莫霍克工業集團 (MHK) 2007 Q3 法說會逐字稿

Good morning. My name is Crystal, and I will be your conference operator 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. And after the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then 1 on your telephone keypad, and to withdraw your question, please press star, then 2.

Should anyone need assistance at any time during this conference, please press star, then 0, and an operator will assist you. As a reminder, ladies and gentlemen, this conference call is being recorded today, October 19, 2007. Thank you.

I would now like to introduce Mr. Jeff Lorberbaum, Chairman and CEO. Mr. Lorberbaum, you may begin your conference.

Welcome to Mohawk's third quarter conference call. With me, I have Frank Boykin, our CFO who is going to give you the Safe Harbor Statement.

I would like to remind everyone that our press release and statements we make on this call may include forward-looking estimates as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including but not limited to those set forth in our press release, in our periodic filings with the Securities and Exchange Commission.

Thank you. Mohawk's third quarter results were better than we anticipated in a difficult environment. The net earnings for the quarter were $122 million, and the earnings per share were $1.78, both about 5% below last year. Net earnings and earnings per share include a charge of $14.2 million before tax or $0.13 per share related to plant closing costs in both Mohawk and DalTile segments.

Excluding these closing costs, this year's earnings exceeded last year's third quarter net earnings and earnings per share which were $128 million and $1.88 per share respectively, and included an $0.08 per share charge benefit -- an $0.08 per share benefit from a U.S. Customs refund. Net sales for the period were $1.9 billion, a decrease of about 4%. The company in the third quarter generated cash flow from operations of $287 million. In addition, debt of $53 million was paid down after the purchase of four wood manufacturing plants.

Mohawk's total results have been positively impacted by the broadening of our product portfolio and our expanded geographic participation which offset the cyclical contraction of the U.S. flooring market.

Our management team remains flexible in adjusting to the changing market; an environment which is impacting demand, raw materials, energy and transportation costs. The U.S. flooring industry was negatively affect by the slowing economy, tightening credit market, falling housing prices and low consumer confidence. The combination of these factors further reduced the sales of flooring in the residential channel. The U.S. commercial channel is operating at a higher level and leading indicators point toward continuing business investments. We made changes in our operations levels, controllable costs and plant capacities to adapt to the slowing environment. The European business is performing well overall with faster growth in the Eastern European and Russian markets. Frank, would you give our financial report, please?

Sure. As Jeff had mentioned, our sales for the quarter finished at $1.938 billion dollars, down about 4% from the quarter last year. This reflects our continuing growth in our European operations, as well as our growing U.S. commercial business which offset the declining -- somewhat offset the declining U.S. residential business. Our gross profit for the quarter ended up at 28.1%, flat with last year's gross profit as a percentage of net sales. SG&A expenses were $345 million, or 17.8% compared to 17.1% last year. Dollars were flat with a slightly higher percentage of net sales as we were impacted in this ratio by lower sales this year. Operating income as a percent of net sales came in at 10.4%.

Our margin would have actually been higher at 11%, which was even -- which would have been even with last year, without the $14 million charge for plant closings that Jeff had mentioned. Interest and other expense was $37 million. Interest was down $7 million for the quarter compared to last year, and in addition, last year's third quarter included a benefit of $9 million from customs refunds. We received no benefits in 2007. Our income tax expense for the quarter was $42 million. This reflects a tax rate for the quarter of 25.6% compared to last year's tax rate of 31.7%. The taxes were lower this year due to the implementation of a couple of European tax strategies. We expect that our future tax rate will be around 26% in both the fourth quarter and future periods. However, it will be impacted by the mix of our business in both Europe and the U.S.

Earnings per share came in at $1.78, which was down 5% from last year. Earnings per share were impacted negatively $0.13 a share from the plant closings that Jeff had discussed, and in addition, the customs impact last year benefited earnings by $0.08 a share. As we move into 2008, I would like to remind everyone that we would expect lower intangible asset amortization of approximately $20 million next year. And also remember that the amortization is not tax deductible.

We expect to continue to pay debt down which will continue to reduce our interest expense next year, and then as I just mentioned, we expect our tax rate year-over-year to be favorable in 2008 compared to 2007, with 2008 probably running around 26%. If we look at the Mohawk segment, sales in this segment finished at $1.077 billion for the quarter, down 13%, reflecting the softness in the residential business. Operating income at $77 million was 7.2% of sales, down due primarily to volume decline and due to the plant shutdown.

Plant shutdowns reduced earnings by $8.4 million. Before the shutdowns, the margin would have been 7.9%. DalTile sales finished at $497 million, down slightly at 8/10 of a percent from last year. The residential decline was offset by gains in commercial. Operating income at DalTile was $63 million, or 12.7%. Margins would have been flat to last year at 13.8% if we had excluded the shutdown for the plant operations in the DalTile segment. Shutdown cost was $5.8 million. Unilin sales were $378 million, up 29% from last year. If we look at this on a constant exchange rate basis, the growth would have been 22%.

In addition, I'd like to remind everyone that we included about six weeks of Columbia's results in our operations for the third quarter, representing about 7% of the growth rate. Operating income for the segment came in at $71 million, or 18.8% of net sales. Operating income was impacted favorably by about $4.5 million due to foreign exchange.

The corporate and eliminations segment included an operating income loss of about $10 million, and we would expect the total loss for the year to be in the range of $30 to $35 million. If we look at the balance sheet, receivables came in at $959 million, about flat with last year with our days and receivables at 42.8 days. Inventories came in at $1.298 billion. Included in that number is about $65 million related to the Columbia inventories. Our inventory turns for the quarter were about 4.1 times, down slightly from 4.2 times last year. Fixed assets at [$1.009 billion] included capital expenditures of $37 million and depreciation and amortization of $75 million. We're estimating total capital expenditures for the year to be $200 million, with depreciation and amortization at $305 million. And then long-term debt was $2.464 billion, with our debt to capitalization ratio improving to 36.7%, and our debt to EBITDA ratio for the trailing four quarters running at about 2.2 times. Jeff.

Thank you. The U.S. economy is slowing, but most economists do not anticipate a recession. The housing and flooring industries are in a significant downturn and have deteriorated as credit markets tighten with more conservative lending standards and higher interest rates for greater risk profiles. We believe all major flooring categories of carpet, ceramic and wood are down in volume 15 to 25% from their peaks, and we do not see any indication of near term improvement. The 50-basis-point interest rate cut by the Federal Reserve has historically been a leading indicator of future improvements in flooring. In past cycles, the remodeling category has led the industry out of these downturns.

The Mohawk segment continues to adjust to a challenging environment with industry units running off about 20% from the peak. We are completing the implementation of the carpet increase that was indicated -- initiated in June. There's a higher level of promotions and pressure on commodity products in the industry. Our raw material costs stabilized in the third quarter and remain difficult to predict.

This year we took several steps to contain costs in SG&A and manufacturing while aggressively pursuing SKU reductions and pricing discipline. We are right-sizing the manufacturing capacity, permanently closing some facilities. We have managed the margin side well. We're addressing volume by accelerating introductions in key categories, focusing sales efforts on areas which will better perform in the near term, such as multifamily, higher-end replacement and commercial, and utilizing promotions to fill market opportunities.

This quarter we began shipping bio-based carpets made from corn from our SmartStrand products using DuPont Sorona polymer. This additional feature will add value to the already successful premium collection. We're shutting down assets that have cost us $6.5 million before taxes because of shifts in demand and cost reductions. These shutdowns include a staple yarn plant and a tufting plant. We've also exited the flat weaving business which was primarily used for manufacturing throws. These changes improve our results by operating our more efficient assets and closing facilities that are not providing adequate returns.

We'll continue to manage our margins as we execute our strategy to improve the business.

The DalTile sales in the quarter were about flat compared to last year. We believe we're outperforming the industry and have benefited from our significant position in the commercial channel. We're repositioning some of our sales efforts to focus on the commercial and multifamily channels from the residential channel. We're introducing higher-value products from our new production line, new exterior stone products, and new merchandising warranties for ceramic accessories. We're expanding our position in both the retail replacement and home center channels. We're managing our SG&A, manufacturing and distribution costs. We're closing a high-cost ceramic plant with a charge of $5.7 million before tax in the quarter and moving the production to more efficient facilities. A price increase is being implemented to replace surcharges that have been used to cover rising energy and transportation costs.

Unilin continues its excellent results with sales growth of 29% and operating income of 43%. Compared to last year, the exchange rate positively impacted sales in the third quarter by 7% and operating income by $4.5 million. Columbia was included in Unilin's third quarter results and have negatively affected margins. Unilin's historical business grew revenue in the mid-teens on a cost and exchange rate without the wood acquisition. All Unilin product categories showed positive sales growth.

The European business was strong with sales increases in our Western European markets and accelerated growth in the Eastern Europe and Russian markets. We've added sales personnel in Eastern Europe supported by a warehouse in Poland to enhance our penetration of the market. We're reinforcing these efforts with a consumer advertising campaign to position Quick Step as the premium brand of laminate in Eastern Europe.

Improved demand in our roofing systems and other board products has positively affected revenues, as well as selling prices. The laminate business was also strong in the U.S. Our products focus on the value-added mid- to high-end markets using the Quick Step, Mohawk, and private label brands. We're growing our business in both the retail and home center channels.

Our U.S. laminate flooring production is running efficiently and at full capacity. We're beginning to install 100 million square feet of new flooring capacity which will be running in the second quarter next year. We continue to gain share in a difficult residential market. Quick Step was also selected as a top manufacturer by retailers in a survey done by National Floor Trends Magazine. In the period, we've signed additional agreements with other companies to license our patented technology.

We completed the purchase of four wood plants for approximately $145 million during the period, and the results are included in Unilin.

We have started to implement our plans to improve the productivity, costs and quality through both process changes, as well as new investments. We're moving products Mohawk previously purchased from outside suppliers into these facilities. The plants are operating at a loss which we estimate will be between $7 and $15 million in the first year. The third and fourth quarters will have noncash purchase accounting charges totaling about $2 million. We anticipate the operating results being accretive in the second year with an expanded product line and broader distribution.

Mohawk continues to do well and generate significant cash. Since our purchase of Unilin in November 2005, we've paid off $1 billion of debt, and our debt to capital improved from 55% to 37%. Our free cash flow for the prior 12 months is $10.20 per share. Mohawk is well positioned to take advantage of any opportunities which may arise as we move through this cycle.

In the fourth quarter, the slowing U.S. housing and tightening credit markets are forecast to negatively impact the residential sector. We expect lower production levels and increased promotional activity in the U.S. and more difficult comparisons in the Unilin segment as last year's fourth quarter operating income grew 30% compared to the preceding third quarter. We're managing the controllable elements of our business while adapting to the industry dynamics. Based on these factors, we estimate for the fourth quarter of 2007 our earnings per share will be between $1.47 and $1.56.

This year we've taken many difficult steps to adapt to the cyclical downturn and enhance our long-term position. We've reduced costs in all areas. We've improved productivity and restructured our product lines and sales organization. We've reduced our debt and initiated tax strategies which will have ongoing benefits.

At this point, we anticipate next year's results in the U.S. will be the inverse of this year with a softening environment at the beginning -- with a softening environment at the beginning and improvement in the second half. The European market is expected to do well with some moderation of growth in 2008. We expect our business to perform well in this challenging environment.

At this point we'll be grad to take questions.

Operator?

At this time I would like to remind everyone, ladies and gentlemen, at this time if you would like to ask a question please press star then the number 1 on your telephone keypad. Management requests that you limit your questions to one primary and one follow-up. If you have additional questions, you may reenter the queue by pressing star 1 on your telephone keypad. Your first question comes from the line of David Mcgregor with Longbow Research.

Good morning, guys.

Good morning, David.

Jeff, you need to give Frank a big bonus. This tax rate, you're down 10% in the last 11 quarters. I guess I'm trying to understand how much further this could go and how sustainable it is.

Well, the -- as I said in my comments, David, the tax rate we expect, going forward, to be 26%, in that range with the caveat that the mix between our European operations, earning in Europe and earnings in the U.S. could impact it up or down. But I would say it's sustainable for some period of time to come, and we'll continue to look for other opportunities.

So what is your all-in European tax rate just so as we see movement in these two segments --

I don't have that off the top of my head, David, to be honest with you, but I can get it for you later.

And when you say is it's sustainable, are we talking about years to come or quarters to come?

Years.

Okay. Congratulations on that progress.

Thank you. And thank you for the plug.

Yes, you need that big bonus.

Thanks a lot.

I want to talk a little bit about the production levels in the fourth quarter. You indicated that you thought lower production levels were in store. Is that across all businesses? Is it more concentrated on the Mohawk segment or DalTile?

We think it will be in both Mohawk and DalTile segments.

Can you give us some sense of magnitude?

It's all built into the estimate, and I don't really have the numbers in front of me of each one.

Okay.

We're planning on reducing the production levels, and at the same time, we're assuming that the sales levels will be soft.

Okay. Last question, can you talk a little bit about the difference in your -- in sort of the range of guidance you've provided between the high end of the range and the low end of the range? Where is the difference in some of the key assumptions?

You have to start with the first piece that the revenue side of the business is very difficult to predict, but we have a very limited forward view of revenues. We then have that -- we have a limited view of our energy costs and raw material costs for the same reasons. So basically those things are moving almost daily with market, and so we don't really have a clear view of the revenue side, and the cost side is very volatile, and we don't have it, so there's a lot of guesswork in these numbers, and we're trying to give reasonable estimates of what could be a rational range.

Okay. Thanks very much, guys.

You're welcome.

Your next question comes from the line of Keith Hughes of SunTrust.

Thank you. I have a couple of questions. I guess, number one, Jeff, in your prepared comments regarding the competitive business in the carpet industry. You've been saying that for awhile now. It appears as though your revenue numbers were below what the industry put up for the quarter. Has this gotten worse? Has this spread out? Is there one specific competitor you're dealing with? Just any kind of color on that would be great.

First you have to start out with what the industry number means. And so the industry was down about 8% in dollars, and I think about 11% in units. Within that, the residential categories are off much more than the rest of the business, so it's off significantly. Then the companies that have builder, which are not all of them, the ones that have builder pieces, the builder piece is off significantly more.

We then have the same thing on the commercial side. On the other mix, the commercial side is actually up in dollars, but you have a change going on in the modular business. The modular business is growing much more. The higher participation you have in the modular business, the more the modular has a higher unit price, so the unit selling prices are also impacted with that.

On our side, we've taken a very aggressive stand in cutting costs this year, dropping SKUs to maximize our margins, and I think it did negatively impact our share in the revenue side because we were so aggressive. And we're taking steps to make sure we keep our share going forward.

Are you going to maintain that stance in the near term?

The stance of?

Being aggressive with SKUs and not going down in margin and chasing the low margin business.

I think that we've gotten through a lot of the SKU pieces. We've introduced new products, we've taken out redundancy in it, and that's impacted the business in the transition a little bit, and I think we're through a lot of that and we're trying to prepare to get our business well in line going forward and back in balance.

Kind of building on that -- on the commercial side. We obviously know what's going on in residential. Any change in commercial in the last three to six months in terms of the tone of positive business?

I mean, I think that the rate of growth we're expecting to continue to slow down. We still think, from all the forward indications we're getting, that businesses are still spending money, and we don't see any change in it growing, but the growth rates could moderate over the next year.

Okay. And finally, just to clarify your comments on Unilin, the U.S. business of Unilin was up in the quarter. Is that correct?

Correct.

And that would most likely be share gain, given where residential is right now. Would you agree with that?

I don't have any numbers to base it on. I think we're doing better than the industry. I think that we bring more innovation to the marketplace, and I think because of that, we tend to get paid for it, and helping it.

Alright. Thank you, Jeff.

Your next question comes from the line of Michael Rehaut with JP Morgan.

Hi. Thanks. Good morning.

Good morning.

Good morning.

First question on the Unilin margins. I was wondering if you could hit on perhaps why, even ex-currency, they were lower versus 2Q despite higher revenue. And, you know, as this has been a story of real upside surprise over the last few quarters, what are you thinking about in terms of '08 if it can sustain the high-teens number, or do you think, you know, maybe it would drift down from the 19% average that, you know, is on track for '07? Two parts there.

You ask a lot of questions. First is, the business doesn't run in a straight line. That we have raw materials, energy costs and different pieces changing from quarter to quarter. We have different geographies doing differently. We have product introductions going in at different points of time, and all of these things are going to keep the business from having exactly the same results from period to period.

There's a holiday in the third quarter, where Europe goes on holiday, and we shut down things. Our business was a little better than we expected this year, so we had to use a lot of overtime and other things in it. Every quarter there's unique opportunities within it. We try to pass through the price and cost relation there, and depending upon how they fall, it affects each quarter. So you're going to have variation as we go through the year, and we'll continue to have those variations as we go through.

What was the other part of the question?

Just looking at '08, you know, obviously in '07, you had margins, even for '06 for that matter, come in well above expectations. As you look down the pipe over the next couple years, and typical product adoption cycle, you'd see perhaps price competition as you're going up the adoption curve. What are your thoughts about margins in '08 and beyond? Do you still look to see that kind of drift down a little bit as you capitalize on the topline?

We believe -- what's happened recently is the revenue growth that we've had has dramatically exceeded our own expectation, that investments we've put in, in the U.S. marketplace, are operating more efficiently. Those all help the margins. That we continue to put in new innovations in the marketplace that we get paid for, and so that's positively helped us.

Longer term, we are going to try to continue doing all those things, but we've said as we continue expanding our share of the various marketplaces that we participate in a broader portion of the market, and in some cases we're going to participate in lower margin products but still increase our dollars of profit. And so on an ongoing basis, we think over a period of years you'll see continuous deterioration of the margin even though we increase our bottom line, which is what we're looking for since we can't spend margins.

Okay. One last question. On the Mohawk carpet segment, obviously, you know, sales have come down decently. Is the downturn -- certainly the housing downturn is greater than in the last maybe -- as great as it's been in the last 20 years. Are you surprised by the pullback in sales, in residential? And, how much further do you think over the next couple of quarters, perhaps looking at backlogs and demand are you looking for? You had mentioned that there's already been sort of a 20% drop from the peak.

Again, one is that we don't really see the carpet industry drop significantly different than the other categories. We think that if you look at the drops, our best guesses are that the wood business has dropped more severely because it has a greater portion in the new construction business, and the ceramic has dropped less, so we don't see the carpets any different than the other categories. But going forward, as we keep saying, is that we have a very limited forward view of our revenues. We ship things, you know, almost next day from the time our customers order it. So basically our forward view is take the recent past and what we're hearing from our customers and guess. And with that, we're making the assumption that for the near term, we're going to see softer revenues rather than growing revenues, and we're anticipating that they'll get better as we go through next year. And we don't have any more detail. We're so close to the purchase, we don't have any more forward view than you do.

Your next question comes from the line of Dan Oppenheim with Banc of America Securities.

Thanks very much. Was wondering if you can just talk about --

Could you speak a little louder, please?

Sure. Sorry. Was wondering what your thought is in terms of pricing strategy going forward. In the past you've talked a lot about how you're not going to sacrifice pricing or margins enough just to capture volume. Was wondering if you would, in this environment where you see orders coming down and certainly look at what's happening in the market today, if it doesn't improve for awhile, do you think -- what do you think about promotion and more activity in order to stem some of the volume decline?

I think what we've always said is, our goal is try to act disciplined in the marketplace and to react to market conditions. When you get end markets where the volume is off as much, the pressure always goes to the commodity areas, and those prices always get impacted. The same things happening now. Those margins in those areas are less than we would like to see. We're going to react to those things and continue reacting to them in the marketplace. We hope our competitors react rationally. So far, for the most part, we've acted reasonably rationally as an industry. And we'll continue to react to those.

Got it. So you are saying more flexibility (inaudible) in the past in terms of being willing to match what others are doing within reason?

I'm not sure we ever said we wouldn't do that. I think what we say is that we hope our competition in the marketplace acts rationally because we intend to, but we have to react to the competitive market.

Okay. Perfect. Thanks very much.

Your next question comes from the line of Eric Bosshard with Cleveland Research.

Good morning.

Good morning, Eric.

Just to close that last question, have you seen a change in rational promotion and price competition in the last 90 days?

I think that we didn't increase the prices on the commodities as much as we had intended to as an industry, and I think the industry reacted to lower volume as typical, and people are trying to run some assets, and you typically go there. It's a rational thing to do in a market, so we have seen more -- you know, we didn't accomplish as much in the price category in those categories as we had hoped to.

Secondly, I guess, or my first question, you commented at the outset, obviously, that the quarter was better than expected. Can you just explain specifically where and why you saw upside versus expectations? It appears to be Unilin, but can you just say where and why you saw upside within in the quarter?

Backing away from the business as a whole, the Unilin business, the sales were higher than we had anticipated. The margins were better than we had anticipated in almost all markets and all product categories. The DalTile business was actually better than we had anticipated. I mean, the ceramic industry, we're guessing it's off in the mid-teens in units.

Is it?

So all the investments that we've been putting in the Unilin business over the last few years -- I mean, in the DalTile business continue to pay dividends. At the same time we have a higher portion of the commercial market which is tending to do better. So that positive surprise is there. And, you know, we didn't quite do as well as I'd like to do in the Mohawk side. We're taking steps, we think, to get it where we'd like it to be.

And the upside in Unilin, which has been a consistent theme, is this a function of throughout performance or just continued conservative expectations on your part?

It's difficult in -- we're in two marketplaces, in Europe and here. They're both very mature markets. Unilin has a strategy in Europe that is toward the mid to high end. It's very focused on that piece. And to have, you know, double-digit growth in mature markets over there, and in the U.S., the residential -- all of this business goes into the residential replacement business over here, which is under significant pressure, in today's marketplace, to have mid-teen growth rates, it's difficult to sit back and predict that. But we're glad to have it.

Your next question comes from the line of Arnold Brief of Goldsmith and Harris.

Two short ones. One, could you give us some idea what you anticipate your inventory direction will be in the fourth quarter ending December versus the third quarter ended September 30th? Is there a drawdown coming for cash generation?

We're going to be taking our inventories down to try to match demand levels.

So we're anticipating the demand to go down, too.

Yes.

Hopefully we can be surprised.

Could you give us some guidance? Maybe 4%, 5% down from September?

We don't have that number right here in front of me.

Okay. Can you give us some idea what your position is in terms of a stock buyback at this point?

We have authorization to buy back stock from the Board. We continually watch it based on where the stock price goes. We have -- the debt ratios are down where we're comfortable with multiple options. We continue to look at acquisitions as potential -- potential acquisitions that are out there in the marketplace. And it's a balance between leaving flexibility for investments, leaving flexibility for unknowns in the future of the economy, what's going on, and buying back stock. So it's one of the things we have available to us, and we constantly look at it, and we'll determine if we're going to invest one day at a time.

On a longer-term basis, can you give us some direction in terms of Columbia's output, how much you intend to use internally? Will there be any external sales?

Columbia, we believe that Columbia will continue like we have both in the Unilin business and the DalTile business, which is that all of them have different brands that are sold in different ways. We expect to continue with the Columbia brand and support those customers who like it. We expect to broaden the product line for them and expand it.

At the same time, we expect to use the Mohawk brand and increase our sales in the marketplace with it. And we also in our DalTile business, we supplement unique products from around the world, and we'll continue to supplement the product line with what we think is needed with products from around the world where we think it's appropriate. We think there's a lot of excess capacity in the plants run properly, so it gives us a lot of upside in growth, and we're preparing for that by getting our costs down, improving the quality. And we think that we'll have a dramatically different product line over the next year or two from where it started.

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

This is actually Jeff calling in for Sam. Sam wasn't able to make the call. Good morning, Jeff, Frank.

Good morning. How are you?

Doing well. My only question relates to tax, and it sounds like -- The way you describe your tax strategies, it sounds like there's more going on than just the obvious mix shift towards European business where there, presumably, is the lower tax rate. Can you describe at all the strategies for us? Hopefully specifically, but even broad terms if that's what you're willing to do.

I can tell you you're right. The improvement in the tax rate is not just -- is not mix, but it's new strategies we've put in place in Europe. And they're all rather complicated. It's more than one strategy. I'd be glad to try to talk you through offline at a high level what we've done, but it would be a little bit time-consuming and difficult to try to explain it right now, I think. But they are ongoing, and we're expecting this 26% or so tax rate, you know, Q4, then into future periods, as we go forward.

Okay. That would be great. Thank you.

Your next question comes from the line of John Baugh with Stifel.

Good morning.

Hey, John.

How do you like the way we pronounced your name?

Whatever. It was close enough that I knew they were referring to me. I've got one question that's got five or six parts, so grab a pencil.

How about giving them to us one at a time, then?

Okay. CapEx, '07 and '08, what are the budgets?

'07, we think we're going to end up somewhere --

200.

Around 200. It depends at some point how much gets initiated in the fourth quarter which we haven't got exactly nailed down yet. We have not completed the budgets and had them approved for next year yet.

Okay. The amortization that's coming down, I think you mentioned 20 million, Frank. Is that coming out of the Unilin division?

It is, John. It's all related to the intangibles that were set up when we purchased Unilin.

So the gross there will drop from X to Y. What is X and Y? 75 to 55?

No. I think if you go back in our footnotes in the K, it shows an estimate of about $88 or $89 million for '07, and $69 million for '08.

Okay.

That's the total. That's total amortization.

He's not reading the numbers. Go look at the 10-K and get the exact numbers.

Yes, it's Footnote 5, but it's pretty close to those numbers.

Did I hear you right? Did you say that your carpet volumes were off 20% in the quarter, or did I mishear that?

What I said was that the industry's volume from the peak looks like it's running about 20% off. In units.

Okay. Industry from the peak.

So the peak would have been in 2005.

And that's not a residential comment, that's just the whole industry?

That's the whole industry. Again, I said that I thought that the wood business was running higher than that and the ceramic running lower than that.

Okay. Are there any customs coming, Frank, in the future?

Yes, as we've said in the past, we've received about $30 million between first quarter this year and last year. So far, we haven't received any after the first quarter of this year. In total, we're expecting to receive some number over $40 million, which would include the $30 million we've received so far. But as you know, we're working with the government, and there's no certainty in terms of the amounts or the timing. We're still working on it and counting on it.

Okay. And the last one. You've touched a little bit on it, Jeff, but going into this downturn, DalTile had by my estimation about 30% of its business tied to the residential builder market, and you're running flat revenues with building off like 40% from a peak. What's going -- How did you do this? Is the residential replacement momentum you had that strong? I know you've got the commercial helping, but maybe a little more color on how you're achieving flat revenues and, as you said, a mid-teens kind of decline for the industry.

I think that the residential business we are performing better than the industry. All those investments we've put in of people, capital, distribution are giving us better results in the residential business. In addition, we have a significant share of our business in commercial. I think the number is somewhere in the 40% range of our business is in commercial, and we have a very high share of commercial to the industry. And that business is doing well. And so between the two, that's helping us. I think we're outperforming in both commercial and residential, and it's giving us better results in the industry.

Where's that plant being closed on the ceramic side?

Conroe, Texas.

Texas. Great. Thank you. Appreciate it. Good luck.

Your next question comes from the line of [Bob Thompson with Advance Capital].

Good morning.

Good morning.

In terms of acquisitions, are you looking at small acquisitions in the wood products area, or are you still -- would you entertain a larger acquisition?

We think that with the debt level we have today that we could do a very large purchase if we found one that we liked. We have said that we are looking in areas of add-on acquisitions in the U.S. where we have significant market shares in most of the categories today. We're looking around the world in some high-growth areas, where economies are doing well, as well as to other things that would fit in with our European business, which is doing well. We're constantly looking at all of those.

okay. And in terms of Unilin in the European side, are you seeing any moderation in any of the areas over there?

It does appear that the economy is going to slow down. Some of the input we're getting back from some of our customers, we perceive it's going to be, but I have to tell you, it's still growing. The question is, can it grow at the rate it's been growing at. And again, as I said before, to take a business that is here and stabilized and grow it at the rates we're growing in the business, I think we're doing quite well. It's difficult to keep that up.

Okay. Thank you very much. Great quarter.

Thank you.

Thank you.

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

Good morning, Jeff and Frank.

Good morning.

There are obviously lots of puts and takes in the Unilin business. It sounds like you've got Columbia in those results, as well, and you are seeing some currency fluctuation, but can you give us any kind of ballpark for the next 12 months in terms of EBIT margins?

I think that all we've said so far is that the EBIT margins we expect to be slightly lower than they are this year and to continue over time to be lower. Again, as we broaden out the business, as we go forward -- And that we said it's going to be difficult to keep growing at the growth rates we've had this year. If we get lucky, we'd like to do it again, but --

But would lower still imply the mid-teens to you, Jeff? Would you be shocked to see a low double-digit operating margin, or is that something we've got to be prepared for?

I think it's going to moderately -- it's going to go down moderately over time, not jump down in 5% increments.

Your next question comes from the line of Andy Schaffer with Farley Capital.

Good morning.

Hi, Andy.

Good morning.

I was wondering - I've seen some numbers saying that an estimated two million homes in the U.S. may be foreclosed upon in the next couple of years. I was wondering if perhaps that could be an opportunity for you guys, for instance. Do you know what happens to the homes once they're foreclosed upon and sold by the bank at auction? Are they typically remodeled before they're put on the market, or do you have any anecdotal evidence?

I can't say that we have any specific data. A large portion of homes when they're purchased -- there's two questions there. One is what happens before they're sold, and what happens after they're sold.

Right.

Before they're sold, I don't have a lot of data on it. I would guess a lot of them have limited amounts of work done to them to make them saleable in the marketplace. Where you tend to get more of the work is where the new purchaser comes in and says, I like this house, but I want to make it fit my lifestyle or my perception. And you get more of the work done afterwards, and then typically, they start out with limited projects, and they continue them over time. So usually, existing home sales are good for remodeling business over time. And it should be here, too.

Okay, thanks. And also, in Europe, the Unilin business, is the distribution there -- is that mainly through distributors?

It is. In most of the areas, it's through distributors. In some areas that are close to our factory, we distribute directly, but most of it is through distribution.

You also get variations between different countries, too.

Your next question comes from the line of Stephen East with Pali Capital.

Good morning, guys.

Good morning

Jeff, could you talk a little bit -- I know the trends obviously decline throughout the quarter, but could you put a little magnitude, you know, July, August, September, and maybe even into October, sort of the relative strengths of those?

It's difficult to answer because in this environment, you have -- week to week, the sales don't go in a straight line, and they bounce up and down because in poor conditions, there's a lot of oscillation going on, which makes it difficult for us to predict our own production levels and everything else. In general, I would say it's softened a little bit going through it. You have the price increases that impact it. You have the interest changes, or the availability of credit going on. Every time the news changes, it impacts it. So I think it might have been a little weaker somewhere in the middle and helped a little towards the end. But in general, I think it's softened as we've gone through, and we are anticipating softer more from instinctive things than actual evidence.

Okay. All right, that's fair. On the price increases you talked about, you know, you didn't get them across the board. You didn't get them in the commodity-type product. If you looked across your sales for the quarter what would you say would probably be the blended increase that you were able to get out of it?

Your next question comes from --

It's hard to -- I would guess that we've probably got about 60%, 70% of where we had initially asked for. We don't ever get all of what we ask for in any increase. And then here, we got less -- we got less of the commodity increases than we had intended, and it was basically due to reactions in the marketplace and competition. Ready for the next question.

Your next question comes from the line of Chris [Vennins] with Wachovia.

Thank you. Couple of questions. First off, can you just give us an idea of what the sales in MDF were to external customers during the quarter, or generally how those trended?

Sales of MDF. What are you trying to get at, and I'll try to help you get there?

Your medium-density fiberboard, stuff that would go into your laminate.

I have European businesses, American businesses, all types of things that are going on.

Mostly domestic. Domestic.

U.S.

Yes.

We're running our plants basically at capacity. We have put in new production, so what's happening is we're using a greater percent of the capacity than we were, so then sales to others has to come down because we're utilizing more of it internally.

Okay. And then could you give me an idea what your current yarn mix is versus maybe a year ago?

What would you see is that the nylon filament and polyester categories are doing better, and that the polypropylene and staple nylon would be doing worse.

Okay. Thanks, guys.

Okay.

Your next question comes from the line of Jerry Rivera with SAC Capital.

Hi, Frank and Jeff.

Hi, Jerry.

Couple of questions on Columbia. You said 7% of the sales growth came from Columbia in the quarter, Unilin. Did you tell us what the profit was in the quarter?

It's running at a loss.

There's no profit.

No profit. Okay.

We said that we expected to lose somewhere between $7 and $15 million in the first year, that we've only owned it for a limited number of weeks in the period, and that the question that's going to determine how much is how fast we can make the changes and how the -- and what happens to the market over the same period of time with prices and volume. So those are the pieces that are moving.

Okay. And then there's an additional $4 million of costs over the next -- or between this quarter and next?

No, I think what we're trying to say there is there's some one-time charges related to -- you're talking about the $2 million that we talked about? There's one-time charges related to acquisition accounting, and a portion of that, maybe half of it, was in the third quarter, then we expect the other half to be in the fourth quarter.

But that was $2 million total.

Yes, it's not $4 million.

Which $4 million are you referring to?

Jerry?

He's not in queue any more.

Okay.

Your next question comes from line of David Macgregor with Longbow Research.

Just to follow up on your press release where you indicate that business is good in Eastern Europe and in Russia. Just Europe in general. With the weak dollar and low capacity utilizations in the United States, are you exporting to Europe the product that you would have typically sold in the United

No, it still doesn't make sense to export the product to Europe from here at this point.

Okay. Is that freight cost that's the principal source of friction there, or is it access to markets, or what is it?

No, it's really the -- it's mostly the freight cost to move it there. We have low-cost plants in Europe, so the question is, you have to be able to offset the freight and the cost from here, and so --

And freight is going up every day.

Freight is going up daily.

Okay. And then, of the product that you're bringing into the United States is supplemental, as you referred to it earlier, was that up or down in the quarter?

Okay, what I was trying to say in that one is that we use in our business suppliers to give us product that fit niches that either we don't make or we want to supplement our capacity in.

Right.

And we do that in various places. We do it in our ceramic business, we do it in our wood business and here, and sometimes other products as we go through. So we use that to supplement either what we don't make or what are unique products or unique -- could be a unique wood species.

Right. So were they up or down in the quarter?

I would assume -- I don't have the numbers, but I would assume everything's down. What's happened is, we have brought internally products that we could produce as the industry slowed down, and we've put in more capacity, we've internalized product with the Columbia acquisition. We've moved wood products that we were importing. We're moving into the business. And with the increased capacity that we've put in the U.S. in the laminate business, we're bringing less in from Europe from our own facilities over there, so I'm sure it's down substantially.

Okay. Thanks, guys. Nice job in a tough environment.

Thank you.

Your next question comes from the line of Stephen East with Pali Capital.

Thanks. She's quick on the button, so I'm going to ask several questions, and you all can answer them if ever I get cut off here. First, you laid out pretty well how you think about what you do with your cash flow, but is there a level on your debt to total cap that you say enough is enough we don't need to go any lower on that? That's the first thing. The second thing --

Let's answer them one at a time. We haven't found a level when we got there that we didn't pick one of the choices, either buying something or buying back stock historically. One of the two happens.

And what level? I'm sorry.

I said one of the two has always happened historically. I'm going to assume we're going to do one of the two again before it gets down too low.

I got you. Okay.

But there's no magic number.

Before we bought Unilin, I think it had gotten down to mid-20s, then what we did was leverage it up to the mid-50s.

Right. Okay, fair enough. I was thinking more along the lines of not necessarily acquisition per se, but switching over to a share repurchase, particularly at these lower levels after it's backed off so much.

It's really a balancing of how much flexibility we want to maintain for future unknown acquisitions.

Okay. That's fair. And then you all have talked a lot about trying to forecast Unilin and all that. And I know in the past, you've said you just haven't felt that comfortable and really having your hands around, being able to forecast this business very well because they hadn't done much of that, et cetera. Do you feel any better yet, or is it still a case of, hey, you know, some of this positive surprise is just because you don't that have gut feel like you do at Mohawk and DalTile, et cetera?

I think we've improved substantially. I believe that we have very strong systems in the place today. We have upgraded the financial systems dramatically. The people are getting used to creating forecasts and working towards the business. I mean, I would have to commend them greatly. The real question is, when you have increases at the level you are, how comfortable are you at predicting immature market places growing like this? You don't normally expect it to the happen on a continuous basis.

Right. Okay. Then just two quick questions on Unilin. Is the nonflooring business lower margin than the flooring business? And I know you haven't given out actual royalty numbers in the past, but can you give us some type of idea what magnitude, since because that's virtually 100% margin coming through, et cetera.

Yes, the nonflooring business is our lower margin than the flooring business. And the -- one thing is, the income is all going to the bottom line. I don't know if you read the things we put out about winning legal suits; ITC things. We've spent a tremendous amount of money getting the marketplace to accept the validity of the patent and forcing people to do things. So we have a very high level of legal expenses taking different propositions to courts in both Europe and the U.S. and other places. So we spend a lot of SG&A creating the value in the patents or else there wouldn't be any.

Okay. Any type of magnitude you want to put around the royalties?

I don't think we're prepared to do that today.

Okay. Thanks.

Your next question comes from the line of Jerry Rivera with SAC capital.

Good morning. All right, one more time. I just wanted to ask also about what the -- what growth did you see in laminate, either on POS -- I think last quarter you said POS and laminate was roughly high single, low double. And then, if also you could say what your POS on hardwood or Columbia is.

I'm sorry, you want to know the sales rate to our customer? I'm not sure what the question is.

Just the point of sales growth rate for laminate and hardwood during the quarter.

The growth rate of the Unilin business was 15%. The flooring is growing at least that rate, or we wouldn't have the margins that we have. Flooring is growing in double digits.

The U.S. flooring, is it?

The total flooring.

Okay. Do you know what the U.S. laminate sales were?

I don't know what the breakdown is between the two, but I can tell you the flooring business is growing at least equal with the whole business.

Okay. Okay. And then what about Columbia?

Columbia, we've owned for a few weeks.

Six weeks.

I'm not sure. We haven't been able -- our focus at this point is just to get the cost, quality and infrastructure underneath it. And I have no idea what's going on with the growth rate. It may even be shrinking a little at this minute. I don't know.

The wood business is falling.

The wood business, I think, in total is off close to 25% at a run rate from its peak --

To the industry.

To the industry.

Okay. Versus down 20 for carpet.

And down mid-teens for the ceramic.

Okay. Last question on the debt capacity. Is it fair to say -- You've paid off $1 billion. Is it fair to say you have about $1 billion to use between, you know, either acquisitions or share buyback?

I don't have the numbers, but I guess we would have more because the equity is greater than it was two years ago.

So, I mean, given that you have more than $1 billion, you have the capability of doing a number of things. You could do acquisitions and buyback. You don't have to necessarily choose between the two.

It all depends on the size of either one or how the mix is, but, yes, you're right. We could do more --

We have a lot of flexibility to do what we want to at this point.

And, I mean -- okay. So, and then the urgency to use that -- to use that $1-billion-plus of debt --

I would say that we would like to use it. I don't think -- The urgency is to do the right things for the long term, not to get rid of it.

Yes. Okay. Thank you.

Okay.

Ladies and gentlemen, we've reached the allotted time for questions and answers. Mr. Lorberbaum, are there any closing remarks?

Thank you for joining us. We think we had a good quarter, and we think we're well positioned for the environment that we're in and will be in for the next year. Have a nice day.

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