莫霍克工業集團 (MHK) 2012 Q2 法說會逐字稿

Good morning. My name is Bethany and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries second-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 call is being recorded today, August 3, 2012. Thank you. I would now like to introduce Jeff Lorberbaum, CEO and Chairman of Mohawk Industries. You may begin your conference.

Good morning and thank you for joining our second-quarter 2012 conference call. Joining me on the call is Frank Boykin, our CFO, who will review our Safe Harbor statement and later our financial results. Frank?

I would like to remind everyone that our press release and statements we make on this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, 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 a 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. Jeff?

Thank you, Frank. Our second-quarter earnings per share were $1.06 as reported, or $1.14, an increase of 20% over 2011, excluding restructuring charges. Selling prices offsetting raw material inflation, productivity gains, product mix improvements and lower interest costs all contributed to our results. Sales increased 2% on a constant exchange rate with commercial sales continuing to outpace residential sales. We continue to control SG&A costs while increasing new product investments across all businesses.

During the quarter, we generated adjusted EBITDA of $187 million, free cash flow of $96 million and paid off $336 million of senior notes. US commercial activity continues to expand as it has for some time. The residential multifamily category is improving with rising occupancy and additional construction projects. Residential new construction is rebounding from a low level as reflected by the National Association of Homebuilders Confidence Index reaching its highest level in five years. Residential remodeling continues to lag due to concerns by consumers about the general economy and compressed housing prices. As the second period progressed, the flooring industry slowed along with retail in general. Frank, could you give the financial report please?

Yes, thank you, Jeff. Good morning, everyone. Net sales for the quarter were $1.470 billion, down 1% as reported, or as Jeff pointed out, up 2% on a constant exchange rate basis. Higher prices and better mix offset lower volumes in the quarter. Overall, commercial and sales outperformed residential.

Our gross profit margin was 26.4%, an improvement over the 25.9% last year and up 70 basis points over last year, excluding restructuring charges. SG&A was $281 million, or 19.1% of sales. We held dollars flat to last year with emphasis on cost control placed across all of our businesses. We are focusing on reviewing all functions to apply lean principles throughout the business to continue to control costs.

Restructuring charges were $8 million. They included $7 million in the Mohawk segment and $1 million in the Unilin segment. We closed the year on plan and consolidated other operations in our Carpet segment and then we have also announced an additional carpet plant closure for the third quarter.

Our operating income was $116 million with a margin of 7.9%, excluding charges. Operating income improved 7% over last year as a result of our many efforts over the business. Interest expense was $19 million and improved $7 million over last year. The improved results from rating agency upgrades, as well as lower rates realized meant our 2012 bonds were rolled over into the revolver. We expect similar results in the second half for our interest expense.

Other expense was down primarily due to foreign exchange. Our income tax rate, excluding charges, was 18%. We expect a rate of 19% to 20% in the second half. Earnings per share, excluding charges, was $1.14 per share, which was a 20% improvement over last year.

If we jump to the segments, the Mohawk segment sales were $734 million, down 3% from last year. Carpet price increases implemented in the first quarter are holding up well. Mix improving with more activity in premium products also benefited our sales. Rug continues to be impacted by lower retail activity. Operating income, excluding charges, was $45 million, or 6.1% of sales and improved 110 basis points from higher pricing, better mix and productivity.

In the Dal-Tile segment, sales were $404 million, or up 7% over last year. 8% up if you look at it from a constant exchange rate basis. All categories and geographies performed well. Operating income, excluding charges, was $36 million, or 9% of sales. Higher volumes and productivity improvements impacted us favorably in this segment.

Our Unilin segment sales were $354 million, down 2% from last year. However, if you look at it on a constant exchange rate basis, it was actually up 7%. We continue to grow the top line in this segment even with the slower European economy. Operating income, excluding charges, was $41 million, or 11.7% of sales. It was impacted by lower mix and inflation headwinds, partially offset by productivity. The year-over-year impact of foreign exchange was about $4 million unfavorable in the quarter.

And then finally in the Corporate and Eliminations segment, our operating loss was $6 million. We continue to anticipate a full-year loss of $20 million to $25 million, which is in line with last year.

Moving to the balance sheet, our cash ended up at $319 million. We had strong cash flow this quarter. Cash flow from operations was $140 million and free cash flow was almost $100 million. This allowed us to build cash and pay down debt during the quarter. Our receivables ended the quarter at $782 million. Our accounts receivable aging remains strong with our days slightly up due to channel mix changes.

Inventory was $1.161 billion and increased $58 million over last year. We were impacted by higher inventory levels required for new plant startups, as well as building inventory for our peak fall selling season. We expect to show improvement at the end of the year. Fixed assets were $1.652 billion at the end of the quarter. This included capital expenditures of $44 million. We estimate that capital expenditures for the full year will be $210 million and depreciation and amortization of $300 million for the full year. Long-term debt was $1.628 billion, down slightly from a year ago and our net debt to EBITDA ratio was 2.0 times. Jeff?

Thank you, Frank. The Mohawk segment's adjusted operating income margin increased 110 basis points over 2011 with gains from pricing, improved product mix, lower cost from productivity offsetting lower volume and higher material costs. Segment sales were down 3% during the second quarter. Carpet sales for both the industry and Mohawk were approximately flat compared to last year with residential remodeling activity slow.

Our rug sales continue soft due to lower retail sales, as well as retailers deferring promotional activities and further reducing inventories within the channel. Carpet price increases were fully implemented in the second quarter to offset inflation. Our carpet raw material costs have stabilized in the period. We do not see significant cost changes from the fall in oil prices as certain chemical components increased due to worldwide demand.

During the quarter, we completed the launch of our SmartStrand Silk collection and consumers embraced its surpassed softness, high performance and proprietary environmental features. Our innovative merchandising systems highlight Silk's superior luxury and ease of care. We're broadening the styling options of our luxury silk collection and leveraging our technology innovation into other products and channels that should benefit future growth and product mix.

Early in the third period, residential carpet orders are showing some improvement and new product introductions in both carpet and rug channels should grow our business in the second half of the year. We anticipate continued favorable product mix and stable input costs in the second half.

In our Mohawk-branded hard surfaces, we introduced new soft-scraped wood products, porcelain designs using our industry-leading Reveal technology and laminates inspired by exotic woods. Sales of our new luxury vinyl planks with Uniclic technology are growing because of their easy installation and enhanced visuals. During the period, we implemented a 2% to 6% price increase on our vinyl products and announced a ceramic price increase of 3% to 4% to recover inflation.

In the commercial category, new performance and styling enhancements have helped to improve margins in key distribution channels. In the expanding hospitality sector, we introduced a new room carpet collection with faster delivery to reduce room renovation time. Our new Lees and Karastan commercial products now feature a new higher value fiber that provides the same high-performance attributes at improved price points.

For the growing healthcare market, we introduced our new SmartStrand technology with its superior stain resistance and durability in new commercial broadloom, as well as tile products. In the second half, we expect to further expand SmartStrand into the corporate market.

We executed productivity improvements across the business with particular gains from our capital investments and reduction of waste. In the period, we reduced staple manufacturing capacity and in July, we announced the yarn plant consolidation, which will improve efficiencies further. We are increasing extrusion capacity to meet the growing demands for our filament products.

Salesforce training and new CRM technology are creating product opportunities and enhancing the effectiveness of our residential and commercial presentations. Dal-Tile sales grew 7% during the quarter or 8% on a constant exchange rate. The segment posted gains from increases in both residential and commercial sales and growth in the Mexican market. Operating margins were enhanced by higher volumes, improved productivity and increased yields. Price increases of 3% to 4% have been announced for ceramic in the third quarter to recover inflation.

Across all residential channels, sales grew with new wall and floor tile products that feature larger sizes, expanded Reveal Imaging designs and new wood visuals. Our new statement selling system is enhancing our aligned dealer ceramic sales by improving the selection and design process with consumer-friendly merchandising. Over the next few years, we anticipate installing statements in several hundred aligned ceramic retailers. We are increasing our SKU productivity by introducing better selling designs, taking out product redundancy and eliminating low-volume products.

Commercial sales remain strong with retail, restaurant and hospitality sectors outperforming our other commercial channels. Our Dal-Tile and Mohawk commercial organizations are better leveraging their relationships across customers to increase the specification of both our ceramic tile and carpet on major projects. We have launched a new luxury ceramic collection that offers unique textures, sophisticated design, contemporary shapes and fashion-forward colors to improve our position in the premium commercial category.

In Mexico, our new plant in Salamanca is operational and producing red-body tile for the domestic ceramic market. The plant startup costs remain in line with our expectations and we anticipate positive contributions in early 2013 due to higher volume and productivity. The Salamanca location is allowing us to expand our sales in the central region, which has the largest population and greatest market potential.

Through our leading design, higher value and superior service, our sales are outpacing the Mexican market, which is forecast d to grow about 5% this year. We are adding marketing resources to increase our customer base, broadening our product offering and becoming a total resource for our existing customers.

In China, the softening local economy and higher European duties on ceramic exports have created additional challenges for the ceramic market. Government actions are expected to improve the local real estate market and benefit our industry. Since entering into our Chinese JV, we have implemented numerous improvements to reduce costs and differentiate our offerings.

We have increased our sales outside China through Dal-Tile's US, Canadian and Mexican channels, as well as other areas of the world. We have changed the structure of our JV to increase our position in the more developed southern region, which has a greater premium market and exited our participation in the north where sales are largely dependent on commodity products.

During the quarter, Dal-Tile's lower manufacturing costs through higher kiln efficiency improved material formulations and increased recycling. In order to meet the growing demand for porcelain tiles, we converted some of our mosaic and floor production to porcelain and added our Reveal Imaging technology to create more sophisticated visuals. This reengineering also improves our ability to participate in more outdoor applications of mosaic and floor tiles.

We also made production changes to support a shift in the market to larger sizes of wall tile with enhanced style and design. With ceramic sales strengthening, we opened our first new local service center since 2008 in North Dakota. We also reduced freight expenses through new carrier relationships, equipment modifications and higher utilization rates.

Unilin's second-quarter sales decreased 2%, but increased 7% on a constant exchange rate. Gains in the home center channel, price increases, installation product growth and our Australian acquisition compensated for the general slowing occurring across Europe.

As a reminder, our European business is concentrated in the Benelux, France, Germany, UK and Russia and is seasonally slower in the third period. Our margins continue to be impacted by negative product mix from consumers trading down and material inflation.

Outside North America, laminate and wood flooring sales grew from continued expansion into the DIY channel, expanded distribution in the UK and Australian sales. Later this fall, we are introducing luxury vinyl tile utilizing our click technology to participate in this growing European category.

Our Russian facility is progressing with increased productivity and is manufacturing more complex products. We are expanding our customer base and product distribution even as we see signs of a slightly slower Russian economy.

In Australia, we increased prices 2% to 5% on all products to cover currency changes and freight costs. Our South American joint venture will introduce a new premium Quick Strip branded collection and better styled product ranges under its existing brand.

We completed consolidation of our wood plants in Malaysia, which increased our production capacity and reduced manufacturing cost. We continue to encounter some headwinds from the stronger local currency, increasing export costs to Europe, which we partially offset with a price increase of 3% on our wood products.

In North America, we experienced good laminate growth through increased promotional activity by large retailers and greater penetration in the home center channel. Laminate collections featuring richly embossed surfaces, premium long plank and our proprietary GenuEdge technology improved our mix in both the remodeling and new construction markets.

Several new wood products were introduced to enhance our product mix with innovative finishes, soft-scraped surfaces, beveled edges and unique textures and color variations. We continue to expand our North American distribution and are focused on gaining share through innovative product differentiation.

Our European board products were under pressure from excess market capacity and higher raw material costs. Insulated roofing sales declined in Europe as the housing market contracted, but were offset by the growth of our insulation panels, which helped meet energy efficiency goals. We are increasing our insulation panel production in the third quarter to satisfy expected growth and we are planning to construct another facility in France by the end of 2013 to expand our geographic reach and total capacity.

During the period, Dal-Tile and Unilin received awards for the best manufacturers in their category by a retailer poll. Consumer Reports again named Quick-Step the top pick for exceptional design, quality and value. In July, we released our third corporate responsibility and sustainability report, which validates our actions to provide sustainable products our customers desire.

Mohawk's commitment to product innovation, resource management and productivity improvements yielded improved second-quarter results. Our investments in innovative products improved our mix and contributed to higher margins. Though sales softened in the second quarter, US order rates have shown some improvement as we began the third quarter. We do not expect material costs to follow oil price declines due to specific higher chemical costs.

In the US, low mortgage rates and higher housing starts should support future flooring sales. In Europe, we expect the present soft trends to continue and exchange rates to be a headwind. Based on these factors, our guidance for the third quarter earnings is $0.96 to $1.05 per share, excluding any restructuring costs.

We have addressed many of today's economic challenges by enhancing our product differentiation, reducing costs, improving efficiency and entering new product categories and geographies. We retain a strong financial position, which provides us flexibility to invest in strategic opportunities going forward. We will now take questions.

(Operator Instructions). Stephen Kim, Barclays Capital.

Thanks very much, guys and congratulations. Strong performance in a tough quarter. My first question relates to the US. You had made some comments about how the residential market showed some improvement in 3Q. I was curious if you could elaborate a little bit more on whether a little bit of this pickup you are seeing here in 3Q is showing up from primarily the new or if it's also a little bit of remodeling starting to pick up. And as part of that, if you could talk a little bit about the impact of product mix looking into 3Q.

The statement was that we saw some improvement in the business coming in. We didn't really reference any piece in general. We are seeing slightly better trends in the first part of the quarter than we saw coming out of June. I forgot the second part of your question.

Mix.

The product mix, we spent a tremendous amount of effort over the last year and a half, two years focused on trying to create more innovation in the marketplace, introducing better products that can achieve higher margins in all the different segments and we are starting to see some benefit from those actions in all the different segments.

Okay. Well, I would like to follow up on that more, but I'm sure other people will. Let me switch it a little bit to Unilin. Obviously another very strong performance there. If I heard Frank right, it sounded like Unilin's operating margin was actually 12.8% ex currency, which obviously was a very strong figure.

I am trying to understand if you could help us with a couple of things as we look at Unilin going forward. First of all, my understanding is that the foam board business is expanding rapidly. And I am guessing that that probably represented about roughly half of the growth, that 7% growth top line in that division that we saw this quarter. I wanted to see if you could give me some sense of if that is about right or if the laminate part of the business grew -- was the bulk of the gain. And then also if you can make some basic comments about what you expect for the furniture initiative and any update on what is going on there. Thanks.

The insulation board business, the increase we have today will allow us to grow to about EUR70 million with our present capacity in the business and it is growing much faster than the other parts of the business. The laminate business grew less than the average for the others, which we would expect and all the different actions we are taking we think. We are growing where the industry is shrinking has got to do with again all the actions to expand our distribution into different channels and marketplaces as we go forward.

And Steve, let me correct you. You had said, I don't remember the number, but the actual operating margin, excluding charges, was 11.7% and that does not exclude FX. That is just the margin as a percent to sales.

Right, but if you exclude the currency on top of that, it would be 12.8% excluding charges and excluding currency effects?

We can go off-line on that. I think you would have to go back and adjust the sales number as well for the currency.

Okay, got it. Okay, great. Well, thanks a lot.

Mike Wood, Macquarie Capital.

Hi, good morning. In the DIY channel expansion in Unilin, how much room is there to go -- how much headroom or how much longer should we expect that kind of penetration to occur for?

We think we have continued opportunity. We really have different strategies between the US and Europe. In Europe, the strategy is to have selective distribution and participate under our brand in the premium part of the marketplace. So we are going to each country looking for a limited number of customers to participate in the premium market and give them opportunities to step their customers up.

In the US, we have a broader-based strategy, which is to participate in a broader range of price points in the marketplace and do it under other brand names. So we have different strategies. We think there is opportunities in both to keep growing. We have limited participation in both continents in it, so it has significant upside.

Okay. And in the rugs, with the retailers deferring promotions, can you just give us some more color in terms of do you have control over whether or not they are promoting the product? And in your view, is this the right thing to do in the current environment?

We don't have any control over what they do. We provide them opportunities and they choose whether to do it. What is happening is they are getting -- in the last quarter, they were much more conservative than we expected both with their inventories and their promotional activities as they have greater concerns over the consumer.

Great, thank you.

David MacGregor, Longbow Research.

Yes, good morning Jeff; good morning, Frank. You flagged the commercial business and the growth there. Can you just give us some quantification of what you were seeing in terms of a growth rate for the overall commercial business?

I am not sure that I have a number for the overall piece. We see that the commercial business started growing about two years ago now as most of it -- it started out with mostly investments in remodeling. We saw an increase in it through the period. We see, as we have gone through this year, that it has continued to grow. The growth rate is slightly less than we think it has been last year. There is some new building starting going on, which is helping it a little bit and we think it is going to continue at a reasonable rate.

Can you give us an update on the percentage of each segment that would be commercial?

I don't have those broken out.

At a very high level, David, in the Dal-Tile segment, about 40% is commercial and in the Mohawk segment, it is in the kind of mid-20%s, maybe high 20%s, in that range.

20%s.

In Unilin, it would be zero.

And Unilin is zero.

Cost is zero.

Right, right. Last question, just with all the new product investments you've got going on, what do you think is sort of the temporary expense associated with just ramping those might be?

What we have done is we have really tried to focus on our SG&A expenses and what we have been doing is reducing our general SG&A expenses by becoming more productive and cutting out things that we thought had limited value. What we have been doing is investing those dollars into these new product categories. I think we are managing through it reasonably well and overcoming all the inflation you have and everything in addition to that.

Can you hold onto those cost savings once these products are fully ramped?

We would expect SG&A as a percent of sales to keep improving over time.

Thanks very much, guys.

Eric Bosshard, Cleveland Research Company.

Good morning. In terms of your commentary on second-half volume seemed to suggest that you thought you would have growth in the second half and you didn't in the second quarter. I am just wondering if you can give a little bit more color on what you think is different in the second half relative to what you experienced in the second quarter?

We have our internal estimates that we think we have in place, certain activities to increase the sales. We really do not know exactly what the market is going to do, but we are making the assumption that it is more of the same. Under those conditions, we think that the volume is going to go up a little bit, as well as price increases. So you have a price increase in the ceramic business going in, the price increases that we have already put in place in the carpet industry. We have expansion of products that we think are higher value than the other, which should help the average selling prices. So we think we are going to see some positive things.

Great, thank you.

Mike Rehaut, JPMorgan.

Thanks. I was hoping to go back to a question earlier about a little better granularity around your comments of US order trends improving so far in the third quarter. If you could possibly just break that down for us between if either that was driven by new residential construction or builder end market versus repair remodel. What was the bigger driver of that or was it only one of the two segments, just some better description of that?

I don't have the detail in front of me. We all know that the new construction builder business is going up from a very low base. Most people have it about 15%, 15% plus or minus in that. The apartment part of the business is improving. The occupancy rates are there. It is showing improvement. The commercial business is still improving on similar trends than it has been in the past we think and the big question is what is going to happen to the remodeling pieces and your guess is as good as ours. We just think that we are well-positioned in product mix and new introductions to help ourselves a little bit different than the market.

Okay. And in terms of your back-half outlook, so, as you just said, you are looking for volume, a little bit of volume growth, a little bit of pricing growth. But at the same time, your comps in the back half of the year do get a little bit tougher and here, in the second quarter, you were up 2% against an easier comp. So are there certain initiatives or selling promotions that give you that extra confidence? And if there is maybe certain segments like -- because we would still expect Mohawk to be down a little bit year over year. If there are other things going on perhaps in Dal-Tile and Unilin that drives that confidence for the volume growth.

I can just tell you that each of the divisions have it broken down by customer, by product, by channel. They have looked at new introductions and they appear optimistic about their potential.

David Goldberg, UBS.

Good morning. It's actually Susan. In terms of the new products that you guys are introducing, can you give us some sense of how the pricing or the margins on those compare to your more traditional offerings or your older products, more established products?

Each of the divisions has internal goals to introduce new products that improve their margins over the past ones. They all have goals that look to add greater value of style and design that command slightly higher margins on new products and old. They all track what they are introducing versus the ones they are doing. On the other hand, we want to participate in the different areas in the commodity businesses, which are price-driven and we believe that we are improving our mix through providing leading style and design in each area.

I would say that one of the best ones we have is our Unilin business, which they focus on, since we haven't -- they basically have almost no commodity business and everything is driven through bringing style and design to the marketplace and we are driving that across all the different businesses.

Okay. And given the current environment, would you say that you are basically able to hold the higher margins or the improved profitability on the products where that is sort of your goal or are you having to give some of that up?

Listen, we are in competitive marketplaces. We have inflationary pieces in different ones. We have talked about raising prices in the ceramic business to help cover the inflation. We have talked about the margins in the Unilin business being under pressure as the raw materials have risen faster than we have been able to pass them through.

The Mohawk business, what you have seen is we have been able to change the mix in the products to help the margins as we go through the new product introductions and so that is how we are getting to the improved margins in the business.

Okay.

Keith Hughes, SunTrust.

Thank you. On the rug business, can you give some kind of idea how much the rug business was down or what it was down in dollars or something along those lines in the second quarter?

We really don't break out the sales of individual products within the business.

Let me ask it this way, Jeff. As a percentage of the Mohawk segment, what do rugs represent nowadays?

It is a limited portion of the total. We just don't break down to each individual product and pieces for you guys. I mean we have 100 different products and pieces in all the different businesses.

In that segment, Keith, as you know, we have got broadloom carpet, we have got rugs. We have also got our Hertz car surface products, we have got pad and cushion products. So we have got a number of different products in that segment.

This is the second quarter in a row we have had some rug issues. Are they behind us at this point or do you think this issue is going continue on in the second half of the year?

We believe that the third-quarter rugs will be better than the second quarter in rugs. There were some things pushed out in the second quarter into the third quarter; we will see those. We are anticipating improvement in it, but we haven't assumed that the market is going to change dramatically and the retailers are going to change. Some of them are becoming very conservative in their buying habits.

Final question, you talked about mix positive. Is mix in carpet positive in the last quarter or two?

Yes.

Is that the first time in three or four years that you have seen positive mix in carpet?

I don't remember exactly when it started, but we have put a lot of emphasis on putting out more stylized differentiated products and it is starting to give us benefits.

All right, thanks.

Kathryn Thompson, Thompson Research Group.

Thanks. In your prepared comments, you talked a little bit about raw materials, the pluses and minuses, but the reality is a lot of -- you have had some abatement in raw materials in Q2. Could you clarify the potential positive impact of lower raw materials as we go into Q3 on your margins?

The raw materials went up. We raised price, and I assume we're talking about the carpet, we raised prices going into the quarter. The raw material reached a peak and then we work off of our own business, we work off a forward view that we anticipate and we typically don't raise the prices to momentary peaks. So in there, we build our models and pricing based around what we think the long-term values are and so basically we were on track for what we thought was going to happen. And what we are trying to say as we look forward into the future, we believe that the oil prices should push down the raw materials. However, there are individual chemicals, which are in short supply due to world dynamics and we think that the increase in those specific chemicals are going to offset the general decline to give us basically a stable material environment for as far as we can see. Now that could change in a given moment based on market conditions of those chemicals.

In other words, you really won't see any positive impact; it is just really neutral and covering passed increases?

I am talking from quarter to quarter consecutively.

Yes.

But we are not anticipating an overall decline to help us at this moment.

So that would imply, just assuming no real changes right now, there is probably not much room or possibility for another soft-flooring increase in the second half this year?

We are not anticipating one.

Okay, great. Thanks so much.

Dennis McGill, Zelman & Associates.

Hi, good morning. Jeff, just wondering if you had an opinion on the nonresidential market. Your trends seem to be stronger than both peers and well some peers in flooring and the broader market. I wonder if you have any views on why flooring remodeling on the non-residential side or the commercial side would generally be stronger than other building product categories. Anything unique that you can think of that would be driving that?

I'm not sure that I said that. The remodeling part of the market has been under pressure due to the general economy and consumers' perception that their home values are much lower than they were.

No, no, no. I was asking on the nonresidential side.

Your question is why the commercial business is going to be stronger?

Yes, just curious what you think is driving the refurbishment activity on nonresidential because that strength is not evident across building products. And just from your perspective if there is anything in the flooring industry that you see that is unique in that regard.

I don't think that I anticipate it getting stronger. I think it is more of the same. The only thing in the carpet business, which is different, is the change to carpet tile, the average unit price goes up when you move from broadloom to carpet tile, which helps the dollar volume.

Do you have any approximation of how much, across both the carpet and the tile business, how much would be publicly funded education projects for you?

I don't know that off the top of my head.

Okay. Maybe we can follow up off-line. Thanks, guys.

Sam Darkatsh, Raymond James.

Good morning, Jeff, Frank. How are you?

Perfect.

First off, a housekeeping question. Frank, I think you mentioned that you will be closing another carpet plant in the third quarter. Do you have a sense of what the restructuring charge will be for that item in the third quarter?

I think it is going to be around $5 million. That is not included in the guidance.

It was a yard plant consolidation.

Got it. Thank you. And then the other question I have, with respect to Dal-Tile margins, the new plant's online, you are getting some pricing benefits. Should we expect incremental margins over the next 6 to 12 months to be better than the 30% kind of standard contribution margin because of that or are there some mix issues that degrade that a little bit?

Yes to all the above. The Mexican plant is presently not contributing anything to the business. It is actually a negative. So we are expecting next year that the Mexican plant will rise up to the normal levels of returns on the rest of our business. I don't know when it is going to get to that level, but during the year we expect it to get up to the average of our whole business, so that will move from a negative into a positive contribution in that part. We continue to, in the rest of the business, depends on inflation and product mix going forward, we are trying to drive it as high as we can. We are hoping to keep expanding the margin.

So incremental margins in Dal-Tile overall would be better than 30% or so over the next year?

I don't think they will be that high. I think it is more in the mid-20%s in Dal-Tile.

Okay. If I can sneak one more question in if I could. With the global demand moderation period that we seem to be entering into on a macro sense, does that make your appetite for larger scale international acquisitions a little bit more circumspective or are you still actively trolling for deals internationally of some size?

We continuously look for opportunities. I think what it does is it impacts positively the valuations of the buyers and the sellers and the future perceptions of what is going to happen and that makes concluding in transactions more difficult as you would suspect.

Thank you both.

Daniel Oppenheim, Credit Suisse.

Maybe you can talk quickly in terms of the SmartStrand. You talked about the benefit in terms of sales. Great product and clearly a much higher price point. Just confirming you are basically saying that despite that significantly higher price point, you are getting the sales that you expect and so the margins coming through and sort of more for those non-commoditized products in general rather than just maybe you can comment on that in particular.

I think you understand it. As you introduce higher value products, the margins on those are higher. The introductions that we have put in, we are achieving good sales results at higher margins. We are continuing to expand those attributes into more products and categories and we think those will help us as we move them into the marketplace.

Okay. And then just following up I guess, you talked about some of the trends in July (inaudible) quarter-end (inaudible) primarily in the states, but hearing less in terms of just Unilin, which did very well on a constant exchange basis. Can you give any sense in terms of what you have been seeing since the end of the quarter there and the overall trend?

The trends from the second quarter of the consumers in Europe are following the same thing. There is plenty of concern in Europe over what is going on. Country by country, you have differences in each one. The further south you go, the worse it gets. You get into markets like Spain, they are under tremendous pressure with unemployment and as you would expect, the volumes there are under great pressure.

I would add too, as you move into July and August in Europe, that is the holiday season over there. So sequentially it is a slower time of the year.

John Baugh, Stifel Nicolaus.

Thank you. Good morning, Jeff and Frank. Could you remind us first again what total revenue exposure is to US residential construction activity? And then on the laminate piece, you have mentioned I think the US is up. I am curious. Is that a margin negative for the Unilin segment or are you filling up your plant there better and actually getting a margin benefit from US laminate sales growth? Thank you.

In the different divisions, we have, in the Mohawk side, the residential business is about 75% (inaudible), about 25% commercial. In the Dal-Tile business, it is about 60% residential and 40% commercial. In the Unilin side, there is very little.

And how much of that is new construction of the residential pieces?

In Dal-Tile, it's about half and half residential and remodel and it is high teens, maybe 20% range in Mohawk. It is probably a little bit closer to the teens given the environment we are in right now. And everything -- I would say most of what sold in Unilin is going into the remodel channel.

And the US laminate issue?

Could you repeat the question?

I'm curious. You said US laminate sales were up and this is a difficult market here and I believe generally a lower margin market than European laminate. But you have got a plant here, maybe you are getting some leverage by utilizing that plant. I am wondering whether or not the growth in US laminate sales is a hurt or a help to the overall margin on the Unilin segment.

Listen, growth always helps. What happened in the Unilin piece is we have some large retailers that have done better during the period and that are doing promotional activities to try to do that. We have made some progress into expanding our business in some of the home center channels so that we think we are doing a little better than the average and anything that adds volume to the business helps. On the other side, in the laminate business, you do have a contraction of the value products. This is pressure on the mix.

Bob Wetenhall, RBC.

Hi, good morning. You had very strong margin performance in Mohawk against down sales and that is pretty impressive and I was just trying to understand is the pace, the 110 basis points in the 6% range for operating margin in the Mohawk carpet business sustainable in the back half of the year?

We believe it is.

Okay, thank you very much.

That does conclude our Q&A session. I will now turn the call over to Mr. Lorberbaum for closing remarks.

We appreciate everyone joining us. We look forward to a good rest of the year. Have a good day.

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