莫霍克工業集團 (MHK) 2010 Q4 法說會逐字稿

Good morning. My name is Tiffany, and I will be your conference Operator today. At this time, I would like to welcome everyone to the Mohawk Industries fourth 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) Participants are allowed to ask one question and one follow-up question. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, February 23, 2011. Thank you. I would now like to introduce Jeff Lorberbaum, Chairman and CEO. Mr. Lorberbaum, you may begin your conference.

Good morning, and thank you for joining our fourth quarter 2010 conference call. With me on the call is Frank Boykin, our CFO, who will review our Safe Harbor Statement, and later, the financials.

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, including but not limited to those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers. You can refer to our Form 8-K and press release at the Investor Information section of our website for a reconciliation of any non-GAAP to GAAP amounts.

Thanks, Frank. Our fourth quarter earnings per share of $0.66 exceeded our expectations. Sales as reported in the period were 6% lower than last year, but were approximately 2% ahead after equalizing the number of days and exchange rates. Our European revenues continue to grow, with US residential business stabilizing and commercial remodeling beginning to improve. Our operating margin of 6.8% improved from last year, due to enhanced manufacturing efficiencies, reduced costs, improved process consistencies, despite rising raw material costs.

Our cash position liquidity remains strong, with over $500 million available after we retired $300 million of bonds in January 2011. Our net debt to EBITDA ratio is two times, and our net debt to total capitalization ratio is 26%, positioning us well for additional opportunities. The US industry decline experienced over the past two years appeared to have reached bottom, with some markets showing signs of improvement. The predicted 3.5% growth of the US economy this year reflects sustained improvement in consumer confidence and increased business spending.

Although US housing activity remains low, forecasts anticipate an improvement in home sales as we move to a normalized level. Commercial remodeling is already growing, as business investment increases with higher economic growth. Commercial construction should pick up as indicated by the Architectural Billing Index, which is at its highest level in three years. Frank, could you give the financial report?

Thank you, Jeff. Good morning, everyone. Net sales as reported were $1.262 billion, down 6% from last year. Our fourth quarter sales in 2010 had fewer days than last year, resulting in a 7% impact on sales. As Jeff reported, sales were up 2%, using constant days and a constant exchange rate base. European business continued top-line growth, and we had stronger US commercial remodel end market. The US residential business is at the bottom, and should improve.

Our gross margin was 27% and flat compared to last year, after adjusting last year for restructuring charges. We were able to offset the higher raw materials with manufacturing improvements. The SG&A was $256 million, or 20% of net sales. SG&A declined, after adjusting last year for restructuring charges, by over 10%. All segments are reducing cost, while improving their service. Our fourth quarter SG&A is the lowest it's been in dollars since 2005. Operating income was $86 million, or 6.8%, which compares to 5.7% last year, after adjusting for restructuring charges. We had no restructuring charges in the fourth quarter of this year. Operating income is up over 10% compared to last year, as our strategies across the Company continue to benefit us.

Interest expense was $30 million. It's down $5 million from last year, as a result of the $200 million bond tender that we did earlier this year and lower rates that we are able to negotiate on our bank revolver. We anticipate interest expense to run between $28 million and $29 million each quarter in 2011. The income tax rate for the fourth quarter was 19%. We expect the rate to be in the low 20% range during 2011. Earnings per share were $0.66, up 18% compared to last year's earnings per share, excluding charges.

If we move to the segments, the Mohawk segment sales as reported were $667 million, down 10% from last year. Sales were down 3%, using a constant number of days. The commercial remodel business is improving, as residential is still soft. Our operating income was $49 million, or 7.3%, which compares to 4.9% last year. Our margin percent was the highest since before the industry decline several years ago. The margin improvement was driven by manufacturing improvements and cost reductions throughout the segment.

Dal-Tile sales as reported were $317 million, or down 4%. Sales were up 4%, using a constant number of days and a constant exchange rate. Our commercial and Mexican businesses both performed well. This is the best sales performance since 2006, in year-over-year improvement for Dal-Tile. Our operating income was $20 million, or 6.3% of net sales. We were able to hold the margins flat in our year-over-year comparisons. The Unilin sales came in at $297 million and were flat as reported; however, sales were up 14%, using constant days and exchange rates. All regions grew with the northern European, Russian, and Asians regions growing the strongest.

Operating income was $21 million, or 7% of net sales, down from last year at 8.5%. Our raw material inflation in this segment was a headwind, and we're continuing to increase prices to offset it in the first quarter. If we jump to the balance sheet, cash came in at $382 million, with about half of that in the US. Our receivables, at $615 million, had a slight improvement in days sales outstanding, compared to a year ago. Inventories were $1.007 billion, were up due to inflation, pre-buying ahead of the cost increases and higher sales volume. We expect to have lower inventory levels and to improve our turns by the end of the first quarter this year.

Fixed assets were $1.687 billion, and included capital expenditures of $156 million for the year. A portion of the $180 million original 2010 CapEx estimate will be spent in 2011. Our capital expenditures estimate for 2011 is $280 million. This estimate includes projects to support growth, such as our Russian laminate plant facility, our Mexican ceramic tile plant, and fiber -- additional fiber extrusion capacity. We're estimating our depreciation and amortization for the year to be $300 million.

Our long-term debt ended the year at $1.653 billion. In January of this year, we paid $300 million of bonds that came due. We used about $170 million of cash and $130 million of bank financing to pay the bonds. We have another maturity in April of 2012 of $400 million. We are continuing to look at different alternatives there to refinance those bonds, that include a combination of cash and bank financing or cash and bonds. The financing markets remain good for us today. Jeff?

Thank you. During 2010, our focus on innovation, new products, manufacturing improvements, and cost reductions have benefited our margins and increased earnings. Our product enhancements and introductions such as Reveal Imaging, SmartStrand, installation boards, and hardwood with unit clip technology are growing as we adapt to current trends.

SG&A reductions this year reflect improvements in distribution, marketing, and sales expenses. Higher material yields and improved information processes have benefited our operating results. Investments in China, Russia, and Mexican flooring markets are expanding our international presence and will provide platforms for future revenue and profit growth. The consensus among economists is that these markets will outperform the more mature US and western European flooring markets.

In the period, our Mohawk segment sales, after adjusting for the lower number of days, decreased 3%; but achieved the highest level of operating margins in two years, despite increasing raw material costs. Manufacturing costs, material yield, and process controls have improved our focus on efficiencies, quality, and energy reductions. These improvements have increased customer satisfaction. Our sustainable manufacturing practices have reduced our waste streams, lowered costs, and improved margins.

Our market position after adjusting for the days in the period stabilized in the fourth quarter, as we accelerated key introductions and new residential polyester carpets and commercial carpet tile products. We implemented a 7% to 10% carpet price increase in February, to offset our raw material inflation. Sales of our commercial carpet tile continue to grow, supported by a broader product offering and an expanded sales force. We've improved our carpet tile manufacturing efficiencies and increased capacity to meet higher demand levels in the future.

We continue improving our sales and customer management systems to enhance our execution and increase efficiencies. Improved planning and inventory processes have raised our service levels with reduced delivery times and costs. Our extrusion expansion is progressing as planned, and will support the changing trends and product styling. Dal-Tile sales declined 4% in the quarter as reported, but increased 4% after adjusting for the number of days and the exchange rate.

In the fourth quarter, we began implementing a price increase of 1% to 2% to recover rising costs of transportation. We've added sales personnel focusing on large commercial accounts, and housing contractors to maximize participation in the markets as they improve. We've updated our retail merchandising vehicles to enhance the consumer selection process and better convey the product benefits. We've introduced the new ceramic boutique shops for dealers, that will raise their retail mix and sales while making product selection and visualization easier for the consumer.

Dal-Tile is leading the industry with advances in decorating technologies created by Reveal Imaging. This process creates more sophisticated visuals and improves manufacturing productivity. We're introducing products with greater distinction between individual tiles and larger sizes, more natural visuals, stronger colors, and new textures. We've also revised our collection of fashionable tile accents, with richer colors and a greater variety of shapes and textures. We expanded our value tile offering to satisfy the current trend in the new home market. We've also broadened our engineered stone countertop line, complementing our natural stone offerings.

Our Mexican tile plant has fully recovered from the flood that occurred during the beginning of the third quarter. Production has returned to normal levels, with limited impact to our customers. We're increasing our Mexican sales and customer base by expanding our product selection and sales force. We purchased a site near Mexico City, and begun construction of a new plant to manufacture moderately priced tile for the Mexican market. The product mix and location will allow participation in the higher volume segment of the Mexican market, in addition to the premium category we have focused on to date. We anticipate the plant will begin operations in 2012.

We have increased our efficiency, quality, and production levels with new procedures, higher production speeds, lean manufacturing techniques, and use of alternative raw materials. We are improving material yields with new formulations, waste recycling, and reduced set-up times. Enhancements in our distribution strategy and systems are improving our service and efficiencies. Our joint venture in China is broadening its product offering, implementing new production technology, and supplying tile to existing Mohawk markets.

Our new Glazed Porcelain line has successfully initiated production of floor tile. Products are being shipped to Dal-Tile's US and Mexican Markets. New glazed floor tile products have been developed for the local Chinese market, and will provide opportunities to markets we have not participated in before. We are developing new international customers to distribute our Chinese product lines. The plant in the South is running near capacity, and we are moving production to the new plant in the North, while we're broadening our local product line. These changes should reduce costs and expand our customer base.

Seasonal shutdowns and lower volume will impact the first quarter. We anticipate our investment in China will be accretive to earnings this year, and will position us long-term to take advantage of a huge market that should grow about 10% per year. Our Unilin revenues were flat as reported, but increased 14% after adjusting for the number of days in the period and the exchange rates. Our margins remain compressed, as our material costs have continued to escalate. We implemented price increases in our European board products in the fourth quarter, and are executing additional price increases in our boards, laminate, and roofing in the first quarter to recover continued inflation and improve margins.

Our flooring business is increasing, with northern Europe, Russia, and Asian Pacific outperforming. In the recap specialty channel, our Quick Step program now covers a broader range of laminate price points. We are expanding our home center participation, by levering our technology and styling leadership. The introduction of new furniture finishes and high-definition technology continues to affirm our leadership in laminate technology.

Product innovation is also differentiating our wood assortment and textures, finishes, and colors. Our wood business improved from last year. We're utilizing our Quick Step brand on premium wood products, introducing innovative visuals, improved installation systems, and expanding into new geographic areas. Our costs have been reduced by increasing our conversion efficiencies and material yields. We're presently consolidating our Malaysian wood plants, and production there is being expanded to reduce costs and support our European and Asian Pacific business.

Both our European board and laminate businesses are under pressure from rising raw material prices. Even though we raised prices in 2010, we have not recovered the significant material inflation, which continued upward in the fourth quarter. Our board selling prices were increased about 15% last year, and we have announced additional increases of 10% to 15% for the first quarter. European laminate prices are also being increased from 4% to 6%, due to raw material pressures. We believe additional industry board capacity in Europe will be shuttered, reducing excess supply.

US raw materials for wood and laminate peaked earlier last year, but still remain high. Our Russian laminate business continues to mature, with new customers and broader geographic penetration. We have purchased an existing building close to Moscow, and are upgrading it to manufacture laminate flooring. We anticipate production in the third quarter, assuming permits are obtained as expected. The economic recovery and stronger consumer spending will positively impact our industry in 2011. The seasonally slow first quarter is being affected by harsh weather and increasing raw material costs, offsetting prior savings from our cost initiatives.

In our Chinese joint venture, extended holiday shutdowns will unfavorably impact the first quarter. Residential remodeling market will improve with increased consumer spending and higher home sales. Commercial remodeling is growing as businesses invest to maximize their operating results. For the balance of 2011, we anticipate an improvement in our results, as price increases are implemented, volume expands, and a recovery continues. With these factors, our first quarter guidance for earnings is $0.36 to $0.44 per share, excluding any restructuring charges.

We remain committed to enhancing our organization to drive innovation in product, processes, and costs. Advances in our marketing, products, efficiencies, and service should yield higher profitability. We are investing in new systems that heighten our visibility and execution capability. This year, a higher level of capital investments will improve our productivity, support new product trends, and expand our global reach. We have managed through a challenging period, and our efforts during that time have laid the foundation for the Company to deliver greater results during the recovery. With that, we'll be glad to answer any questions.

(Operator Instructions) Your first question comes from the line of Kathryn Thompson of Thompson Research.

Hi, thank you for taking my questions today. The first is on -- I want to dig a little bit deeper on your Mohawk position upside in the quarter. If you were to look past at your other divisions, Unilin, eight out of the 12 had a lot of upside. And your Dal-Tile, three out of the 12 previous quarters that led the upside. But what's different is this is the first time that Mohawk really led the upside on the margins. And as you noted in your prepared comments, it's the best quarter on a margin basis since Q4 of '07.

My question to you is, what is driving the upside to the EBIT margins in the Mohawk division? When you were reducing SG&A, was most of this focused on the division? Just help me understand the big move. And also, for the clarifying, does this bode well for Mohawk going forward, or is this more of an indication of what's going on, maybe, on the negative side with Unilin and Dal-Tile?

We've been working continuously on improving the bottom line of all of the businesses. We've been reducing our cost structures. We've been introducing new products to help the sales. We have been enhancing the productivity of all the different parts of the businesses. And in the fourth quarter, you're seeing some of the results of that. And all the businesses, including Mohawk, our goal is that the earnings will continue to increase as we go through this year. We believe we'll continue to get benefits from all of the pieces we've put in place, and I don't think it's any one specific thing.

Yes, Kathryn, it's spread across the business, from manufacturing improvements that we've made, quality improvements that we've made, efficiencies we've put in place, cuts we made through SG&A, lower claims, and sometimes everything -- just all the stars just align. And that's really -- we've worked real hard to get where we are, and everything worked out just right this quarter.

If I'm hearing you correctly, essentially, the sequential 300-basis-point swing and 100-basis-point swing year-over-year, on an adjusted basis -- what you're saying is, we should expect, excluding weather impacts and raw materials, we should expect similar type momentum going into 2011?

You have to make sure to look at the yearly numbers, quarter to quarter, they swing a little. But we expect the yearly numbers to improve.

Okay. Also, digging a little bit more into your CapEx, I know you outlined three major initiatives that you're working on this year. But it is a pretty big swing from CapEx, $280 million from $156 million. How much of the roughly $124 million increase is for those new -- those projects that you outlined, and how much of it is changes in your other business, for instance, maintenance CapEx?

Out of the $280 million, approximately $120 million is on the three large projects, being fiber extrusion, Mexican ceramic, and Russian laminate are the three pieces of the $120 million. Roughly about $100 million or a little less is maintenance, and the difference is on a whole host of smaller projects.

All of which are going to either reduce costs or give us revenue opportunities.

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

Good morning.

Good morning.

Two things. First of all, the 1Q guidance -- the 4Q result was quite strong, and you just talked about the -- strengthen the Mohawk segment. Why does 1Q look worse? I understand weather in China, but are there any other factors that help us understand a little bit of why 4Q is good, 1Q is not so good, and then things get better from there? Can you give us any color on that?

You have, in the first quarter, the softer revenue that always occurred during the period, and the weather is impacting it. Other than that, the inventory we're going to reduce a little bit in the first quarter, to get them more in line with what we would like. And we raised them a little bit in the fourth quarter, due to what we saw coming forward in front of us. I think you have the raw material impact, which is going through. And we're going to have to catch the prices up.

We have actions in every business and every area to get in front of the raw material increases; we've announced major increases in almost every product category, which we're implementing as we see. We typically take a while to catch those, so those will impact the first quarter and part of the second quarter as they get implemented, as you go through. Frank, anything else you want to add?

Well, we're investing in new products and introductions and earlier shipments, so we generally have higher marketing cost in the first quarter than we do in the other quarters.

Great. And then, secondly, with the pricing actions across the business, I'm curious on what your experience and what your thinking is showing you on product mix. Some of the market share erosion that you saw in carpet was some trading from higher price to lower price. What are you seeing in terms of the appetite for mix? Are people back to trading up, is it stabilizing, or is mix an issue that's a challenge to -- not only the price increases, but rebuilding the margins in these businesses?

The product mix has declined as we've gone through the downturn. Almost every one of the businesses has a lower product mix than they had before, as customers were trying to minimize their investments. Typically, as you come out of recessions and people's confidence go over, nobody strives to have low-quality merchant parts in their home. So typically, as you go through and the confidence rises, the mix also increases as you go through. We anticipate that occurring over the next year or so, also.

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

Thank you. On Dal-Tile, this is the first positive revenue on the adjusted basis we've seen in some time. Is that coming primarily from their commercial markets, or are their residential markets been assisting?

I think it's both. The commercial markets -- the remodeling part of the commercial markets are showing improvement in all of the different businesses, and the commercial side people postponed it -- as their businesses are improving, they are trying to invest in those. I think that we're having some share gain in certain of the other markets.

Our Mexican business is improving. So, as we look forward in all of the businesses -- and that one is no different, we're anticipating that the flooring industry, which is a very low point, that we'll have growth this year. And the question is, will it be a little or a lot more, is the question we're going to add. It depends on the timing of when things kick in this year.

Okay. Second question, you talked about bringing production rates down a little bit to bring inventory in the first quarter. Is that true across all three businesses? And were you running faster production in anticipation of pre-buy before price increases, is that correct?

I think that we probably started out with anticipation that the volume would be a little stronger than we had in most of the businesses. I think that we tend to try to reduce inventories when we shut down, as some of it hits in the end of the fourth quarter and some of it hits in the first quarter, just due to the vacation schedules. So, some of it is just a timing issue of how it hits and when the holidays hit.

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

Hi, good morning.

Good morning.

Wanted to touch base on how much of your price increases have been realized -- because they are kind of sizeable, and what the customer response has been. And I'm specifically speaking to the price increases at Mohawk and Dal-Tile.

Mohawk increases are just being executed in the marketplace. Nobody likes increases. We don't like them, and our customers don't like them. I think that the marketplace understands that there's a dramatic increase in raw materials across all categories. So, they're moving through the marketplace, and it takes a period of time to get them all implemented and executed. But they're going in. The Dal-Tile products are really only increasing 1% or 2%. And most of those increases have been for -- we sell products in Dal-Tile FOB local destinations. So when we do, as the freight rates change, we have to change the pricing to cover the freight.

Understood. And I think you touched on both higher freight costs and higher raw material costs affecting Unilin. Could you kind of specify, on a margin basis, how much of a headwind you're expecting from higher input costs in the next quarter and the year?

The input costs -- well, on the carpet side, we put in a 7% to 10% increase to cover those. The Unilin side in Europe, which is where most of the pressure is, because of the wood prices in Europe have escalated dramatically and continue to do so throughout the year. I mean, we're putting through 10% to 15% increases in the board businesses, which are fairly low-cost products. And then, we're putting in a 4% to 7% increase in the laminate products, all that we think will take to cover the raw material increases.

The plan is, when we put the price increases in, is that they will basically cover the cost increases -- the price increase that we actually realize. We generally realize a little bit less than what we actually announce.

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

Thanks, good morning, everybody.

Good morning.

My first question was actually -- I know there's been some questions about Mohawk and Dal-Tile. I wanted to know about Unilin, and the price increases we're putting through. And what I wanted to kind of focus on was the competitive environment. Are you seeing -- I don't want to use the word cooperative, but are you seeing competitors trying to put through similar prices? Or is there more of an acceptance of lower margins in the business, as you try to put through price increases now?

In Europe, the -- most of the business is going through the downturns in the industry, it adds very depressed margins, us included. So the industry, as the raw materials have come through, we can't absorb those price increases. And we and competition have announced price increases to try to recover those raw material changes.

In addition, in the board businesses, there are capacity that has been shut down. And we anticipate additional capacity to reduce the excess production in some of the different product categories over the near term -- all of which should help. Again, when you come through downturns where the margins have been compressed, you can't -- there's no way to absorb the raw material increases which are occurring.

Right. My second question -- Jeff, I think you mentioned in the comments that you're now shipping tile from a factory in China to the US and Mexico, if I understood correctly. And I'm just wondering what the cost structure is. Is it relatively less expensive, all in, when you look at it to be producing in China, relative to your US and Mexican operations? And do you think you're going to eventually be producing more and importing more from China?

The products we're importing from China are high-end commercial products that tend to have a lot more labor in them. And so, it's a very specific market that those things make a lot of sense in. It's not in the major parts of our business. The joint venture in China, we really believe the big benefit is going to be maximizing our participation in the Chinese market. The Chinese market, on a unit basis, is about 25 to 30 times larger than the US marketplace. And the exports around the world presently are around 20% of their capacity, and our goal is to expand our local participation and where it makes sense to import stuff for the Mohawk sales.

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

Hi, this is actually Jason Marcus in for Mike.

Hi, Jason. Good morning.

Just a follow-up on the Unilin segment. Assuming that you are able to get most of the price increases through, do you think you'll be able to get to a double-digit margin in 2011?

We're going to try to improve -- the margin will improve from where it is right now, but we're not going to give out specific guidance on margins for this year.

Okay, and then, just regarding the Chinese joint venture extended holiday. Is there any way to quantify what, from an earnings perspective, the impact will be in the first quarter?

I'm sorry, ask that one more time?

The earnings impact from the Chinese joint venture extended holiday.

Again, we're not prepared to give out information at that level of detail, but it's going to depress earnings from where we were in the -- with China, from where we were in the fourth quarter.

Your next question is from the line of Dennis McGill of Zelman & Associates.

Hi, guys. Thanks for taking my questions. First question, Frank, just wondering -- you guys kind of touched on all of the moving variables within the Mohawk segment. What do you think about it for the quarter or for the year? Can you maybe split out the benefit or detriment of raw materials versus price, and then, the cost savings from all of the other initiatives that you've talked about?

Yes, we generally put that out in the 10-K, Dennis, and I'm not sure I have the exact numbers. But we had significant improvement in the quarter as a result of the restructuring activities -- the benefits from the restructuring activities, and the SG&A cost cuts that we did, and raw materials that more than offset, obviously, the headwinds that we had from raw materials and net price.

Okay, I wanted to ask you about working cap in 2011. But just a follow on to that, would you still have a tailwind as you enter 2011 from some of those initiatives, or have most of those run the course?

I think we'll still have some opportunities going into 2011 from the initiatives we've been working on in 2010, to realize the full benefit. You want to say anything else on that, Jeff?

Also, we have a large list of additional opportunities. So, some of them haven't annualized yet, so you'll have to get benefit from there. And then, there's a significant list of new opportunities this year that each organization has defined, measured, and is aggressively pursuing.

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

Thanks. My question is on the Mohawk side. When you look at your raw material costs, in terms of what flowed through your P&L in the fourth quarter, versus what the market price of your raw materials increased, and then how that relationship might look in the first quarter.

The question is, the spread between price and raw materials, Q4 to Q1?

Well, yes, really, in terms of what flowed through. In other words, you're purchasing raw materials that are escalating, I assume, starting in October, November, and have continued. Yet, what you've ran through your P&L, with FIFO accounting, was lower than that. And I'm just curious what that relationship was in Q4, and then, what that looks like in Q1.

Well, we had, year-over-year, raw material inflation in Q4, and offset a portion, but not all of that, with price in Q4. But we're going to have higher raw material inflation in Q1 running through our P&L, and then into Q2.

Any quantification on that, or no?

Not at this point.

Okay. And then, is there -- it sounded like the Mexican facility will not come online until 2012. Does that mean, that in terms of P&L impact of start-up costs, we're really only looking at Russia impacting 2011, or the -- because I assume the extrusion capacity really won't be terribly disruptive to earnings. Are there any major cost start-up issues to think about in 2011? Thank you.

Okay, there are always start-up costs with every project, so we have a long list of projects. On the other hand, we're expecting to get benefit from the ones that implement during the first half of the year -- we're supposed to see positive benefit during the year. You're correct that the start-up costs from the Mexican plant, most of those will go in the cost of the facility, other than some of the labor and training you'll have to do towards the end of the year, to get ready. Frank, any more color?

It's the largest impact -- like you said, John, on start-up costs for this year should be from the Russian laminate plant.

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

Yes, good morning.

Hi, David.

I wonder if you could just help us understand if you bundle together everything you've got. I realize some things start up sooner than later. But if you bundled all of the emerging markets -- China, Mexico, Russia, Enterprises together, what's the revenue contribution in 2011? And I realize it's a bit early, but can you give us some sense of what you'd expect in 2012?

Well, it's kind of a mix. I mean, if you looked at our total international business revenues, I think it's in the kind of high teens. Remember that the Chinese joint venture is one line in our P&L, so the sales aren't consolidated there. So, it becomes a little bit difficult to answer your question as you're posing it. But what we're doing is we're growing significantly from a small base in these emerging markets -- Russia, China, and Mexico.

Is there maybe another way to ask it, what would that international fraction be, come 2012, based on your projections today?

'12, we're not ready to answer.

Okay, try a ballpark for us? I'm just trying to get a sense of proportion, as to how fast that's growing. You're not able to do that?

Let's see if I can give you any color. Do you have the capacity, Frank, of the different pieces? In Mexico, I believe it's going to be around 90 million square feet of capacity, that's going to be put in the Mexican marketplace, and ceramic, I believe that we're going to put in an additional -- in Russia, do you have the number?

I thought it was 50 million or 60 million square feet.

I can -- David, I can get the capacity numbers for you. We don't have them right here in front of us. Maybe that will help with what we're putting in in some of these emerging markets. How about that?

Your next question is from the line of John Fox of Fenimore Asset Management.

Good morning, everybody. I was going to ask about the CapEx, so, maybe -- which was asked in the first question, drill down a little bit. The $120 million, which -- kind of the investment in the three big projects. Can you talk about the expected benefits of those, whether it's lower cost or whether building something in Russia allows you to sell more, since you're on the ground in the country? And just talk about the benefits from those investments, thank you.

Let's start with the Mexican ceramic. In Mexico, the plant in Mexico makes higher value porcelain products that we have today. So we could participate in the high-end portion of the market only, which is a relatively small part of the total Mexican marketplace. The new plant, which is located near Mexico City, which is where the populations are -- to reduce freight costs as well as it's located near different body materials, will allow us to produce moderately priced tile and compete in the top of the bell curve of the marketplace.

So, in Mexico, we have less than a 10% market share, and we believe we can start participating as a sole line supplier across the business. We are adding salespeople. We are adding product lines, in order for us to participate in that. The Mexican marketplace this year grew 3%. It's anticipated to grow about 6% next year. So we believe it's a good market to be in. We have management talent there that understands how to operate the plants and understands the customer base. And we will invest this year, broadening our distribution; and in some cases, selling the products that we have into the marketplace. And they will be replaced by new ones when the -- or converted to the new plant when it comes up.

In the Russian market, we've been importing ceramic from -- laminate from our European plants. We -- a year ago, we put in a distribution center, in order that we could improve the service level and get prepared for putting a plant in it. We have spent the last year broadening our sales, using that local distribution center to increase the sales, to get to a different customer base. All that will continue this year, and that will allow us to participate in Russia. And also, by importing the difficulties in getting things across the Russian border, it impacts service as well as costs. And so, that will allow us to participate in a greater basis there. In the Russian marketplace, we will be aimed at -- similar as we do in Europe, in competing in the mid to high end with differentiated products in it.

In the Chinese market, with our joint venture -- it is a huge market, estimated about 60 billion square feet. The largest company has, I believe, no more than 3%, 4% market share in it. It is hugely fractured. The business, we put in significant investment -- at the time we purchased our share in the joint venture, had just put a new plant in the North in Mongolia. It's far enough away that the transportation costs -- you can't compete from one to the other, puts us in a totally new market. We put significant capacity in that marketplace. We are developing the customers and broadening our distribution.

We are -- in China, we brought together glazed floor tile technology, which the first line has already been started up in China. We are helping them develop products. We are helping them improve their merchandising and marketing. And the combination of those pieces -- we believe that we can grow our share, both from an internal standpoint, and then longer term, it will give us a base to possibly start consolidating the market over time, and put us in a position to significantly participate in the market over time.

Terrific. So, I mean, a number of these investments are to grow the top line, going forward?

All of them.

[But] I hear. Okay, thank you very much.

You're more than welcome.

Your next question is from the line of Kalpesh Patel of Jefferies & Company.

Hello, everyone.

Good morning.

I wanted to ask about the contribution margin, or the operating leverage, in your business model. Obviously, you've taken out a lot of costs over the last few years. What sort of levels of operating leverage should we think about, in terms of the three different segments?

I think what we've tried to do in the past there is to give you an idea of fixed costs in the different segments. And if you look at fixed cost in the cost of goods sold section of the P&L for the Mohawk segment, fixed costs are in the, I'd say, mid-teens level. And then, in the Dal-Tile segment, they would be close to 20%; and higher, maybe 25% in the Unilin segment. And then, across all of the businesses, SG&A is probably 50%, fixed.

Okay, so you want us to kind of use those numbers to get to the operating leverage numbers?

Yes.

Okay. And then, my follow-up question -- you said in your press release that you, I guess, gained market share in the carpet, or it improved. Did you lower prices there, in your commodity products? Is that what happened? Or what sort of changed from last quarter, or the last two quarters?

What we said was that we thought our position had stabilized, that we've been losing some share, that the marketplace had moved in the product to polyester faster than we anticipated. As the prices went up, the market moved to lower cost raw materials faster, and that we needed to increase our polyester introductions. We started doing that in the third quarter, and those introductions are gaining traction. At the same time, the other area that's growing is the commercial carpet tile. We've also increased the number of the commercial carpet tile introductions. We've increased the capacity of our carpet tile, and it's growing significantly, and we think both of those will continue and help get us where we want to be.

Your next question is from the line of Laura Champine of Cowen & Co.

Hi guys, it's Rob Simone stepping in for Laura this morning.

Almost sounds like Laura.

Hi, guys. No, it's not Laura. We were wondering if -- you talked about inventories before, and in dollars, your inventory balance is up 13% year-over-year. But we were wondering if you could just kind of segment what portion of that growth came from the different components. So, inflation, the demand component that drove your inventory growth, and whether or not your prior period's inventory growth was trailing or ahead of where -- how demand developed in Q4. Thanks a lot.

If you look at the increase, about almost 40% came from inflation and pre-buy, where we're trying to get out ahead of the cost increases. And then the balance of it is just increased volume and quantities. Both of which were, as we said earlier, planning to reduce the inventory levels and improve the turns back to more normalized historical levels, by the end of the first quarter.

Okay, great. That's very helpful. And you actually already answered my other question on shares, so good luck in Q1. Thanks, guys.

Thanks.

There are no further questions at this time. Presenters, do you have any closing remarks?

Yes. We appreciate everyone joining us. We believe that this year that the industry will see improvement, and that we're well prepared to participate in it. We're taking the actions we need to cover the raw material increases, and we'll keep reacting to them as the circumstances change. Thank you very much for joining us.

This concludes Mohawk Industries' fourth quarter earnings conference call. You may now disconnect.