the inventories in those categories, which put a higher value into immediate service levels. Then we're putting inventory in warehouses around the country so that we can improve the service to those type of customers. We're increasing the number of distribution points to deliver the product to them and we're putting more salespeople in, as well as opening more design centers to help people select our products to increase the sales.

That's very helpful. I will come back to this question. On a longer-term basis, are the margins on the retail higher than the commercial?

It depends on the product mix. That's what Jeff was getting to. Just being in retail, no, it could be exactly the same, lower or higher, depending on what your product mix is. Right now we're focused on the higher product (multiple speakers)

I don't think it's going to have a significant effect on the average margins when we get through.

Finally, I know it's in my notes but you could save me a lot of trouble going back and adding them up. What is the total impact of the -- negative impact of the new Dal-Tile plant expected to be for all of '03, if you add up all the quarters?

It's come out to be about 7 to 8 million, if you look at all the quarters right now.

7 to 8m --

We don't have that in front of us either.

(multiple speakers)

It's in that range.

I thought it was more than that, because I thought it was --?

We don't have a number in front. You'll want to call John back later; he'll pull them out.

Yes, I can pull them out.

We don't have the historical.

As I recall it was in that range. Maybe a little higher.

(multiple speakers)

The fall is going to be 2.5 and 2, so it's going to be 4.5 in the fall. We don't have in front of us what the first half was. John will be (multiple speakers)

I thought the third quarter was the biggest impact? Okay, thank you.

Thank you.

At this time, there are no further questions. Do you have any closing remarks?

We appreciate everything. We believe that we are on a trend to improve our business. We think we are well positioned for the future, and thank you for joining us. Have a good day.

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