莫霍克工業集團 (MHK) 2011 Q4 法說會逐字稿

Good morning my name is Kathy, and I will be your conference operator today. At this time I would like to welcome everyone to the Mohawk Industries fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions).

As a reminder, ladies and gentlemen, this conference is being recorded today, February 24, 2012. Thank you. I would now like to introduce Jeff Lorberbaum, Chairman and CEO. Mr. Lorberbaum, you may begin your conference.

Good morning. Thank you for joining our fourth-quarter 2011 conference call. Joining me on this 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 of 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 fourth-quarter earnings per share were $0.62 as reported, or $0.72 excluding unusual items, an increase of 9% over 2010. Volume and price increases as well as cost reductions contributed to our earnings improvement over last year. Sales grew by 9% as reported, or 10% on a local basis, with all segments showing sales growth over the last three quarters.

Price increases across many product categories are being implemented in the first quarter to offset higher costs. Excluding unusual items, we reduced SG&A to 18.9% of sales, holding spending flat with last year by overcoming inflation and specific growth investments. Our leverage is at historically low levels with a net debt to adjusted EBITDA of two times. And we have liquidity of more than $900 million available to redeem our 2012 bonds and provide flexibility for future opportunities.

In the US, both our residential and commercial categories expanded where the commercial category continued to expand at a faster rate than residential. Builder sentiment rose in January for the fourth consecutive month. In 2012 forecasts for existing home sales expect growth of 5% and for new home starts improving about 15%.

The trend has been improving for both US consumer confidence and employment. Our long-term outlook supports a rebound from the present low sales levels experienced by the flooring industry with future growth projected to outpace the overall economy.

Frank, would you give the financial report, please?

Sure. Thank you, Jeff, and good morning everyone. We ended the fourth quarter with net sales of [$1.378 billion], 9% up over last year. Sales increased in all segments, with both residential and commercial gaining over last year.

Our gross margin as a percent of sales was 24.3%, down from last year's 27.1%. Raw material inflation impacted us during the quarter with price increases that were going to be implemented in the first quarter of 2012 to offset the inflation.

SG&A was $269 million or 19.5% of sales, as reported. It included non-cash charges for an estimated -- it included non-cash charges for an estimated change in lease accounting and restructuring activities. Excluding the charges, the fourth-quarter SG&A improved by 140 basis points over last year.

Our team did an excellent job of managing SG&A. Our full-year dollars were actually flat with last year. We were able to offset inflation with productivity improvements. Our emphasis on cost control continues to benefit the business.

Charges included $8 million for restructuring and $6 million for a lease accounting change. Dal-Tile results included $3 million of the charges, with the balance going into the Mohawk segment. $5 million of the charges were included in cost of goods sold, and the remaining $9 million in SG&A.

Our operating margin, excluding charges, was 5.8% compared to 6.9% last year. Interest expense was $24 million, an improvement over last year's $30 million. We had better rates and a new bank facility that resulted in a lower interest expense. We are estimating our 2012 interest expense to be approximately $90 million.

Income tax rate excluding charges was 9% during the quarter. We're estimating our full-year rate in 2012 to be 20%.

Earnings per share excluding charges were $0.72 compared to $0.66 last year, representing a 9% improvement.

If we turn to the segments, the Mohawk segment sales ended the quarter at $724 million or a 9% improvement. We had a strong fourth quarter this year, with improvement in both volume and price. Our SmartStrand and polyester products both performed well.

Operating margin excluding charges was 5.7%. The margin was down as a result of high raw material costs which impacted our results. We have got productivity improvements that partially offset these higher costs.

The Dal-Tile segment sales came in at $349 million, or a 10% improvement over last year. Our business both in the US and Mexico improved year-over-year. We had one of our strongest quarters in the Dal-Tile business over the last three years this past quarter.

Our operating income was $22 million or 6.2% of sales. Operating income is up about 10% over last year with our margin percent flat.

In raw materials and transportation costs, we had some headwinds during the quarter. We're putting in price increases in the first quarter to offset this inflation.

Our Unilin segment sales ended the quarter at $326 million, up 10% over last year as reported and on a constant exchange rate basis. Our sales during the quarter were benefited by the Australian distribution acquisition that was closed during the third quarter of 2011, and price increases that we put in place earlier in the year.

Operating income for the quarter was $22 million or 6.6% of sales. Our operating income is up slightly over last year, as we were impacted by declining mix as well as startup costs with our Russian laminate plant.

Corporate and illuminations segment showed an operating loss of $4 million, which is line with our expectations.

If we move to our balance sheet, our cash ended the quarter at $312 million. That compares to $382 million a year ago. The decline is due to bonds that we paid in the first quarter of 2011.

Our receivables were $686 million and continue to be in good shape. Our days sales outstanding ended at 46.7 days, which is about flat with a year ago. Inventories were $1,114,000,000, up over last year, with our inventory days showing slight improvement over last year.

We were impacted this year in inventory by a pre-buy in raw materials, inflation, and then the Australian acquisition which added about $10 million to our inventory. We're continuing to focus on increasing our turns as we move through the year and expect to show improvement through the year.

Our fixed assets ended the quarter at $1,712,000,000 including CapEx of $93 million during the quarter and depreciation and amortization of $75 million. We are estimating that our capital expenditures for 2012 will be $235 million, with depreciation and amortization estimated to be $300 million during 2012.

Our long-term debt ended the quarter at [$1.586 billion]. We increased our bank facility by $150 million in the first quarter of 2012, with pricing that is consistent with our previous bank deal. This will improve our liquidity for any growth opportunities and provide us liquidity for payment of our 2012 bonds that come due in April.

Our net debt to EBITDA leverage of two times is at historical levels. We're finishing this year with a strong balance sheet and excellent liquidity.

Jeff?

Thank you, Frank. Our Mohawk segment sales grew by more than 8% with both residential and commercial channels showing improvement. Operating margins were compressed by higher raw material costs and the delay of our price increase until the first quarter of 2012. A price increase of 5% to 7% is presently being implemented and will partially offset material inflation in the first quarter.

We continue to lower our manufacturing costs with improved productivity, and reduce our infrastructure with efficiency improvements and restructuring activities.

In our residential business, we introduced two brand extensions in our exclusive SmartStrand product category. SmartStrand Ultra is a unique brand for the specialty retail channel with a collection of new soft, stylized products with enhanced warranties that complement their value position.

We also introduced the next generation of soft carpets with our new collection called SmartStrand Silk. No other carpet compares to SmartStrand Silk's soft feel, performance and environmental position. SmartStrand Silk is being enthusiastically received by the market and will begin shipping in the first quarter.

Our EverStrand and Wear-Dated Revive polyester products grew significantly, driven by fashionable products, excellent value and industry-leading recycled content. The expansion of our polyester collections with new styles and price points are being well-accepted by our customers.

We are integrating our premium carpet cushion into our carpet selling systems to enhance the mix and margins of our customers. Sales of our Mohawk hard surface products grew, with engineered hardwood showing the greatest gains particularly in our domestic, exotic and distressed surfaces. We also launched a new line of luxury vinyl tile with our patented Uniclic technology for easier installation. A 2% to 6% price increase for our vinyl product is being implemented this month.

Commercial sales posted strong year-over-year gains for the sixth consecutive quarter with both broad loom and carpet tile increasing. We have expanded our specifications with national accounts and have realized the strongest growth in corporate, hospitality and retail channels.

In our premium [Belize] brand, we introduced a SmartStrand collection that leverages its stain resistance and environmental benefits. A Duracolor collection with premium features and more economical prices was also introduced.

We have improved our delivery time on all our commercial products and expanded our quick ship offerings. In addition to the carpet price increase, we also raised delivery charges to offset transportation costs. We believe our prices will align with material costs when they are fully implemented in second period. And we'll respond to future inflation as necessary.

Inventory levels will increase in the fourth period in anticipation of higher material prices in the first quarter. During the quarter we completed the second phase of our 2011 extrusion expansion to satisfy the growing demand for our SmartStrand and EverStrand products. We are increasing our carpet tile production about 35% with the majority currently operational.

We implemented a new soft surface printing technology with enhanced design capability and productivity to strengthen our hospitality and printed rug lines. We reengineered our existing backing systems and consolidated our offerings to provide better performance, service and value. During year we deployed new technologies to increase our recycled content, supporting our commitments to sustainable manufacturing.

Our Mohawk segment improved productivity, yields, and performance of our overall infrastructure. We completed the closure of a staple yarn mill and associated extrusion asset, and a commercial carpet manufacturing facility. By improving product flow we further reduced regional warehouse capacity and improved our costs.

Dal-Tile sales grew about 10% during the quarter, with increases in commercial sale still exceeding residential. Hospitality, healthcare, retail and government sectors led the growth of our commercial business.

Our residential sales continued their positive trends for the third consecutive period. Our investments in design technology, product expansion, marketing and distribution sustained growth of our business.

In the first quarter we are anticipating price increases of 3% to 5% on certain products to cover the higher material and transportation costs.

Our statements retail program is selectively adding retailers who want to be the preferred destination for ceramic and stone products. American Olean has replaced three distributors in smaller markets to improve our service and market position. We increased our presence in the home center channel with expanded offerings of both floor tile and wall tile.

We are broadening our design alternatives for larger ceramic tiles at all price levels to meet the expanding demand. Our new ceramic introductions replicating wood finishes are being well-received for use in areas that require high durability or resistance to water.

In Mexico, we are significantly growing our sales with the expansion of both our customer base and product offerings in anticipation of the completion of our new facility in April of this year. The facility's red body tile will complement the higher-value products which have been our primary focus. The new sales we're presently developing will be converted to red body and provide higher margins when the plant is operating efficiently.

At the most recent show in Mexico, Mohawk received an award for the best ceramic tile product in the industry. Price increases of 3% to 5% are being implemented to recover increasing material and energy costs in Mexico also.

In both the US and Mexico, we are increasing the sales of products manufactured by our Chinese JV. In China, new product introduction using our reveal imaging and other high-performance technologies are improving Sanfi's styling and product mix. A new showroom concept is being introduced to enhance the effectiveness of our retailers and improve our distribution.

Changes in government policies to reduce real estate inflation have caused the ceramic industry to slow. We're adjusting our cost structures, product lines and business strategies to accommodate the present environment. Recent banking policy changes to encourage economic expansion should help our industry.

During the quarter Dal-Tile reduced costs with improvements in production speeds, yield and process controls, along with reductions in waste and energy. With recent investments, we're recycling a higher level of internal waste back into our processes. Sales of our Reveal Imaging continue to strengthen and we have added capacity in the US and Mexico to meet the demand.

Our natural gas consumption per unit improved to an all-time low in 2011. Logistics improvements increased shipments from our manufacturing sites directly toward customers, and we implemented lower-cost transportation methods to minimize costs.

Unilin sales grew 10% as reported and on a local basis. Operating income was reported at $21.6 million, up slightly from last year. Unilin's margins were impacted by material inflation, declining mix, and the startup of several major initiatives.

Our laminate and wood flooring products continue growing in Europe, supported by the success of our new product introductions, expansion of our DIY strategy, the addition of Australian distribution, and Russian manufacturing. In Europe we are implementing a laminate price increase of 2% to 3% in the first quarter.

In the fourth quarter US wood sales grew, laminate was slightly softer, and we saw reductions in inventory by our customers. In the US, we received additional commitments with home centers for both laminate and wood, which will begin shipping in the first quarter. Our new laminate introductions are addressing today's fashion trends with larger formats in both wood planks and tiles.

Visually, our new introductions have more character with new rustic, antique, and reclaimed looks, complemented with precise embossing to enhance their realism. Our wood products are following similar design trends, using soft scraping and multiple color applications to achieve rich appearances. We are introducing more luxury vinyl tile and incorporating our patented click systems where suitable.

Our US solid wood facilities are being modified further to improve our productivity and lower costs. The consolidation of our wood plants in Malaysia is on track for completion in the first quarter, reducing costs and increasing capacity.

Our Russian laminate plant is in the startup phase and has begun delivering products comparable to our European production. We will increase production at the Russian facility during the first half by offering more locally-produced products.

We completed the acquisition of an Australian wood laminate distributor at the end of the third period. Activities to improve processes, coordinate supplies, and increase market penetration are ongoing. In the future other product types may be distributed in Australia.

Our board business in Europe is improving our topline growth from our cyclical bottoms and we have raised prices to recover higher material costs. However, there is significant pressure on our margins due to limited construction and continued excess industry capacity in many of our products.

We're combining our two board sales forces to increase distribution, product penetration and efficiency. Additional strategies to increase sales, reduce the infrastructure and increase productivity are being executed.

Our insulation board business, which initiated production about two years ago, is exceeding our expectation and is presently being expanded. We have also purchased another site in France to manufacture insulation boards, which will be operational in the second half of 2013.

Our click furniture rollout is progressing in Europe and we have made additional investments to communicate the features to the retail consumer. We entered into our first licensing agreement for manufacturing click furniture with our patented technology, and new products have been designed to sell components to other manufacturers of furniture.

Mohawk's strategy to have a healthier workforce and reduce costs for both the Company and our employees is succeeding. We are improving the health of our employees and their families by providing on-site clinics, disease management, and education on assessing quality care and shopping for the best value. Our [YourChoice] health plan will be fully implemented in 2013 and should further advance these trends.

Training Magazine recently recognized Mohawk as the fourth best organization in the country for employee-sponsored training and development programs. In the past six years Mohawk is the only manufacturing company to be selected as one of the top five recipients of this award.

Throughout this cyclical decline, we've driven significant improvements in our business strategies, organizational talent, product innovation and process enhancement. Improving consumer confidence, a positive employment outlook and lower housing inventories are cause for future optimism. In the first quarter we anticipate additional sales growth, but at a lower rate in the fourth quarter which had easier comparisons.

Presently we are raising prices on many of our products to recover the inflation of our materials. These increases will not be fully implemented until the second quarter, reducing our first-period margins. The startup expenses of our major projects will impact our short-term results and additional costs will decline as they ramp up.

We expect continued sales growth, higher pricing and productivity improvements will impact favorably our 2012 results. With these factors, our guidance for the first-quarter earnings is $0.47 to $0.57 per share, excluding any restructuring costs.

The flooring industry should continue its improvement throughout 2012. We have many initiatives to strengthen our product offering, expand our geographic reach, recover raw material inflation, and reduce our costs. Our financial structure is strong and we can take advantage of new opportunities.

With that, we'll be glad to take questions.

(Operator Instructions) Michael Rehaut, JPMorgan.

The first question I had was on the topline expectations. You know, you had said in the release that you expect growth in the first quarter but to a lesser rate than the fourth quarter, due to easier comparisons you had in the fourth quarter.

I was interested if that kind of slower growth rate you expect to be uniform across all three segments, or with the initiatives you are having, for example with the home centers, with the laminate and wood, if Unilin could maybe benefit from that. Or if there's any type of Company-specific trends that might allow one segment maybe do a little better than another. And I guess that question is also more broadly for 2012.

We typically don't get into the exact details on each of the segments in the four pieces. I can tell you that if you look at the full year 2011 growth, we expect those trends to continue going on into 2012.

And, you know, what happened in 2011, though, we had in the second half the comparisons were a little easier, so they'll be a little different in 2012. But we think that the present trends we're seeing will continue in all of the different categories.

Okay. I guess the second question is on the margin side. With Unilin kind of lower than where it's been in the last -- previous few years, and I think you guys have talked about some of it being negative mix, I guess going forward over the next two or three years should we expect a 9% to 10% type of level as the new normal?

And also, if you could give us any thoughts around the royalty situation, if that should change the profitability of the unit over the next year or two.

Do you want to start with that one?

The margins in the Unilin segment are depressed as the whole market has gone through a downturn. The market continues to remain difficult, so the margins have been compressed.

We see the market remain difficult in the period. As we look forward into the next year we see slowing of the European economy in general.

The compression, I guess, relates back to -- in Europe there is more excess capacity in the marketplace as the economy really hasn't and the building segment pieces have not bounced back yet, and there are still customers trading down. What's happened to ours in the short-term is that our portfolio growth has been more in the non-laminate products. And that growth in the non-laminate products don't have the same margins as our differentiated laminate products.

If you look over the long term, we expect the margins to improve as we come out of this thing going forward. But you know, I think they'll probably be midteens. Rather than we are up in the 18% range, 16% to 18%, they'll probably in the 14% to 15% when we come out of this thing.

Thank you.

David Goldberg, UBS.

Good morning it's actually Susan for David. It sounds like as we go through 2012 you are focusing more in terms of new products and expansion and those kinds of efforts, versus taking cost out of the business. Is that -- should be expect you're primarily done with a lot of your restructuring and that most of that is sort of behind us as we go through the year?

We have done a lot of restructuring in all the businesses. We don't have any planned at this point. But I have to tell you, we are always looking to better position the business. If we identify opportunities to do that, we will do it. We'll take short-term charges and implement those as we go forward.

If I left you the impression were through with cost reductions, I made a big error. It is on top of the list of each of the divisions. It's pushed down through the pieces. We have developed over the last few years really good systems of identifying potential opportunities.

They are all aligned by business, all the way down to the department levels. There are monthly reviews of those pieces. And I mean, we are driving them hard.

Okay. I just meant more in terms of the bigger trends that we are seeing. And then just can you give us -- has there been any change in what you're seeing in terms of maybe M&A opportunities? Are you seeing more attractive things come up as perhaps the market stabilizes a bit?

There are some conversations going on, you know, as typical when you are in these points in time you are sort of at an inflection point, where the sellers of businesses believe that they want to get paid for the future improvements. And the buyers want to pay for what the business is presently doing. So, in those times, where -- in time there'll probably be more acquisitions going on in the marketplace over the next year. But it has to move through those where the profits align with the expectations on both sides.

David McGregor at Longbow Research.

Good morning. It's actually Jarrod Rapalje filling in for David. My first question is on margins. You listed a lot of startup expenses that are expected to weigh on margins by segment.

Can you just talk about where you expect to see the brunt of this effect margins, maybe some quantification about how much of an impact you can see? I know you're talking about raw material inflation being neutral starting in Q2, so what kind of pressure can we expect to see from the startup costs?

In the fourth quarter there was about $3 million of startup costs. I don't have about it by the quarter. For next year it's probably going to be an additional $8 million to $10 million with most of it front-end loaded in the first half.

Okay, is that -- can you talk about where most of that is going to be seen by segment?

Most of that is going to be in the Dal-Tile and Unilin businesses. The Dal-Tile is starting up the Mexican plant and the Unilin putting more investments in the Russian plant getting it off the ground. And then there is a lot of smaller things across all businesses.

Okay. With the Mexican plant, you mentioned it's going to be up and running by next -- by April. How quickly or how much of a bump can we expect to see from that? And in terms of profitability, how quickly will it be accretive to the P&L?

The capacity put in Mexico, the average selling price of the material is about half of what it is in the US because of the different materials, as well as we don't have the same distribution margin in it is well. The plant, as it is set up, will probably have capacity for around $50 million of additional sales when it starts up. It can be significantly expanded from that point.

It should impact the margins when it gets running sometime towards the end of the year. But expect the cost to come down as we move the production from our -- either Northern plant which we are actually shipping higher cost products at lower prices getting prepared for that, and as we bring other products in, it should impact positively the margins in Mexico a few percentage points.

Okay, if I could sneak one last one in there, within Mohawk this quarter can you break out the volumes of residential and commercial? And tell us what you're seeing in the commercial business if you -- any slowdown over the last several months? Thanks.

We don't break out the specific pieces. I think in last year the commercial carpet grew as an industry somewhere in about 7%. Part of that is driven by a shift to higher-priced tiles, so that's actually growing -- the dollars are growing faster than the units in the whole industry.

As we look at the residential business in our thing, we see the industry as a whole, we think is probably flat to off slightly but improving. Our view going forward in 2012 is that the residential piece is going to continue strengthening with the employment and the economy. And we really expect the renovation and building businesses to improve. It's what's built into our own forecast.

Okay. Thanks, guys. Good luck.

Dan Oppenheim, Credit Suisse.

Thanks very much. I was wondering as you were talking there about the switch to some higher-priced tile, within all the segments really are you seeing much of a positive mix shift occurring where the past couple of years is definitely a shift towards more commoditized lower-priced items? Are you seeing anything of that? Any thoughts in terms of positive impact on margins from that?

We're not seeing a significant change at this point. We believe it's bottomed out and we are optimistic about it improving with the economy. But I can't say we have really seen it yet.

Okay, thanks. And the second question, just wondering, when I think of within the Mohawk segment, what do you think about the ability to push for further price increases if needed, given input costs and such, after seeing some challenges with pricing last fall? How do you look at that if there is a need for further price increases?

We have -- in the last years we have gone through a significant inflation in the carpet industry. We have been able to pass it through. What you saw last year was not that we weren't able to pass it through, it's that the timing was moved a month or two, which is not exactly the same thing.

I'd see no reason why, if the raw materials go up, that we won't pass them through because they're such a high percentage of the total costs when they go up.

Dennis McGill, Zelman & Associates.

Hi, good morning. I guess my first question is similar to the pricing announcements. I think within the Mohawk segment, I believe the announcements you made last year would get you to a double-digit type increase. But the realized price adjusted for mix is somewhere in the low single digits.

So I was just hoping to square those two. If you could talk about how much of the drag was mix, what the effective pricing really was, and anything else that may be causing a divergence in that, timing or something else?

There's a lot of moving pieces. So, first, you have the price increases that went in. I don't have it in front of me; the average pricing went up.

But what happened is not only are you having those go up, you have a change in mix from nylon to polyester. So there was a mix change, so you bought similar value products out of lower raw materials. There's a dramatic shift going on in that offsetting some of the price increase that is going on.

In addition to that, you have the consumer trading down from higher-priced products to lower ones, so the realization to the price in total is different. I don't have that by segment. If you look over the whole business, I would guess that about 4% of the total was price increase across all the various businesses. Of the total dollar increase, about 4% of it is pricing across all the various businesses.

Would you expect that the Mohawk business was above that average?

I don't really know, because -- it was probably a little bit, but I don't know for sure because of the mix change was so dramatic.

Okay, got it. Separately, you touched on this a little bit, but just curious on your thoughts. As best as you can quantify it, share across the different segments, what you think you did plus or minus in 2011. And then as you move into next year, it sounds like the share gains are most pronounced in the Dal-Tile and Unilin business, but any other expectations you would have for share growth?

In most of the businesses we don't have specific numbers to get them at this point. The industry numbers aren't available in most of the different pieces.

I think in the Mohawk segment we turned the corner and I think that we did slightly better than the industry. We put a lot of things in place to improve our share over the past year through enhancing our sales team, expanding our polyester and SmartStrand offering, improving our commercial offering on those.

In the Dal-Tile business we keep expanding our presence and broadening our product line in the United States. The commercial businesses improved in the US and we have a larger share of the commercial business and the residential business in the Dal-Tile business. I think we're set up to grow faster than the industry as it picks up.

The Unilin business has a lot of different parts in it. I think that our laminate business we improved share in. But we're in a lot of businesses in Europe that are highly depressed, and I don't know exactly when they're going to come out.

Stephen Kim, Barclays Capital.

Hi guys it's actually John Coyle filling in for Stephen. Just want to try and understand the nature of the homebuilder relationship.

Do you guys have an idea like what your share is with the top 20 builders, how the relationship would work between you guys and the builder? Is it exclusive or does it vary regionally? And then if you could maybe quantify your leverage to new single family starts.

Yes, we do have the information. No, I don't have the information. We track all of the major builders in each of the different relationships we have.

The major builders we have multiple ways of getting to them depending upon how they want to do business. Some of the builders have specifications that they specify the products to it. Some have national specifications. Some have regional specifications.

Some buy through contractors that they make arrangements for. Some control the purchases that the contractor provides them, some the contractor provides them. So we develop relationships with the various contractors within it. And there's -- you get to the smaller ones, there has been 100 other ways to do business.

So there's all types of ways. I think that we have good relationships with most of them. We're doing things to increase the specification in all of our businesses with them. I think we are well positioned in the marketplace and we'll continue to do things to try to maximize our share.

When we look at it this year, it's going to improve we are guessing about 15%, and so 15% of a relatively low-level versus historical. And we hope to participate more than our share of it.

Got it. And then just in the event of -- sorry, of an increase in volume, just trying to get an idea of the margin leverage across the various businesses. Could you maybe talk about them in order of magnitude, how you look at each division on like an incremental margin basis?

Yes, at the operating margin level I think we're looking at the Mohawk division. It may be 15% incremental margin. And then Unilin or rather Dal-Tile at about 25%, and Unilin about 30%.

Bob Wetenhall with RBC.

Good morning, how are you? This is Steven Bachman in for Bob.

Good morning. We are well.

Good. Given the increasing confidence for both builders and investors over the past couple of months, has anything specifically changed in the broader market to give you guys confidence that the price increases can be successfully implemented versus a couple months ago?

I mean, the price increases for the most part are well being executed already. So it's not like we don't know where they are. They're going through the marketplace and being implemented as we speak. We understand the competitive market at this point, and they're basically in place moving forward.

I guess as a clarification, is there something that has changed that you think is the reason they're going through? Or is it just kind of this is the way the market works?

I don't see anything unusual about it. This is the way it works.

Makes sense. And as a follow-up, can you give an overview of how much some of your key raw materials have increased on like a percentage basis over the fourth quarter, be it propylene or something else? And if there's any incremental view on the extent to which they are rising in the first quarter?

On specific items, you're asking?

Yes, like propylene for example.

I don't have those in front of me, but there are charts that show market prices of them that are readily available. What happened in last fall, the polypropylene were high. And they took a dip and then they came back up where they are.

The prices going forward, they are anybody's guess. They're driven by oil prices on one side, their chemical capacity on the other and worldwide demand. And they can be going opposite directions. So far my forecasts, I mean, they're not worth the paper they're written on 3 to 6 months from now.

But we do believe our current price increase we've got in place that we're implementing now is going to cover any -- and the present raw material costs, and as Jeff said earlier, we'll adjust further as we need.

John Baugh, Stifel Nicolaus.

Thanks. Good morning, Jeff and Frank. I was wondering if we could look at raw materials in calendar 2011 in full.

You mentioned I think that you estimated 4% pricing for the year. What would raw materials have been? And what I'm trying to get at is, you keep talking about catching up with the prices you are going to implement now.

I'm wondering sort of what the dollar spread was between how much raws went up in 2011 across all your businesses versus how much your prices went up.

We don't have the exact numbers. The raw materials in total across all the different businesses probably went up approaching, you know, $200 million across the various businesses. I don't have exact numbers in front of me.

And what happened that is we passed through a lot of it. On the other hand, a lot of the productivity and improvements we made offset that, which is why the margins didn't jump dramatically.

So -- but if that were true -- you did, what, $5.6 billion in revenue, and you said 4% of that was maybe pricing.

Price and mix, John. We can't separate those two (multiple speakers) so mix is a negative in that equation, right?

Okay. And then in terms of what's going to flow through your P&L here in the first quarter, because I anticipate there's still margin pressure there. But what's happening right now with the key raw materials on the spot market if you will? We've seen oil move dramatically here. Has there been a recent spike in any of those or not?

There is not enough time passed to see the impact of that and we're still waiting to understand it. And with the erratic part it is, it's hard to tell what it's going to be a month from now.

My final question would be on Unilin, if we were somehow able to separate out just the European laminate business, Jeff, has the margin there pretty much held up? Have the volumes pretty much held up? I understand all the board issues and other things where it sounds like it's pretty depressed.

In Europe you have the same thing that's gone on here, is that there has been trading down of the quality of the products, so that as you traded down some of the margins were compressed with the trading down.

We have been able through the expansion of our distribution into the DIY channels and our products to, I think, do better than the marketplace. And in volume on the other side, we think our margins are much higher than the rest because we have no commodity business in that business, whereas other participants have huge commodity businesses.

Sam Darkatsh, Raymond James.

A couple of questions here that are left. Specifically related to Dal-Tile pricing, I know historically that it has been difficult to get price in ceramic tile because of all the import pricing pressure. Do you anticipate there being issues with this particular price increase? Are the importers seeing the same inflation in the El Paso fires that you folks are seeing? What is the sense of the ability to jam that one through?

I can't speak for all the importers. I could tell you we're seeing it in Mexico, in China and the US. So the raw materials in every market are going up. They're the same suppliers across the world, so all markets are having those.

The other part is, that you have to keep remembering in ceramic, is that a large part of the costs are moving it to the destination and transportation, and I don't care where you buy it from, it goes up.

Okay. Just last question, then; you're talking about your liquidity being $900 million and you have the bonds coming due. I guess that leaves about $600 million or so in free liquidity to make an acquisition, if need be. I guess more than half of that would be, I'm guessing, tied up in Europe.

So does that mean that, if you were to make a deal, that you would lean more towards looking in the European theater for acquisitions because that's where the cash is tied up?

We are used looking for places to use the cash in Europe, but you are assuming that I don't have any other options to raise capital, which I don't think is correct.

And let me just clarify. The money that is outside the US, we can use it anywhere outside of the US, not necessarily just in Europe and not have tax consequences.

Understood, thank you much.

Keith Hughes, SunTrust.

Thank you. As you look at the organic growth, I believe you had different days in the fourth quarter 2010, an adjustment we need to make to get to the core number?

The days in 2010 and 2011 fourth quarter, Keith, were about the same in those two.

Okay. And if we look specifically in the US carpet market as the big surge in polyester product, I guess have we seen that peak in the last couple of quarters? Is it still continuing? What is your view there, Jeff?

We think the trend is continuing and it is going to continue. Polyester products are being able to be put in a broader selection of products. The customers are looking out to provide the most value to their consumers. They're trying to offset the price inflation of the raw materials.

So we believe that polyester will continue growing, which is one of the reasons we invested almost $100 million in expanding our extrusion capacity to expand support it and our SmartStrand. The two things are different. The SmartStrand is going into higher value products and we really believe that we have a huge opportunity in the high-end with the new Silk products we are introducing.

There are two trends in the marketplace. One is cheaper products and polyester, and the other is softness. And our Silk products are a dramatic step change from the marketplace.

When we get a stronger economy, most likely the mix will go back the other direction in fact, to the high-end of the market. It appears you have a lot more competitors at the low end, particularly in polyester, one particular new entrant. When we go back to a shift to the high-end, will that be a share gain opportunity for Mohawk?

We always try to improve our position in all the pieces. We participate in all the parts of the marketplace. I think that as it shifts -- it's going to shift back, because nobody wakes up in the morning and says they want the cheapest thing in their homes. They all aspire to have better.

And there's been a compression through the entire channel about the retailer trying to present a value to the customer to get a bigger share. And the supplier is trying to meet those needs, so that compression has made it much worse. At some point it's going to turn and we think we are positioned to participate in both.

[Alex Cook], Voyant Advisors.

Hi, good morning guys. What percentage of that increase in inventory related to raw material cost inflation? And what percentage related to inventory quantities?

The raw material inflation was about $26 million but -- I'm sorry, $44 million. But we also, as I mentioned we bought ahead. We strategically increased our carpet raw material inventories about $26 million to get ahead of some cost increases.

And that is on a year-over-year basis?

Yes.

And then you guys mentioned a change in lease accounting, but in the earnings release you guys called it a correction of an immaterial error. So this is a change in lease accounting or was it a natural error?

It is -- let me just kind of go through that for you. It's, first, to make clear, there is no cash impact on this. The accounting rules here require that uneven lease payments be expensed on a straight line basis and we were previously estimating the amount.

We put in a new lease accounting system that gave us a more precise number, and that's what we are recording now. So it is true-up to get us to a more precise number.

Okay, thank you. And then one last question; you'd mentioned that there would likely be restructuring charges in FY 2012. I was wondering if you could quantify what the restructuring charges would be in Q1 and in FY 2012.

What I said was there was no restructuring at this point, and that we're always looking to better position the business. And if we find things we could do, we'd do them.

Eric Bosshard, Cleveland Research.

Good morning. This is Tom Mahoney calling in for Eric today. Just quickly, what are you guys seeing in January/February versus the 10% organic number in the fourth quarter?

We are seeing a continued trend of the sales level. What we said was the second half of last year, and the fourth quarter in particular, had easier comparisons because the prior year, the volume went up in the first half and was under pressure in the second half. From there, we said as we look forward into this year, we think the overall growth for 2011 will continue into there, noting that the comparisons will be a little more difficult, though.

Okay. And then what's the best way to think about the Q1 comparison? Because if you take out the calendar impact from Q4, sales were up -- from Q4 2010 sales were up 2%. And then you move into Q1 2011 and organic sales were flat. What's the best way to think about the comparison in the first quarter?

I'm not sure we followed your numbers there, your percentage increases.

They don't sound like they are aligned with ours.

Okay, we can follow up after the call.

Yes, that might be better.

At this time there are no other questions. I will now turn the call back over to the presenters for closing remarks.

Thank you very much for joining our call. We look like we're well positioned in the marketplace and we are optimistic about 2012. Have a good day.

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