莫霍克工業集團 (MHK) 2012 Q3 法說會逐字稿

Good morning. My name is Alicia and I will be your conference operator today. At this time I would like to welcome everyone to the Mohawk Industries third-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 session. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, November 2.

Thank you. I would now like to introduce Mr. Jeff Lorberbaum, Chairman and CEO. Mr. Lorberbaum, you may begin your conference.

Good morning and welcome to the Mohawk third-quarter earnings call. With me I have Frank Boykin, our CFO. Would you please give the Safe Harbor statement?

Be glad to. 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. Jeff?

Thank you, Frank. Our third-quarter earnings per share were $1.01 as reported, or $1.04 excluding restructuring charges, reflecting an increase of 25% over 2011 adjusted earnings. Improvement in product mix, pricing volume, and productivity, as well as lower interest expense contributed to our results.

Sales increased 2% as reported, or 4% on a constant exchange rate. During the period we generated EBITDA of $179 million and free cash flow of $156 million. Both our debt to adjusted EBITDA and net debt to capitalization ratios improved to 1.7% and 22%, respectively.

Across the enterprise, we have managed to keep SG&A dollars in line with last year even as we increased significantly more in new product innovations and marketing to improve our future sales and product mix.

After the quarter closed, we announced that we have entered into an agreement to acquire Pergo, the most-recognized brand of premium laminate flooring in both Europe and the United States, for $150 million in cash. Pergo operates manufacturing facilities in the US and Sweden and has generated 2011 sales of approximately $320 million.

In the US, the acquisition complements our strong Unilin specialty retail distribution with Pergo's strength in the DIY channel. In Europe, Pergo's most significant market position is in the Nordic region, which broadens our laminate distribution.

In addition, Pergo will enhance other geographic positions and provide opportunities to augment Unilin's patent portfolio. The combination offers significant opportunity to optimize the assets of both companies while expanding the product design and performance features of both brands.

Many indicators anticipate improving trends for our industry and business, both of which have lagged the overall economy. The US Commerce Department reported that record low mortgage rates, increasing home prices, and limited supply of existing homes have led to the fastest growth in new home construction and building permits in more than four years.

In October, the Fed affirmed plans to keep interest rates low through at least mid 2015. With existing home sales strong, Harvard's leading indicator of remodeling activity is predicting increased growth in renovation spending. The AIA's Architectural Billing Index also moved higher, projecting additional commercial construction. Finally, the Consumer Confidence Index also rose at the end of the quarter after an August dip.

Frank, could you give our financial report, please?

Thank you, Jeff. Good morning, everyone. Net sales for the quarter of $1.473 billion were 2% over last year, or 4% on a constant exchange rate basis, with both volume and price driving growth.

Gross profit was $373 million or a margin of 25.3%. That is a 50 basis point improvement over last year, resulting from higher volume, productivity initiatives, pricing, and mix. In addition, continuing product innovation, cost reduction, and process improvements are driving better results.

Our SG&A was $269 million or 18.2% of net sales. SG&A dollars were about flat with last year, with our percent to net sales improving 30 basis points.

Emphasis across all businesses on cost control and lean activities are positively impacting us. We had restructuring charges in the quarter of $4 million, of which $3 million were incurred in the Mohawk segment and the remaining $1 million in the Unilin segment.

These were incurred to align the business with the current economic conditions. About half, $2 million, of those restructuring charges were cash.

Operating income, excluding charges, was $108 million or 7.3% of net sales. This represents a 15% growth in operating income dollars over last year.

Interest expense was $18 million, down $7 million from last year. The improvement was due to the second-quarter payment we made this year of $336 million of the 7.2% bonds, as well as a rating agency upgrade that we improved early -- upgrade that was made earlier. Other expense improved from last year due to the negative impact of foreign exchange that we incurred last year.

Our income tax rate was 20% this year. That compares to an 11% tax rate that we had last year. We're expecting our fourth-quarter tax rate to be in the high teens.

Our earnings per share, excluding charges, was $1.04. This is up 25% over last year. We had this increase even with significant startup cost from capital projects that were installed during the year. For the full year, we're expecting startup cost of approximately $8 million.

Jumping to the segments, the Mohawk segment sales were $752 million, about flat with last year. We had improving mix and increasing prices which offset lower volumes.

Operating income, excluding charges, was $47 million or a margin of 6.2%. This is a 180 basis point improvement over last year, driven by higher productivity and better mix and pricing.

In the Dal-Tile segment, sales were $418 million, a 9% improvement over last year, or a 10% increase on a constant exchange rate basis.

All categories across the business grew this quarter. Our US residential, US commercial, and Mexican business were all up over last year.

Operating income was $37 million or a margin of 9%. Improvement was from volume increases, which were slightly offset by startup cost and some plant volume adjustments.

In the Unilin segment our sales were $329 million, up 9% on a constant exchange rate basis. We were favorably impacted by North American volume, Russian growth, and the Australian acquisition, all of this offsetting slower Western European sales.

Operating income, excluding charges, was $30 million with a margin of 9.1%. Foreign exchange was a drag on operating profit of $4 million. We also experienced raw material headwinds and a lower mix during the quarter.

Our Corporate segment had an operating loss of $6 million, which was expected. For the full year, we're anticipating about a $25 million loss.

Moving to the balance sheet, cash ended the quarter at $381 million. We continued to have strong cash flow this quarter, with free cash flow of $156 million, improving our cash position and allowing us to continue to pay down debt.

Receivables were $817 million, with a slightly higher DSO primarily from channel mix changes. Inventories ended the quarter at $1.1 billion, flat with last year, but with our days improving slightly. We are continuing to focus on improving our turns across all of the business.

Fixed assets ended the quarter at $1.657 billion. This included capital expenditures in the third quarter of $47 million. We are projecting full-year capital expenditures of $200 million, and we are estimating depreciation and amortization for the full year of $290 million.

The Unilin amortization in the fourth quarter is expected to decline by $7 million, and an additional $35 million next year as certain intangible assets become fully amortized.

Our long-term debt including current portion was $1.525 billion. Our debt is down $86 million from last year. We continue to improve our leverage, with our net debt to EBITDA ratio of 1.7 times.

We anticipate using a portion of our bank availability and a portion of our European cash on hand to finance our Pergo acquisition. Jeff, I will hand it back over to you.

Thank you, Frank. The Mohawk segment increased its adjusted operating income margin 180 basis points, with sales remaining about flat compared to 2011. The gain stemmed from improve pricing and product mix, reduced cost of manufacturing and distribution, and increased productivity.

Our carpet sales performance was stronger in our specialty and contractor channels, but was offset by the timing of product transitions in the home center channel. Our rug sales improved over the prior period, though they still remain below last year as retails adjusted their strategies with consumer spending.

Carpet price increases implemented during the second quarter continued to benefit our results this quarter. We saw continued improvement in mix from our industry-leading products, which have redefined the premium carpet market.

We launched additional products to broaden our SmartStrand Silk collection and capitalize on the exceptional customer appeal of this innovation. To further expand the customer demand for silk's unsurpassed softness, high performance, and proprietary environmental features, we initiated an ad campaign along with a new retail marketing program. We also integrated a new SmartStrand premium cushion into the merchandising of our silk offering.

To complement the demand for SmartStrand Silk softness, we extended our technology to create the next generation of super-soft nylon carpet, with brand wear-dated Embrace which is being launched as we speak. Going forward, Embrace will further improve our premium carpet offering for consumers seeking luxurious softness at a lower retail price point without the performance features of silk.

In our Mohawk branded hard surfaces, the innovative technology in wood, ceramic, and laminate featured in our recent introductions increased our sales growth during the period. To satisfy the expanding builder multifamily channels, we have recently introduced targeted value products in laminate, porcelain, and LVT. During the quarter we announced price increases to cover the cost inflation in our ceramic and solid wood products.

In the commercial category, we also adapted SmartStrand's superior stain-resistant and excellent performance into new broadloom and tile products. We also introduced our new State of the Mind collection which is made of our exclusive Duracolor technology that redefines premium modular tile by providing stylish products with the ultimate performance at affordable price points.

Our non-specified commercial sales continue expanding, with the introduction of new refined products that combined appealing design and durability, the addition of more specialized sales representatives, and expanding customer base. Across this segment we improved our manufacturing distribution efficiencies, realized productivity gains from our capital investments, and reduced our waste level.

During the period we completed the closure of a yarn plant and integrated the production into an existing extrusion facility, which enhanced our cost structure. Our new customer relation management tool is increasing our professional approach of our sales personnel while improving our salesforce productivity, increasing consumer customer opportunity, and enhancing commercial project management.

Dal-Tile sales grew 9% during the quarter, or 10% on a constant exchange rate. The segment improved sales in both the residential and commercial categories and continued significant growth in the Mexican market.

Margins were enhanced from actions that improved productivity and increased yields. During the period, we announced a 2% to 4% price increase for most products to recover the inflation in our material and distribution costs.

Sales grew across all residential channels, supported by our new Reveal Imaging designs, fashionable mosaic tiles, and larger-format tile. We are leveraging Dal-Tile's traditional strength in the builder channel across all our business segments to expand commitments with regional builders.

We have introduced specific value-engineered products to gain position in the growing multifamily category. By improving our product management, our introductions are achieving a higher level of success, and our SKU productivity is rising.

Commercial sales increased during the period, with restaurant, retail, and hospitality sectors leading the growth. We are aggressively pursuing high-volume remodeling projects in shopping malls and national restaurant chains that were deferred during the previous years.

To improve our position in the premium commercial category, we are targeting architects and designers with a new sophisticated collection we call Next. It features contemporary designs, expansive color lines, and unique textures.

In our American Olean brand, we have added commercial specification representatives as well as upgrading some of our distribution partners in key markets. In Mexico, our new Salamanca plant is successfully ramping up and supplying product to satisfy our growing ceramic position. This year the plant will begin to export its products to the US.

The ramp-up is progressing faster than we anticipated and creating some temporary plant adjustments. Salamanca continued to incur startup costs at decreasing levels as we move closer to achieving our anticipated cost structure.

As a result of our leading design, comprehensive portfolio, and local manufacturing, our sales continue to significantly outpace the Mexican ceramic market, which we estimate is growing about 5% this year. By consistently delivering style, quality, and value, we are expanding our retail customer base, securing large construction projects, and positioning ourselves as a key participant in the Mexican market.

During the quarter, Dal-Tile lowered manufacturing costs through improved material formulations, higher yields, and lower waste. Our ongoing quality initiatives have reduced costs and lowered customer deductions.

To align production with consumer preferences, we announced the closing of our Olean, New York, facility and consolidation of our unglazed mosaic production. We reduced our freight expense through improved efficiencies, consolidated shipments, and energy surcharges.

Unilin third-quarter sales were approximately flat as reported, but grew 9% on a local basis. Gains from sales increases in Russia and the US, insulation board growth, and home center channel expansion compensated for the soft environment in Western Europe.

Our margins were impacted by raw material inflation, customers trading down, and the higher participation in the DIY channel. We implemented cost reductions including enhanced operational efficiencies, increased recycled content, improved raw material yield, and continued improvement in administrative expenses.

Outside North America, laminate and wood flooring sales grew from continued expansion into the DIY channel, increased distribution in Russia, and our Australian acquisition. To capitalize on growing European categories, we are introducing a premium LVT plank that features our Uniclic technology for easy installation.

Our Russian laminate facility increased its production and implemented productivity improvements that reduced our costs. During the quarter, we increased sales in Russia by expanding our customer base and broadening our commitments with existing customers.

In Australia, favorable product mix as well as increasing sales of Unilin-produced products yielded margin improvements.

In North America, we grew our laminate and wood products through all customer channels during the quarter. New product introductions increased home center penetration, gains within the builder channel, and promotional activity increased our sales.

In our wood category, manufacturing improvements offset a lower product mix. We introduce new higher-value wood products with fashionable Soft Scrape surfaces and rich finishes. In the fourth quarter we announced a 6% price increase for our solid wood flooring.

Declining new construction in Benelux and France created headwinds for our roofing panels. To reduce costs in this category we are consolidating our brand and salesforces as well as executing process improvements.

By helping meet European energy goals, our insulation panels delivered strong sales increases. We completed the expansion at our Belgian insulation panel facility and we began construction of a second plant in France to satisfy our growing demand.

In July, Quick Step was voted number one in laminate in a survey of North American retailers. In August both Columbia Wood and Quick Step Laminate were given Manufacturer of the Year awards at another retail sponsored ceremony.

While our third-quarter results reflect our strengths in delivering innovative products, driving operational excellence, and entering new geographic markets, we continue to invest strategically by introducing differentiated products, lowering our manufacturing and administrative costs, and acquiring new companies that will enhance our results. We have taken the necessary steps to align our pricing with our raw material inflation and will react as required.

In the US, increasing new home construction and improved sales of existing homes provides a positive outlook for future flooring growth. In Europe, soft market conditions due to economic uncertainty and changes in exchange rates are anticipated to be a headwind.

Based on these factors our guidance for the fourth quarter is $0.89 to $0.98 per share, excluding any restructuring costs. Our strong financial position allowed us to enter an agreement to acquire Pergo, which will benefit our worldwide laminate business, and we are well positioned to invest in the other opportunities as they arise.

We continue to execute our long-term strategy of product innovation, cost reduction, asset maximization, and geographic expansion. Each of our businesses is well situated to benefit from the improvements in the US remodeling and construction category, which remain substantially below their peak levels. Our organization is focused on bringing value to our customers, while maximizing our results.

With that, we will be glad to take questions.

(Operator Instructions) Stephen Kim, Barclays.

Thanks very much, guys, and congratulations on a good quarter. Frank, I was glad to hear you talk about that amortization. We have been looking for that for a while.

My first question. I did want to talk about Unilin and Pergo. I guess specifically, I wanted to see if you could give a little bit more clarity around what kind of accretion we might see. Or perhaps coming at it from a perspective of what multiples you may have paid on an EBITDA basis or an EBIT basis would be helpful.

The price was somewhere around 6 times EBITDA, but they were at a depressed earnings level. We expect to improve their results with synergies that we expect to have across the whole businesses.

The Pergo business is complementary to our business because we are both going after the mid to high end of the premium market of laminate, both in the US as well as in Europe. The sales distribution is incremental to ours.

The combination of the designer performance features that both businesses have we expect to enhance our product portfolio. We see significant potential during the near term to optimize the manufacturing, both in the US as well as Europe. And then there is also additional opportunity to leverage some of their patents with our licensing knowledge, so we think it is good for the Company long-term.

That's great. That's good color. Appreciate that.

The second question I wanted to ask you about relates to your Mohawk division. Specifically in the US, you were referring to the home center channel having some transition and some timing issues related to product transitions. Could you be a little more specific there and help us understand what happened in the quarter?

And when you say timing like that, it makes one think that perhaps you might see a rebound in the fourth quarter to make up what was lost in this quarter. Is that the right way that we should be thinking about that?

What happened was we had products that were dropped before the new product introductions went in, leaving a void. We have commitments in the channel for new products. They will go in between the fourth and first quarter, so we are confident that we will be back where we want to be next year.

Okay, great. Thanks very much.

David MacGregor, Longbow Research.

Thanks, good quarter. Just on the Pergo, what was there, can you be specific with respect to synergy expectations?

We just recently signed the documents and the agreement. We have meetings going on. I mean, it is going to be a while before we have details of all the changes.

We have a long list of opportunities relating to the things I've talked about before. Some of it's got to do with the two brands and how we manage the brands in the marketplace. We think that there is going to be -- both companies are driven by innovation, and we think that both combined are stronger than they were before.

The plants are very similar. We think that we have some knowledge that can help them, and they help us.

On the other hand, they have been starved for capital for a while, so we see that as being helpful to both. We believe there's ways of optimizing the plant utilization between both plants and using the plants to manufacture different brands.

It also helps vertically integrate Pergo. And we think there's opportunities to improve the administrative functions. We're not going to do all this on day one, though.

Okay, so you are still waiting to get your arms around the quantification of those synergies?

Yes, David, we still expect it to be slightly accretive in the first year, even as we start to move through some of those synergies.

Jeff, you have made a lot of progress in terms of penetrating the home center channel in North America with your laminate product. I'm just wondering if there is any cannibalization concerns here.

The Pergo products in the home center channel are in a branded category. They are separate from the rest, so we see it as opportunities to do it. Again, though, the market share [overlaps] could limit the long-term growth potential because we can't take it from Pergo anymore.

Right, okay. Just last question. The Russian ramp in your Unilin business and the Australian acquisition, can you quantify just what that would have contributed to segment revenues in the quarter?

We have not broken out that public detail, David.

Okay. Is the Russian ramp, is that still a $100 million revenue potential business?

That is about the capacity of the plant. There is no imports to support it.

Right, right. Okay. Thanks very much.

Dan Oppenheim, Credit Suisse.

(technical difficulty) about what you are doing in terms of the introduction of Embrace there. I think SmartStrand has been great in terms of the higher price point in carpet and helping margins, also getting away from commodities.

How do you -- what do you think about Embrace? How much room do you think there is in the higher price point market in carpet and how deep that segment is for the customer there?

I think that what we started with, the beginning of this year, with what we called silk, that we have changed the premium part of the marketplace. What is going on at retail is that softness is becoming the rationale for buying higher-value products.

And my expectations would be that by a year or so from now the majority of the premium product in the marketplace will have that. By us leading with silk, with higher -- it has more features to help the customer; then we have come back with Embrace, which we are going to retail at a price point slightly under it with less features, we think that we are positioned to maximize our part in the marketplace.

And in both cases we believe we have -- we are leading the entrance of the products, which is a good place to be for a market that is going to change rapidly.

Great. I guess, wondering -- how much of your carpet sales do you see that segment going -- that portion of the carpet sales going to?

Well, I don't have that number off the top of my head. We have estimate -- I mean, what we believe is the whole high-end part of the market. I don't remember the numbers off the top of my head with all the different product categories we have. But our expectations are that the entire premium marketplace will end up there.

Okay, thank you.

Michael Rehaut, JPMorgan.

First question, on the Mohawk segment. Obviously this year and the last couple quarters specifically from a margin standpoint you have been able to show some nice improvement. Just trying to get a sense on a year-over-year basis how much of the improvement year-over-year -- you broke out for example this quarter mix and price offset volume.

Out of 180 basis points, is the mix and price roughly equal positive contributors? And how do you see that flowing through on any type of incremental basis over the next year?

I think most of the pricing -- there was pricing in it; but most of the pricing was to cover raw material inflation, is it. So the majority of the improvement in margin came from productivity increases, mix changes in the marketplace, improvements in operations.

Going forward, that mix, would you think that you could get another 50 or 100 bps lift into '13?

Our goal is to keep raising the margins going forward and to keep improving it. We are not satisfied with the margins in the segment. We think that through mix and continued productivity, we can keep improving.

Okay. Also, on the product transition in home centers in Mohawk, I believe you said, Jeff, that you expect some of it to come back in 4Q and some in the first quarter as well. But can you just give us a sense of, on a revenue, on a dollars basis, what impact that was to sales growth in 3Q?

We don't break it down to that detailed level. But it did impact the business, and we expect to be back in line or better with the industry.

We think that all the things that we are doing in the high-end part of the marketplace, we are pushing products nearer, across the business we think we have improved the execution of our salesforce. And we think the business and the economy is going to help us a little bit. We think we are well positioned.

Great, thanks.

Ken Zener, KeyBanc.

On the tile side, obviously Salamanca came up faster than expected. I think there was a couple different issues you're talking about there, startup. As well as the fact, because it came on it impacted inventory. Could you be, just to be clear, reframe how much that was, again, on the startup cost as well as the inventory? And if it was just a 3Q event or if it's also going to carry into 4Q?

Let me start with the inventory piece. The inventory, what happens is we go into the period, then we estimate the sales, and that we align the production to meet the sales of that period. What happened is what we estimated Salamanca to produce, we were able to achieve it, coming up faster. So we made some adjustments in the inventory to make up for those.

So there were some shutdown costs related to that. Frank, you want to give him some numbers?

Yes. The startup costs were about $2 million in the quarter, and they won't be that large in the fourth quarter, but there will be a little bit more in the fourth quarter.

Now is that $2 million startup -- that is obviously in the reported EBIT. Then was there an associated -- is that also included in the inventory impact?

No, no. The inventory, the impact of shutting down production to get inventories in line was above that.

Above that?

Yes,

Would that carry into 4Q?

No, I don't think so.

Okay. Again very nice -- Pergo, what a nice fit for you guys. Considering the margin mix you are seeing in carpets, an area which -- very good industry structure there for the industry.

Given your product innovation, A, how large is that high end of the market, if you want to think about it in terms of both volume and dollars? I would appreciate that, or percentage of volume -- A.

And then, B, what you are doing with silk because you learned how to manage that triexta material, how do you think about that in terms of sustainability versus it being just more commoditized over time? Thank you.

The first question was --?

How much of the market is the high end (technical difficulty) .

The high end in Pergo --

Not Pergo, I'm sorry, in carpets. In carpets.

Oh, in carpet?

Yes, since that is what you are obviously getting good mix out of. Thank you.

Listen, we have so many different product categories and markets by piece I can't -- I don't remember all the numbers. If you will call Frank back, he will get you an estimate of the percentage of the business.

What we believe is the long-term piece is that these will become fundamental parts of the marketplace, that silk will be the premium end, and then Embrace products will be here. We are leading the market. We're getting to market faster than the rest, and we think we are able to improve our positions.

Over time the industry is going to move there as fast as it can. And the softness -- it has been going on the last three or four years, getting softer and softer, so this is the next step in it.

We think the industry will try to catch up with other alternatives over the next year. We think it's sustainable. There will be more competition in the marketplace a year from now than there is today.

Thank you.

John Baugh, Stifel Nicolaus.

Thanks, good morning, Jeff, Frank. Great quarter. Could you comment on are there, first of all, any capacity constraint issues relating to SmartStrand or silk?

And then, some thoughts if you have any towards the SG&A component as we move into 2013. Do you anticipate it going up, going up less than sales? Any color on that?

Well, constraints? We don't see any constraints on raw materials. We continue to add extrusion capacity in to support the business.

During the downturn, significant parts of the industry changed raw material types which it used, so the excess capacity the industry had and we had in staple as well as in polypropylene, there is limited excess capacity in the industry going forward because we obsoleted so much of it during the downturn. It would go to consumer preferences changes and valuations of different products.

On the SG&A, John, this year as we have said, when we get to the end of the year we expect the full year to be in dollars flat with where we were a year ago. Going into next year, depending on what you use as your estimate for sales, it's not going to go up at the same rate of sales; but it would be hard to keep it flat if you assume some improvement in the top line next year.

Having said that, though, as you know, we are laser focused on reducing SG&A. We have got lean initiatives across the organization. We have got every function looking at the different activities and how they can improve the activities and reduce costs.

So we will continue to be focused on it. But it probably would be some increase as we go into next year with sales going up.

This year you are not seeing all the activities actually happen. The inflation in our SG&A, which occurred from -- in the Dal-Tile we own -- we have 200-and-something warehouses that typically go up a few percent a year. All the personnel pieces, we have absorbed those.

And then we increased significantly the amount of new product introductions in all the different divisions. So we took the costs down and supplemented them with what we believe are investments in new areas which are going to help the long term.

Thanks for that. Then just quickly on Pergo, could you comment at all whether there is any sales trend there, up or down, going into this merger and maybe FX adjusted?

Then also, on your Western European business, which is obviously down year over year, is there a light at the end of the tunnel, or a slowing of the rate of decline year-over-year for your Western European revenue? Thank you.

The Pergo business has been on trend lines that were less than positive. They have been taking actions to improve the profitability of the business and change the mix of the products. So they have improved some of the margins over the time. They're still not where they need to be.

On Western Europe, if you just segment out our historical business and take out all the new actions, I would guess Western Europe is probably down about 10%. If you take it on an apples-to-apples basis in the different product categories and pieces and all the positive initiatives out of it, we don't see any trends that are going to change it tomorrow.

The compares don't get easier at some point?

I mean, if it quits declining it will get easier. (laughter)

All right, good luck. Thank you.

Bob Wetenhall, RBC.

Just wanted to understand. New residential construction keeps going at a pretty good clip. I wanted to just get a ballpark idea of how much better Mohawk would do on the carpet side of things if new starts go to 900,000 in 2013.

If you assume that they are about 750,000 this year, it would be about a 15% increase in that category. It makes up about 20% of the Mohawk business -- maybe a little less now. I don't know; could be less than that now, with where it went to.

So there is growth in it. The big opportunity is in consumer confidence and housing prices reaching a point where people start remodeling in pieces in addition to that. And the remodeling side really hasn't done what we have anticipated.

We still believe that people want to live in nice places. And as they get more confident about the prices of homes stabilizing, we expect improvement in the remodeling piece, too.

We think there is a good bit of pent-up demand on the remodeling side. If you look at the carpet industry, it has been down for five or six years, and people just haven't been replacing carpet.

So, as Jeff says, once the economy starts to show some improvement and consumers become more confident and start spending again, we should see a nice impact from that.

What is happening in this time also is the Dal-Tile segment has a much higher portion in new construction. So the positive moves though that impact the Dal-Tile segment much more than the carpet segment, and it's around 40% of their residential business I believe is new construction.

Got it. So you have a mix bias towards -- on Dal-Tile specifically you guys had a very strong quarter sales-wise. Given current trends, repair and remodel spending is a bit soft, as you noted.

What do you think is driving that big move up? Is it just the fact that you are gaining steam in Mexico and you have momentum there? Or what is the core driver of the better performance there?

Part of it's as we just talked about; they have a larger part of the new construction business. The new construction business is up about the same 15% we are talking about next year, is it.

We have a broad product offering, a differentiated product line, and we have the distribution strength in the marketplace. That combined with -- we have the technology and design over the last few years has moved to new digital printing, and we lead the industry in what we call Reveal technology and style and design, taking benefit of those things.

So the combination of all those things are improving our US business. The Mexican business is growing rapidly, but from a small base, so it can't impact the business as much.

Understood. Thanks very much and good luck.

Dennis McGill, Zalman & Associates.

First question just around the hardwood business. I think you mentioned that that product mix was a drag in the quarter. Can you just talk big-picture about what you are seeing in price and mix, and maybe separate those two within the industry? And just talk about the drivers there, as far as what is causing that, both in the quarter and then how you think about that playing out as residential construction recovers.

The wood business is highly impacted by the new construction business. A lot of the things we are talking about in new construction -- remember that the flooring is one of the last things to go in, in new home constructions. So what happened through the year in starts, we get -- we put in, in the last month of the building process. So it is still flowing in.

We think that the wood segment will be significant -- positively impacted by it because there is so -- it's such a high -- the wood has the highest percentage of new home construction than any of the other product categories.

There is some changes going -- the raw material side of the wood business, as it picks up, a huge part of the infrastructure to cut the trees down and cut them up was taken out during the downturn. So as it picks up there is pressure on pricing.

And so the solid wood side which has the most -- the largest use of the wood per square foot has pressure on it, which is why we have announced a price increase to cover the prices in it as we go forward.

So looking back, realizing you have a price increase announced and coming, have you seen price pressure in the business within the builder channel? Or is it just the mix between builder and remodel that is driving that?

There is pricing pressure in all marketplaces today. With the building industry still at lower levels, we are not past the pricing pressures of anything.

The builders side of it, given the pressure on the building prices, they are trying to buy more moderately priced product. In our business we are trying to keep improving the cost structure with what we have. And if we can get a little more volume through the place we will do quite well.

Okay. Frank, as we fold in Pergo next year, can you just give us a little bit more detail on what the D&A will look like once that is closed?

And then maybe just clarify the revenue side. Is the $320 million a good number to assume for 2012, or is that lower year-over-year?

Well, on the D&A side, we are not prepared -- we are still going through that process of assigning the values of purchase accounting. So I am not prepared to give you a number on that yet.

On the revenue side, I think we said they were about $320 million, and they have had some headwinds here over the last nine months or so. So it's probably going to be down at least initially a little bit from that.

Okay. Then just one last one. Within the carpet segment I think the last couple quarters there's been some issues with both mass merchants and home centers this quarter. If you excluded the customers, what would volumes look like year-over-year within the carpet segment, just roughly?

I'm sorry, I'm not sure what do you want to include --

I think your question is, if we excluded the rug business what would the volumes look like. Is that it?

Well, but then you also had the home center business this quarter. I guess if you just exclude the mass merchants and home centers in total, what would volumes look like?

Well, I mean if you exclude the two pieces, those two pieces, the balance in the business would have been up several percent higher than the average of the business.

Okay. Okay, well, thanks again, guys.

Sam Darkatsh, Raymond James.

A couple of questions. Most of my questions have been asked and answered. Specific to pricing, I know you were talking about wood and ceramic price increases having gone through.

Are you seeing input cost pressures on the carpet side? I think Honeywell mentioned raising prices on caprolactam and nylon 6. I was wondering whether that was becoming more pervasive to the point where you would require some price increases there incrementally.

I think we're a little early in the point. So far the material costs haven't changed significantly. There are signs of potential cost pressures, but we are not sure what will happen at this point.

Our raw materials are influenced by the chemical supply and demand as well as oil prices. We are watching it; at this point we haven't announced anything. Depending upon what happens we will adjust if necessary.

And my last question, Frank, I think you were answering a prior question regarding Dal-Tile and the impact of the Mexican business being small because it's coming from a small base. Should then we assume then that the US growth in Dal-Tile roughly approximates the 9% growth that you saw in this segment?

A little less, but not --

Not appreciably less?

Yes.

Okay. Thank you, gentlemen.

Susan Maklari, UBS.

Bigger picture, can you guys discuss -- has your appetite to do some acquisitions outside of flooring changed at all, especially as we start to see housing and maybe some general economic improvement coming through?

Our primary focus on acquisitions are things within the categories that we know that we can get leverage from, either knowledge, geography, the businesses, putting them together. On the other hand, on the right set of circumstances, we wouldn't rule out something else. But the majority of our focus is leveraging the businesses we are in.

We think there is a good many opportunities for us to stay focused on flooring.

Okay. Then as you look out geographically you've made a lot of progress over the last few years, clearly. Russia and Mexico and now Pergo gets you into a different part of Europe somewhat, too. Can you talk about maybe where else you can take your product next and what lies ahead for that?

As you would expect, the places we look at primarily by the ones that are growing higher. So if you go around the world, you have Western -- you have Eastern Europe, you have Russia, China, Australia, Brazil. And then India is a little difficult for people to figure out, but we would have interest under the right set of circumstances.

And it doesn't mean we won't look at other places either. I think Mexico is surprising how it sort of separated itself from the US, and I think Mexico has a lot of potential in the future.

Okay, thank you.

Keith Hughes, SunTrust.

Yes, a question on the insulated panel business in Europe. You made some comments, good and bad, in the press release. Is that business up in the quarter? And is it up for the year?

There may be a little confusion. In what we call our insulation piece, we have a roofing business, which are insulated roofing panels and that goes into new construction and remodeling. It's down under pressure, and it is mostly a regional business in the Benelux area.

We then started about three years ago with a new business that we call -- the product we call insulation boards. And those insulation boards are used to help meet the European energy expectations. That industry is growing double-digits.

We basically started with no business, and it was similar technologies to what we have, and we built a nice niche business. The plant that we built has about 100 million worth of capacity in it. We expanded it to that lately. We are running it.

And so now we're looking for the next step which is broadening. We have to put up more capacity.

We have started building a site in France. We are presently selling into that area from where we are, and we expect it to be up and running the end of next year.

So I assume the new product you discussed is still a lot smaller than the roofing business, correct?

Yes.

Okay. As you look forward in that business, is that share gain specifically in the new business -- is that going to continue? Or is there a limit you are going to reach here near term?

It depends on what happens. We believe that the industry is somewhere around $1 billion.

In euros.

EUR1 billion, and it is growing 10% or more. So we think there is a significant opportunity in it.

At the other side, we are not the only competitor in it. There are other people trying to grow at the same time.

If we exclude those two businesses out, would the Unilin segment numbers on a constant currency, would they be higher than what you reported?

North America is up. If you excluded those two -- trying to do the math here in my head. Yes, the total Unilin business would be higher.

Got it. Okay. Thank you very much.

Mike Wood, Macquarie.

Hi, guys; this is Adam for Mike. Just a quick question in Unilin. How much room do you guys have left in the DIY expansion? And when do you start anniversarying this, if that is the way to look at it?

We talk about it like it is one thing, but what happens is you have DIY -- which is called home centers in the US -- and there is DIY in Europe, which is smaller more regional businesses. And we actually have different approaches in both continents.

In the US, we have been -- if you go back two or three years we had I think probably close to zero being sold of laminate through the home centers. And the home center channel controls somewhere around 50% of that category of product. So we started building a business in it.

The Pergo acquisition, which is good for us, is that their primary sales are through those channels. So it complements where we were going; just gets us there faster.

On the European side of the business, we have a different approach, where we are putting together -- we are adding to most of them a premium branded segment on top of it. And we are doing it with limited distribution strategy, so it fits us and them and gives them a differentiated feature.

And two different strategies, both of which have been working so far.

Great, thanks, guys.

(Operator Instructions) Eric Bosshard, Cleveland Research.

I was just wondering, in the Unilin segment with the growth of 9% ex-currency, what is the sustainability of the benefits in Russia and the US and Australia, offsetting the weaker Europe?

The Australian acquisition we are anniversarying this quarter, so we won't see the same kind of benefit next quarter or next year as we have in the past for that. On the others, Russia continues to grow; we continue to take market share. Insulation continues to grow.

So we should see continued help from both of those as we move forward, as well as DIY growth.

Then we have said before that the Western European businesses were down around 10%, give or take. And we don't know if it has bottomed out or will keep going down more.

Great, thanks.

At this time there are no further questions. I would like to turn the conference back to Mr. Lorberbaum for any closing remarks.

Thank you very much for joining us. Have a nice day.

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