莫霍克工業集團 (MHK) 2003 Q4 法說會逐字稿

Good morning. My name is Judy and I will be your conference facilitator today. 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 any background noise.

After the speaker's remarks, there will be a question and answer period. If you would like it ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two.

As a reminder, ladies and gentlemen, this call is being recorded today, Friday, February 6th, 2004.

Thank you. I would now like to introduce Mr. Jeff Lorberbaum, President and CEO of Mohawk Industries. Mr. Lorberbaum, you may begin your conference.

Thank you. Welcome to the fourth quarter Mohawk conference call. With me I have John Swift, our CFO.

John, would you give our Safe Harbor statement, please?

Yes, sir. 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 or 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 cannot be -- there can be no assurance that the forward-looking statements we'll provide will 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. The economic recovery is starting to impact our business.

All product categories have shown signs of improvement in the fourth quarter. The economy appears to be gaining strength, and should positively affect both our residential and commercial businesses in the first half of 2004.

Our fourth quarter improved significantly more than we had anticipated. Net sales for the fourth quarter increased 14%, resulting in the highest quarterly earnings in our history. Both net earnings and earnings per share grew 21% to $102 million and $1.51, respectively. Our sales for the year exceeded the $5 billion mark, an 11% improvement over the prior year.

John, would you give our financial report, please?

Yes, sir. If we look at the quarter, sales were up 14% up to $1 billion 370 million; and for the year, we crossed the $5 billion mark, up 11% for the year. If we go down to the gross profit, it came in at 27.7%.

That compares with 28.5. As we discussed in the press release, there were a couple of items that contributed to the lower percentage.

Number one was the mix of products that had a higher --- a lower manager percentage that contributed nicely to the dollars. We also had the -- the Euro had skyrocketed during the fourth quarter and impacted some of our costs. And then in addition, the natural gas and the oil costs continued to be up in the quarter versus the quarter before.

If we look at year-to-date, though, it was 1 billion 359 in gross profit, and 27.2% of sales compared to 27.4 last year. If we look at SG&A, it came in at $205 million, 15% compared 14.9 in the year before; and year-to-date, 817 million and 16.3.

Operating earnings, $174 million, it came in at 12.7% compared to 13.5 -- again, the main reasons were the gross profit line. And our operating earnings year to date came in at 10.8, and 542 million.

Our net income, 102 million, up 21% for the quarter; and 310 million, up 9% for the total year. Earnings per share 1.51, up 21% and our operatings per share 4 to 6 -- hello? Our receivables are 573, 38 days compared to 38 days the year before. Inventories 832, 4.8 turns versus 5 turns the year before.

Our debt to cap, 30.6 -- even after the lease acquisition, compares to 29.3% the year before.

Thank you. We're especially happy with our annual results when compared to the prior year, in light of the weak first half of 2003.

Our operating margins for the quarter were slightly down, from 13.6 last year to 12.7% of sales in 2003. This decline results from a mixed shift, which includes sales, the impact of a higher Euro, higher oil and natural gas prices.

Our balance sheet is very strong, with a 31% debt to cap at the end of the current quarter. At the end of 2000, we began the process of moving from a carpet and rug company to a total flooring supplier. Today, about 30% of our revenues come from hard surfaces products.

Hard surface should continue to be the highest growth category in Mohawk. In 2002, we purchased Dal-Tile, the largest ceramic manufacturer in the world.

The goal was to maintain the momentum and infrastructure, while leveraging Dal-Tile's strength with Mohawk's. About 18 months later, in the fourth quarter of 2003, we have grown this segment by 18%.

Dal-Tile is well-positioned for the future, with new products, improved service levels, more sales personnel and distribution points.

Over the past few years, we have broadened our product categories, becoming the largest manufacturer of throws, the largest stone flooring and countertop supplier, and a significant participant in the wood, vinyl, laminate and carpet underlight products.

Overall, the carpet industry continues to improve, with new residential building continuing at high levels. Our residential replacement business is improving as consumer confidence increases. The value products in the commercial segment are beginning to show signs of improvement, and we expect higher end to follow later in the year.

We continue to manage our costs in lieu of high energy and raw material costs. Our fiber suppliers have announced increases effective during the first quarter.

Mohawk has announced corresponding price increases of 4-7% to our carpet customers to offset material and other increases.

In addition, Mohawk in the marketplace are implementing selective price increases in ceramic, wood and vinyl, in the range of 3-10 percent to cover rising costs.

The acquisition of Lees was completed in November of 2003. We have integrated the financial and administrative systems into Mohawk.

Additionally, a team has been formed to consolidate the operating systems in 2004. The Lees acquisition gives Mohawk a leading share in the commercial carpet category.

Lees provides us with a strong foundation in the carpet, tile and quarter product areas to expand our business as the commercial expenditures recover this year. The hard surface product line will continue to grow in sales, as the product offerings expand, the service improves, and our sales knowledge broadens.

The Maselki [PHONETIC] plant continues on track and will increase our tile capacity by about 15%. The facility is exceeded our expectations. We continue to introduce many new and existing products into the facility.

The facility will continue to improve throughout the year, as the volume increases and the product development costs decline. We continue to focus on our brand merchandising to assist our customers in maximizing their sales and margins.

We have expanded our program for Mohawk Floorscapes and ColorCenters, with new merchandising, advertising and marketing programs to enhance the value to our dealer.. We also added a new marketing program called Mohawk Floors, aimed at the larger markets.

It combines a stocking position with a special order assortment to enhance the consumer's shopping experience. Today, we have almost 3,000 dealers committed to co-developing the Mohawk brand.

Momentum continues to expand for the Mohawk brands through all our distribution channels.

Our regional product shows replaced our participation in the Las Vegas market. We stopped at over 75 countries. The proximity to the customers, the availability of knowledgeable sales reps who have relationships with our customers, the strong presence of our senior management and our professional presentations are providing higher value to our customers.

We believe these meetings will result in a more effective and timely rollout of our new products and programs. In 2004, we will maintain our focus on the new residential builder.

We continue to specify our Portico brand products and trade up our systems into the builder channel. We expect this category to stay at high levels this year. We continue to invest in our distribution systems with new technology and expanded distribution to enhance our service level.

Our home product sales improved in the second half of the year, and we expect them to continue as the economy improves. We're building an organization to take advantage of global sourcing opportunities in both home products and flooring.

We are presently importing products from South America, India, Europe, China and other countries.

Finally, I am proud to report that Mohawk has received the Partner of the Year Award from Sherman William, as recognition outstanding service, products and assistance in training.

This is another indication of the strength of our organization, as we strive to provide superior value to our customers. The company believes the economy will continue to improve and our revenue growth should continue to outpace the prior year. However, high oil and natural gas prices will continue to put pressure on Mohawk's cost structure.

After considering these factors, the first quarter of 2004 earnings forecast range is from 95 cents to $1.02. We'll now accept questions.

At this time, I would like to remind everyone in order to ask a question, please press star and then the number one on your telephone keypad.

In order to allow fair access to all participants, management requests that you please limit your questions to one primary and one follow-up.

If you have additional questions, you may reenter the queue by again pressing star and then the number one. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of John Baugh from Wachovia Securities.

Good morning John.

Good morning, and congratulations. I've got one question wrapped in three.

First of all, I calculate, including acquisitions, trying to get maybe carpet and rug numbers for the year. Fourth quarter, you're up about 5%, and that's excluding the extra day.

Is that correct? And then within Dal-Tile, any comment on residential versus commercial performance within Dal-Tile? And finally, was Muskogee profitable -- is it going to be profitable, and if so when? Three questions, thanks.

I think we can answer all of those.

If you take out the acquisitions, you end up with about a 9% increase -- take out the acquisitions and the days -- end up with about a 9% increase in the business. If you look at the two --

That is with -- without -- are you are referring to the carpet now or just total?

No, the total.

Okay.

The total is 9%. If you look at the different segments, if you take out the same things, the Mohawk side will be around 6% and the Dal-Tile side will be, John?

17.

17%.

Okay, and would it be fair to assume that Mohawk hard surface did a little bit better than that 6% average?

Yes.

Okay. And then on Dal-Tile residential versus commercial and Muskogee?

The commercial businesses and the ceramic side -- a lot of products crossed over the pieces, so we really don't have a good -- they are just estimates.

But we are seeing is some recovery in the commercial side of the business in both sides of the business. And the other question was?

Muskogee.

Muskogee. The loss was as anticipated in the fourth quarter, and going forward it's going to be insignificant to anything.

Great. Thank you. Good luck.

Thank you.

Your next question from the line of Laura Champine of Morgan Keegan.

Good morning.

Hey, Laura.

Could you elaborate a little bit on the mix that you talked about in the press release? What categories and so forth?

As we go through we are trying to grow some of the builder business, which is on average a lower margin than our residential replacement business.

So as it grows versus the other pieces, it will impact the margins.

We're in other businesses, such as some of the hard surface businesses and the stone businesses -- and even the carpet underlay businesses also have different margins than the rest of the business, but they also have some different cost structures. So that the investments don't relate to the same thing.

Okay.

And as a follow on, can you give us what builder business was as a percentage of your revenues in the fourth quarter and what kind of growth you think you might have in that channel in 2004?

I don't have that to give you

We don't have that here, Laura

Okay, so new construction, you can't break out new construction for the quarter?

Yeah, I don't have it here.

Well, it's really an estimate, too, because a large part of our business goes through multiple -- the same thing goes through multiple channels.

Okay.

And so again, it comes down to estimates rather than exact numbers.

Can you ballpark it at say 20% or so, or?

I can't do that at this second.

Okay, thank you.

Your next question comes from the line of Michael Rehaut of J.P. Morgan.

Good morning, it's John Barlowe on behalf of Mike.

Hey, John.

Just wanted to ask, regarding the Lees acquisition, what kind of -- if there are any other one-time costs you expect in 2004, and if you could specifically address the amortization of customer lists and if you have been able to quantify how that will impact the P&L?

Right. It's 3.6 billion, is what going to be annually amortized -- and, yeah, go ahead.

What was the rest of the question?

Are there any other costs, any other intangibles that you're looking at expensing, or other acquisition costs that we should look at when trying to put together an accretion estimate for this acquisition?

There is no other acquisition costs, but there will be costs as we melt the businesses together and try to maximize the whole business.

As we look forward, this year we are going replace their operating systems and put them on the Mohawk system ,and there will be other costs similar to that as we try to improve the business.

Okay. And do you have an idea of what those costs will be?

Those are still being developed.

We haven't even concluded exactly what we're go do with some of the pieces.

Okay. Thank you.

Your next question comes from the line of Margaret Whelan.

Good morning, it's Bonnie [INAUDIBLE] on behalf of Margaret Whelan. Terrific job on the quarter, you guys.

Thank you.

Quick question, actually, just for the commercial that you are seeing start to pick up, is there any seasonality to that and will we see in the second half, beginning?

I think that all that we can go on is what is happening, and we see is that the lower price points, there seems to be more activity, which usually has shorter lead times. And typically in cycles, the other business at the higher end of the marketplace typically lags, and we're assuming the lag is going to be somewhere is in the 6-9 month range, which would put it in the second half. And that's assuming that the economy keeps going, businesses keep getting more confident. And it's typical of historical reference points, and it could come sooner or it could come later.

Okay, and then one follow-up to that, just that now at Lees close, do you have any pipeline coming through on future M&A plans?

We always look at new opportunities. We have our capital structure, we think is in the right shape to make considerations. We usually are talking to multiple people at all points in time, and very few of them come to a conclusion.

Okay. Thank you.

Your next question comes from the line of Keith Hughes of Robinson Humphrey.

Thank you. Just expanding on your comments on commercial, are you talking about the lower end as specified in your positive comments?

Yes.

Okay, it is some of the strength coming out of the office environment, or is it still coming from education and health care, the things that have been doing better than the office the last year or two?

To tell you the truth, I don't have that data in front of me. I can get it for you if you want to call me later.

Okay, that's fine. We'll get it later.

And you talked about your global sourcing program. John, do have a number in terms of what percentage of the revenue you are now sourcing?

It's very small.

Okay. Thank you.

Your next question comes from the line of Dennis Rosenberg of Credit Suisse First Boston

Good morning, and let me add my congratulations.

Thanks, Dennis.

When you talk about growing the builder business, are are talking about -- is that primarily tile or is that in carpet also?

In both.

Any emphasis on one or the other?

Historically, the carpet business -- we tended to focus more on the redecorating side of the business, and the businesses we bought tended to focus more on that side.

So that we think there's an opportunity for us in it. On the carpet side -- on the Dal-Tile side, if you go back historically, when we purchased them, they had a relatively small share of the entire residential business, including new construction and redecorating.

And so we foresee there's opportunities in all of them, and one reasons it's growing so rapidly is we've put in place delivery systems, inventory, and sales force in order to grow the total residential side of the ceramic business.

Okay, and a follow-up: Assuming no acquisitions, how much debt do you plan to repay during the year?

As much as we can. I don't know -- whatever our cash flow would generate.

Basically, it would be the net income unless we buy back stock

Which would be the -- what would you prefer doing?

You're starting from the assumption there's no acquisitions?

Yes.

We would probably look at buying back stock at some point, because the net to the debt ratios are getting down lower, so we would probably considering buying back stock above pushing the debt levels a lot lower.

Okay great. Thanks.

Your next question comes from the line of Andrew Sidoti William Smith and Company.

Good morning, gentlemen. Congratulations, also.

Thanks, Andrew

Just a quick follow-up on the commercial [INAUDIBLE]. I didn't quite catch it.

You're seeing strength pickup in demand -- is that across the board, and can you tell whether it or not you are including [INAUDIBLE] in that area?

The first is that the commercial business is off dramatically from three years ago across the entire industry, so at and low point. And what is happening is, we are happy to see that the industry is starting to pick up.

If you look at industry numbers for the quarter, the commercial business is up for the industry about 3.5. So we're starting to see an improvement in the commercial business, but it's from a very low ebb relative to historical points, and we see that as a very positive movement.

And do you feel that the pricing pressure in the commercial area, that has bottomed out as well?

That is going have to place itself out.

Okay fair enough. Thank you, gentlemen.

Your next question from the line of Earl Ludman of Ludman Capital Management.

Hi, Jeff.

Hello, Earl.

I have a few questions for you. Could you tell us approximately what percent in '03 commercial business represented of the total company?

With or without Dal-Tile, and with or without new acquisition?

I would be pleased to take whatever you offer.

Lump it all together.

You looking it up?

Yeah, you could figure an estimate I think it's probably in the whole business, John.

Give us one second. We don't normally look at it this way. I am guessing to be in the 15-20% range as a whole

And --

Including everything, hard surface, soft surface

When you said it was off dramatically -- I will just for the sake of argument, you threw out 15-20% so let's say it was a billion dollars.

What I was referring to the was the carpet industry numbers are off from 30-40% from their peak.

In '99.

In '99. So that is the reference point.

I see. So --

Then they'll have an of upside potential as the commercial businesses come back.

I understand. What percentage utilization rate is there at Muskogee currently, and could we assume that your business from Europe or your imports will be declining in tile dramatically as the plant comes on?

The plant -- the equipment is operating around 70% today -- 70% of the equipment operates.

Now it's not operating at maximum productivity rates, which we expect both of them to go through there.

But what we expect is the growth of our ceramic business to increase to a level that as we bring it up, the imports will still be at a similar volume level to where they are today.

I see. So that the effect -- by the way what was -- what is the rise in the Euro cost to you in the quarter?

I don't have that broken out in front of me.

Something you might be willing to share a little later?

We are in the process of trying to -- as with other people importing things in, some of our suppliers in most cases absorb some portion of it.

On the other hand, we talked about increasing prices in hard surface. Basically, we in the industry are raising the Euro-related ceramic products in the marketplace as we speak.

And in terms of the price increases that you alluded to, what is the time -- the cost increases, rather, what is the time delay between when the costs go up and you are able to pass on the prices? You had mentioned before that it was maybe a 45-day delay in some of the prior calls.

Is that still holding?

I don't think we ever gave you time before. Right now, there are so many different pieces to it they are all over.

But our goal is to try to keep them concurrent with the increases, concurrent with the pieces. We probably have -- we did not do well last year in the carpet business.

We are expecting to do much better and keep them in fairly close proximity of each other -- is what we're anticipating on the carpet side.

So would that be -- you know, is it probably less than the 45 days that I incorrectly alluded to?

45 days is your number, not mine

I know, so -- but is it probably less than that mistaken identity?

In the carpet side, we are trying to align the increases that we are passing through with the cost increases, and we're hoping to get them close. In the other categories, it would be different.

Every one of them will be different

And in terms of the hard surfaces, how much of the hard surface increase came from the Mohawk division's increased sales of tile?

I'm sorry. You want volume?

I am trying to understand how much of the hard surface increase came from Dal-Tile and how much came from the Mohawk hard tile sector?

The Mohawk hard surfaces is in the Mohawk piece, and the Dal-Tile piece, you can see it in the numbers that we have announced, whatever it is. What is it, John?

It went up from -- up 19% -- or 18%.

I was trying to find out what the Mohawk increase -- you say it's in the numbers, but can I break it out? I don't think I can break it out.

You don't break it out. It's about the same as the Dal-Tile, though.

Mixed in there not only is hard surface product, but carpet underlay products and home products, and they're all different product categories.

Salesman you recently hired are for -- to service Mohawk hard surface potential customers?

We put on a new Mohawk hard surface sales force starting in the end of 2000 and 2001, so it's been in place.

So we continue to modify it on an ongoing basis.

So did I handle all the questions?

Yes, you did.

Thank you.

Your next question comes from the line of Sam Darkatsh from Raymond James.

Good morning gentlemen. Just quick questions, if I may.

John, I think you mentioned -- or Jeff perhaps, you mentioned that cash flow next year is expected to approximate net income.

Would it be fair for us to model a little less cap ex for depreciation and working capital as a use of funds. Is that the way we should look at it?

The depreciation should be in somewhere in the neighborhood of 125 million, and our planned capital expenditures today are in the neighborhood of 150 million. Depending upon the economy and other things, it could be higher or lower.

So then you're going to have some working capital rationalization next year is your plan?

We're going to see how it goes, Sam. It depends on the economy, whether it -- if that happens or not. If the economy is booming, no.

I think you're finer than my comment -- I mean, the 25 million would be offset.

I see. Second question, your goodwill was down sequentially and I'm guessing that's just a reclass into other assets?

Correct.

Okay, and -- that will be fine for me. That's fine.

Okay. Thank you.

The next question comes from the line of David Herman from Shemway Capital.

Good morning.

Could you remind me what the investment you made in the Portico business was in 2003? Expenses you incurred to start up the Oklahoma facility in 2003, that sounds like it won't be there in 2004?

The Portico is just expensed throughout the business,, we can't separate one from the other. We have told you the total expenses for the -- Is it 10?

Yeah.

I don't have it front of me, but we believe it's 10 total for the pieces. I would have to go back and get it. If you want to call us back, we'll confirm it

It was in that range.

That was on Oklahoma?

Yes. [INAUDIBLE]

In Portico, you have no sense, but is it greater than 10 million?

We're starting programs like that

Portico has been around longer than that. It's a constant

Build.

Build throughout the years.

And can you give me a sense on the ramp up for Oklahoma this year? I mean, it sounds like you said you are running the equipment at 70% right now -- but clearly, you are not running full level. Do you think you'll obtain that level sometime in the first half this year or is that for the latter half of '04?

I don't have the progress.

We are running 70% of equipment, but not at peak efficiencies, and I think what is happening to us is that the matching of the products takes a great effort, and so how rapidly we can match the products and how fast new product introductions grow in the marketplace are going to determine that, and I don't have the schedule -- I don't have the plan in front of me to give you more details

And the last question, I know you guys started talking to customers about the price increase in December, effective February. Any sense you can give us as to what typically happens in sort of prebuying?

You know, are we going to see people placing orders in January for 30-60 day delivery to try and offset some of those price increases?.

There is always some prebuying. The reality is, though, that a majority of our customers have either no inventory or limited inventory position, so the prebuying is limited in the effect of the [INAUDIBLE].

Okay. Thank you.

Once again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of Joel Habbard from BB&C Capital Market.

Good morning, guys.

Hey, Joel.

John, could you give us sort of a sketch of the major components of the debt?

I am particularly interested in how Lees was treated.

It was in resolver in receivables securitized debt, is what it is. It's all floating.

All right, so it was all --

Everything we spent on debt was on floating debt

Most of that 248 or whatever it was increase was associated Lees then, is that --?

That is correct. That is what it all is.

See, Lees spent 350 million, so we've already generated over 100 million.

Okay, and the various senior notes really haven't changed all that much -- is in regular amortization?

No, the -- the notes are exactly what we had before that -- they had to do with the Dal-Tile acquisition.

All right. That's all have I thank, you.

Your next question comes from the line of Sam Darkatsh from Raymond James.

Quick follow-up, if I may -- and I know you folks are quite adept at delicately answering questions -- this one will be answered every bit as delicately.

The price hikes that you have announced, Jeff, does that entirely offset the cost hikes, or is there some internal overrun baked in there just in case there is a bit of a mix shift from your customer base, or a bit of stickiness that doesn't appear?

Our goal is try to recover some of the margins that we have lost -- is always our goal, and it depends on competition and market conditions.

It takes months to play out just to see exactly how it ends up.

Okay. Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Are there any closing remarks?

Thank you very much. We appreciate it, and have a good year.

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