莫霍克工業集團 (MHK) 2011 Q2 法說會逐字稿

Good morning, my name is Antonile and I will be your conference operator today. At this time I would like to welcome everyone to the Mohawk second-quarter 2011 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, August 5, 2011. Thank you. I would now like to introduce Jeff Lorberbaum, CEO and Chairman. Mr. Lorberbaum, you may begin your conference.

Good morning and thank you for joining our second-quarter 2011 conference call. With me on the call is Frank Boykin, our CFO, who will review our Safe Harbor statement and, later, the financial results.

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 second-quarter earnings per share were $0.88 as reported, or $0.95 excluding restructuring charges, an increase of 23% over adjusted 2010. Sales reported during the period exceeded last year by approximately 6% or 3% on a local basis with all segments growing and Unilin reporting the largest increase. Our adjusted operating margin improved to 7.3%, an increase of 50 basis points over last year as a result of continued cost reductions, selling price increases and productivity gains throughout the enterprise.

Our cash position at the end of the quarter was $285 million, and our net debt to adjusted EBITDA ratio was 2.1 times. A new five-year lower-cost bank facility was executed in July to support future growth and investments.

US economic growth was lower than expected in the second quarter, and most economists are predicting slower growth than anticipated in the second half. The US housing industry continues at a slow pace, though recent reports indicate the supply of new homes is coming into line with historic averages.

Residential remodeling has not rebounded as consumer confidence remains challenged due to high unemployment rates, reduced home values and high energy and food prices. Multi-family occupancy rates are improving, resulting in additional investments in remodeling and new construction. Commercial construction remains low, but commercial channels are increasing remodeling to attract more customers and improve business performance.

Frank, could you give the financial report, please?

Thank you, Jeff. Good morning, everyone. Net sales were $1.478 billion, or 6% over last year. All segments were up year-over-year with the biggest gain in Unilin, even after considering the impact of foreign exchange.

In the US, residential remains weak with commercial continuing to grow. Our gross margin was 25.9%, down from last year's 26.8%. Price increases and productivity improvements partially offset raw material inflation and product and channel mix. SG&A was $281 million or 19% of net sales. SG&A continues to be a good story as we improved 140 basis points from last year. We declined in dollars $10 million from last year's after looking at SG&A from a constant exchange rate basis.

We continue to focus on cost reductions and efficiencies. We had restructuring charges in the quarter of $7 million, all of which were included in the Mohawk segment. $6 million of the restructuring charges were included in cost of goods sold with the balance in SG&A.

Our operating margin was 7.3%, 50 basis points better than last year's 6.8%. Interest expense was $26 million compared to $39 million last year. Last year included $8 million for a bond tender premium. In addition, we were favorably impacted this year by lower interest rates.

The income tax rate excluding charges was 19% in 2011, and that compares to 14% last year. We expect our rate to be in the mid to high teens for the balance of this year. Earnings per share excluding charges were $0.95, up 23% from last year -- good results in a weak environment.

If we move to the segments, with the Mohawk segment, sales were $758 million, about 1% higher than last year. We had strong commercial performance. Also, we had one price increase that was fully implemented during the quarter and then a second price increase that was partially implemented. Operating income excluding charges was $38 million or 5% of net sales. That compares to 4.2% last year, an 80-basis-point improvement with price increases and cost reductions offsetting inflation.

In the Dal-Tile segment sales were $379 million, a 4% increase over last year. We had good performance across all of the business in Dal-Tile. Operating income was $32 million or 8.5% of net sales. It improved 80 basis points over last year.

As we look forward to the third quarter this year for the Dal-Tile segment, I want to remind everyone that last year we settled the insurance claim to cover lost sales and profits from a flood that shut down our Mexican plant for about two months. The insurance covered all of the $5 million of lost profits. Our operating margin last year would have been in the high-single-digit range had the flood not occurred.

Moving to the Unilin segment, sales were $363 million or an 18% improvement as reported. Sales were up 7% on a constant exchange rate basis with most product categories growing. Operating income was $46 million or 12.8% of net sales. That compares to 13.7% last year.

Foreign exchange favorably impacted our results by $5 million in operating income. We were impacted both by raw material inflation and de-mixing in this segment.

In our Corporate and Elimination segment, our operating income charge was $8 million, and we estimate for the full year that amount will be in the range of $20 million to $25 million, which is in line with past years.

Going to the balance sheet, cash ended the quarter at $285 million, down from last year as we used a portion of it to pay down the bonds that were due in January of 2011. Receivables were $798 million, continue to be in good shape with our DSOs at 45.7 days, an improvement from last year. Inventories were $1.1 billion, up about $95 million from the fourth quarter. Inflation and foreign exchange account for much of this increase. Inventory days improved from the end of the fourth quarter, and we expect continued improvement in days through the end of the year. Our long-term debt ended up at $1.608 billion, which compares to $1.654 billion last year, with the decrease in debt coming from free cash flow that we used to pay it down.

We put in place a new five-year, $900 million bank facility in July. This provides much better pricing and improved terms with interest at LIBOR plus 150 and an unused fee at 30 basis points. This provides additional liquidity and flexibility for future growth. We anticipate annual interest running about $100 million under this new facility.

Jeff?

Thank you, Frank. We experienced normal seasonal improvement in our second quarter, with the US residential business remaining soft and the commercial business continuing to grow. All of our segments reported year-over-year sales growth, and our adjusted operating margin was the highest since 2008 at 7.03%. We are driving process improvements and cost reductions throughout the business in all manufacturing, selling and administrative areas.

Our Mohawk sales grew about 1% with improving commercial business offsetting soft residential sales. Adjusted operating margins were 80 basis points higher than last year as a result of reductions in SG&A costs, the impact of price increases and improvements in manufacturing productivity. We are performing in line with the industry with growth in commercial remodeling and lower residential activity.

Our customers are trading down to lower-value products to minimize the impact of inflation. The realignment of our residential brands under a common geographic manager was completed during the second quarter. Our high-end residential products began to show some improvement, reflecting growing brand penetration and increased remodeling among affluent customers.

In the multi-family channel we introduced Tri-Star, which is made of Triexta and provides the best flooring alternative for apartments, due to its high durability and stain resistance. Additionally, the launch of our Wear-Dated Revive brand with recycled content has established a premium category of polyester carpets.

We grew sales in the home center channel with improved position and higher special order activity. In the third quarter we will complete the launch of a comprehensive SmartStrand collection at Lowe's. Expansion of our commercial sales force increased our penetration, and we are adding more sales representatives to maximize the category in the third quarter. Our commercial business posted sales gains in both the tile and broadloom product categories.

Our tile capacity was expanded during the period, and further investments were made to support the continued tile growth in the second half. At the annual commercial trade show we introduced the first commercial products made of SmartStrand in our Lees collection and were awarded the best of show for combining high fashion and performance with environmentally sustainable materials.

We also reengineered some of our premium commercial products with our best styling and durability to provide improved value and more competitive price points. These changes have increased specifications of our products by major national accounts by providing solutions that set us apart.

The carpet price increase announced in February was fully implemented in the period. The second increase, initiated in April, will be completed during the third quarter. We continue to review our carpet selling prices as required by our raw material changes, which remain volatile following oil prices and international demand for commodity.

Our South Carolina expansion of extrusion was completed on time and is operating at expected levels. In north Georgia a smaller expansion will be installed by year end. Additional investments in yarn processing are being made to support the growth of filament products and to reduce our conversion costs. Due to the value-add and performance features, our SmartStrand Triexta and polyester products are growing at the expense of traditional fiber options.

During the quarter we announced the closure of a spinning mill to align our yarn manufacturing with today's preferences for filament products. We successfully shut down a commercial carpet facility, announced in the first quarter, and moved the production to alternative plants with lower costs, without any interruptions.

Our operations group is improving efficiencies, reducing manufacturing cost and enhancing material yields through increased production speeds, innovative product engineering and utilization of alternative materials. The reengineering of our business and simplification of our processes has enabled us to reduce our personal costs by an additional $10 million annually in the period. Much of the impact will flow through cost of goods sold as our inventory turns.

Dal-Tile sales grew more than 4% this period with commercial sales growth exceeding residential. Sales grew in all channels over the period as we outperformed the overall market due to the breadth of our product line and our superior service. In this period, higher product prices and fuel surcharges were implemented to recover rising transportation costs on products that are delivered to our customers.

Our new product introductions are further distinguishing Dal-Tile with our Reveal Imaging technology providing enhanced visuals and new sizes we have added greater than 24 inches. We introduced a new dealer program called Statements by Dal-Tile that provides a completely merchandised ceramic and stone shop with marketing, advertising and promotional assistance. A new installation warranty is being furnished to differentiate Dal-Tile with the consumers. Additional product placements are being realized with major retail groups, home centers, national commercial accounts and leading homebuilders.

Our American Olean brand is growing with the independent distributors by providing direct shipments to replace offshore suppliers, enhanced commercial programs, new stone products and stylized porcelain tiles that satisfy the changing tastes and budgets of consumers today.

Our business in Mexico is growing significantly as we broaden our product line and satisfy all price points in the market. We are adding more sales personnel in the market to maximize our distribution, and we're providing a higher level of service than our competition in the market. We've expanded our commercial product lines and sales staff to increase specifications of our products on large projects.

Larger-sized tiles from our Chinese joint venture are differentiating our high-end offering. We are investing resources to drive volume and train manufacturing personnel for our new manufacturing plant near Mexico City. The plant will produce non-porcelain ceramic tile at lower costs and improve our margins after it becomes operational in mid-2012.

We have improved the productivity of our tile plants with lean manufacturing processes, lower setup costs, increased production speeds and improved yields. Our Reveal Imaging technology is being expanded throughout our manufacturing operations. New trim production has been installed to make higher-value products at lower costs. We are making additional investments to increase our wall tile and porcelain floor capacity to meet projected demand.

New workforce management systems and increased truck utilization rates and new shipping channels are reducing our freight and distribution costs.

In China, our ceramic JV is implementing a new product plan, enhancing marketing and sales strategies and adding more talent to expand our business. The Chinese government efforts to control real estate inflation have had a short-term impact on demand as well as commodity inflation has been a headwind. Price increases are being implemented to offset inflation. We are optimistic about the long-term growth of China, supported by the government's commitment to add 10 million new homes.

Our Unilin revenues were up 18% as reported or 7% on a constant exchange rate.

Sales of our European products were positive with growth in our roofing systems and panels outperforming our flooring products and impacting the mix of our margins. In most of our European products, our price increases are beginning to catch up with the higher raw material costs. Consumers to continue to select more value-priced laminate products at retail, impacting our sales mix. Our European flooring is gaining share in a challenging market by increasing our position in the European DIY channel and growing our presence in the UK, Russian and Australian markets.

Continuing our focus on innovative technology, we introduced Quick-Step Elite, which has a multi-gloss finish and creates a more natural look; Quick-Step Vogue, which has a highly textured antique character; and Quick-Step Go, which offers a value proposition for the budget-conscious consumer.

Our European would businesses expanding, and the sales of our premium Quick-Step wood products are improving our product mix. The consolidation of our Malaysian wood manufacturing operation is progressing, and additional capacity will be operational in the first quarter of next year. We continue to invest in growing our Russian customer base to support our new plant under construction near Moscow. The plant is expected to initiate production at the end of the third quarter.

In the US our flooring sales were impacted by low residential remodeling. We are growing our distribution in the home center channel, especially wood channels. Our new product introductions are being well received, and we are using promotions to address lower price points. In the US we're introducing laminate with more realistic designs made on unique technology in our Belgian facility. Our wood plants have improved their productivity, yields and flexibility.

In Europe, sales of our roofing systems and panels are up substantially, reflecting greater volume and increased prices to cover higher cost of wood and glue. Our wood panel margins have improved over last year, but our margins still face pressure due to excess industry capacity. In the period, our insulation board sales have more than doubled over the prior year, and we have become a significant participant in our region. We are planning another installation plant to extend our geographic reach and our capacity.

We are also completing a small manufacturing operation to produce ready-to-assemble Didit-click furniture to begin test marketing the products in the market. In all segments, we have increased the use of recycled materials in our products and reduced cost through more effective use of natural resources. During the period, Mohawk received the industry's most prestigious award for environmental leadership and was also ranked in the top five most sustainable businesses from more than 3000 of the largest southeastern companies. We have recently issued our second annual sustainability report online at www.mohawksustainability.com.

Our second-quarter results were accomplished despite the weaker-than-expected economies in both the US and Europe. During this challenging economic period, we've made many improvements throughout our business, resulting in a leaner, more efficient organization. We're introducing innovative products and reengineering existing ones to improve our sales mix and margins. We are continuing to reduce our cost structure, increase our productivity and invest in new products and geographies. We are increasing prices as needed in response to raw material and energy inflation. We are well positioned to leverage these changes into a more profitable business as residential remodeling and the economy improves.

With these factors, our third-quarter guidance for earnings is $0.82 to $0.91 per share, excluding any restructuring costs. Our strong balance sheet, improved leverage and available liquidity will support our current strategic initiatives and facilitate future opportunities. We are committed to growing our business with new investment and strategic opportunity including Mexican and Chinese ceramic, Russian laminate, European insulation boards and click ceramic tile and click furniture. Mohawk's strategies reflect our evolution from a North American carpet business into a larger, more diverse, total flooring Company operating in a global market.

With that, I will be glad to take questions.

(Operator instructions) Ken Zener, KeyBanc.

I just have two questions, one on Unilin. Obviously, a lot of that growth was FX. But of that 7%, can you comment on how much of that was pricing, given the material cost inflation you're seeing?

It's probably around 2% price -- I'm sorry, looking at the wrong line here. Probably around 4% price.

Okay, and then in -- I guess the other part, in noncommercial in the first quarter you said that was growing 8%. I wonder if you could just kind of comment on that. And then, given the recent April price increase, which partially fell in 2Q and the rest will fall in 3Q, do you expect that will be neutralizing your inflation by the fourth quarter with margins still being up year-over-year in that business for your Q1 comment?

Mike Rehaut, JPMorgan.

Just a minute. I'm not sure your reference to the earlier-quarter comments -- where it came from. I think your question is --

On the commercial growth.

On commercial growth -- the commercial, in all the categories, is growing significantly. It's growing -- I have to remind you that the Unilin segment is all our residential business, almost all residential replacement. And it has none, so the commercial business is all in the Mohawk and Dal-Tile segments in the US business. Both of those have been having significant growth as commercial channels have begun more remodeling in the business. And we see it continuing at this point as people invest to continue improving their business.

Mike Rehaut, JPMorgan.

First, I was hoping just to drill down on Unilin for a moment. The growth has been a relative bright spot over the last several quarters. As we look into 2012, can you give us thoughts in terms of what type of growth is reasonable in 2012 vis-a-vis what you are doing in Europe, and also continuing to build out the laminate footprint in the US?

First is our anticipation of what's going to happen in the economy is no better than yours. You have to guess at what's going to happen. What we've had in the laminate business in Europe -- it has been under pressure. We think that we have been doing better than the marketplace by taking share in the different markets and expanding into different channels than we have been in. We're putting investments in Russia to put up a new plant there. The capacity we are putting in Russia is about $100 million worth of sales in Russia. It will take a while to utilize the full capacity. We have been investing money in the short term building up the sales so that the plant has things to operate under.

The roofing and panel businesses have been improving from a low point in volume. On the other hand, they still have pressure in the margins. But those have improved also. We think we will see continued improvement in those areas from the low points they have been at the last couple of years as we go through.

I guess, just to fill out this question, if you can kind of also -- you know, as you said, the macro economy is anyone's guess. But assuming some stability from here, I mean, can you kind of describe a laminate market overall? I mean over the last 5 to 10 years, laminates have taken share from other flooring categories. Maybe you can kind of update us on how that has gone in the last couple of years. And, at least from a relative share standpoint, what are you doing -- what is laminates doing as a category? And is this something where you feel you can take share within laminates?

The laminate industry had -- prior to a number of years ago, we're growing dramatically faster than the flooring market as a whole. Presently, it's growing relatively in line with the industry as a whole. At the same time, you have that the average price of the industry has gone down as an industry so that reduction in it has impacted some of its participation in it.

We think that it will continue to grow at market plus or minus a little bit, going forward. We think that we're going to improve our position by participating in the do-it-yourself channels into Europe and US, much more so than we have in the past. We have made dramatic moves to participate on both sides of the water, and we think it will help us improve our positions in the marketplace.

Great, thanks.

John Baugh, Stifel Nicolaus.

I was wondering, staying on laminates for a second, if you could talk -- it sounds like laminate volumes in Europe are down. I'm curious, first, is that right? Secondly, are laminates performing in line in volume in the United States with, say, carpet, which I know was down residentially?

And then you mentioned going after the home center channel or DIY more aggressively. That, with everything being equal, I think be a lower-margin proposition, but perhaps you are in a low-margin leverage with the increased volume, where you'd actually see an increase? Thank you.

Okay, I'm not sure I heard a question.

The first question was the laminate growth in Europe.

Laminate in Europe -- Europe used to be a major producer for the entire world, and huge amounts of the European capacity was exported around the world. In the last few years there has been a buildup of capacity in various local geographies, so the opportunity to export has decreased dramatically.

At the same time, that has created significant excess capacity in the European marketplace, which has pushed down the average price of product significantly along with the reduction in the economy in general. From our business, we focus more in Europe on the mid-to high-end part of the marketplace, and so the pressures are much worse in the opening price point than they are in the differentiated products and where we have brands, so we are not as affected as much.

On the other hand, with the marketplace being down, we have been able to increase our market share by offering differentiated products through the DIY channels, which we have very limited participation in prior to the last year or so. In the US, the same thing -- most of our business was through the specialty store channels. In the last year or so, we have moved into participating in both wood and laminate in the do-it-yourself, the wood channels, the home center channels, and we have made significant progress in those channels, which are helping our business.

So I was trying to get a feel, Jeff, whether your unit volumes in laminate in Europe were a plus or minus, and the same in the US, and then whether or not the strategy to go into more DIY home center -- whether that will hurt your margins in that business or actually help because of the increased volume contribution.

Our business was actually up slightly -- our volume was up slightly in an industry that was down. And we think we've done that through expanding the shares. And then the mix of products -- we are going to participate in the mix of products, and we think it will be in line with our average across the different channels with lower SG&A costs and other things that go along with it.

Thank you.

Laura Champine, Cowen and Company.

I've got another follow-up on the growth of the Unilin business because it's a lot stronger than what we expected. I think you mentioned that your insulation is doubling. I'm wondering what's driving that. And also, Jeff, I think you just said that you expected in Unilin to grow in line with the market, which would be slower than you had been growing. Is that because you are annualizing some of the entry into the DIY channel, or is there more to be done there?

Let's start with the insulation. Insulation is a new business for us about a year or so -- a year, two years old. It is a board that you put in construction of either new homes or remodeling to insulate the homes and businesses so they use less energy. The European government are supporting those things with incentives, so that category is growing significantly. We estimate the insulation board business in Europe to be about a $1 billion business. In that, the regions would participate in is about a third of it, so about $300 million. We think the industry is going to grow about 5% to 6%, 7%. We think the polyurethane insulation, which has properties that are better than the others, will grow in the mid-teens at the expense of the other ones.

With that, we are increasing our capacity in the operations we have as we speak, and then we have a plan to extend it further and add other facilities in the future.

The European growth -- I think what I was trying to say is that we expect the European laminate growth to grow approximately in line with the flooring industry, and our goal is to outdo the industry by somewhat. We've had more pressure on our category because, in the last period of time, as the industry and the economies have gone down, people have traded down. And so the lower price points have grown more than the higher price points, and we have been able to overcome that by expanding our distribution channels.

Got it, and then just a clarification -- I think, Frank, you answered a question about price in Unilin, saying that it was up about 4%. But I know your mix was not great. So do you have the price/mix change year on year in that segment?

That was price/mix. We are unable to separate those two, Laura, that I gave, that 4% number.

Got it, thanks.

Eric Bosshard, Cleveland Research.

In the carpet and the ceramic tile business, I'm interested in what you are seeing go on with mix trends, if anything changed in 2Q and what your expectation is for the second half of the year and how that might be playing with what you are trying to do with price, and also within the backdrop of what the material environment is.

The product mix in all the businesses has declined as the retailers and consumers try to minimize the expenditures that they are putting in their homes, which they perceive as less value. So the mix across all the different channels are lower. Where historically we would see, when consumers come in, they would want to buy the best thing they could afford and trade them up, through their own limitations in their financing and/or through the retailers driving lower price points to try to differentiate themselves, the mix is lower. Usually, when you get further along in -- coming out of a downturn, people go back to buying higher-value products. We haven't seen that yet.

And then, Secondly, coming out of 1Q, Jeff, you sounded a little bit more optimistic than now. And I understand the economy grew a little slower in the second quarter. But is there anything else within the business that has you sounding a little bit more conservative at this point than you did 90 days ago?

I think that 90 days ago we had a view of the economy that were potentially coming out of the downturn, that the economy was picking up. We had hoped employment would be higher, along with everybody else. And so we are a little less optimistic, given the latest information.

Is there anything within the business competitively or structurally that's different, or is it just an economic issue?

If anything, I think that we have gotten stronger.

Thanks.

Dennis McGill, Zelman & Associates.

The first question just has to do with, Frank, around gross margins. What you recover, whatever impediment you have from raw materials and price of raw materials normalized out and you incorporate the cost cuts that you've taken through the second quarter -- what would you say is the medium-term stabilized gross margin that we can think about moving forward?

Well, you know, Dennis, we are not really -- we don't typically give out gross margin estimates going forward. We try to look more at stabilized operating margin estimates. As we get to a more normalized trend -- if that would answer your question. I can give you those numbers.

Yes, maybe that would be helpful. And then I guess just (multiple speakers) just not necessarily looking for 2012 but just kind of the way you would think about it relative to where you have been in the past, incorporate the cost cuts, kind of how that works out to be a more normalized margin today.

Well, maybe let be try to answer it this way. And it's not a 2012 answer, it's when we get back to a more normalized environment from an operating margin standpoint. We've said, as we think our carpet business is going to get back to the high single-digit range and, in the Dal-Tile business, back to the 13%-14% range and Unilin maybe in the 15% range. But that's when we get back to a more normalized environment.

Okay, that's helpful. And as it relates to 2011, if you hold everything constant today, for the full year will raw materials have been a headwind, and implying a tailwind into next year if you do hold everything constant?

Well, for sure they would be a headwind for the full year, this year. And then, if nothing changes, then it should be a tailwind.

Okay, great, thanks again.

Stephen East, Ticonderoga Securities.

If we could look first at what you are seeing with monthly trends as you went through the quarter and into July in your businesses, your demand trends.

If you look at the second quarter there was some inconsistencies you would expect from week to week in different pieces. In general, we saw the relatively seasonal improvement that you normally see. And typically, the business gets a little better as you go through the year, so we saw the normal things we do. If we look back at July, we see a continuation of the similar trends that we saw in July and going forward.

Okay, so that means you are -- seasonally speaking, you saw monthly progression up? Did I understand that right?

Yes, with some inconsistencies, though. It's not like a straight line you would see in a perfect economy. On the other hand, I have to remind you that Unilin's business slows down with European vacations and things on that basis, so you have to add all that back together.

Right, okay. And then the second thing -- if you look at -- you got one price hike in, you are putting another one in right now. Is that it, or do you see more on the horizon? And then how does that correlate to what you all are seeing on the raw materials as far as peaking in the second quarter and going from there?

The two price increases we put in will be fully realized in the third quarter. The raw materials reached a peak higher than we probably expected in the second quarter. To remind you, the second quarter raw material costs flow through under FIFO into the third quarter. Presently we are expecting the third quarter to be slightly improved over the second quarter purchasing costs, which will flow through into the fourth quarter. And then, as usual, we have our raw material costs that we basically buy very short-term and follow either costs or market. So they are volatile, with all the impact from both oil prices as well as worldwide demand. And they change almost monthly.

Okay, do you see a need to put through another price increase?

We constantly monitor what's going on and we will react as required.

Okay, thanks. Frank, if I could sneak in one quick one, what do you expect on Unilin, the FX impact in third quarter?

I think we are in the 141-2 range, somewhere around there.

Okay, thank you.

David MacGregor, Longbow Research.

Where within the North American business are the biggest opportunities for further cost reductions and productivity?

It's a never-ending battle that you never reach the end. We are right in the middle of our strategic plan for next year. I can tell you that this year, each of the divisions had more than 100 very specific projects to reduce their cost structures to drive their product mix and drive their management of it. And I can tell you that they are achieving what they did this year and they are putting together similar things for next year. I think that we will come up with process improvements, ways of improving the products and driving the production yields. I think that we are getting better at controlling our product mix to the marketplace. I think we have opportunities to improve our product management with pricing structures in the marketplace. I think that if we can get a little leverage in the top-line volume, it will flow through all the parts of the business. But I still think there's opportunities in all of them to get better.

What do you think you capacity utilization rate is right now?

If you look across all the businesses -- I mean, we have so many parts and pieces, if I had to give you a broad range I'd say it's probably 70% to 80% across all the pieces, I mean. But you could have pieces above it, close to 100%, and pieces below it also.

All right. I guess, second question -- you talked about the fact that the mix had been negative across all your businesses as consumers are responding to the inflation. I guess my question deals more with your expected elasticity of demand as you push through these price increases, more on volume, obviously. But what are you expecting there? What are you seeing maybe in the order book already or maybe just talk about the second half with these price increases going through?

A large part of the price increases are in, and we're pushing them through the back end. What you see in the carpet business is a dramatic change in the makeup of the product. So what you see is that, where polyester not long ago had a limited share of polyester, it's growing rapidly because the cost of it in a product is less. So you see this dramatic shift in quality to lower-priced polyester product.

So continuing, you're going to see, as we said, polyester and Triexta, because of the values they provide, are going to move as nylon and polypropylene are declining. And on our ceramic businesses, the margins show that the customers are buying less-value products. And so the compression of margins is as much about the change in the use of the products in ceramic and the average prices that are being sold in the marketplace today as anything else.

Laminate, same thing, so it's not related to one product category. They are all the same. Our expectations are that consumers will go back to higher-value products, though, as they get more comfortable and they start spending more money. We did see some indication in some of our higher-end carpet products. We're seeing some of them starting to sell a little more, but not enough to offset the mix change that's going on.

All right, okay, great, thanks very much and good luck.

Joshua Pollard, Goldman Sachs.

My first question is on your guidance. If you guys look back to 2009-2010, you put a lot of conservatism in your guidance. You guys were beating your guidance by large numbers. That slowed in 2011, and I believe you guys are sort of taking a bit of the conservatism out of the way you guide. I'm trying to get an understanding along that spectrum where you guys are with the guidance you have provided last night. I'm wondering if you guys have started to bake more conservatism in with everything we are seeing, or if this is sort of more of a 2011-like just your view of the world, and basically you guys think that street estimates are too high for the third quarter?

We attempt the best we can to project where we think they're going to be. There are a lot of variables in it. When we look at the going-forward piece, we start with the top line, where the economies are really hard to guess because they're not going in a straight line. If you look at our raw materials, we have said that we have about a one-month view of the raw materials that keep changing. So we do our best to do it.

I think we're pretty good at the guessing. I think, if you look back in the thing, we probably tend to be around the third quartile. If you look at the range, we tend to end up somewhere in the third quartile, up or down, most of the time. And some of the time we end up above it, some of the time we end up the low it.

Okay. When you -- you made a comment a little earlier. You said customers are trading down to minimize the impact of inflation. Two questions around that -- I wasn't clear if that was a comment being made more so about the Mohawk segment or if that was more broadly across your entire business. And you could you talk about your thoughts on margin expansion over the coming few quarters? It seems like -- I'm wondering how fast you guys are looking to offset what looks like a mix impact.

I think the answer to the first question is yes, which means we have a mix impact in every product category that we have across every segment. You heard me be more specific about the change that's going on in the raw material and product structure, in the carpet one. But the same things are happening at different levels across each of the businesses. As much from retailers trying to create reasons for customers to come in; they tend to be pushing price more. And then it tends to be compacting it even more than I believe that consumers are really desiring by their focuses.

Looking at long-term, we continue to do everything we can to increase the margins. Our goal is to get back to the margins Frank was talking about earlier, about overall the historical margins. We think that we are putting in place the right cost structures across the business. We are aggressively managing the pieces we can control, and I think we're going to continue increasing our margins. And then we are going to get a big lift when we get some unit volume to help us.

I guess the -- if I can ask a bit more of a pointed question, I'm just wondering if the next few quarters are more likely to have more stagnant margin expansion, just given the number of factors that have come up, or if you guys haven't viewed that -- the plans that you are putting together for '12 are likely to actually turn into material -- not materially higher, but higher margins than where you are today.

Josh, you know, if you look at the third quarter, for example, we do have price increases that will be coming online by the time we get to the end of the third quarter. But they won't be in place for the full third quarter. We also, as Jeff had mentioned, have the headwind with raw materials that will be impacting our third quarter, on the balance sheet at the end of the second quarter, it will be flowing through in the third quarter.

So we have pluses and minuses in there going both ways, as you move from second quarter to third quarter. And in the fourth quarter, you know, there's still a lot of uncertainty in terms of what's going to happen with raw materials and mix.

Understood. And if I could just sneak one last one in there that I think will be helpful to everyone, just your country exposure at this point -- I know it moves around a ton with all the different things going on in the US versus some high-growth areas. Where are you? How much of your exposure is to maybe your top five or six countries, if you could?

I think somewhere in the mid teens in terms of our revenues are outside of North America, and most of that is in Western Europe -- Belgium, Netherlands, France, UK and Spain. We are growing our presence in Russia, and there are a few other countries that would be scattered in there as well.

Bob Wetenhall, RBC.

Just quick question -- in the Dal-Tile 4% growth, what is the split there between organic versus share gains?

I'm not sure of your question, Bob. One more time?

Is that mostly organic growth, or is there any market share pickup involved in that number?

We don't have exact industry numbers. We think the industry -- you have to remember, now, in the ceramic industry almost 50% of it historically was new construction. So we think the industry is under significant pressure. We think we are gaining share from imports as a percent of the piece. We are taking share from it, and we are growing our share in -- we think the industry would be down some number; I don't have the number at this moment.

Got it, so it does sound like you are taking some share. Any update on your expansion plans in Mexico and Russia?

Sure. The Mexican plant should be up and operating about mid next year. It has about $50 million of capacity in the initial phase that's going up. We have been doing -- making aggressive investments in our product line and our sales personnel to increase our distribution.

What it does for us in Mexico is that historically we've had -- we've played in the mid-to high end of the marketplace because of the -- making porcelain tile. The majority of the Mexican market is in a non-porcelain tile. The plant we are building is outside Mexico City, which is where the majority of the population is, and it reduces the freight costs. The raw materials are nearby it. So this is going to allow us to be a full product line supplier to the industry.

We have actually already started selling products at most price points and subsidizing them in the short term. When the plant comes up, we will move product that's being manufactured in our northern facility to the new plant. We will more aggressively go after the price points in the lower end of the marketplace, and we will use the capacity in the north to support more of our US business growth that we expect to happen over time.

In Russia we are putting in a laminate plant outside Moscow. It has a capacity of somewhere around $100 million capacity. We have been growing our customer base there by shipping in products. We have put in, about a year or so ago, a local distribution center so we could get to smaller customers that couldn't import as much. We have been building the distribution in Russia. The plant should be operational at the end of this quarter. We have been putting money in it to expand distribution as well as train people to operate the plant.

As with everything in Russia, you have to make sure and get the permits, which, until you finally get them, you can't say you have them. But we think we are all in line with it, and we are optimistic about our opportunities to participate in there also.

Just in a big picture framework, even though macro picture is a little unstable just both in Mexico and in Europe and in China you are still committed to moving forward with your current CapEx and expansion plans?

It's put in place and being spent. Just as a point, in Mexico the economy is not tracking the US at this point. The Mexican economy is doing rather well. And just like other parts of the world, they are behind in housing. And we think that it's doing well at this point.

Got it, that's helpful, thanks very much, good luck next quarter.

Kathryn Thompson, Thompson Research Group.

Your Mohawk segment saw nice growth in the quarter, twofold -- could you discuss the differences in growth rates for different types of products in this segment? And in addition, on a percentage basis, how much did your commercial grow in the quarter? And is it at a same rate as the industry?

I think the industry in commercial grew almost double digits. I'm not getting exactly close. I think it's about 10%, could be plus or is. I think we are in line with the industry in growth.

On the residential side the industry had a decline, and we also showed a decline, as everyone was expecting the remodeling business to pick up more than it has, due to the pressure on the consumer it hasn't picked up as we had hoped it would by now. We still think there is pent-up demand and it will increase going forward at some point.

What was the other part I missed?

Well, that pretty much mostly covered it. But I guess, carrying along with that, have there been any changes in momentum or trends in your commercial segment, in particular?

Not at this -- not -- the trends from the second quarter, now we are one month later in this thing, it's continuing on the same direction.

Okay. And I know there have been a few questions about the easing of oil prices and what that means to you. But just a follow-up two-part question -- assuming lower oil or energy translates to lower raw material prices today, when could you start to see margin expansion due to lower raw materials? And in an environment of falling energy prices, would you be forced to give some of the relief back?

To start out with, the third quarter -- basically, the raw materials we bought in the second quarter are the costs we have to have to flow through in the third quarter. So the costs in the third quarter are going to be higher. The costs in the financial statements will be higher in the third quarter than they were in the second quarter.

The raw materials do follow the oil prices with some lag, with the exception of they don't follow exactly. And at points in time they can be running diametrically opposed because what you have is the supply and demand of the intermediate chemicals that flow through in the different pieces. And with the world marketplace, those things flow across countries and borders, and the prices in one country impact the prices in the other. So -- and as a general statement, as oil prices go up and down, we will get costs up and down with a lag. It depends on different pieces.

But they can be -- I mean I've seen them six or nine months apart, going opposite directions for periods of time.

So, assuming all the intermediate parts, including oil, do abate -- say, just assume that those prices abate. Would you be forced to give back some of that pricing that you've gained? Or do you feel like your pricing that you have now is secure?

If you look back over time, as the prices decline significantly, the industry starts giving them back through promotions and other things, and they do leak out over time. The difference at this point is the industry margins are not as high as the industry needs to support the investments we all have to do. So hopefully, we would hold onto more of them. But getting back to more normalized margins would be a nice thing to occur.

Okay, great, thank you for taking my questions today.

Sam Darkatsh, Raymond James.

Most of my questions have been asked and answered, just a couple quick ones -- first off, you mentioned capacity utilization earlier, about 70% to 80% across the Company, although most of your restructuring actions over the past couple of years have been specifically to the carpet industry or carpet business. What is your -- what do you peg your capacity utilization, specifically in the Mohawk segment right now?

I would still put it in that same range. Again, the carpet industry, carpet piece -- we have a lot of different manufacturing operations that support it. So we have extrusion pieces, which you see us putting in more capacity because the needs are running and we need the capacity. You see us putting in more filament piece, because it's running relatively fill. Now, what has happened is it's a change from spun yarns and nylon into Triexta and PET. So you see us changing the structure of those pieces.

We have shut down significant parts of the business. Most of them are running on five-day schedules with the ability to go up to seven days, if required, across the pieces. I think we are in relatively good position across the businesses today.

Last question, then -- you haven't bought -- repurchased stock for several years now, I guess since '06 or so, if my memory holds. With the valuation having come in fairly sharply and your balance sheet in pretty terrific shape right now, what are your thoughts in terms of use of incremental cash flow going forward?

It's really a decision over, can we find the right acquisitions to do -- to support our long-term strategy versus the value we can add through buying back stock. And the third piece is, we have been trying to get our balance sheet in order so that we can get an upgrade in our rating. So we're balancing all three, and we are willing to push the limits of all of them, you know, if we think it's the right thing for the business.

Thanks much.

Daniel [Oppenheim], Credit Suisse.

Hi, this is actually Mike Dahl in for Dan. Jeff, just to follow up on your answer to the last question, what types of acquisitions would you be focused on, and how should we think about the magnitude and kind of timing of those? I guess, what does your pipeline look like today?

We have multiple strategies on the acquisition side. We are looking at tying on acquisitions in the present geography with markets we are in. We're looking at opportunities in new geographies and high-growth world marketplace is that we don't participate in. We think there will be opportunities in all of those over the next couple of years.

On the other hand, you know, if the stock at the right price becomes an opportunity, that may be better than the others. We have authority to buy back stock from our Board, and we will consider which ones we want to use.

On the other hand, we'd like to have enough flexibility in the future to adapt to changing environments. So it's a balance of the three.

Okay, thanks. And then I guess, domestically, do you have any desire to -- specifically on wood, are you happy with your platform there, or would you like to grow it? Do you see anything?

In the wood business, we have available capacity to sell in our present business, and engineered wood is one category. We have excess capacity there. We also have excess capacity in our solid woods. We have significant capacity to grow our business. The question would be, is there an acquisition that would help us achieve our goals better? And we always look at them.

Okay, thank you.

Keith Hughes, SunTrust.

Just quickly, multi-family housing -- what percentage of the business does that currently stand in?

I don't have the percentage. The industry -- at one point, the new construction is somewhere around 25% of all new homes, which that's a part of. And it's a piece of it. If I give you a guess, it's less than half of that. At this point, it could be about -- I remember the total being built now; it's about half-and-half, apartments and other. And then, because they use less flooring per each -- I'm just taking a guess, I don't know.

So it's probably single-digit?

Yes. But I mean, you just heard me walk through a guess at it.

Yes, but it would all be concentrated in the Mohawk segment; correct?

No. We would also sell some in the Dal-Tile segment and then limited pieces in the Other.

All right, thanks.

David Goldberg, UBS.

Good afternoon, guys, it's actually Susan in for David. Good afternoon, guys, it's actually Susan for David. Can you talk a little bit about the promotional environment that you have been seeing? And as you head into the second half, and I think, given the environment that we are in, do you expect that to change meaningfully relative to what we've seen historically for that, seasonally for that time of year?

Promotions are used for multiple objectives in the industry. We use promotions to try to balance out assets with the sales level. We use promotions to try to react to competitive environments. We use promotions to try to create relationships with the customers. All those different things are ongoing at all points in time. I don't see them significantly different than they are at other points.

Okay, so then we shouldn't really expect anything to change meaningfully, given sort of what we are seeing from a more macro perspective?

The macro things you are seeing, you know, the reports are coming out. Whatever is showing up in the numbers we've been living with. It's not a new thing for us. We have been acting in the environment. The numbers are coming out that you're seeing. But nothing has changed from yesterday to today.

Okay, thank you.

Carly Mattson, Goldman Sachs.

Given the less certain economic outlook and the recent rates rally, would Mohawk consider issuing debt to term out its 2012 maturity early?

We look over those things constantly, and what we have to do is measure the cost of either buying back the old bonds or the cost of having more debt than we need for a period of time versus the long-term savings. And since you have seen us not buy it back up to now, what you see is that the economics that come out, the cost of the two, weren't -- the savings weren't enough to overcome the other, up to this point. If it changes, we will do it in a hurry.

Okay, and then the second question is, is with the recent larger credit facility, should we take this as an indication of the size of acquisitions that Mohawk would be willing to execute at this point?

Not necessarily. I mean we've got a maturity coming up in April of next year, so it gives us flexibility with that as well.

But we have the ability to borrow more money for acquisitions when required.

Yes, we have the ability -- we have an accordion feature in that bank facility that allows us to add on to it.

Okay, great, thank you.

Alex Cook, [Voyant] Advisors.

Could you tell me what percentage of inventory build relates to raw material cost inflation and what percentage relates to inventory quantities?

Well, of the build from the end of the fourth quarter to the end of the second quarter, about three fourths of it is related to -- about three fourths of it is related to a combination of inflation and foreign exchange.

And then could you also tell me what restructuring charges will be in the coming quarter?

We don't have anything in terms of restructuring on the drawing board right now. Any charges that do come through will just be carryover from projects that have been started in previous quarters. So it will be much smaller than what we saw in the second quarter.

Okay, thank you.

And at this time there are no further questions. So Jeff, I will turn the call back over to you.

Thank you for joining us. We think we are well positioned for the changes in the marketplace, and we will keep working diligently to improve the value of our business. Have a nice day.

Ladies and gentlemen, we thank you for your participation. This concludes today's conference call. You may now disconnect.