莫霍克工業集團 (MHK) 2011 Q3 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries third-quarter 2011 earnings conference call. (Operator instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, November 4, 2011. Thank you.

I would like to introduce Jeff Lorberbaum, Chairman and CEO of Mohawk Industries. Please go ahead, sir.

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

Thank you, Frank.

Our third-quarter earnings per share were $0.68 as reported, or $0.83, an increase of 12% excluding unusual items over 2010. Volume increases, process improvements, and lower interest expense all contributed to our earnings improvement.

Our sales during the period exceeded last year by 10%, despite declining consumer confidence and an uncertain housing market impacting flooring demand. All business segments reflected growth over the prior year.

Our cash position remains strong with $276 million at the end of the quarter, and leverage remains low with our debt to adjusted EBITDA ratio at 2.1 times.

The Company's third-quarter results reflect an improvement over last year, even with increasing raw materials and consumer reluctance to invest in renovation projects. Sales in both residential and commercial categories expanded, with our commercial renovation leading the growth and new residential continuing to lag.

The Architectural Billings Index rose in August, indicating future growth in commercial construction. Longer term, our sector should recover from the depressed levels and expand faster than the overall economy as renovation and housing sales rebound.

Frank, could you give the financial report, please?

Thank you, Jeff. Good morning, everyone.

Net sales for the quarter were $1.443 billion, up 10% as reported, or 8% on a constant exchange rate basis. All three segments grew, with both residential and commercial up in the U.S. We were positively impacted by both volume and price increases during the quarter.

Our gross margin was 24.8%, compared to 26.3% last year, down year over year with rising raw materials and continuing mix pressure. We were also impacted in our Dal-Tile margins, while last year insurance proceeds covering the loss from the flood in our Mexican plant resulted in a higher-than-normal margin in 2010.

SG&A was $266 million, or 18.5% of sales. That compares to 19.8% of sales last year. SG&A cost control is a positive, with our dollars flat compared to last year on a constant exchange rate basis. Restructuring charges were $2 million during the quarter and all within the Mohawk segment, with about half in cost of goods sold and the remaining half in SG&A.

Operating margin, excluding charges, was 6.5%, compared to 6.8% last year. Interest expense was $25 million and was favorably affected by lower interest rates this year.

Other expense was $14 million and includes a $9 million loss related primarily to the peso devaluation. Since our Mexican Dal-Tile business is based on U.S. dollars, the accounting rules require that the balance sheet be revalued from the peso to the dollar and the change recorded as an expense. This is different than our other international operations, where the change is reported to equity.

In the third quarter, the revaluation reduced income by $9 million, which is an unusually high number. Usually this amount runs in the range of $1 million to $2 million each quarter over the last 10 years.

Our income tax rate, excluding charges, was 11% both this year and last year. We expect the tax rate to be in the mid-single digit range the fourth quarter this year, due to favorable settlements in some of our tax audits.

Earnings per share, excluding charges, the peso FX charge, the restructuring charge, and deferred loan cost write-off, were $0.83 a share, up 12% compared to a year ago.

If we move to the segments, the Mohawk segment sales were $754 million, up 6% from a year ago, with both residential and commercial growing over last year. Both volume and price mix were positive. We had two price increases that were fully implemented by the end of the third quarter.

Our operating income, excluding charges, was $33 million, or 4.4% of sales. Our margins were flat year over year with inflation and mix offsetting productivity gains.

Dal-Tile sales were $382 million, up 11% over last year. However, we estimate sales would have been up 5% to 7%, excluding the impact of the flood that we had in Mexico last year. We're continuing to show good growth in this division.

Operating income was $33 million, or 8.7% of sales. Our margin last year again was favorably impacted by the insurance proceeds we received from the flood.

In the Unilin segment, sales were $330 million, up 19% as reported, or 11% on a constant exchange rate basis.

Both our European and our U.S. businesses showed positive results for the quarter. Operating income was $33 million, or 10% of net sales. We were favorably impacted in the quarter by foreign exchange by $3 million. We had both price increases and volume improving our earnings in the quarter.

Our corporate and elimination segment reflected a charge of $6 million, and we are estimating a full-year charge of $20 million to $25 million.

Finally, turning to the balance sheet, cash ended up at $276 million, down from last year, as we used a portion of it to pay off the 2011 bonds earlier this year.

Receivables at $775 million showed an improvement in DSOs, where our days were down to 45.9 days. Inventories were $1.132 billion. Our inventory days improved almost four days from the end of last year. We had about $60 million of inflation in our inventory when compared to the end of the fourth quarter last year.

Long-term debt was $1.611 billion, down $43 million from last year. This includes a purchase of $15 million of our 2012 bonds during the quarter. We purchased an additional $49 million of those bonds in October for a total of $64 million that we repurchased in September and October. We paid approximately [$102.7 million] for those bonds. Jeff?

Thank you, Frank.

Our Mohawk segment sales were up 6%, as we improved our position and grew on both residential and commercial categories. Operating margins were lower due to price increases lagging material inflation, as well as continued pressure on our product mix as consumers remain cautious about larger discretionary investments.

During the quarter, residential grew across most channels and product categories. Our performance in the home center channel improved with additional product placements and expansion of our SmartStrand products. Through specialty retailers, we accelerated new SmartStrand and WearDated product introductions, and launched a joint carpet and pad program with enhanced warranties to improve the value proposition.

In the multifamily channel, support for our Triexta TriStar carpets continued to grow, due its superior durability, stain resistance, and value.

Our new extrusion capacity has allowed us to expand our sales in the fast-growing polyester segment. Sales growth was also achieved in most categories of our Mohawk residential hard surface products through new placements and program expansions.

Commercial sales momentum continued from the previous quarter, with both broadloom and carpet tile achieving gain. Commercial sales have increased from gaining national and regional specifications and expanding partnerships with foreign contractors. Our quick ship program is tailored to commercial projects with short lead times and has been expanded to include a wider variety of price and product solutions.

We have installed advanced printing technology for the next generation of precision designing for our hospitality carpets. We have broadened our commercial SmartStrand products, targeting corporate and institutional channels, offering fashionable carpet tiles with low maintenance and a compelling environmental advantage.

We continue to gain sales in all commercial categories by offering leading product design, service, and support to architect and designer communities. During 2011, we implemented two price increases that were fully realized by the end of the third quarter. During the period, raw material costs were greater than we anticipated, and the higher expense will impact our fourth-quarter costs and margins.

We delayed a third-quarter price increase in the fourth -- quarter due to a lack of support. We will monitor our material costs and market conditions and consider further price changes as appropriate.

Throughout the year, our team has driven innovation and process improvement across this segment. We've implemented hundreds of initiatives, yielding cost savings in 2011. The major reductions include lower extrusion cost, product re-engineering improvement, administrative restructuring, higher process speeds and efficiencies, and tighter process controls. We have implemented Phase 1 of a 35% increase in carpet tile capacity, which will be completed going into next year.

We have re-engineered our tufting and coating processes to improve costs and material yields. The use of recycled materials continues to increase and provide both marketing and cost benefits. Additionally, we have reduced our environmental footprint by lowering our water consumption, which improves costs and protects our resources.

We continue to align our manufacturing assets with market conditions and changing consumer preferences. In October, we announced the closing of a yarn plant due to lower demand for spun products.

New sales training and processes are being implemented to identify opportunities, manage market changes, and enhance the performance of our sales team.

In October, we celebrated the 10th anniversary of our Specify for a Cure program, which supports the Susan G. Komen for the Cure Foundation in promoting breast cancer research. We're expanding that support with a new residential pad produced in Komen's signature pink color.

Dal-Tile sales grew 11% in the period, with both residential and commercial categories showing gains, as mix continues to decline. In the comparative 2010 period, business was lower than expected due to flooding in our Mexican facility from Hurricane Alex. Without this disruption, this year's estimated sales growth rate in the period would be in the 5% to 7% range.

Renovation projects are the primary driver of our commercial growth with hospitality, healthcare, and government sectors leading our sales.

During the quarter, we increased sales in all channels, with particular strength in home centers due to additional commitments for our innovative mosaics, wall tile, and porcelain tile. Our low-cost position, creative merchandising, and exceptional design are contributing to this higher sales growth.

Our American Olean brand is broadening its penetration in both residential and commercial sales through independent distribution as an alternative to offshore suppliers.

Our new merchandising program we call Statements by Dal-Tile is improving our retailers' ability to communicate product design options, coupled with professional marketing, advertising, and promotional support. Our Mohawk and Dal-Tile sales forces are leveraging the flooring industry's most comprehensive commercial product portfolio to offer solutions for projects in all channels and budgets.

Dal-Tile sales in Mexico grew significantly on a local basis as we increased our penetration of the Mexican ceramic market. The Mexican economy is anticipated to grow 4% this year, with flooring expanding at a higher rate. We have added new wholesale and retail customers by broadening our offerings and expanding our sales force. On select products, we're offering proprietary antimicrobial protection, which minimizes the growth of mold and germs on ceramic tile.

Our [Solomonica] plant near Mexico City is progressing on schedule for its start-up in mid-2012. The plant will produce red body tile that addresses the core of the Mexican market and will complete our product offering and satisfy all price points.

In China, our ceramic JV is enhancing our brand position with an expanded product line, greater styling, and advanced surface technologies. We're launching an innovative showroom concept for retailers, with unique merchandising and marketing materials to improve the sales process.

We are expanding the use of our Reveal design technology across all our floor and wall tiles, mosaics, and decorative accents. We continue to innovate new manufacturing techniques to minimize process variation, improve efficiencies, speed up product changes, reduce lot sizes, and minimize energy consumption.

We've lowered raw material costs by utilizing sources located closer to our plants and re-engineering our body formulas with alternative materials. We have expanded the production of glazed manufacturing to reduce costs.

Freight costs are being reduced with higher truck utilization rates and more cost-effective transportation methods as well, as more direct shipments to our customers.

Our Unilin sales grew 19% as reported, or 11% on a constant exchange rate. Sales in Europe increased across most channels and regions, and our price increases are catching up with the raw material inflation we have experienced. We are implementing additional price increases for roof panels and insulation boards to offset further material inflation in those products. The third period includes summer shutdowns in Europe related to European vacation schedules.

During the quarter, Unilin acquired the largest distributor of laminate and wood products in Australia. The acquisition followed the successful partnership with Premium Floors, which is the only distributor to cover the entire continent with five regional distribution points. This acquisition expands our strategy to get closer to our customers and be more responsive to local markets. Unilin's marketing and operational expertise will enhance Premium's leading market positions and strengthen its penetration across the continent.

Despite challenging market conditions, our European flooring products grew by capitalizing on the strength of our Quick-Step brand, growing our participation in the DIY channel, and expanding our wood flooring category. We completed our Russian laminate flooring plant on schedule and are presently initiating production. We are expanding our customer base in Russia by adding new distribution partners and innovative products for the local market.

In the U.S., sales of our laminate flooring grew through expanded programs in all channels. We've received additional commitments for our products, expanding our home center participation. We're introducing a new decor wood collection with high definition that reproduces the natural beauty of exotic woods on ultra-long planks, creating luxury hardwood visuals at an affordable price.

Using our proprietary technology, our wood flooring is positioned as a leader in high-fashion distressed visuals. A successful Facebook campaign called Room Refresh has increased the brand awareness and positioned us as a fashionable, affordable solution for flooring makeovers.

In Europe, sales of our insulation boards grew significantly and improved our market position. Our new Didit click furniture line is being tested in the UK and will be introduced in other geographic markets to respine our long-term strategy.

In the fourth quarter, we will increase our capacity and reduce costs with the consolidation of our Malaysian wood plant and begin the expansion of our insulation board plant. Process changes in the U.S. wood plants continue to improve efficiencies and yields. We have enhanced our board manufacturing processes to improve material usage and reduce energy consumption. We restructured the sales of our European roofing boards and insulation products to provide more comprehensive solutions and improve customer support.

Mohawk's strategy is to maximize our long-term results with our international expansion in Mexico, Russia, China, and Australia; with new technologies to increase value; innovative product categories like Didit click furniture; and process enhancements to lower our cost position across the entire enterprise. We remain confident in the future of our business and continue to adjust our tactics as economic conditions change.

The European debt crisis, high unemployment, low consumer confidence have created short-term uncertainty in the economy. Year-over-year comparisons should remain easier in the fourth quarter, but we anticipate sequentially softer demand, along with normal seasonal trends. In the fourth quarter, we will be impacted by higher third-quarter raw material costs. However, we are seeing some moderation, which will benefit next year. We will consider further price increases as appropriate and implement additional cost reductions to improve the business.

With these factors, our fourth-quarter guidance for earnings is $0.67 to $0.76 per share, excluding any restructuring costs.

Our strategy in this environment focuses on lowering our cost infrastructure, creating innovative products, maintaining a strong balance sheet, and targeting new investments for future growth. Although the macro outlook is somewhat uncertain, we believe our results for next year will reflect continued improvement. Next year, we'll be positively affected by the full impact of our 2011 price increases, productivity improvements, and cost savings from capital investments.

The industry will recover with time -- over time, and with pent-up demand improving volume and leveraging our initiatives. With that, we'll be glad to take questions.

(Operator Instructions). Eric Bosshard, Cleveland Research Company.

Good morning. This is actually Tom Mahoney calling in for Eric today. I wanted to ask about the demand trend through the quarter, and what you guys saw, I guess, in October and the early read on November that makes you a little more conservative on the fourth quarter.

I think that we saw a little bit of softening as we went through the quarter. But it started out softer than we expected, a little bit, due to all the impact of the government settling what they were doing, its impact on consumer confidence. The consumer confidence still remains low. So we're just a little cautious as we look forward.

And then, the follow-up on raw materials. I think last quarter, you were thinking Q3 would be favorable versus the second quarter. And you relayed that pressure in the fourth quarter. When did you guys see or what is the timing of the moderation that you guys have seen? And is there any change in how that flows through, maybe with lower demand in the market, the timing of the 60- or 90-day lag to when that flows through to costs?

We came out of the second quarter and we had made certain assumptions about where raw materials went for our pricing. And as we went through the third quarter, the raw materials were not coming down as we had anticipated.

As we went into the fourth quarter, we have seen some moderation. However, oil and chemical prices are really volatile. We're going to have to continue monitoring them as we go forward. Given that, though, we would expect some positive impacts on our costs in the first quarter.

And just to answer the question regarding the FIFO timing, inventory turns about once a quarter, so it takes about three months to get the raw material costs into the P&L.

And so, you guys saw the input costs moderate late in the third quarter or early here in the fourth quarter, is when that moderation happened?

Most of our prices are bought at market, and they move all the time. As you see oil prices going up and down weekly, we don't actually see it that minute, but it goes up and down. The chemical prices are much more volatile than the oil prices as they are being influenced by worldwide supply and demand. And so, we're reading them every day, and it's just -- we keep monitoring to try to see how they're going to fit.

Joshua Pollard, Goldman Sachs.

I really want to understand how all of the productivity improvements that you guys are talking about -- and there's a significantly long list of them, and I think you guys are doing the right things -- how those impact the financials as we look out to 2012. Is there any way you can begin to put a dollar figure or a range of dollar figures on how those should support your earnings as you look at 2012 and beyond?

We do have a long list of changes that we do. We have a good system for and are planning for setting up what the changes are, and then holding each group accountable for executing against them on a quarterly basis, driven down through the entire organization.

The questions really are, that as you go through with those things, what happens to the product mix and what happens to pricing offsetting or helping those conditions? And what we had this year was a large part of the changes have been absorbed in the different mix changes and product changes we go through, but they have impacted our results. We haven't gotten the full impact of what we've already done, and we'll see more of them in the future. Up to this point, we haven't given a specific number for the pieces, though.

Is giving a number something that, at least on a productivity side, also known as the things that you guys can control, is that something that you guys look to do in the future, or is that something that we'll have to stand by and wait for commodities to go the right direction to see those benefits?

This year, we estimate approaching $100 million worth of various benefit through all the changes that have actually been achieved during the year or will be achieved through the year.

(Multiple speakers) that's an annual number, Josh.

Okay, that's actually quite helpful. That was my key question. I appreciate the time.

John Baugh, Stifel Nicolaus.

I was curious if you had any thoughts about 2012 CapEx plans, and update us where 2011 will come in as well.

And then, the only sector that seems to be showing signs of life is multifamily construction, and I was curious how you're positioned vis-a-vis your competitors in that end market.

I'll take the CapEx question. We have said $280 million for the year. I think the spend is going to be closer to $260 million, and then that other $20 million probably falls over into next year, John. We haven't finalized our budget for next year, so we're not ready to give a number for 2012 yet. But it could be --

Could be in the same range, (multiple speakers) but we haven't finalized it yet.

(Multiple speakers). We are still working it, though.

Multifamily?

Multifamily, we participate in the multifamily. The multifamily business is a much more lower-end product. It typically has a low -- we typically use very inexpensive products and turn them over.

We have increased our participation in that over the last year or two with positioning our SmartStrand products in it, in addition to the other products. I think that there's probably ourselves and Shaw have a large share of it. Shaw would have a larger share than we do, though.

As a follow-up, you didn't brag about it, so I'll brag for you. You seemed to gain market share within the quarter within carpet and rug. Was that primarily the positioning with the home center channels, or were there other areas where you saw a lot of strength as well? Thank you.

I think it was across all the different pieces. Over the last year, we have put in place a lot of things to improve our business.

We had talked earlier in the year about not fully participating in the polyester participation. As we have put more capacity in, we have been able to participate in it, as well as broadening our SmartStrand products, which are differentiated into categories. We have improved our carpet tile offering, and across all the segments we have enhanced our sales team in execution of our strategy.

Steven Kim, Barclays Capital.

I wanted to follow up on a couple of questions, if you don't mind. You had mentioned $100 million in savings you expect this year as a result of some of the -- the many initiatives you have taken. I was wondering if you could put that in some context for us. I know avoiding, maybe, specific numbers, but is that number significantly greater or less than what you benefited from last year? And do you have a view of where that number may go next year? Do you expect the savings to be greater than that next year?

I don't remember the last-your number, so I don't have a reference point for you. The changes are across all the different categories and segments.

I would expect next year probably not to be as much because we've made a lot of positive changes this year. Some of it also applies to the benefits of putting in new equipment and the productivities achieved from those, as well as redesigning our product strategies and re-engineering products across all the different businesses to create process improvements.

So next year, I would assume it's going to be less than this year. I don't have the number to give you (multiple speakers)

Okay, that's fine. And then, I wanted to follow up. With respect to market-share gains, it appeared that you gained share in the laminate business.

I was curious if you could just comment broadly about what your strategy is in the U.S., whether some of the gains that you've seen are due to short-term tactics or if you think there's some fundamental shift that we're seeing taking place in your laminate business. And if you could also, then, extend that abroad because obviously you are expanding the laminate pretty aggressively into Russia and Australia. If you could talk about the different dynamics that may exist in those markets for laminate versus U.S.?

We have been discussing for quite some time -- you know, the laminate business in the U.S., there's a large part of it in the home center channels. And if you go back, primarily we were focused on the specialty channels.

We still are, but we have gotten additional commitments in the home center channel to expand our participation in markets here, again pushing our strengths, which is our style and design and differentiated fabric products in the business. And so, we're doing that.

The European business is a little different. We're positioned different in the European business with a little higher-end position. We have a more recognized consumer brand in that marketplace. But again, we're focused on, in that marketplace, the medium to high end of the marketplace. We have started in that marketplace also selling into -- they call it the DIY channels in each country, as a step-up product in those, and we're achieving some successes with those.

We started broadening our business in some ways to other places like Russia. We started a few years ago. We thought that we would only be able to have a small niche position within Russia if we didn't build a plant in Russia, so the plant is actually up and operating as we speak. It will go through probably about $5 million worth of start-up costs this year in starting it up. The plant will be running about half-capacity probably by sometime the first of next year. It will take a few years to increase our business there.

We have been developing business in Australia. We are supporting it with wood out of Malaysia, as well as laminate out of Europe. We think that this gives us an opportunity to have even a larger share of that marketplace.

We think we have gotten the best distributor that's down there, that really has a huge share of the laminate wood business. We think in Australia, due to the size of the continent, that having offshore production may be advantageous, where in some countries it's disadvantageous because the cost of moving it from a central point in Australia around to the continent. So we think we're well positioned there.

Over a long time, we'll have to consider, do we broaden it into other product categories or not? But we're happy with our positions.

Michael Rehaut, JPMorgan.

First question, on carpet mix, it certainly continues to be an issue, I think, and a negative margin impact. I was hoping to get some clarity around -- if you could give us a rough idea of the negative, on a basis point. Is it 100, 200 basis points year-over-year incremental negative impact from the lower mix in carpet? And have you seen that mix -- certainly, I think you've seen it continue to go down on a year-over-year basis. But has it stabilized to any degree on a sequential basis?

You have two things going on in the carpet business. One is the consumer trading down. The second and related, not only to consumer, retailers using price as a motivation to try to create value to the customer, so that's compressing prices.

In addition to that, you have a huge change in the industry where we're moving from nylon to lower-cost polyester. So the industry is growing. In order to help maintain price points which the industry is trying to do, and the improvement in polyester product categories, we are also trading down so that the industry is moving to lower-cost polyester replacing the nylon products at the same time.

And then, one of the earlier calls, like the multifamily is growing faster than the other one, as well as you have a change in the channels. The home centers seem to be doing a little better, more focused on price value at the moment, which also compresses the mix. We have all those things going on at the same time. I don't have a number to give you, though.

Yes, that's really what I'm trying to get to is not just perhaps what the year-over-year change was. And Frank, I don't know if you have any thoughts around this in terms of the basis-point impact on a year-over-year basis. But the other part of the question -- on a sequential basis, have you seen that mix stabilize? Or does it continue to go down every quarter? I know you've talked about mix worse on a year-over-year basis. But do you see any -- what are the trends on a sequential basis quarter to quarter?

It's really hard to read on a very short timeframe. We know that last year compared to this year, it's all going down. Quarter to quarter, there's a lot of movement that really hard to read.

And Mike, to your other question to me, it's almost impossible to separate price and mix with the number of customers and products and that type thing. So that's why we present a net number.

Just one more, the tax rate benefit, I guess, continues to be lower than expected. How should we start to think about 2012? Obviously, there's a mix of U.S. versus international. But I think you mentioned there was a benefit that's driving the mid-single digit in Q4. How should we think about 2012?

High teens to maybe 20%. We're still trying to finalize it, but probably somewhere in that range right now is our best guess.

Sam Darkatsh, Raymond James.

Just a couple quick questions. Most of my questions have been asked and answered. Regarding specifically the Mohawk segment, again everybody is, I think, real happy to see the share gains there, and they are real impressive. Related to the mix within the Mohawk segment, could you rank for me the carpet versus rugs versus hard surfaces, where you saw the most growth in that segment?

The carpet is so much larger than the rest of it, it overwhelms everything. So it doesn't really -- you can forget the rest.

So the plus 6, the carpet constituted a majority of the plus 6?

Correct.

And the second thing, on the residential side, you mentioned that you were up in residential. Is that units and dollars, or just dollars?

Yes.

Up both units and dollars? Very impressive. Thank you, guys.

Dan Oppenheim, Credit Suisse.

Just a quick question here, you talked about CapEx plans for next year. With the Russian facility coming online and such, how do you think about the CapEx internationally? Are there any projects you're looking at, any parts of the world where you're focused in terms of your new expense you see right now?

We continue to look around the world. The focus would be on high-growth marketplaces, which are easy to spot. That would be China, Australia, Brazil, Mexico. Mexico is separating off also from the U.S. economy, doing better. So those would be primary, but we continue to look around for opportunities, as well as in the present markets we are in. We assume that over the next year or so, there will be businesses for sale that could create opportunities as tie-on additions to both our U.S. and European businesses as well.

David MacGregor, Longbow Research.

You're making tremendous progress here in terms of expanding your distribution. You talked about DIY growth in Europe, you talked about specialty retail growth in the United States. I just want to tie that back into the observation about volume growth. If you were to exclude the new store sales, what do the same-store sales look like? In other words, does the core volume that would be comparable with what you were doing a year ago, is it still up?

I don't have the numbers in front of me. What happens is in the specialty store part, given the huge decrease in the industry volume since the decline, there's probably 15% to 20% less units in the industry. At the same time, the home center channel has increased its share. And that's about as good as I can give you at this sitting.

I guess you have got some forward perspective on the extent to which you can continue to grow your distribution, new distribution volume here. Does this continue on for another quarter or two, or is it sustainable through 2012?

A lot of it has got to do with the entire marketplace and what's going on. The outlook for next year is uncertain. We believe that we're going still be able to improve our results next year, even with that.

It's really hard to read the consumer. With consumer confidence down to almost a historical low, it's really difficult. At the same time, commercial business has still tended to be good. The question is, will businesses continue spending at those levels? We have very limited forward views of purchasing. So I mean, your guesses are as good as mine for the overall pieces.

But it would be hard to sustain this growth rate we had in this quarter, I think, for a period of time.

And another question, you mentioned just in passing, and you mentioned it quickly so I didn't get it all, but you were engaged in expanding your carpet tile capacity, and you referenced Phase 1 of, I think, a 35% capacity increase. I wonder if I could just get you to go back and just talk a little bit, recap for us what Phase 1 entails and what -- is there a Phase 2 and 3? And maybe just talk a little bit about where you're going with that.

Our carpet tile business has continued to increase. Carpet tile is becoming a larger part of the marketplace.

As our business has increased, we continue to improve our -- to increase our capacity to support it. We actually have two phases going on. The first one has been complete already. The second one will be complete before the first of the year, or close to it. The combination of those two will give us an additional 35% production capacity, which will support growth for the near-term future of carpet tile, which we expect to keep growing.

Can you give us a revenue number for that incremental capacity, what it might represent?

I don't have it with me.

How should we think about that in terms of the commercial potential?

What you see over the period of time is -- there's two parts. There's one is there's a change where commercial carpet tile is replacing broadloom tile. And as it gets more cost effective to manufacture, as the styling increases, as it's used in broader price points, it is being used in more jobs and impacting the broadloom piece.

In the past, we have got our -- broadloom business has started growing also at this point. But we see ongoing that there will be this continued shift in broadloom tile.

Then the question really becomes, how much can the commercial tile business continue to grow as an industry? And we continue to try to get a larger share of it.

Do you target most of that incremental capacity to the hospitality segment, where you've always been so strong?

Actually, the hospitality uses a small portion of it.

So these are new end markets that you would be pursuing with that capacity?

It's in all the other markets.

Corporate and all the other markets.

All the other markets use much more of it than hospitality.

Dennis McGill, Zelman & Associates.

Frank, just taking the comments you made about fourth-quarter seasonality and revenue, and then the mid-single digit tax rate, it kind of implies margin being down 150 basis points or so year over year. I just want to make sure that's how you guys are thinking about the midpoint of the range, and if that's the case generally, just directionally how you'd think about the different segments within that context.

Well, we are not prepared to give out a margin estimate for the quarter. But I think as we go into the fourth quarter, one of the points we were trying to make was that we were going to have some raw material pressures, particularly in the carpet segment. And so, that will impact the margins in the fourth quarter.

And then we'll have the normal seasonal slowing as we go into the fourth quarter that will impact both our topline and our margins.

Is all of the raw material pressure largely in the Mohawk segment or are you still feeling that in the Unilin segment, the incremental pressure, I guess?

There is some in the Unilin segment, but it's not as dramatic.

Second question would just be around -- with the capacity coming on in Russia, can you just talk about how you are currently servicing the customers that will be benefiting from that capacity addition and what that means internally, from cost savings, anything that would be beneficial to the segment, above and beyond the revenue benefits?

It should be both. We are now paying import duty taxes coming in. We are shipping product from Europe into there. There should be a benefit in cost.

On the other hand, you're not going to start the plant up running fully efficient, to begin with. So those will have to flow through. As we get the plant, over time we would expect it to improve the margins of the products we're selling into it, once the costs get aligned.

And the capacity that gets freed up in Europe, then, you've already got initiatives in place to absorb that?

We are doing things to increase the sales base within Europe, as we mentioned, selling to new channels and new products and categories within it. There will be some decrease in that. We have been preparing that for some time to be able to have our costs more flexible, to keep them in line as we move the capacity.

David Goldberg, UBS.

I appreciate all the color you guys have given about the home centers and the increase in your sales into the home centers. What I'm trying to figure out is, can you give us some idea about margins in the home centers, especially because it seems like that trend is going to continue for the near term? How much of a difference is there when you sell through the home centers versus your other channels? What's the profitability difference, the margin difference?

Historically, the margin difference was really dependent upon the average mix that you sell to customers. So what happens is, in the specialty channel, the specialty retailers are more proficient at providing different options to the consumer and helping them pick better quality products within it. So the margin difference is -- a lot of it comes from the mix differences between the channels.

So does that mean if you had better trained -- or you had salespeople in the home centers that could do a better job in either upselling customers or helping them choose better options, that the margin difference wouldn't be that significant? There's no inherent reason it would be?

There are different cost structures and a lot of different pieces, and as you go through -- I'm not prepared to give you margins of different customers at this minute.

I understand. My second question is just on the cost savings that you guys have been able to achieve. Just wondering, as you look forward and eventually if the market does start to improve and demand starts to get better, about the sustainability of the cost improvements as you look forward.

The cost improvements that we are putting -- we are really changing the way we operate the business. We've put in a lot more disciplines in the business. We've put in a lot more processes to create innovation through it and challenge the status quo, which I'm excited about. They are continuing. I think they will continue forever, as the management has improved its ability to define and execute these things ongoing.

Keith Hughes, SunTrust.

Most of my questions have been asked, but just back to Unilin real quick. Obviously, a lot of controversy in Europe. Have you seen any sort of (multiple speakers) in September, even into October, of any sort of change in the order patterns in the countries you're most prevalent in?

Not really. The market -- when we look over the market, the consumer seems to be a little separated from the banking system. They may be reading about it or not. We haven't seen a dramatic change in most of our [stuff].

Now, there is the same thing you have here, and it's hard to separate. Over a period of years, we've seen trading down, just like we have here, as people try to minimize cost themselves. But in general, we don't see a major change in the purchasing habits.

Typically in Europe, they don't use credit as much as we do. They typically save more before they spend it. And so, there's potential for having a significant change if this thing gets worse. But at this point, we haven't seen the consumers really dramatically change.

And would you say the same thing in the United States as you moved September to October in residential shipments? In terms of the shipments being more or less the same to what you saw in the third quarter?

I think that we see the -- the third quarter was a little softer than we had expected. But I'd say, at what point expected? When we came into the second half, we were expecting the second half to improve, and given the low consumer confidence level, we didn't see the improvement. There is some softening going on, and we've built it into our estimates.

Bob Wetenhall, RBC Capital Markets.

This is actually [Tom Austin] on for Bob Wetenhall. I just wanted to follow up a little bit on your conversations about Unilin and your strategy to move into the DIY channel a little bit more. I'm just wondering what you guys think the impact on margins will be long term from that. And maybe it's so small that it's not going to have a material effect, but I would assume that would put a little pressure on the Unilin margins. Do you have any kind of color on that?

Let's just make sure that we go a little bit deeper into the strategy. The strategy in Europe is to position our participation in the DIY as a step-up premium product to what they typically sell, and be the higher end of their category.

We are aligning with a limited number of DIY accounts in each marketplace, trying to position that they can improve their sales and margin by selling better quality products. So we're not trying to become the commodity supplier to the DIY marketplace.

On the other hand, the products that -- the average product, just like we discussed in the U.S. market, the specialty retailer is going to sell a higher mix of better-quality products than a DIY.

Okay, got it. So based on the fact that you are trying to be that specialty provider, you think you would be able to maintain the margins that you have historically had there?

Or close to it.

Carly Mattson, Goldman Sachs.

This is actually (inaudible) on behalf of Carly. I just wanted to ask about your cash generation and cash flow expectations for Q4 and into 2012, since it would be from the standpoint of I know you guys said you'd bought about $64 million of that 2012 maturity. But you're still planning on paying about half of that with cash by the time it comes due? Thanks.

On the 2012 maturity, I think we're probably going to -- as I mentioned earlier in the call, we bought back about $65 million and rolled that into the revolver. And I think that the majority of what's left, we will pay a little bit with cash. But most of that will be rolled into our revolver.

Stephen East, Ticonderoga Securities.

On the Australia business, one, how big is that? And does it make sense for you all to eventually put some type of manufacturing presence there?

It's presently about $50 million in sales. We are presently servicing it from Malaysia and Belgium. We believe, at the moment, that continuing to supply it from offshore makes sense. But we will have to see as we go along.

We believe that, given the size of the country and the costs of moving it within the country, that, for instance, shipping it from Malaysia, where there is low-cost labor, is advantageous. And we will have to see if there's other opportunities as we go along.

Okay, and then, if you look at your three major raw materials -- nylon, polyester, polypropylene -- in the carpet side of the business, how much are they up, generally, year over year? And how much have you recaptured through pricing? In other words, how much more do you have to go to catch up with what's going on?

Let's see. So we don't even know what the costs are going to be this month yet. What's happened is the volatility we have to deal with is really difficult to estimate. Most of the products, we are buying either at market or on contract plus cost somewhere.

You have oil prices that move up and down, you know, in the last month, say, 10% to 15%. You have commodity chemicals within each of those that come through. It's easy to have 20% to 40% movements, given the international movements of things and how things are moving across borders and supply and demand. So we sit back at any given point and try and estimate what we have and react to the changes. It's a -- we don't know what we're going to do the end of this quarter yet.

I got you. (Multiple speakers).

If you could tell me what the oil prices will be next year, it would help.

Yes, I wish I could. If we just talked about magnitudes, would you ballpark it, say, hey, I'm 50% recovered, two quarters, three quarters -- two-thirds, three-quarters? Where do you think you all are, at least in big picture-type numbers?

I can tell you that the increase that we considered putting through earlier was in the 3% to 5% range.

Okay, and then, just one last question. If you looked at just your incremental margin per dollar of sales for each unit, where are we now? You talked about taking 100 -- it's framed in the question. You talked about taking $100 million out in productivity costs, et cetera. So I'm just trying to understand what type of operating leverage you have for each dollar of new sales that come in the door.

I think we're at, for each of the three segments, about a 15% incremental margin for Mohawk, a 20% incremental margin for Dal-Tile, and 25% for Unilin. The operating earnings level.

[David Manger], [AMI Investment Management].

I was wondering what percentage of Unilin's operating profit comes from royalty payments. And as a follow-up to that, do you have an idea of the impact Uniclic's patent expiration in 2017 would have on your estimate for normalized operating margins of 15%? Thanks.

The only information we've given out is that when we originally purchased it, it was in the range of around $50 million. And we haven't given out specific information in addition to that since then.

And then, do you have a gauge of how much the patent expiration would maybe change your estimate of normalized margins in kind of a normalized environment, then?

What is the volume going to do between what's the -- all the different pieces that we have in investments and things? There's a lot of things between here and there that are going to impact the business.

I guess, just, in a normalized environment, if we were at 1.2 million to 1.5 million housing starts, how that would change that normalized figure?

I don't think I'm going to be able to answer your question.

We don't have that information for you right now.

Kathryn Thompson, Thompson Research Group.

Just on the Mohawk segment, could you give the growth rate by the different end market, residential versus your non-residential or commercial? And then, also, breaking out a little bit further, could you clarify how much of your sales in that segment were driven by volume versus pricing?

I can, real quick, just give you the volume versus price mix. It's not going to be price by itself, Kathryn.

Understood.

Volume impacted us by about 2 -- say 2.5%. Price mix impacted us by about 3%.

In terms of looking at that, your residential versus commercial -- and really, keep in mind, as modular gets to be a bigger portion of your business, that is more the commercial. Really just trying to get a sense of have you seen any change in momentum? And what is the sales momentum of your commercial side of the business in the Mohawk segment? Because that is a number that you have generally provided in the past, so just getting an understanding -- I know residential is a little slower. But (multiple speakers)

Yes. What we said earlier was that both the residential and the commercial businesses were up in the Mohawk segment, and the commercial business is up at a higher rate than the residential business.

Substantially higher than the residential.

Is it still up in the low teens?

Yes.

Yes? Okay. And as far as -- I now we've talked a little bit about multifamily. I get the impression it's not as big of a business, obviously, for you. Are you able to provide how much of your sales in the Mohawk division are to multifamily?

I don't have that. I don't have that answer for you.

Okay, great. I'll follow up with my questions after the call.

At this time, you have no further questions. I will now turn the call back over to Jeff Lorberbaum for closing remarks.

Thank you for joining us today. We think we are well positioned for the future. We continue to invest in our business and continue to improve our processes and controls. And we appreciate you joining us. Have a good day.

Thank you. This does conclude today's conference call. You may now disconnect.