莫霍克工業集團 (MHK) 2010 Q3 法說會逐字稿

Good morning, my name is Caroline and 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. 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 November 5, 2010. Thank you.

I would now like to introduce Jeff Lorberbaum, Mr. Lorberbaum, you may begin.

Thank you. Good morning to the Mohawk third quarter earnings call. Thank you for joining us. With me on the call is Frank Boykin, our CFO, who will review our Safe Harbor statement and later the financial results.

Frank?

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

This call may include discussion of non-GAAP numbers. You can refer to our press release at the investor information section of our website for a reconciliation of any non-GAAP to GAAP amounts. Jeff?

Thank you.

Our third quarter earnings per share of $0.74 is in line with our expectations with sales of $1.3 billion down 5% from 2009 or 4% with a constant exchange rate. Our operating margin of 6.8%, excluding unusual items, improved from the prior year. We have a strong financial position with free cash flow of $87 million and an improving net debt to EBITDA ratio at 2.0.

The industry slowdown that began in the second quarter continued into the third quarter and affected our revenue growth. Although the short term industry conditions are soft and difficult to predict, the long term future for both the economy and industry remains good. The US economy has bottomed and is expected to continue growing at 2% to 3%. Consumer spending is expected to improve with higher employment levels and longer work weeks, though consumers continue to defer large expenditures on their homes. Credit markets and availability are better and the consumer's balance sheet is improving. The outlook next year is for both new housing remodeling to grow while commercial investments recover.

Our third quarter sales were down from last year while our European businesses grew in most categories. Our US residential sales declined as spending remains slow. Commercial markets appear to have bottomed with business remodeling starting to gain some traction. Frank, would you give our financial report, please?

Thank you, Jeff. Good morning, everyone. As Jeff had mentioned, net sales came in a 1.310 billion, 5% down from last year or 4% on a constant exchange rate basis. Our US residential sales were soft with commercial approaching a bottom. We are seeing some improvement in the commercial replacement business and our European business continues to grow although at a slower rate.

Our gross margin came in at 26.3%, which compares to 26.7% last year. We had higher raw material costs with lower volumes impacting that and they were partially offset by price increases and restructuring improvements.

Our SG&A expenses, which is a bright spot, came in at $260 million or 19.8% of net sales, compared to 21.8% last year. SG&A dollars are down 14% from last year and improved 200 basis points over last year as a percent to net sales. Overall, our spend was well controlled and the many initiatives we put in place over the last year and a half have had a positive impact. We had $3 million of restructuring charges during the quarter, with about $1 million in each segment of restructuring charges.

Operating income, excluding charges, was $89 million or 6.8% of net sales. The increase in operating margin was driven by SG&A actions and improvements in manufacturing productivity and quality. Interest expense at $30 million was down from last year, due to the purchase of $200 million of bonds earlier in the year and partially offset by increased pricing and fees for our bank facility we put in place earlier.

Other income includes about $6 million in a US customs refund. This is for excess duty charged on Mexican tile that we shipped into the US, where customs improperly classified the tile. We estimate that possibly there will be an additional $10 to $20 million of refunds, but we can't be certain whether we will receive that or when we will receive that. Our income tax effective rate was 13% during the quarter, and we are estimating that the rate for the fourth quarter will be in the mid 20% range.

Our earnings per share, excluding unusual items, was $0.74 a share, up 16% from last year. This is the same as our GAAP earnings per share. The items after tax all net to zero and include a $4 million customs benefit offset by charges of $2.3 million for restructuring and $1.7 million for one-time purchase accounting related to our Chinese investment.

If we jump to the segment information, the Mohawk segment sales came in at $713 million, down about 6% from last year. The overall decrease was driven by softness in the residential category, while the commercial rate of decline is improving with positive modular growth. Operating margin excluding charges was 4.5%, up from last year's 3.2%. Margin improvement of 130 basis points over last year was supported by price increases and productivity improvements.

In the Dal-Tile segment, our sales were $345 million, down about 5%. This decrease was primarily from a continued weak residential home starts, as well as lost sales from the flood in Mexico. Our operating margin excluding charges was 10.2%, which compares to 8.1% last year. Our Mexican tile plant has fully recovered from the July flood and is currently running at normal operating levels. We settled the $25 million insurance claim during the quarter, which reimbursed us for damage to property and equipment and replaced profits from sales lost as a result of the flood.

Our third quarter results include the full effect of the insurance coverage and put our operating profit dollars at the same level as if the flood had not occurred. Our revenues were lower, due to lost sales, so our operating margin percent was higher than normal. Our lost profit for the period, covered by insurance, was approximately $5 million. Our operating margin would have been in the high single digit range had the flood not occurred.

In the Unilin segment, sales as reported were $277 million down about 2%. However, on a constant exchange rate basis, they were up 6% with improvements in most regions outside of the US. Our operating margin excluding charges was about 9.2%, versus 12.4% last year. The margin decline was impacted by higher raw materials and maintenance cost. Foreign exchange reduced margin by about $3 million this quarter.

If we turn to the balance sheet, cash ended up at $366 million and includes about $195 million in the US with the balance in Europe. Receivables at $698 million had days outstanding of about 46 days, which is in line with the second quarter. Inventories at $996 million are up about $30 million from the second quarter. About two-thirds of that increase relates to inventory purchased to cover the Mexican plant that was down from the storm, which recovered faster than we anticipated. We expect to work through the tile inventory in the fourth quarter. The remaining one-third is related to foreign exchange and additional European inventory to support growth.

Our fixed assets at $1.7 billion include capital expenditures during the quarter of $39 million, with depreciation and amortization of $73 million. We are continuing to forecast CapEx spend for the year at $180 million and depreciation and amortization at $300 million. Our total long term debt was $1.655 billion and net debt, net of cash $1.289 billion at the end of the quarter. Cash flow and liquidity remained good.

Free cash flow was $87 million and our total liquidity was $850 million at the end of the quarter, of which about $300 million will be used to pay down bonds in January of 2011. We are estimating that we will probably use about $150 million in cash and $150 million of the bank facility to take care of the bonds when they are due.

Jeff?

All of our businesses were impacted by the soft industry conditions during the quarter. We reacted to this by reducing operating costs and implementing product promotions, introducing new product to satisfy market changes, and continuing our international expansion strategies in Mexico, Russia and China. The results of our cost containment and restructuring initiatives are reflected in the lowest SG&A expense recorded in over 12 quarters. Liquidity remains strong with $850 million available including $350 million in cash.

In our Mohawk segment, we made progress improving our overall margins and operating performance with a 34% increase over the prior year. However, some of this progress came at the expense of lower than anticipated sales revenues which were down 6%. Our efforts to maintain our pricing position through two increases during challenging business conditions led to lower sales results in residential carpet. During the last price increase, our more firm position on the increase led to some volume loss. To respond, we've adjusted prices on specific products and are using selective promotions to regain position. We secured additional customer commitment that will positively impact us next year.

Polyester filament products have grown faster than we anticipated and we've responded by adding additional styles and price points. Production capacity has been expanded in our polyester and additional extrusion is being installed next year to support the trends.

In commercial, carpet tiles growing faster at the expense of broadloom. Our product line is being rebalanced to have a higher portion of carpet tile with greater styling and more price points to align with the trends. We are also adding additional sales resources to increase our market participation. In commercial, we also have a greater share of the hospitality channel which has had a more dramatic contraction than the other channels. We're presently seeing improvement in most areas of commercial remodeling.

We're reducing our manufacturing administrative costs, increasing service levels, improving quality, and introducing innovative products. A new SmartStrand campaign using social networking and other media has begun using elephants at the Dallas zoo to demonstrate the durability and ease in cleaning of our proprietary products. The extrusion expansion in South Carolina is progressing as scheduled and will begin production in the first quarter of 2011 to meet the changing demands of the market.

The Dal-Tile sales were down 5% due to the continued softness in the ceramic markets and the impact of loss production in our Monterey, Mexico facility. The reduction in purchases by customers and businesses which began in the second quarter has persisted. We've announced selective price increases for our ceramic products of 3% to 5% to cover increased transportation costs beginning in November.

As an alternative for customers who import tile, we are offering limited high volume products shipped direct with lower freight, shorter lead times and reduced capital investments versus their alternatives. We've dropped and added more products in the period to limit the impact of lost production from our Mexican facility. We increased outsourcing of tile to minimize supply disruptions to our customers. The plant recovered faster than we anticipated, increasing inventory levels which will be adjusted out in the fourth quarter.

New product introductions this fall are focused on residential remodeling and have enhanced merchandising to maximize sales. Commercial ceramic sales appear to have reached a cyclical bottom with the health care, educational, and institutional channels outperforming. We've increased number of large account specifying our commercial products for their projects around the country. Many of our new introductions are utilizing our Reveal image printing technology which creates more realistic and random visuals. We've expanded our tiles with surfaces that minimize bacteria growth for residential and kitchen and bath as well as for commercial applications. We've increased the distribution of our stone slabs to maximize our penetration in the market.

The Mexican tile industry is expected to grow 3% this year. And we are expanding our customer base and broadening our product lines. A site near Mexico City has been selected for a new tile plant which will manufacture low to medium priced ceramic for both the Mexican and US markets. The plant should initiate production in 2012 and is located near our raw materials and major markets.

Our manufacturing team continues to implement cost savings by increasing production speeds, improving productivity and utilizing more localized materials. A new warehouse management system, which optimizes labor and improves efficiency, was implemented in the period. The system will be installed across the distribution network in the first half of 2011.

A hurricane in July caused a flash flood which completely shut down our ceramic plant in Monterey, Mexico. The plant was repaired in the period and operating at normal levels. The insurance claim for the damage and disruption was resolved during the quarter with proceeds compensating for damage, repair, sales, and margin impact.

Our ceramic investment in China was completed during the period. We've begun developing new products for both the Chinese and American markets. The Dal-Tile brand will be used China for a high end ceramic collection. The Foshan plant in the south is running near capacity, while the new plant in the north is still increasing its production. The new plant expansion and revenues was slowed due to delays in the electrical infrastructure which have been completed now.

A new tile line is being started up to provide premium tile for Dal-Tile distribution in the US. As anticipated, the SANFI results were slightly accretive during the period excluding one-time charges for purchase accounting. Unilin sales decreased 2 percentage as reported, but increased 6% using a constant exchange rate. Business in Europe improved while conditions remained difficult in the US markets.

Margins declined in the quarter, as prices lagged material costs, US sales slowed, and maintenance expense increased. Presently, material costs appear to have peaked and additional price increases have been announced. We anticipate our margins expanding next year with higher selling prices and material costs stabilizing. In Europe, our flooring sales increased in most markets as well as Russia and Asia. Our wooden insulation panels increased in sales while our roofing systems remained weak. Our strategy of participating in the home center channel by providing style and fashion is broadening our laminate distribution.

Our European wood sales including our premium Quick Step branded wood are growing. We are broadening our laminate customer base in Russia to support our new flooring plant which should be operational in mid 2011. Sales of our new insulation boards are rising and we are increasing production to satisfy the demand. The building codes in Europe are requiring energy reductions and the market for insulation boards should expand 15% to 20% annually.

In the US , demand for laminate remains weak across all channels. We're offering targeted products to address the value needs in the market and stimulate demand. Demand for our wood products is improved and our wood product mix has increased. We are increasing our flooring sales to national retailers while broadening our board sales to other industries. The plants are improving productivity and reducing expenses. We are continuing to introduce innovative products in each category with unique features including laminate with more realistic patterns, finishes and edge treatments, click wall boards, new surface technologies in wood as well as bamboo flooring.

The third quarter sales demand and raw material trends are expected to continue through the fourth quarter. Next year we anticipate increased sales growth, higher selling prices, and margin improvement, as we gain leverage from the changes we have implemented in our business. Our fourth quarter guidance for the earnings is $0.53 to $0.63 per share. The fourth quarter of this year includes four fewer days in the period compared to last year.

We've implemented significant changes in all segments, functions and levels of our business as we managed through the economic downturn. Our costs have been dramatically reduced. The processes have been redesigned. Advanced information systems have been employed, and our infrastructure is more efficient than any time in history. We've demonstrated the ability to adjust to a changing economy, national disasters and a difficult competitive environment. We are further expanding internationally with ceramic in Mexico and China and laminate in Russia.

Our capital structure is well positioned with additional liquidity available for growth opportunities. The company is well positioned as the industry improved from pent up demand and economic growth. With that, we will be glad to take

(Operator Instructions) Management request that you limit your questions to one primary and one follow up. (operator instructions) Your first question comes from the line Dan Oppenheim from Credit Suisse. Your line is now open.

Thank you very much. I was wondering if you can talk a little bit more about the pricing environment. You talked about how you lost a little bit of volume, we saw on the pricing, but then used promotions to regain share. Would it be difficult then to pass on higher costs for raw materials if you see that coming through next year? How do you see the pricing environment shifting here?

Well, I think that we were a little aggressive in some of our price increases relative to competition in the marketplace. So we made adjustments for those. The raw material prices in all of the different categories, as those go up they have to be passed through to the customers across the marketplace, and that's our intentions where it's required. In our Unilin business we've announced multiple increases already and in each of the businesses we are looking over where they are and making determinations what will have to be done.

And then secondly, I was wondering about in -- you commented about an expectation of growth in residential in 2011. Do you have concerns about the lower existing home sales activity that we are seeing now which will more than likely translate into reduced repair, remodel activity certainly in at least the first half of 2011?

I think that we are optimistic about the improvement because they are at very low levels and we believe that those levels will improve as the economy improves and as people get more comfortable spending money in the remodeling segment, which they have been postponing. We are reasonably optimistic in that. It appears that-- it is a little early to tell, it appears that the commercial remodeling businesses -- that we are seeing some more activity presently and going forward. So we are expecting improvements.

Thank you.

Your next question comes from the line of David MacGregor from Longbow Research. Your line is now open.

Good morning everyone. Pretty tough market out there, I don't know how many ways we can slice and dice this one. Jeff, can you take a couple minutes and just talk about the emerging market growth and --you've got Mexico, you have got the new plant ramping in China, the Russian distribution, the laminate facility over there. What are you generating right now in terms of emerging market revenues and how does that grow over the next three to five years?

Let's see if I can lump all that together. In Mexico, historically we have had a limited share of the marketplace, it's been less than 10% and we've focused on using the capacity to support our US business. As the industry slowed down, we started increasing our participation in the marketplace and broadening our customer base. We are making good progress in that. The marketplace in Mexico is about half the size of the US market in dollars, but it's got similar volume because the average price points are different on the products.

We have been focusing originally when before on basically high end products in the marketplace. In the last year, we've started broadening out so we compete in all price points in the marketplace, preparing to put more capacity in the market. We have a site selected down there and we think we can continue to increase our participation in the market. The market's different than the US market, did not drop as dramatically as the US market did. And this year the market is actually expected to grow about 3% in the ceramic business, which is a good sign. But we think we are prepared well for that marketplace and can improve our position with the new capacity and lower cost product that we are introducing and the plant set up to make those.

In China, we have completed the fancy joint venture. The marketplace for ceramic is about -- I might know, if I'm asked, exactly -- I think it's around 75% of the flooring market that's ceramic. The ceramic market is about 60 billion square feet, which is about 25 times greater than the US marketplace. The market is fractured. The largest players in it only have 2%, 3%, 4% market shares. There's a huge opportunity in growth.

The company we got together with has just built a new facility. They have one facility in the south in Foshan that has about -- that's running--that's about completely filled up. We built a new facility which they were in the process of completing in the north. The capacity of the two businesses are close to -- the two things are close to 600 million square feet, which compared to the US would be a huge capacity in the US. We think there are huge opportunities to improve the product line which they are focused on, basically polished porcelain. The glazed wall tile is a limited part of the marketplace, but it's growing rapidly. Glazed tile and glazed tile. We believe we bring them additional styling and design, ways of improving the operations of the business. We think we can learn from them.

So far we have put in place a lot of discussions to get it. They put a new line in, in glazed -- high-end glazed tile, which is just starting up which we expect to start receiving product from. We've started switching some of our polished porcelain purchases to them already. So we think we are well positioned in the marketplace, they are in the top ten of the companies. So we think we are in good position. We think that the new plant will turn a profit next year as we fill it on up. Just as a note, the first quarter is the low part of their seasonality as they take extended vacations and the cold weather, especially in the north, impacts the building and repair and remodeling business up there, so the first quarter will be lower. But we think we are positioned well to take advantage of the growing marketplace as well as a consolidation that we think is going to continue going on there.

The Russian business as we started two years ago by starting to distribute tile into the Russian marketplace. We built up a core business. We then put in local inventory to support a broader business. Presently, we are expanding our customer base broader. And the plant is expected to start up in mid-next year. And we believe there is a huge opportunity to grow that from a very small business. We believe the economy in Russia is going to continue growing and we think we are positioned well for the initial step into that marketplace.

I think all of these are good opportunities for us. And some of them will take a year or two before we see the results. I think we are building a good infrastructure for growth opportunities in the future.

I -- thank you. That's a very thorough coverage of the point. I appreciate that. What would you be generating right now in revenues from those combined markets? And can you give us a sense of what your thought process might be around a 2013 or 2014 number?

Presently, they are relatively small. We said we had less than 10% of market in Mexico. The joint venture only has about 2% of the market there, is it, even though we're like the seventh, eighth largest player in the marketplace.

Can you talk about it in dollar terms?

Not at this point. But it's basically a small but growing opportunity for us, David, in all three of those markets.

Terrific. Thank you for going through that, guys.

Your next question comes from the line of Michael Rehaut from JP Morgan. Your line is now open.

Thanks. Good morning. First question I was hoping to get a little -- drill down a little bit more on the Mohawk margins and understanding that there are a lot of moving pieces here. But and you would talk about kind of now adjusting back prices on specific products, and initiating selected promotions. How are we to think about margins for next year in that segment, given that you come a little bit off the bottom here? Obviously, it's still a long way back to normal margins. But, you know, could we see potentially some margin compression in this segment in 2011 relative to 2010? Or do you expect this give back on some of the price, et cetera, to be potentially offset or even more than offset by the volume leverage that you are also referring to?

I think the answer is the same for all our businesses. We've spent a lot of time reducing the infrastructure and costs across all of the businesses. We are expecting volume to improve in all the businesses. Our plans in all of the businesses are for margin expansion next year with volume increases. Leveraging all of the work we've done over the last couple of years. I think the answer's consistent across all of them.

Okay. And also, a couple of number-related detailed questions. Frank, can you give us a view for the tax rate for 2011 and also the $1.7 million of investment, did that run through a particular segment in the operating earnings or in the other?

The first question on tax rate is looking in the low to mid-20% range going into 2011. Of course, it's going to depend on how the year turns out and how the mix is between the different regions because we have different rates in different regions. And then your other question was what?

I'm sorry, the $1.7 million of the China investment. Where was that in the income statement.

Other, other income.

Okay. And also just interest expense for 2011, do you have an initial figure for that?

You know, it's probably going to be in the $29 million to $30 million per quarter range, somewhere around there.

Thank you.

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

Good morning, Jeff, good morning, Frank. Two questions. First off, Jeff, your market share in the carpet business is a little softer at least than the industry reports would suggest. Specifically on the residential side, do you think that's--I guess in order of importance, is that more of a reflection of you are keeping -- your being steadfast on price or is that more of a reflection of the PET under representation? I guess what I'm getting is looking forward, if you are looking to regain market share, which of those two particular items would be of more consequence?

I think you have the right two. I think the price firmness that we had that we lost some share in some of the opening price commodity marketplaces that we reacted a little slower in the marketplace, and lost some position and I think that's a part of it. The second is that we didn't anticipate the polyester gain quite as fast as it's moved and we are introducing products to gain the share in that that we expect. We have changed the manufacturing equipment to support it. We've put in additional investments in extrusion and we will start in the first quarter. We are introducing products rapidly and I think we are well positioned to get back where we want to be.

In terms of order of importance though, the PET intros would be less margin dilutive, I would imagine, than cutting price. That's why I'm asking the question in terms of the degrees of significance.

I don't know how to put a number on it like you would like.

Okay. I will move to the next question. Frank, the four shipping days, I'm guessing that was a similar sales impact of 6% than we saw in the first quarter. How should we look at that from an earnings standpoint or from a--should we look at it from a contribution margin or an operating margin and if we are trying to get the effect of that on EPS?

More of an operating margin than a contribution margin. It's seasonality, Thanksgiving, Christmas time, that's going to impact both the sales impact and the margin impact.

Okay. Thank you very much.

Your next question comes from the line of Eric Bosshard from the Cleveland Research Company. Your line is now open.

Thanks. Two questions for you. First of all, on pricing, I'm interested, Jeff, your perspective on the share issues or the pricing issues in carpet and Unilin and specifically, if you think there is something structurally different where they are becoming more price competitive categories, or if you look at this just as a cyclical factor.

I think in the carpet side, you had the rising raw materials going into the third quarter. We were trying to read the various marketplaces and what was going to happen and we thought we did the right thing and after the fact we found out it took us a little too long to adjust. As normal cases you go into these increases and you have to adjust to what's going on in the industry. And I think it's just a normal place in our aggressiveness to try to manage it and where we thought maybe we were compressing the margins ourselves we took a little more firmer stand. And so I think that's just a normal course of events.

The Unilin side, there has been a huge upward move in the wood prices as well as the other raw materials being used in it and that's compressed the margins as we lag it. We thought that possibly it would be peaking in the second quarter and it's gone up substantially since then. At this point it does look like it's flattening out and we have to get the pricing back aligned with it. I don't see why they are going to disrupt the long-term view of the business.

From a Unilin perspective, in terms of the competitive forces impacting that business, it seems like you continue -- or we continue to see lower-priced quality laminate and fake hardwood product competing against laminate. Do you have a thought on how the profitability dynamics of that business is evolving?

The average selling prices are coming down in the marketplace and have been. It was anticipated that that would happen in the marketplace. Within that, we typically are not as impacted as much because we have a very limited share of the commodity parts of the marketplace. Typically the commodity parts are more affected. We tend to drive our business through product differentiation much more so than the average of the marketplace and we spent a lot of time on innovation. So they are down. At the same time we cut our costs in the manufacturing and infrastructures of the businesses.

You have the other segments of it, the board businesses, which are smaller pieces but as you go through the cyclical downturns the costs tend to go close to cash costs. you then put that with a rising environment of costs and over time we expect them to come back to more normalized levels but that's typical of where we are in the process. I think we're continuing to invest in increasing our geographies. We will continue to invest in broadening the product lines with new products and niche products like the insulation board business moving into Russia. We are actually looking at eastern Europe to do more on those marketplaces. And to tell you the truth we continue to look at other geographies around the world. So I think we were well positioned. The margins, long term it will be hard hit to hit the high teen margins like we did at one point.

And secondly, you sound quite optimistic or optimistic on 2011 margins as well as volumes and I understand the margin optimism. But in terms of the volume optimism, especially in light of this quarter and what last quarter looked like, I'm just curious what is giving you what sounds like a little incremental optimism about 2011 volumes.

I think that when we look over it, we see that in 2010 you had the new construction business that's still relatively low. Every estimate that we have seen shows 2011 new construction being better than 2010. We believe that the consumers are getting in better position from a debt basis, or we believe that there is a little more optimism in the world, spending is going up. There is a little more employment. We tend to focus on unemployment, there is a little more employment. So our assumption is that we will see some improvement in the remodeling piece as you go through.

If you look at the commercial business, I think there are a lot of signs that possibly we're at a bottom and that remodeling is improving. So if you take the major pieces of the business, they all look like next year will be better. The question of how much and when is more difficult, but to state in the crystal ball it looks like there is very limited view of it going down and the question is how much will it improve?

Your next question comes from the line of David Goldberg from UBS. Your line is now open.

Hi, It's actually Susan on for David. Given the fact that you are continuing to take some costs out of the business and assuming that most of the low hanging fruit has already come out of that, can you give us some idea of the choices that you are now making and how they relate to the longer term goals that you have for the different segments of the business?

The choices in infrastructure or capital investments? Or I'm not exactly know where you are headed.

Both I guess, really just sort of where you are headed in terms of the capacity and how you think that positions you for an eventual recovery? And then also in terms of the different investments that you are making in the segments?

On the capacity side, we think we have enough capacity in place to manage the increases in volume over the next couple of years with some capital investments. We continue to -- we are planning to invest more next year than we did this year. This year, I think, we put in about $180 million of investment. Next year we are planning to put more in. Those will do two things. They will give us improved costs in some places as well as where we think we have limitations in capacity we will take care of those as we go through.

When we look at the whole marketplace, we think that there are opportunities to participate in world markets better. You have heard the explanation over the three in China and --China, Russia and Mexico. We're looking at other marketplaces in different product categories in various ones going through. We haven't concluded any of them but we've continued to look at those. And I think we're positioned well with the capital to support whatever we need.

Okay. And then just building on that, and I know it's still maybe a little early. But how do we think about the CapEx trends especially for next year, given the investments that you are making, especially like the new Mexico plant? That sounds like it will probably start to be a project that comes next year.

In all of those pieces we have already started investing.

The investment, like Jeff said, Susan, next year is going to be higher than it is this year. We have not finished budgeting yet so we don't have a number--an exact number to give you. But as he said, we do have the tile plant that has been started. Or rather they found a site and they are going to start on that next year. In total that's probably going to be $65 million to $70 million to build that. And we are starting, as Jeff had mentioned, the Russian laminate plant and that's probably about $30 million investment in total. With a portion of that in this year and then a portion of it in next year. And then we have got some other projects we are looking at, too. We need to add them all up and decide what we are going to go through with or not.

Your next question comes from the line of Stephen East from Ticonderoga Securities. Your line is now open.

Thank you. Jeff, you talked a lot about the forward prices looked like they've peaked in Europe. Can you give us a little idea of what's going on in the US for the oil based products, oil started to move up again. Are you seeing anything or have we basically flattened and started to turn down there?

In the third quarter we were relatively stable. Lately, we have started to see increases in raw materials. At the moment, we're watching the oil prices and the chemical prices, trying to determine the long-term impact at this point we're still evaluating them and trying to decide what pricing considerations we need to do, if any.

Okay. And then, Frank, I guess this is directed at you. If I look at the fourth quarter, what your guidance was, $0.53 to $0.63. From your prior guidance on tax rates, et cetera, it looks like about $0.05 was coming out of -- was because of that, because of the tax rate. And then on the four fewer selling days, you know, I just look at it and is that about a $60 million revenue impact? And I was thinking about a 20%, 25% margin hit which led me to around a $0.10 or $0.15 impact in quarter. Am I thinking about those two issues properly?

That's hard to do. Like I said earlier, with the holiday season at the end of the fourth quarter and all, we have just such a difficult time with sales trailing off, it will be I think like we said before, 4% to 5%, 5% to 6% less than what it would have been otherwise with the fewer days. And then the margins, you know, they are going to be lower in the second half of the quarter than they are in the first half of the quarter.

You just have to build in the seasonal changes that normally occur.

Your next question comes from the line of Laura Champine from Cohen and Company. Your line is now open.

Good morning. Jeff, when you talk about giving up a little bit of share to get pricing, your more aggressive competitors --- were they small players who might be a little desperate at this point in the cycle? Or was it your larger competitors who just saw an opportunity?

It's normal that prices move around. It's normal that after you have announced them there are adjustments in the marketplace at all levels. I think we were a little more firm in what we were doing, trying to read the marketplace and determine whether we were causing it or whether we were following it. And I think it took us a little longer to react than normal and we suffered a little bit because of it. I think it was a good learning experience.

In your experience, I know you have been through similar things before, Jeff. How long does it take to regain share and how long -- where does that put us in 2011 in terms of share in the Mohawk carpet business?

I think that we will see some improvements with commitments that we have in the first part of the year.

Your next question comes from the line of Dennis McGill from Zelman and Associates. Your line is now open.

Good morning and thank you. Just the first question. Frank, can you talk sort of longer-term tax rate? I know a few years ago you had some different tax planning impacts that were going to linger for a couple of years. Can you give us any update on where you might be a couple years out, assuming normal mix of international versus domestic business?

Normal mix of international/domestic with the strategy we have in place, assuming that none of the tax laws are changed here or overseas, I am in the low to mid-20% range.

Okay. And then secondly, when we think about the different businesses over the next year or two with all the cost saving measures you have in place, can you just review what normal incremental margins look like by segment and how that might differ in the early stages of the recovery?

I'm not sure I got it broken down, Dennis, right here in front of me, in that level of detail for those different time periods, but we can talk afterwards and I can go through it with you.

Okay. I can follow up off-line. Thanks.

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

Thank you. As the quarter progresses into October, have you noticed any changes in the pace of business specifically in residential in the US and in Europe?

I can't say that we have seen any dramatic changes one direction or the other.

Okay. And second question, on the --in the ceramic tile business, Dal-Tile, are you starting to see the upturn there in commercial? I know they're in a lot of things besides office, where all the strength seems to be at this point. But in the hospitality and restaurant and things of that, has that business started to improve?

We have started seeing improvement in the various channels. You have to understand that the ceramic business versus the carpet business, for instance, there is a significantly more greater part of it in new construction as a general piece. So you remember it lagged coming in. The ceramic business held up better coming into it and it tends to lag a little more coming out. We are seeing more across broad channels, more things going on with people starting to bring projects back in and starting to upgrade them.

So I mean, it's just sort of across the board in little pieces. I still think that we're seeing it in the institutional piece and the education pieces. We're still seeing other parts of the business improve. In the requests and things. How that translates completely and keeps going is anybody's guess.

Your next question comes from the line of John Baugh from Stifel Nicolaus. Your line is now open.

Good morning, Jeff and Frank.

Good morning.

Mohawk segment, polyester in this shift, Jeff is this something that when you look at it, because you have the exclusive I believe on Triexta, on at least the residential side. Is this something that helps Mohawk? Or has the rush to commodity polyester, where I assume you don't have the same presence, hurt you? And then how much of the CapEx in '10 and '11 is going into polyester fiber extrusion capacity? Thank you.

There is really -- each one is a different marketplace. The Triexta is basically positioned versus nylon rather than being positioned versus the PET. And so, the PET is a separate market that, I think we were surprised with the rapidness of its growth. We participate in it and we are participating more. The assets that we're putting in for extrusion are flexible and they can make any of the various raw materials required. So as the market shifts, we can shift between them.

The number you had asked for between this year and next year is in the kind of 50 to 60 range for extrusion capacity.

Total?

Yes, both years.

Great, thank you.

Your next question comes from the line of Joe [Shrabcolher] from Goldman Sachs, your line is now open.

Thank you for taking my question. I just wanted to understand your strategy on pricing versus market share. In the Mohawk segment, you said that you raised prices and felt like you did it maybe too aggressively. You are peeling that back to get your market share in place. If you look at your other two segments you said that cost started to creep up too fast, had its impact on margins and now are looking to raise prices to recover the margin. I'm trying to understand, which is of most importance to you as you look out to 2011, keeping your margins or keeping your market share? I recognize that having both would be great, but in this environment I'd love to understand what the strategy is.

The goal is to recover the costs and make sure 'we're positioned well. You have to break the different markets down and as you go through the different value propositions the more commoditized the market, the more defined the market is. And so in the lower end of the marketplace if you want to compete in it, you have to be competitive with the alternatives in the marketplace and we intend to be so. In the other product category it depends what value you're bringing to the marketplace in style, design, service, quality, et cetera. And you're supposed to have the prices of the products to reflect the value you bring in.

And then I guess my second question would be in your prepared comments you said that you expect material prices to stabilize. Could you give a bit more detail on exactly which materials you are expecting to remain stable in 2011 within your outlook for higher margins next year?

What's happening is each of the different businesses have different materials and different pieces. The comment there was around the Unilin segment. The Unilin segment has a major part of their costs are based on wood prices. The wood prices in US and in Europe have gone up dramatically and we believe that those prices are at high levels. In the short term we think they will stay at those levels for the near term and the question is as you move through next year, if the wood supply increase and will they move off the peak levels they are at, there is a possibility, but our plans at the moment are that they stay at those levels. On each of the other businesses, there are different ones. So I don't know if I answered the question you asked. Do you want to try again?

Your next question comes from the line of Carl Reichardt from Wells Fargo Securities. Your line is now open.

Hi guys. I've just got a couple quick ones. Jeff, you talked in previous quarters about a trade down in the carpet segment and mix in particular. I'm curious if you think that's basically abated now and your overall mix in residential carpet is normalized like you would expect to see in a more normal environment or you've still got a larger mix of the lower-end stuff moving through?

There's two separate pieces to the question, one is, that in general the marketplace has pushed more value products to the consumer that they think the consumer is looking for it. And so all the different levels of the industry are trying to get lower price points to bring customers in to their retail establishments. So that's impacting the general mix. There's a second mix question that the industry as the raw materials have gone up, the industry is moving from the historical nylon and polypropylene raw materials more to PET, which is a lower-cost alternative to making the same thing. So as the industry moves to more PET that will be a lower value of cost product than the equivalent nylon that we are seeing the trends and that will continue as long as the differentials between it and the other categories remain where they are.

Appreciate that. And then on China, is China for you now in the Foshan and Mongolia plant -- is this all residential or mostly residential at this point and what's your expectation of the res/commercial mix as you look out a couple of years there?

I'm sorry? Residential and commercial in which category?

In China. In tile in China.

I'm not sure I have that answer right now. They use a lot of the same products going into both categories. And the biggest part of those ceramic markets is in polished tile, and they like the way it looks. In the US market same thing. They are at the high end of the marketplace, due to the labor that's in them. So I don't really know the percent here. What we look at in both cases is that the amount of homes are increasing. The size and quality of homes are increasing. So that market still has a lot of potential. And in the commercial business the infrastructure and new businesses continue to expand. They may be trying to slow it down a little bit now but it is still going to continue a significant growth rate. And we think flooring will continue growing at a greater rate than the general economy.

Carl, I can give you a mix break down if you want to call me back after the call.

Your next question comes from the line of Bob Wetenhall from RBC. Your line is now open.

Hi good morning. If you had to rank it, are you more concerned in 2011 about weaker volume or higher input costs?

As you heard from the prior pieces, we are fairly confident that volume will improve. The question is how much and when. So the raw material costs, there is tremendous pressure across all commodities today as we've ended up with worldwide markets. And where we used to be an island in the raw material, commodity costs will go up and down with the US. what we are seeing is a worldwide market. So the US, capacities are being exported or being balanced out around the world and we are going to have to adapt to that in all markets and all product categories.

I'm just trying to understand more specifically if you experienced a demand recovery, I assume that would be accompanied by more demand for input materials as well, which could put upward pressure on your input costs. And I'm trying to understand, if that occurs, I assume the costs would move up before you can take pricing and what you can do to offset that lag.

Offsetting the lag is going to be difficult. What you've heard is in the woods business we believe that increased commodity cost is already here and we are dealing with it as we speak. We also heard in the Mohawk segment, we are starting to see some of it and it's a little too early to tell what's going to happen to it because it's been volatile and so we're evaluating it as we speak. In the ceramics side, we talked about a large part of our products are FOB destination so those raw materials, the gas to manufacture it, which is still relatively at reasonable prices and then you have the transportation costs where we deliver it locally and you heard us say we've announced prices to push through the transportation costs. So I think that there are--there's potential to have raw material inflation in the Mohawk segment but it's a little early to tell where it's going to end up or not and the other ones we are having it and we are acting upon it as we speak.

Your next question comes from the line of Alex Mitchell from Scopus Asset Management. Your line is now open.

Good morning. Appreciate the granularity of the call and (inaudible) they affect your price increase-- Most of my questions were answered but I wondered if I could ask a big picture question. As you expand into other markets around the world, are you at all concerned about your ability to control the fluctuations in those markets as well as you've controlled it here in the US? With obviously a very hands on approach moderating up and down volume-- production and cost?

Our approach as we move into different marketplace has been to find local management, I think is probably the most important thing that we have to find is the right management group that understands it. And I think that we believe that taking the same decision-making processes and overlaying them in different cultures and different environments is a mistake. And what we try to do is align ourselves with management that understands those and then take the philosophies we have that we think are good and review those with philosophies they think are good because many times they have many ideas also we haven't considered that we try to combine those rather than take a formula and overlay it over the top of anything. I think that's -- if you look at our European business, I think it shows there how we operate the business and what we do and I think it's the right approach.

Okay. I -- So you are not worried? Because it sounds like you are going more volatile economies than you have in Europe or in the US?

Well, it would be hard to be more volatile than we have been in the last three years.

Okay. Fair enough. Thank you.

This concludes today Q&A session, I will now turn the call back to Mr. Lorberbaum.

We appreciate everyone joining us. We will continue to manage the business and take the actions we think are appropriate for the long term viability of the business. We will continue investing in both the US market as well as internationally and we think we have a lot of opportunities going forward. Thank you very much.

This concludes today's conference call, you may now disconnect.