莫霍克工業集團 (MHK) 2004 Q3 法說會逐字稿

Good morning, my name is Angela and I will be your conference facilitator today. At this time I would like to welcome everyone to the Mohawk Industries third-quarter 2004 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded today, October 21, 2004. Thank you. I would now like to introduce Jeff Lorberbaum, Chairman and CEO of Mohawk Industries. Mr. Lorberbaum, you may begin your conference.

Thank you very much. Welcome to the third-quarter Mohawk conference call. With me I have John Swift, our CFO; and Frank Boykin, our Controller. John, would you please read our Safe Harbor statement?

Yes. Certain of the statements made during this conference call particularly those anticipating future performance, business prospects, earnings and expense estimates, 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. Estimates and 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 estimates or forward-looking statements will prove to be accurate. For those estimates statements, Mohawk claims the protection of Safe Harbor for forward-looking statements as contained in the Private Securities Litigation Reform Act of 1995.

Thank you. We have completed another strong quarter. Mohawk's third-quarter sales grew 17 percent to $1,530,000,000 million with both earnings per share and net earnings increasing 23 percent above last year. The results of both the Mohawk and Dal-Tile segments exceeded our expectations. The improvement in earnings resulted from strong sales growth which leveraged our fixed costs and the Lees acquisition.

During the quarter we continued to raise prices to offset higher materials, energy, and distribution costs. The price and cost increases have not fully been recognized. The flooring industry continues positive growth, reflecting improvements in the economy from the prior year.

John, would you please give our financial report?

Sales for the quarter were $1,531,000,000, up 17 percent or $228 million. You see Mohawk was up 1 billion 131 or 17 percent. Of that 17 percent growth, 5 percent is contributed to the Lees acquisition. The rest was internal growth. Dal-Tile, 400 million was up 19 percent. That is all internal growth.

If we turn to the quarter, $4.4 billion up $774 million from the previous year, that is a 21 percent growth. If we look at the Mohawk segment, 3.2 billion up 21 percent, of that 21 percent, 5 percent has to do with the Lees acquisition. The Dal-Tile was 1,140,000,000 up 22 percent for 9 months over the previous year's 9 months.

Gross earnings came in at 436 million for the quarter, 27.9 percent versus 28 percent the quarter -- the year before, 1,176,000,000 or 26.7 percent gross earnings compared to 27 percent 9 months the year before.

SG&A at 234, 15.3 percent of sales compared to 15.8 percent of sales in the quarter the year before, and 713 million of SG&A for 9 months, 16.2 versus 16.8.

EBIT was 193 million, 12.6 percent of sales versus 12.2 the year before. 463 million or 10.5 for the 9 months percent of sales compared to 10.1 the year before. Interest and other was about in line with the year's befores numbers. If we looked at the tax rate, it was 36.2 and for the quarter and 36.1 year-to-date. We have net income of 113 million, up 23 percent and year-to-date its 266, up 28 percent.

If we turn to earnings per share, $1.67 up 23 percent from the quarter a year before and year-to-date $3.94, up 27 percent.

Turning to the balance sheet for a moment receivables came in at 718 million. That is 42 days compared to 602 the year before, which was also 42 days of receivables. Inventories at $1 billion, 4.4 turns. That compares to 830 million or 4.5 turns the year before. Keep in mind that we have Lees in these numbers, we did not have the year before.

Debt, $907 million and the debt to cap is 26.2. That compares to 26.5 debt to cap the year before at 789 million.

Jeff, I'll turn it back to you.

Thank you. We are really pleased with our financial results. There were gains in both the residential and commercial channels during the quarter. Our interest rates and increased prices did not impact the demand for flooring during the quarter. New residential building was strong in both soft and hard surface categories. The commercial purchasing continued to recover in all channels with the corporate category better but still lagging the others.

The Mohawk segment continues under pressure from rising materials, energy, and gasoline costs. Our costs in the third quarter continued to increases as they have throughout the year. We continue to raise carpet prices to offset these in the market. Individual products have collectively increased from last year from about 8 percent to as much as 14 percent. The cost in selling price increases have not been fully reflected in third quarter. Both residential and commercial customers are substituting product to maintain price points or meet budgets.

Trading down is changing the product mix and offsetting a portion of the price increase. We have not been able to specifically quantify the impact of mix change to our margins from the other changes that are occurring simultaneously.

The Mohawk segment, carpet and hard surfaces continue to grow. We're supporting our customers with aggressive marketing, merchandising, and promotions to assist them in achieving their goals. Our annual regional show strategy, which we began last year, will commence during the quarter from our 2005 product launches. We will introduce our new products in marketing at over 40 locations. In these we're able to better focus on each customer and design strategies to improve our results together.

Our Mohawk brand hard surfaces have continued their growth during the quarter. The infrastructure and product offerings are continually being enhanced to support the business. Our commercial carpet business is improving in all distribution channels. The corporate area which has been lagging has the greatest potential upside in the future. The strategy of using our various commercial brands to focus on different decision makers and end-users is working well.

Our strategy with Lees Carpet is successful. We have moved the sales and marketing personnel to Atlanta to improve our coordination. We have maintained substantially all of the marketing, sales, and manufacturing management. Our investments in new products, inventory, and sales are positively impacting our Lees sales. We are maintaining a separate identity in the marketplace for the Lees product offerings.

The carpet tile market continues to grow and we are utilizing the facility we acquired to expand both the Lees and Mohawk brand carpet tile sales. To support our Mohawk segment, we are planning expansions of our fiber extrusion, yarn processing, and warehousing. These will be completed over the next 12 to 18 months.

Our Dal-Tile segment sales advanced to the rate of 19 percent in the third quarter. We continue expanding our product offerings, our sales force, selection centers, and distribution points. This combined with greater inventory commitment has enhanced our service levels.

Our residential channel is growing rapidly and is supported by a rebound in the commercial channels. The increased volume has leveraged SG&A costs which help offset rising freight and natural gas costs as well as mix changes from growth in our stone products. Additional capacity to support our wall tile business was added to our Monterey facility during the quarter. By the end of the year, our Muskogee facility will be operating at full capacity. Further increases in tile capacity to support our sales are being planned in both Mexico and Oklahoma for the next 12 to 18 months.

In the third-quarter, our working capital position remains strong with inventory turns at 4.4 times and our debt to cap ratio at 26 percent. Additionally, we repurchased 150,000 shares of stock at an average price of $74.88. There continues to be raw material and energy cost pressures as both natural gas and oil are at or near historic highs. The continuing high level of commodity costs is troubling. We believe these costs will moderate over the long term but in the short term the effects of these costs is uncertain.

We anticipate the economy will expand moderately the rest of the year based on the current information. However, certain economic factors such as consumer confidence, job trends, oil, and energy costs may impact purchasing decisions. We expect our revenue growth to moderate as comparisons with the prior year become more difficult in the fourth quarter. We have 4 fewer days in the fourth quarter, which reduces sales by 7 percent and the Lees acquisition was included in a portion of last year's fourth quarter.

Future raw material costs could impact our margins in the last quarter. Based on these factors our fourth quarter forecasts for earnings per share is from $1.46 to $1.55.

With that, I will be glad to take questions.

(OPERATOR INSTRUCTIONS) Margaret Whelan of UBS.

Well done, nice quarter. On your comment about the mix, can you elaborate on a little bit please? The mix shift I guess as you're raising prices -- customers are trading down?

Yes, in the various marketplaces, we in the industry have a lot of products at price points very close to each other and so as the prices have been raised in the marketplace, different customers have reduced the quality of the products to try to maintain price points. In the retail channel you have people who have become accustomed to advertising a certain price per unit and so as we raise the prices, they have in some cases looked for alternative products at lower prices to try to maintain this preconceived price point.

In addition on the commercial side, you have budgets that were established for projects and just because we raised the price of the products did not change the budget, and some of those customers are looking and finding alternative lower-priced products to satisfy their needs. And this is creating a change where we won't see the total amount we have raised the prices in the marketplace reflected in the average cost to the industry.

It doesn't seem that you have that many competitors that could afford to discount right now or not to raise their prices.

I am talking about retail. Our customers are trading down to less-expensive products, not our competitors (multiple speakers) our competitor is selling at -- not passing through increases.

Okay, but on the manufacturing side, you are all passing them along at the same rate?

The marketplace is moving similarly.

Can you give us an idea of the trend through the quarter and into October both on commercial and residential?

The comparisons continue to get more difficult as we go through the year. If you will remember last year the first half of the year was weaker. We came into the second half and it improved substantially and we had a very strong fourth quarter and what we have this year is you're going up against those comparisons and as those get better, the increases become less. At the same time, we have concerns over what is going to happen in the marketplace and our customers and we built those into our forecasts as what we believe is most reasonable.

Okay and the just finally -- to what degree have your costs actually increased since the beginning of the year? Do you have a percent?

Of my costs increase?

We know how much the commodities are up but in terms of your costs?

As our price increases reflect different product categories, we said it is a range from 8 percent to 14 depending on which products, our costs would be probably similar to that depending on what product and what category it was in.

The 8 to 14 percent?

Yes.

Michael Rehaut of JP Morgan.

Good morning. I just was hoping to get a little more detail on the year-over-year change in net costs for PVC and nylon and things like that in terms of your overall raw material purchases for the third quarter, year-over-year change in the second quarter.

I don't have all those. We don't give out our costs by a product or a piece. There are public documents where they pull the different pieces together and if you don't know where to get them, we will be glad to help you find when they are, and they publish industry statistics on pieces. You have to look each one of them different. Nylon has gone up the most. It's had the most increase because the costs are not only driven in nylon because of the oil-based prices, you then have benzene, which is a major part which has gone up dramatically, and is at a nonsustainable level for long-term but it is going to take a significant period of time for it to come into balance with supply and demand. So nylon has gone up as a percentage as an amount more than the other commodities. At the other extreme, polyester has not gone up as much in proportion to the pieces and in between you have polypropylene and we think those things will stay in those ratios for some period of time.

I guess I was getting at the some other companies in other areas of the building product space would say for instance steel -- we're seeing a 30 million delta year-over-year in our costs for steel and likewise our pricing actions have offset most of that. And certainly at the end of the day what I'm trying to get at is -- in the second quarter your Mohawk margins were down about 50 basis points year-over-year. This quarter you basically saw a reversal of that and they are up about 40. And I guess looking forward you continue to talk about high raw material and energy cost pressures, but at the same time your pricing has been pretty successful and you also have not seen additional notices of increases since recently. So I am just trying to look forward into the fourth quarter and if all else is equal, why wouldn't you still be able to have up margins like you've shown in the third quarter?

The costs have continued to increase. I think you're probably referring to nylon fiber increases by our fiber suppliers which are announced increases and the last increase from them was I believe October 1 and so we have not had one since October 1. On the other commodities they tend to be bought on -- they tend to fluctuate greater in smaller increments and all of those or a great majority of those, they are continuing to talk about increases in other pieces. So I don't agree with you that the cost pressures have plateaued. Now hopefully they have, but I am not convinced of that at the moment.

Thanks, I was just getting clarification from what you said in the press release, but very helpful. Thank you.

Josh Leisable (ph) with Nataxis (ph).

A couple of quick questions. On regarding the Mohawk segment, you said it was 17 percent. Can you just break that out? I just missed the numbers internal on those Lees acquisitions.

5 percent was Lee's and the rest of the 12 percent was internal.

And year-to-date?

The same 5 percent for Lee's. The rest was internal.

Second question on the commercial business you alluded to that picking up and specifically you talked about the office products or the office -- corporate business I should say. Can you just elaborate a little bit more on that? Have you seen that actually ramp up through this quarter as opposed to last quarter? Is it being steady and what about the corporate?

The industry data shows that year-to-date the commercial business in the carpet area is up about 8 percent in dollars for year-to-date and it is showing that it increased in the last data that we have somewhere around 9 percent or a little more in the latest period that is available. The trends are showing that it is improving throughout the year. The statement was that of the different categories, corporate is a large portion of that and corporate is not improving as much as the other categories.

If you go back and look at the commercial business from its peak, at the bottom it was off 30 to 40 percent, so it has a tremendous potential to increase if the buyers get back to those rates of purchases.

Okay, great. Thanks a lot.

John Baugh with Legg Mason.

Just a question on Lees. I think when you bought it, you were running 250 plus million in revenues and had a nice operating or EBITDA of I think about 44 million. Can you tell me how those members have trended since you bought Lees and give me some kind of feel for what you are doing in the modular segment both with the Lees brand and Mohawk?

We don't break out different pieces. Little by little it’s going to get integrated more and more with our commercial piece. We are going to lose specific cost structures of the business as the 2 get intertwined together with overhead structures and cost structures. In general, what happened to us was when we purchase Lees -- what had happened in the prior year they quit spending money on the business, which meant they quit putting out products in the marketplace; they quit investing in samples; they reduced the cost substantially during the prior 12 months. Then at the end of it, they had to raise cash in order to put the deal through as they had agreed to. So in the end of the time before we got it, they didn't reduce the inventories so the surface levels were off.

Now when that happens in the commercial business, there is fairly long lead times and so that impacted us over the next 6 to 9 months after that timeframe because as we had to build back those same things. We had to put the inventories back in the business. We had to put new products out into the marketplace, and we had to spend more money on sales and marketing in order to support the business. As that was going on, our sales were under pressure all through that period, ours and their sales as their business was declining before we got it and it continued to decline for a period of time after we got it.

As we put those investments in, we have turned the corner and the business is now showing good growth rates as it is coming back and responding to the activities that we've done.

And the carpet tile area?

The carpet tile as a category is growing substantially and our growth is better than the industry at this point.

In the past, you have broken out sort of an annualized run rate of hard surface within the Mohawk division. Would you care to give a stab at that -- where you are running these days?

It would be 500 million or more at a run rate.

Thank you. Good luck.

Laura Champine with Morgan Keegan.

Good morning. Can you quantify your market share gains for the total Company across the floor coverings industry last quarter?

No. We don't even know what the floor covering industry did last quarter.

I thought you might have a better guess than I would, Jeff. (Laughter)

I think all it would be is a wild guess, which isn't worth much.

Understood, and I think that I understand that you're passing through your cost increases at just about the same percentages that you're seeing them, but what does the lag time -- can you generalize about the lag time for those price increases?

As a general statement we've said that takes about quarter but that's not perfect. It could be little a more or less, in different channels or different pieces, but in general we would say it about a quarter.

Great, thank you.

Keith Hughes of Robinson Humphrey.

I will start with Dal-Tile quickly. You had talked about some price increases in the first half of the year on some of the Dal-Tile products. Were those implemented and did they stick?

We basically put through 2 increases but they weren't on the same product. The first increase we put through was on what we call sourced or imported products and so what happened is as the dollar exchange rate and as freight rates changed against different currencies, we put through an increase on those categories and then later on we put through an increase in the other products. And in those products, what happens is the cost of moving those around in many cases is built into the cost of the product so as the freight rates change you have to pass through the freight through a change in product price.

So it sounds like net you were getting, you were offsetting -- any real increase in price is offsetting cost?

That is correct.

And with the big move in crude this month historically it seems like your nylon suppliers have been unwilling to go up in price in the fourth quarter during the seasonal slow period of the year. Anything you see out there that would cause them to break from that habit?

I think that their habits of the last year have not been similar to their habits of prior years, and what has happened to them is that their margins got depressed during the slowdown and recession to the point that they could not absorb anything that they wanted, so basically they are trying to reflect to us their cost pressures. So I would expect on an ongoing basis that that would be the primary driver of it.

And the last quarter or so, have the announced prices increases, are they still giving you sort of a couple week look before they are implemented? Is that the timeframe?

As a general statement it is typically around a months, but sometimes it is shorter.

Thank you.

Carl Reichardt of Wachovia Securities.

I have a question about CapEx for next year. What is your budget for '05 and can you break that out Dal-Tile versus Mohawk for me?

The budget has not been completed yet, but the budget will be substantially higher than it is this year as we have pushed up the capacities of both our carpet production pieces as well as our Dal-Tile pieces so we are expanding -- we have plans to expand as we talked about earlier various pieces. The budget has not been completed but this one could be off dramatically. It could be around $250 million, but it could vary from that dramatically based on timing, which also is going to affect this year. There's some of it coming this year, some in '05 and some in '06 as well as the projects and pieces have not really been completed, so all I can do is give you a general range. It could be off dramatically.

Jeff, does that imply that what you announced in terms of capital spending projects now there are going to be additional ones that you have not talked about yet or are you talking about the budget based on what you talked about today?

Talking about the budget based upon those pieces which I've earlier specified.

Another question I have was just if we look at the Mohawk growth and with a 5 percent Lees, 12 percent in the quarter, can you give me -- and $500 million run rate for hard surface -- can you give me a growth rate for hard surface within Mohawk compared to growth rate in carpet?

We normally don't break out specific product growth by products. We have a lot of them and we don't arbitrarily pick one and track the other. So I guess this one would be in excess -- just to give you a -- in excess of 20 percent.

That is what I thought. Great. Thanks a lot.

David MacGregor with Longbow Research.

Good morning. You had indicated earlier in response to a question on mix -- the question was raised and I guess I just wanted to pursue that a little bit further. You had indicated that the impact had not yet been fully reflected in the margin numbers. I guess this quarter's margins were up and there is some seasonal influence there that I guess I'm aware of but is there still a negative that we should be expecting or was it in the various puts and takes this quarter? When do we get the catch-up on this negative mix shift?

I think I did not get it quite where you understood it. The mix shift was to make sure that you understood that if the price went up 8 to 14 percent that on the same unit sales we are not seeing an 8 to 14 percent increase in sales dollars and the reason we are not seeing that level of increase in the industry is because the individual products are changing that they are purchasing in order to give them a lower cost so that they can maintain either budgets or retail prices. And so it is offsetting it. I believe the industry year-to-date is -- in unit price only up around 4 percent according to industry numbers versus the higher prices that we say we're charging for our customers and part of that is in the flowthrough of it and part of it is in a change in the quality of the products.

So when you say it is not yet fully reflected in the numbers, once it is fully reflected in the numbers, what should be the impact?

We are having it difficult time because there are so many variables moving at the same time applying one to mix change and saying this is the influence of mix change. We have hundreds of products and a lot of different channels and we've tried internally and we can't really put a specific number on it.

Okay. This is a follow. Can you talk about the growth and the number of dealers you have maybe just all in -- then if there has been a big increase in one particular segment -- maybe highlight that?

We sell most of the distribution opportunities in the marketplace, so growth through expanding outlets unless the total outlets change is going to be difficult. We don't sell 100 percent but we sell a very high percentage and I would guess we're gaining and losing as many as we are on both sides. What was the rest of the question?

I was just trying to get a sense of -- you talked about growth in capacity and growth in manufacturing capacity, growth in your distribution capacity, growth in the product offering and so I am just trying to isolate again growth in the distribution and the contribution that might be making to the overall growth of the Company? And then within that, if there was a particular segment that was growing faster than the others -- I was just going to get you to highlight that.

If you look at the industry in carpet, the industry has grown about year-to-date around 5 percent in units and residential. It has grown -- I assume this is right -- year-to-date it has grown about 6.5 percent in residential. It has grown about 4.5 percent in commercial, which is a total 6 percent unit growth, and we were running at fairly high capacities before. We are assuming that the industry is going to grow over time and so we are putting in place for the long term to cover those increases in the industry's growth as well as our own.

Okay, thanks very much.

Errol Redmond (ph) from Redmond Capital.

My question relates to inventories. Can you break out the inventory increase between the Dal-Tile and the Mohawk segment and can you walk us through the implications to the income statement when inventories are built into either segment and when also the effects -- when they decline?

Are you assuming there is going to be a significant shift in inventories over time? The inventories in most places we have held fairly constant in turns and we let it go up and down slightly. Some of it comes from cost increases of the raw material. Some of the increase comes just because we have the same unit but with a dramatic increase in cost. The inventory dollars are going to go up. In some cases we have allowed some inventories to become greater because if you are in a rising environment you'd prefer to have higher inventories. But I don't perceive that we're going to drive the inventory turns dramatically in one direction or the other to affect the bottom line.

I am just thinking in the hypothetical case of undesired inventory building or undesired inventory liquidation, when it's one thing to plan, it's another thing to have the market take away the levels or build up the levels when you don't want it.

I don't know how to give you a rational answer to the question, if you want to know the truth.

We are pretty conservative on our valuations of the inventory and we revalue them pretty quickly when we see that they have been slow moving or sat around for too long, Errol, so that we don't really carry a value on inventory that is slow moving or has been obsoleted.

We reduce the inventories based on age and quality on an ongoing basis and we believe it's reflected today with those in it. Is that the question?

No. My question was relating to if the market suddenly weakens and you are producing at a higher level, what effect does that have on your income statement if your inventories build unexpectedly or if the reverse occurs, that is if the market strengthens and you are caught unexpectedly with less than the desired inventories?

I comprehend the question finally.

I'm sorry, I didn't say it clearly. Please excuse me.

What typically happens if the market declines -- typically we give back the increases over time and so we are able to as -- just like they are not in sequence going up, they are not in sequence all the time going down and so what happens is we can let it out at a rate that typically allows us to even it up with our inventory's values. It does not all drop on day one. On the same thing going up, the pricing goes in over time. We do have inventory and they balance out over time. Our inventories are roughly 3 months. We keep talking about it takes approximately 3 months to get the increases through so they are close in balance, they are not always equal.

I see. I wanted to just ask a question on pricing and that is do you feel that you have performed well in terms of matching cost increases into the marketplace and do you foresee any changes in your ability to continue to match cost increases into the marketplace?

As a general statement, I believe that we have been fairly close in matching the cost to the selling prices. And there's timing differences between the two, but for the most part we have been. I don't see any reason why that would change on a going-forward basis.

I appreciate your answers to the questions and I congratulate you on your excellent work.

Mike Clairfeld (ph) with High Grove Partners (ph)

I just had a few quick questions. First off I was wondering just ballpark what percent of your cost of sales is petroleum-based raw materials?

Of my carpet materials, approximately 99 percent of the materials.

And of the cost of sales on the carpet side?

It is about 60 to 70 percent of cost of sales on the carpet side is soft surface material.

And then what was LIFO expense in the quarter?

I am not sure how to answer that question. We did not really have a LIFO adjustment.

Great, thanks.

Margaret Whelan of UBS.

I had two follow-ups. I guess I just want to clarify a lot of these questions about your cost versus your margin. If on the carpet side half of your cost is up 8 to 14 percent and you have raised your prices 8 to 14 percent, yet he really only half your cost has gone up 6 to 7 percent. Is it the mix that is offsetting any margin expansion here?

We did not raise the prices on the products that did not have a cost increase, Margaret. That is why Jeff talked about individual. It is an across-the-board price increase so the price increase we had was to match up with the cost increase. Could you try the question one more time?

The way I understand it is you have raised your selling prices by 8 to 14 percent.

And it is flowing through and the existing -- when we raise the price, it take a awhile for the price to show up in the selling price is one piece -- so it doesn't show up day one.

I understand that so maybe the lag is the reason margins aren't expanding?

Because the cost is going up too.

The cost is going up as fast as the selling price.

I know what but what you're saying is that the cost on the raw material is only half of your total cost, right? So it half your cost is going up at 10 percent, then you only need to raise your price 5 percent to offset that.

I think we are answering the question as cost in total and I think you are trying to ask -- I think you are assuming that because we have the energy and gas prices are going up basically our natural gas we have very little hedges anymore. What hedges we have are all short-term so we are paying basically today's price versus a year -- it's gone up 25 percent in the year so the gas prices are up. Our health care costs are up.

Your labor and overhead is up as well?

Everything we are touching is up.

Okay. I got it. The second thing is and I'm surprised it hasn't come already but why aren't you buying in more shopped stock. Your balance sheet is getting a big lazy here.

Our stated objective is to do acquisitions as a primary objective. We have things we are considering in many different areas to try to grow our business on a long-term basis and we are making sure that we are leaving ourselves flexibility to do what we want. If we determine that we don't need as much flexibility, we will fix the problem.

Fix the problem, would that be buying in more stock or a dividend?

Historically it has been buying stock back, but if we believe a dividend is more advantageous to the shareholders, we would consider a dividend. Up to this point we have used stock as a primary vehicle.

And the acquisition pipeline? I met with John a month ago. He said there was only about $100 million total of acquisitions you were considering right now. Is that still the case? Ex Armstrong?

It surprised me he would quantify it.

Well, we have him over a barrel.

We talk to a lot of companies all the time and in doing acquisitions you never know which one is going to come through and which one is not. If 100 million is a number you can't do much damage with $100 million.

That's my point and your balance sheet is extremely strong here.

I wouldn't consider that. There are many more options (multiple speakers) .

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Stephen Long (ph) with HMC (ph).

Good morning. At what point does the price value equation, well actually it does appear that the price value equation has diminished for the end customer where they are actually looking at the prices going up and they are moving down in the product, as you mentioned. At what point do you cry "uncle" and say okay, maybe we can't afford to have our end customer trade down and lose margin so we will ease back on price increases?

You have to look at the end customer and what options they have. The only options they have been that are less expensive than ours today are vinyl, which has a very limited end-use and you have to look at it on installed basis also. Carpet is one of the least expensive things to install. So on an install basis, the price of installing carpet into a home is still one of the best values at the prices we are at.

You have also assumed that the other categories are not increasing. The other categories where they use chemicals are increasing. The wood prices have increased in the wood categories. The tile pieces, freight is increasing. The exchange rates for imports is increasing. So there's pressures on all the pieces and then the cost of an installed ceramic job is multiple the cost of an installed carpet job, so it is not close enough to those to impact the decision based on those questions.

Do you have different price levels that you can share with us and the margins associated with those?

I think you the thing you are missing there is that we have 20,000 products out there they can pick from and the carpet, lots of products and those margins do vary from point-to-point. That it is because one is $20 less than another in total doesn't mean that the margin is going to be less or $100 or $1000, whatever it might be. It could still have the same margin percent. So that as we change these when people go from a 50 (indiscernible) to a 45 balance (ph) carpet, it may be still be the same dollars in margins in the end that we end up with. But they have moved down in some of the weights that they are putting in.

Thank you.

At this time there are no further questions. Mr. Lorberbaum, are there any closing remarks?

We appreciate everyone being on the call. We have had a strong quarter and we look forward to -- an improving economy would be nice. Have a nice day.

This concludes today's Mohawk Industries conference call. You may now disconnect.