莫霍克工業集團 (MHK) 2005 Q3 法說會逐字稿

Good morning, my name is Marvin, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Mohawk Industries third-quarter earnings 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] Thank you.

I would now like to turn the conference over to Mr. Jeff Lorberbaum, Chairman and CEO. You may begin your conference.

Thank you. Welcome to the Mohawk third-quarter conference call. With me I have Frank Boykin, our CFO, who will read the Safe Harbor statement.

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 27A of the Securities Act of 1933, as amended.

Estimates and forward-looking statements involve a number risks and uncertainties. These and other assumptions could prove inaccurate, and therefore there can be no assurance that the estimates for forward-looking statements will prove to be accurate. For those estimates and forward-looking statements, Mohawk claims the production of the protection of the Safe Harbor for forward-looking statements, as contained in the Private Securities and Litigation Reform Act of 1995. Jeff?

Thank you. Mohawk's third-quarter net sales increased 11% to $1.7 billion. Net earnings for the quarter were $109 million, 3% below last year resulting in a diluted earnings per share of $1.61. The third quarter was impacted by higher raw material costs, increasing energy and transportation costs, and additional ceramic tile introductions, partially offset by higher sales volume.

The petrochemical industry has been disrupted by hurricanes, causing surcharges and increases in petroleum, natural gas, and petroleum-based materials. These cost changes dramatically affect our carpet raw materials, production costs, and distribution costs. To offset these, we have recently implemented a price increase in carpet, and have announced another for mid-November. The industry is managing these unusual times, and passing these costs through to the end consumer.

Frank, will you give our financial review, please?

Sure. I will start with the income statement comparing the third-quarter '05 to the third-quarter '04. Net sales for '05 ended up at a $1 billion, 698 million, or a 11% increase over the prior year quarter of a 1 billion, 530. Gross profit as a percentage of net sales ended up the third quarter of '05 at 26.6%, down from last year's gross profit of 28.5%. The gross profit margin this quarter was impacted by energy and raw material increases, as well as a LIFO charge of $12 million for the quarter, or if you look at the year-to-date results, about $28 million for the year so far.

SG&A as a percentage of net sales for the quarter of '05 ended up at 16.1%, and that's up slightly from 15.9% in the prior year. This resulted in operating income as a percent of net sales of 10.5%, compared to 12.6% last year. Interest was $10 million, down from $16 million in last year's third quarter, primarily as a result of declining levels of debt. Our income taxes were at $59 million. That represented a tax rate of about 35%. That's down from 36.2% last year.

Our tax rate this quarter was impacted favorably by some state tax law changes, which represent a one-time impact. Net earnings for the quarter ended up at $109 million, that's down about 4% from last year, which was $113 million. And earnings per share came in at $1.61, also down about 4% from last year's earnings per share of $1.67.

If we look at the two segments, the Mohawk segment sales resulted at 1 billion, 248 million, up 11% from last year of $1 billion, 129 million. Operating income for the Mohawk segment as a percentage of net sales was 8.9%, down from the 11.6% last year, impacted by energy and raw materials increases, and the LIFO charge I mentioned earlier.

The Dal-Tile segment net sales came in at $449 million or a 12% increase over the $400 million results for last year's third quarter. Operating income for Dal-Tile as a percentage of net sales was 15.4%, and that compares to 15.7% last year.

On the balance sheet, receivables ended up at $812 million, or about 47 days DSO, and that compares to last year, 46.1 days. Inventories ended up at $1 billion, 90 million, and that compares to $1 billion last year. Turns in both this year and last year, were at about 4.2 times for inventories.

And then finally, our long-term debt ended up at about $769 million, down from last year at $907 million, and our debt to capitalization ratio is down to almost 21% versus 26% last year. Jeff?

Thank you. Little has changed since our conference call the end of September, but I will review the circumstances. Prior to the hurricanes, both oil and natural gas were rising during the quarter. With the hurricanes in the Gulf, we have had the largest shutdown of refinery and petrochemicals in history. There is limited damage to the production assets, but start-up has been impacted by the lack of manpower, as well as the availability of electricity, fuel, and feed stocks.

The lack of inventory flow has affected the restarts for polymer production, which is at the end of the chemical supply chain. There are also many other complications and unforeseen issues, that were causing delays in the start-up of these inter-dependent facilities. While production is constrained, the demand for oil-based product remains strong, creating shortages and significant increases in price.

All of our carpet raw materials including fibers, backing, and latex, have been impacted substantially. Our suppliers' production has been curtailed, but appears to be improving over time, as the facility moves back towards normal. Given the present information, we believe we will be able to maintain reasonable service, as we manage the business with lower inventory levels. In the quarter, some carpet plant curtailments are planned due to reduction in raw material supply, which will reduce our total inventory.

In addition, our natural gas and transportation costs have escalated dramatically. We are presently buying natural gas -- [audio interruption] at slightly under market, as most of our lower price hedges have expired.

In the third quarter, the carpet industry was up about 4% unit and 10% in dollars. During the latter part of the quarter, we saw carpet purchases and shipments increase ahead of our price change. We estimate the impact on the industry to be about 1% or more, as customers took in product ahead of the increase. In the Mohawk segment, sales trends and new residential construction and Commercial, continue to outpace the residential replacement business. Prior to the hurricanes, the retail business was showing improved signs and more consistency.

The Commercial carpet sales are good, but have moderated as the comparisons have become more difficult. The present sales trends are hard to read, due to the changes in purchase regulating to our price increases. To mitigate these changes, we have implemented a price increase in the beginning of October, and have announced another for mid-November. Both are in the 5% to 8% range.

Although it is difficult for both Mohawk and our customers to adapt to these rapidly rising costs, I believe that we both will be successful in passing these through to the end consumer . Presently, hard surface products have continued to grow faster than the soft surface, the industry, we believe, will continue to benefit as the Gulf Coast is being rebuilt over the next few years. The Dal-Tile segment performed well with sales growing at 12% from the previous year, the residential business continues to grow at a higher rate than Commercial in this segment.

The segment was also impacted by higher energy and Transportation costs, as well as more prospectives for product introductions in the third quarter. An increase was implemented in the third quarter of about 2% to cover rising cost of energy and transportation. Our planned expansions are on-track with New Mexican capacity starting up by the end of the year, and a Muscogee plant beginning the second half of 2006.

The combined capacity will add about 20% to our present production when fully operational. It generally takes 12 months to reach full production levels on a large project like Muscogee, as production lines are started up in stages. We added also three new distribution points to improve our service in areas that have greater potential during the quarter in the Dal-Tile segment.

The acquisition of Unilin is scheduled to close in the fourth quarter of this year. The laminate and HDF business in Europe has slowed with the economy, the U.S. business continues to grow. The new plant is in a start-up mode, and the quality is good. The plant will continue to raise production levels through the first half.

We are presently developing long-term strategies to maximize all the channels in the U.S. market with different products and brands. The roofing products continue to grow, and the board sales are flat in Europe. They continue to sign new licensing agreements. New patents have been granted in the United States, strengthening their position in the market. Total margins are in-line with their plan that they had at the beginning of the year.

As previously reported, we have determined to permanently finance this transaction with all debt. We are currently evaluating the appropriate combination of prepayable and term debt. Acquisition is not expected to have a significant impact on the fourth quarter before any one-time noncash purchase accounting charges. Our outside advisors are presently reviewing these charges, and the intangible asset amortization amount, as required under purchase accounting rules.

The Unilin acquisition will be another transformational event for our Company, making Mohawk a leader in the fast-growing U.S. laminate market, the economy continues to show strength, but the short-term impact of the Gulf Coast storms on energy and the petrochemical industry, has created much uncertainty.

Additionally consumer confidence and interest rates could impact the economy as we look forward. Unforeseen changes in our supply chain and cost structure may also affect our results. Before the impact of any one-time accounting charges the fourth-quarter earnings forecast remains $1.49 to $1.58.

With that, I will be glad to take questions. Thank you.

[OPERATOR INSTRUCTIONS] One moment while we pause for the Q&A roster. Our first question comes from Keith Hughes with Robinson Humphrey.

Good morning. How are you. First, just to make sure I understood. You said the industry numbers were going to be 4% unit growth in the third quarter, is that correct?

Right.

And 1% of that came from the prebuy before the October increase?

We are just guessing. We are assuming, even our own numbers you can't tell.

Okay. That's fine. That's close enough. Unilin has been involved in some patent disputes here in the United States. Can you give us any kind of update on where you stand on that?

Unilin is involved with all kind of patents on an ongoing basis, as they continue to make sure that their patents stay valid, and that people don't infringe on them. In the United States, there was a recent article about a suit against Chinese manufacturers, and importers bringing in product that Unilin believes infringes on their patents, and that is going on as we speak.

Several of them have withdrawn from the marketplace already. We will continue to make sure that companies that infringe on our patents, that we will take actions against.

It was a fair number, has it not, that have removed themselves from the marketplace?

That's what the papers say, but I don't know the numbers.

Okay. That's fine. And for Frank, as we go into the fourth quarter, given your operating schedule and what you think demand is going to be like, will inventory most likely be down year-over-year?

Yes, Keith.

It will.

Yes.

Is that something that you will try work out at the early part of the year? How would you handle that?

We will see where they are at when we get there. We are not sure what the inventory levels will be because the supply is still uncertain, and so we get there depending on how low it gets, we will have to make those decisions. We believe we can operate on an ongoing basis with less inventory than we have had.

Okay. Final question. As you talk to your petrochemical suppliers, do they see a light at the end of the tunnel now that some refining capacities have come back on line? Are we over the hump is my question?

The capacities are coming up. We are getting -- the supply increasing in the future from what they had thought it would be, and, you know, we are hoping by, you know, the supply side December will be back in-line with where it should be. But we don't know until we get there.

Okay, thank you.

Our next question comes from Margaret Whelan with UBS.

Can you hear me?

Yes, we can.

Two questions. First of all, housekeeping. What should we expect the tax rate to be for the fourth quarter? What's in your range?

I am not sure I understood the question.

The tax rates?

Oh, the tax rate. It should be more back in line with what it has been historically, 36, 36.5 range, Margaret.

What about other income?

Other income should be, you know, in the same range it has been historically as well.

Okay, because there was a gain this quarter that we hadn't seen for a while.

Right.

Was there any reason for that?

I will have to get back to you on that. I don't have that in front of me, Margaret.

Okay. Second question I have is in your press release, in your prepared comments, you are just talking about the service levels being dependent on the inventory available to you. Can you just talk about the capacity that you have internally, and how much control you have over the commodities and raw materials that you are using?

What happens is that whether it is internal or external, the chemicals supplied to it have been restrained, and so we do not have the raw materials to support the business as it has been run historically, and we are scrambling around trying to get alternative suppliers to different pieces. We are paying premiums to product, in order to make sure we have it, and just because it is in internal extrusion, does not mean that we have unlimited raw material supply for [inaudible]

Sure. I understand. Do you see a point where it could get worse than where it is right now?

What we believe is that the biggest shortages will be in October, and it will improve through November and December.

Okay. Do you -- have you actually stopped taking orders or sales?

We have not.

Because of service levels, no?

No.

Do you anticipate having to do that this month?

What we hope is that we will be able to have minimum disruptions to our customers, and hopefully it will be in specific items for specific moments in time.

Okay. Thank you.

Our next question comes from the line of [Errol Redman].

I was wondering if you could outline the income statement effects of reduction in inventory, and elimination of going to higher cost market price, natural gas. That is the first question and then I have a second question.

All that has been built into our estimate for the fourth quarter, Errol.

Right.

Natural gas price notice fourth quarter, natural gas and electricity were up 30% from the prior year quarter. As we look forward -- if you look at the first six months of the year, natural gas prices were somewhere in the $6 to $7 range. Presently they are in the $12 to $14 range. If they stay here next year, our natural gas costs will be double what they were. If they stay there. Now I don't know where they are going to be.

I understood that you included inventory reductions in some of your estimates, but I am trying to understand with that contribution, to differentiate the [inaudible] from accounting.

I am not sure -- the positive economic -- reducing inventories, actually negative because we are running assets less, but the bigger negative to our inventory reduction than a positive.

Right. And then the other question. I wanted to discuss, -- with your ability to pass on energy prices, do you anticipate the [technical difficulties] -- [inaudible] to develop from the consumer. Do you think that consumer prefers cement to your conversation?

Carpet over the last 30 years up until this recent increase has basically remained flat. We are one of the least expensive installed products to put on the floor. A percentage of the [drve], even though we have had significant increases, as much as half of it could be reduced by trading down to less expensive products.

At this point, we've seen no change in the consumer purchasing habit from pricing, and we believe that buying them for aesthetic purposes, as well as they still have alternatives at lower price points to fit budgets. So we don't anticipate it having an effect on the industry unit volume.

All right, thank you. That takes care of my questions for now. Thanks.

Our next question comes from David MacGregor with Longbow Research.

Good morning, Jeff. Good morning, Frank.

Hey, David.

You talked about 11% the top-line growth in the soft surfaces, and I think 12% was the number in the hard surfaces. How much of that was pricing versus mix? [end of technical difficulties]

If you use the industry, you have a -- the difference between the 4% unit and the 11 shows a 6%, 7% price increase, the mix piece is difficult to say. If you want my instinctive answer, I think it could be as much as 4% to 6%.

Of the 7%?

No in addition to, as it trades down.

Going the opposite way, right.

What happens is if the customers didn't trade down, the average pricing would have been up more.

Oh, I see what you are saying, okay. That's interesting. And I guess I was going to ask you about the mix as well, what you are seeing in terms of your order book, and demand conditions between the high end, say the Karastan brand, and the lower end, where you have maybe Aladdin or Bigelow. Can you tell us what you are seeing, in terms of order pattern there is?

What we see is, if you look at the total business, the new construction business is doing better, and it tends to be in the lower value ranges on average than the residential replacement, so that's causing a trading down of the mix, as the mix changes between the total in the industry.

Right. Is that accelerating? I mean that was the way it was last quarter when we were talking about this. I was wondering if it is getting worse?

It is continuing in those pieces. What else can I tell you. We do see continued trading down. We see in the Commercial business some of the higher-end products, you know they are trading them down to stay -- instead of changing the budgets up, they are trading them down, in the Commercial segments of the business, and we see it across all categories.

Now you were pretty promotional on the high-end product this past quarter. Is that your intention? Does the market require that going forward? It sounds as though that may not be the case.

I am not sure I understand the question.

You were running sales on the Karastan brand.

We run the sales on the Karastan brand every year, we call it Karastan month. You're just seeing the same promotional efforts that we do every single year.

We shouldn't draw from that in conclusion to both the need to be promotional going into the fourth quarter?

That's normal.

Good. Thanks a lot, guys.

Okay.

Our next question comes from Michael Rehaut with JP Morgan.

Hi, good morning.

Good morning.

Just a couple of questions if I could. First, if you could just review how the industry, on an industry basis, ceramic tile is doing, and you put up several double-digit top-line growth quarters in Dal-Tile. And I was just trying to get a sense for the amount that -- of this top-line growth represents some share gains, and then I have a follow-up.

We do not have industry data to give you. The industry -- the only data we get is on an annual basis after the government publishes the reports, and so we don't have any data. We believe the industry on average is probably doing better than the carpet industry, as it has in the past. We believe that in the ceramic business, a larger portion of it is going into the new housing market, than in the other, but it is growing in the replacement business, and that category is doing better. So we believe that the industries, you know, growing probably typical of historical rates.

Okay. Switching gears a second on the carpet side. Can you just remind us now with year-to-date, how many price increases you've been able to implement, and what is the number of price increases year-to-date, and, you know, before October -- before the one you did in October, you know, what was the total roughly percentage, on an aggregate?

There were two in the first half towards the first of the year. Then the October one, and now the November one that we've announced. So the total announced of four.

So you didn't have any actually during the third quarter?

No, there were not.

Okay. And lastly, I was wondering if you could just give us, if possible, an update on -- you mentioned some of the results with Unilin. In '04, I believe you gave us revenues of a little bit less than 1 billion. You know, what would you expect the full year '05 to be roughly, and how we can think about '06.

We don't have audited financial numbers at this point, and we are hesitant about giving out any numbers that haven't been reviewed, and made sure that all the accounting policies are in-line, until we get those, which will be not long after we close. We are hesitant about giving out information that could be erroneous.

Okay. All right, thank you.

Our next question comes from John Baugh with Legg Mason.

Yes, good morning.

Good morning, John.

Good morning, John.

Just a follow-up on that Unilin. You did give -- I believe it was in July when you announced a deal, a EBITDA number for '04 that it it was 23 -- or 28% or 29%.

We did, and it was not in U.S. GAAP.

Yes. Assuming -- let's forget the GAAP and the adjustments, you also said during that call you expected that our margins to contract in '05, due to various as sundry things. And you just mentioned here this morning, that they are in-line with what they -- you know, I guess, expected at the beginning of the year. What kind of, on their numbers, in other words, no adjustments, which I know may come, but is that a 100, 200, 300 basis-point decline in EBITDA? Is that close?

Hold on one minute.

And then what would be the expectation sort of going into '06. In other words, the project --

What we had said before, is that we believe the margins were at high levels. That we expected on a future basis that the margins over time would continue to climb. That in the year that we are in, that they were starting up the new plants with start-ups. There were new manufacturing facilities being put up in Europe, and those would reduce the income in the year, and then on an on-going basis, we would not expect it to be as high as the peak levels that were in the prior year.

And did you ever quantify 100 a year, 200 a year for the next couple of years, or any stab on that, again on their numbers which I realize is subject to adjustment.

I don't think we quantified going forward other than to say, we didn't think they were going to stay at the levels that they were at in '04.

Okay. So even though this European flooring sales has slowed, it's not alarming and it is not affecting their budget they gave to you, say back in July?

The total margins on average are in line with their plan from the first of the year. Not to say that it didn't move between different categories.

Okay. Fair enough. And then on LIFO in the fourth quarter, Frank, how easy is that to project, #1. What are you projecting, #2. And the fact that you have lower inventory, how does that influence that LIFO number in the fourth quarter?

That's a long question, John. [laughter]

LIFO is like voodoo.

Yes. We can say that we have projected some numbers, and they are built into the estimate, you know it is an estimate right now, and inflation continues to the end of the quarter, and the LIFO numbers continue to go up as well.

And the LIFO number is based on a government --

Index.

Index.

Yes.

-- which has at points in time, more or less than what we are seeing. So what we are seeing may or may not reflect to what the number comes out.

So, for example, the third quarter you had some raw materials going up, but nothing like the two increases you are getting in the fourth quarter, on nylon at least, but you are saying it's the government index that dictates the LIFO number?

That's correct John.

Would that imply if the government index isn't, you know, completely accurate to the floor covering business, that there might be some catch-up later, i.e. '06?

Yes, there could be some catch-up, and it depends on what costs -- whether they moderate to the end of the quarter too, right?

Yes, fair enough. Thanks so much.

You are welcome.

Good luck.

Our next question comes from Eric Bosshard with FTN Midwest Securities.

Good morning.

Good morning , Eric.

A couple of things. First of all, can you help us understand the revenue momentum between the second and third quarter, understanding that you got about a point of benefit in 3Q from the buy-ahead, but the reported Mohawk segment revenue numbers grew. How much of that was price, and how much was better units relative to 2Q?

If I use the industry -- I don't have the Mohawk piece in it, but the industry numbers show that the dollar growth was --

He's asking --

one moment, about 6% --

he's saying second to third quarter --

You are going second to third?

On a year-over-year basis, you said 3Q was up I believe, 11. What was 2Q up?

I don't have those numbers in front of me. I don't recall them, so I don't want to give you bad information.

We can get back to you later on that.

I am sure we gave them in the last conference call. I just don't recall them.

I guess what I am getting to, was the improvement qualitatively, rather than quantitatively. Was the improvement better unit, better price, less-worse mix in 3Q relative to 2Q that helped you in the Mohawk segment specifically, to grow revenues faster in 3Q than in 2Q?

The units increased from the first half of the year, and the amount of price increase increased. So both of them had something to do with it.

The better units was -- it sounds with the better units, the replacement business was less worse, or slightly better. Is that what was different?

That was part of it. You have also the prebuying that's going on, and then possibly some mix change to less expensive pieces, will help the units also.

Prebuying makes it difficult to evaluate it also. It is kind of mixed in.

Let me move to understanding 4Q. How much of the two price increases should we expect to net to the topline in the fourth quarter?

As you know there is a lag, and they don't all go in in at the same minute and we have estimates by products, by channels, by category, and they are built into the estimate of ours.

Does that mean we ought to get 3 or 4 more points of net price in the fourth quarter, relative to what we experienced in the third quarter?

It's hard to say. We are working to get them in as quick as we can.

We are going to get some increase in price, but you are also going to get offsetting -- you are going to get more of the increasing costs, because they are going to go up faster.

Okay. And then I guess within that, based on -- you outlined quite helpfully the natural gas comparison you will deal with in the first half of '06. Are the price increases -- the October, November price increases fully implemented, sufficient to protect you against the material cost inflation, as we work through the first half of '06, or will you be required to put in place more price increases?

We hope they will. We hope they will cover the increases.

As we sit today, if we have no more cost inflation, is the expectation that this should be enough?

We hope so.

Okay. Very good. Thank you.

You are welcome.

Our next question comes from the line of Douglas Pratt.

Thank you. Two quick questions. One, and then a follow-up. Your assumption -- the guidance you have given for fourth quarter, what assumptions do you make on natural gas pricing, relative to that $12 to $14 level you cited as a current level?

We have some hedges, and the hedges are reducing the market value of the pieces that run out. So the third quarter will not have $12 natural gas in the estimate.

You mean the fourth quarter?

The fourth quarter.

It will be below $12?

Correct.

And do -- are there any hedges for next year?

Most of the hedges next year -- the majority of our hedges by the first quarter will run out. Typically if you look back, natural gas prices, if you go back over years, tended to have low points in the September timeframe, and we tended to, as prices were going up, we are intending to wait until September, when they tend to drop, and in the middle of that we had the hurricanes. So most of our hedges will expire between now and the first quarter.

Okay. And -- let's see. Can you talk a little bit about what replacement carpet trends are, in terms of -- not new home builds, and what volumes look like there?

We don't have any exact information because we make products -- the same product that goes into multiple markets, so it tends to be more instinctive, and it tends to be more on looking at specific customers, and extrapolating to the marketplace. What we see is that the -- we believe the discretionary expenditures of the consumers are being limited, and when you get into remodeling, the flooring does not normally have to be replaced in most cases, then it is postponable, and we believe the consumers are postponing some of that due to that, the changes in discretionary income.

Sure. And then finally, do you think that the price increases you're putting into effect now, will be able to keep margins flat, or perhaps even increase them? I notice in the most recent quarter, you still had a decline in margins, or is it always going to be sort of a trailing thing? You always will trying be catch up?

Until they level out, we trail. We have never been through anything like the last two or three years. So this is all new, and there is no historical reference point. What we expect in each case, is that it plateaus and it levels out and we catch up, but we never seem to get there. I don't think -- the question is really going to go down to what oil is going to do, and will it plateau, will it go to 100, or end up at 40? It depends on what scenario you pick, what answer you get.

That is the question. Don't talk to our energy guy, he thinks $120 oil. Thank you very much.

Have a good day.

Our next question comes from Laura Champine with Morgan Keegan.

Good morning.

Good morning.

With the consumer somewhat tentative and interest rates headed up, what are you thinking, in terms of residential replacement demand in 2006? I mean, can we hope for a better year than '05, or do you think things will be down in '06?

You real have two opposite pieces going on. One is you have the discretionary incomes getting squeezed with higher oil and gas prices, so depending on what scenario you create for those. We then have another phenomenon that the consumer will probably travel less and spend more time in their homes, and historically that has been good for the replacement business. We think next year business should be reasonable. I don't think it it is going to be -- we are taking a reasonable approach to it.

Is there any way to quantify over the past couple of years, how much demand for flooring has come from home equity loans and home refinancings, that were fueled by record low interest rates?

We don't have the data.

Okay. Thank you.

Our next question comes from the line of [Prince Vongart].

Good morning. Yes, I wanted to go back to the pricing question the gentleman asked a couple of questions ago. It left me a little bit confused. Exactly how much do you need to raise pricing, you know, per whatever, 10% or, you know, whatever of nylon prices, and remind me how much of the announced price increases, just nominally reflect percent over the first-half pricing?

I am not sure exactly what you want me to give you. Do you want me to --

I don't know, polyethylene is up, say, 75% since -- since August. I don't know what nylon is doing exactly, but if nylon were up 75%, you know, Q4 over Q3, how many percentage points would you need to achieve in your own ASP, or your own pricing, let's say to equal -- you know to just exactly offset that.

I will walk you through an estimate. If you assume the industry averages around 2 pounds to a unit. The average unit price is somewhere in the 650 range. So if it goes up $0.10 a pound times 2, is $0.20 a unit. That's at cost. You then have a 20%, 25% overhead SG&A, et cetera, on top of that. It is a quarter, divided by 650 is 3, 4% for every $0.10 of raw material and fiber, as a round number.

Okay. Great, and how much are your fourth -- are the two fourth-quarter announcements. I understand they don't go in all at once, but just so we can understand it nominally. What do those announcements reflect percentage-wise over first-half pricing, or third-quarter pricing?

if you take the set-up point of 5 to 8 and 6x2 is 12% when totally executed if there is no mix change, and if there -- if the center points to average of the mix.

Great, thank you very much.

Our next question comes from Arnold Brief with Goldsmith.

Could you give us some idea how all this unusual experience is affecting competition? And to the extent -- you can leave Shaw out of the equation all together. I am thinking of the smaller competitors who may have lacked the working capital to buy the higher priced product. Second, third, or fourth in line with the product shortages.

Can you describe that a little bit, maybe what's happening, and any shifts in shelf space, competitive market shares, et cetera?

We don't have any specific information that would lead us to conclude that this is impacting them significantly different than the rest of us. There are various product categories that are on allocation for October. We assume that everyone is on allocation. Whether they have the financial ability to withstand various pieces, I can't speak to.

Could I ask a back-up question then. Does the acquisition you are finalizing in December, does it theoretically -- I am not asking if you are talking to anybody. But theoretically, would that take you out of acquisition market in '06 for a carpet -- for any potential carpet acquisitions? Are you stepping back for a while? Or --

What we have said is that Unilin will keep us from making any major -- very large acquisitions that we have the potential to do smaller ones, if we feel that timing is right, and it fits the business.

Thank you.

Our next question comes from Steve Fockens with Lehman Brothers.

Hi, good morning. Just one quick question. As we think about -- I think as you talked about recently, in terms of paying down the debt that you are going to use to purchase Unilin. What kind of timeframe should we be thinking about, you know all other factors being equal, and no other major deals that you might, you know pare down that call it roughly, $2.6 billion in debt?

I think you have to look at -- we haven't given out any estimates on that, but if you look at the EBITDA that's going to be generated by the two combined companies, it will be pretty significant. 750 on Mohawk, and another 150 or so -- I am sorry, 250 -- 250. It gets you up to about a billion dollars in total EBITDA between the two combined entities.

That is a pretty substantial amount of cash flow that we will be able to use to pay down the debt. We think we will be able to get back to some reasonable leverage levels, you know, fairly quickly.

True. And, of course, you some of that you obviously have to pay taxes and additional capital, and CapEx.

I should ask, should we expect any major changes in CapEx or working capital after this acquisition is closed, such that that cash flow, which has been, whatever, a couple, 200 or 300 million in the last two or three years, might become more in your favor to pay down debt?

We will use the cash flow to pay down debt, but on the other hand, we have to keep investing in parts of the business that require it, and we will manage the debt level to what we think is appropriate.

Fair enough. Just one last follow-up then. In terms of maintenance CapEx and sort of estimated on-going annual expenditures and working caps, should those be a lot different than the last few years?

The year we are in, we had said we would expect to spend about $250 million on the Mohawk side. The Unilin side, I think they spent about 100 in putting up the new plant. I am not sure if I have that number exactly right.

It is in that range.

We spent significant funds this year.

The goal next year is to try to spend less than that. As we go forward, the capital budgets have not been approved that the point.

Historically we have spent depreciation in last year -- this year, rather, was a little bit of an unusual --

unusual year.

Yes.

Okay. Thanks very much.

There are no further questions in the queue.

Thank you very much. Have a nice day.

This concludes today's conference call. You may disconnect at this time.