莫霍克工業集團 (MHK) 2012 Q4 法說會逐字稿

Good morning. My name is Sean 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 call is being recorded today, February 22, 2013. I would now like to turn the call over to Mr. Jeff Lorberbaum, Chairman and CEO. Mr. Lorberbaum, please go ahead, sir.

Good morning and thank you for joining our fourth-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.

I would like to remind everyone that our press release and statements we make on this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers. You can refer to our Form 8-K and press release at the investor information section of our website for a reconciliation of any non-GAAP to GAAP amounts.

Thank you, Frank. Our fourth-quarter earnings per share were $0.95 as reported, or $1.01 excluding unusual charges, an increase of 40% over 2011. Price increases, productivity improvements, mix and lower interest all contributed to our results. Our 2012 sales increased 4% as reported, or 5% on a constant exchange rate.

During the quarter, we generated adjusted EBITDA of $165 million and cash flow from operations of $285 million (sic - see Press Release "$289 million"). For the full year 2012, our sales were $5.8 billion, an increase of 3% over 2011 or 4% at a constant exchange rate. For the year, our adjusted operating income increased 15% to $398 million and cash flow from operations was $588 million.

Year-over-year, all segments increased earnings as a result of improved mix, productivity gains and price increases. We enhanced our carpet mix by introducing new premium products that offer customers an enticing value proposition with desirable features such as luxurious softness and superior stain resistance.

Our expansion into new geographies provides the opportunities for additional growth. The opening of our Salamanca tile facility in Mexico broadened our product offering and our customer base. Expanding distribution in Russia grew local sales from our new laminate plant. Our Australia laminate and hardware distribution business increased sales by introducing differentiated products into the market. We continued to optimize assets by consolidating two mosaic tile facilities into one and [shutting two yarn mills]. We achieved significant improvements in safety across the enterprise, protecting our people and reducing expenses. One of the largest insurance companies in the US recently recognized Mohawk as operating at world-class safety levels.

Last year, across the business, we kept SG&A dollars in line while investing more in innovative marketing and products. Today, economic indicators remain somewhat mixed, though evidence strongly suggests that Americans are investing more in their homes. In the US, January weekly new unemployment claims dropped to a five-year low with steady job creation forecast for 2013. The National Association of Homebuilders project single-family home construction will grow 22% this year. During 2012, remodeling activity was below its full potential; however, in the fourth quarter, the NAHB Remodeling Index was at its highest level in seven years, suggesting higher future demand as in past cycles. Future US commercial growth is supported by a positive [AIE] Building Index and the expansion of new project inquiries across all building sectors.

As the recovery gains traction, we have positioned Mohawk for long-term growth. During the past five years of the downturn, we focused on reducing our leverage and improving our infrastructure so we could take advantage of opportunities when the recovery began. Today, we have transitioned from a focus on conservation of capital to an expansion strategy. We are continuing to strategically invest in growing our core businesses and since October, we have announced the agreement to acquire three businesses -- Pergo, Marazzi and Spano. Each of these represents a different opportunity for Mohawk and all have synergies that will improve our existing businesses. These acquisitions are aligned with our geographical focus on the US, Russia and Europe.

As the US flooring industry continues to improve, we are investing in two of the leading laminate and ceramic players in the US and these acquisitions can optimize the manufacturing assets, raw materials and sales strategies of the businesses to drive growth in margins in both product categories.

Marazzi's Russian business expands our participation in this high-growth region. Through the acquisition, we will obtain the leading position in the ceramic market with an integrated distribution and retail infrastructure. Russia's lack of housing is increasing construction and longer-term growth in flooring. We also see potential opportunities to leverage our Russian-made laminate flooring with our new ceramic infrastructure. To expand upon Marazzi's successful Russian strategy, we will increase investment in the region.

We are entering the European ceramic market with leading positions in Italy, France and Spain while the economy is at a low level. We anticipate Marazzi's results will improve as we complete sales, marketing and cost improvement initiatives and as the economy rebounds in the future.

In the European laminate market, Pergo expands our business in the Nordic countries and enhances Unilin's patent portfolio. Belgian-based Spano supports Unilin's unique position in boards in this European region. Not only is the business complementary with Unilin's, but Spano's facilities are located very close to ours. The combination of Spano and Unilin is anticipated to close in the second half of 2013 and will allow us to modernize high-cost assets, broaden our product offering and create a more competitive business model. All of these transactions in combination with our existing businesses position Mohawk for growth. While each strategy will require time to fully execute, we have specific plans for leveraging the new acquisitions in our existing businesses. Over the next few years we will focus on maximizing these acquisitions and reducing our debt level.

In January, we successfully issued $600 million of 10-year bonds at a couponed rate of 3.85% and plan to use the proceeds to finance a portion of a Marazzi acquisition. Until the close, expected in the second quarter, additional interest expense will be incurred without the Marazzi operating margin in our financial results to offset the interest. We have already received US and German approval for the acquisition and are waiting on other countries where we have no ceramic presence to approve the transaction. Frank, could you give our financial report, please?

Thank you, Jeff and good morning, everyone. Net sales for the fourth quarter were $1.436 billion, up 4% as reported or a 5% increase on a constant exchange rate basis. This was driven by increased volumes both in Dal-Tile and Unilin, as well as pricing and mix improvement at Mohawk.

The gross margin was 25.7% compared to 24.3% in the comparable quarter last year. The margin improved 140 basis points year-over-year as volume, productivity and mix favorably impacted our results. Continued focus on innovation, process improvement and cost yielded stronger profitability this quarter.

SG&A dollars were $273 million, or 19% of net sales. This compares to 19.5% of sales a year ago. SG&A dollars for the full year were flat even as we absorbed higher sampling and marketing investments back into the business. We will remain focused on controlling SG&A as the business grows.

Restructuring charges were $6 million for the quarter, all related to Dal-Tile, primarily in cost of goods sold, for the consolidation of our mosaic tile plants. We will have additional restructuring costs in first quarter related to our other businesses, but we have not quantified those amounts yet.

Our operating margin for the quarter was 7.1%, which compares to 5.8% last year. This is up 130 basis points year-over-year with our operating income dollars increasing 28% over last year. Interest expense was $15 million for the year -- or for the quarter and was lower due to the payoff of 2012 bonds and the rating agency upgrade we received earlier. We expect our legacy interest in 2013 to be approximately $18 million a quarter. And as Jeff mentioned, we will have an additional $2 million each month of interest related to the $600 million bonds that we issued at the end of January for the Marazzi acquisition.

The income tax rate, excluding charges, was 17% during the fourth quarter this year, which compares to a 9% rate last year. Last year's rate was impacted by one-time benefits that we did not experience this year. As we move into 2013, we expect to have a tax rate of 20% on our legacy business before the Marazzi acquisition.

Our earnings per share, excluding charges, were $1.01 and represent a 40% improvement over last year.

Moving to the segments, in Mohawk, sales were $726 million, slightly up with mix continuing to improve in this segment. Operating income was $52 million with a 7.2% margin compared to a 5.7% margin last year. This is a 150 basis point improvement, which results from positive mix in manufacturing and logistics productivity.

In the Dal-Tile segment, sales were $402 million, up 15% over last year. We had strong growth in all channels and end markets. We were also impacted in the quarter by higher promotional sales to home centers that should not repeat in 2013. Operating income, excluding charges, was $27 million or a margin of 6.8%. This is up 60 basis points with higher volumes and productivity improvement offset by plant shutdowns to align inventory and then also promotional sales.

Unilin sales were $330 million, up 1% year-over-year as reported, or up 5% using a constant exchange rate. We had strong growth in North America, as well as our European insulation and wood businesses, which was offset by slower laminate and roofing in Europe.

Operating income for the quarter was $30 million or a margin of 9%. We had lower amortization expense of $7 million in the quarter, which favorably impacted us. In addition, we had about a $1 million drag on earnings as a result of foreign exchange. And in the corporate and eliminations segment, we had an operating loss of $7 million for the quarter or $26 million for the full year, which is in line with our expectations.

Then moving to the balance sheet, cash was $478 million. We ended with a strong balance sheet and good liquidity this quarter. Free cash flow was $216 million during the quarter and this has positioned us to take advantage of strategic opportunities that we have talked about in our industry.

Receivables at $679 million ended the quarter with DSOs comparable to last year. Inventories at $1.134 billion reflect inventory days slightly better than last year after adjusting for inflation and pre-buying activity. We believe we are in line with our expectations.

Our fixed assets were $1.693 billion and included CapEx for the quarter of $73 million and depreciation and amortization of $64 million. We expect 2013 capital expenditures, including Pergo, to be approximately $300 million during the year. We estimate depreciation and amortization for 2013, again, including Pergo, to be approximately $255 million. Amortization in 2013 will be down $35 million as some intangible assets related to our Unilin acquisition will be fully amortized.

And then, finally, net debt at the end of the quarter was $905 million, which compares favorably to last year of $1.274 billion. Cash flow from operations was almost $290 million for the quarter with net debt declining by $369 million as our leverage ratio improved to 1.3 times. Jeff, I will turn it back to you.

Thank you, Frank. The Mohawk segment sales were flat with the fourth quarter with carpet sales performing better than rug sales. Our rug sales improved from last quarter, but they remain below the prior year as lower product mix and retail sales continued to decrease our results. Our new premium carpets have improved our overall selling prices and margins; however, sales levels were impacted by home center product transitions that we expect to be completed during the first quarter. We recently announced a carpet price increase of 4% to 6% to cover rising material cost.

During the quarter, we expanded our industry-leading SmartStrand Silk collection with 10 new fashionable products. By applying the innovative processes used to develop SmartStrand Silk, we introduced our Wear-Dated Embrace nylon collection at lower price points in the fourth quarter. This extends our leadership position in the ultrasoft premium category with carpets that provide exceptional durability and easy care. In 2013, we anticipate both the sales and mix will improve from broader distribution of SmartStrand Silk and Wear-Dated Embrace.

All categories of Mohawk hard surface products delivered sales gains through new product introductions, including new domestic scraped wood products, tile utilizing Reveal Imaging to mimic travertine and marble, our collections of laminate with unique visuals and GenuEdge Technology. During the period, we announced two price increases on solid wood flooring totaling about 15% to offset rising lumber costs.

In the commercial category, we grew sales of our new carpet tile introduction made from our premium Duracolor fiber as designers embrace the styling with high-performance stain and soil resistance. Our hospitality sales were strong as we expanded our customer base both in the US and international markets.

To support sales of our premium tile collections, we launched a new online tool called DesignFLEX so that designers can visualize unique commercial environments with multiple patterns and colors for their clients. We executed manufacturing productivity improvements across the business through waste reduction, enhanced recycled contents and improved efficiencies. We integrated SmartStrand cushion into our premium carpet offering, which enhances the performance of our products and differentiates our offerings.

Dal-Tile sales grew 15% during the quarter with gains in US and Mexico supported by new product introductions with enhanced textures, sophisticated design and larger formats in both the residential and commercial categories. A portion of our sales growth was due to higher than usual promotional sales to better utilize our capacity during the quarter. Margin expansion came from higher volumes, enhanced productivity and improved yields, partially offset by plant shutdowns to reduce inventory as our new capacity ramped up faster than we had anticipated.

Sales grew across all residential channels with successful launches of our new Reveal Imaging, coordinated wall floor mosaic collection, larger sized tiles from our Chinese JV and new decorative assortments in the home center channel. We expanded our presence in the [builder] and multifamily channels with new products manufactured in Mexico. We have reduced our ceramic SKUs while enhancing our offering with more contemporary sizes and innovative styling aligned with today's decors.

To grow our American Olean brand, we upgraded our underperforming distribution partners, increased relationships with national retail groups and renovated our showrooms to present our products more effectively. Commercial sales continued strong with the hospitality sector leading this tile category. We are expanding our commercial salesforce to more aggressively pursue large specified projects. Our commercial tile collection called [Next] has been broadened with additional sophisticated designs and textures, contemporary sizes and fashion-forward colors to excite the designers in the premium commercial market. The combination of additional sales resources and new products is growing our commercial specifications and account base.

In Mexico, we increased production at our Salamanca facility and we are optimizing the plant's efficiencies and yield. To maximize our growth in the Mexican market, we have expanded our sales teams and increased participation in the home center, distributor and retail channels. We announced a price increase in Mexico of approximately 4% to be executed in the first quarter to offset inflation.

During the fourth quarter, Dal-Tile lowered overall manufacturing costs with higher efficiencies, improved material formulations, increased recycled content and effective quality initiatives. We are upgrading our wall tile facilities to produce a wider variety of shapes, sizes and decorative styling. At Muskogee, we have installed a specialized kiln to more effectively produce unique premium products. We also reduced freight costs through rate increases, energy surcharges and favorable volume.

Unilin's fourth-quarter sales grew 1%, or 5% on a constant exchange rate. Increased laminate and hardwood sales in North America, growth in our insulation boards, expanded participation in the DIY channel and solid results from our Australian distribution contributed to our sales improvements. Our margins were favorably impacted by lower amortization charges, partially offset by material inflation and negative mix as European consumers purchase more value-based alternatives.

We completed the final phase of the investment at our Russian laminate plant, which added beveled edge capabilities to our local manufacturing. With the European economy reducing consumption, we partially offset a slower Western European laminate and roofing business with growth in wood flooring and insulation boards. Wood flooring also posted growth in Australia, Russia and India as we increased our laminate -- and we increased our laminate distribution in the German DIY channel.

Two of our laminate collections have been updated with new embossing and structured surface technologies to provide more natural wood visuals at more accessible price points. We expanded our line of accessories and made installation easier. To increase Australian sales, we are offering products specifically tailored to the local design and color preferences. As the luxury vinyl and tile category expands in Europe, we are utilizing Quick-Step design and installation technologies to differentiate our LVT collection that was launched on a limited basis and is now being expanded across Western Europe.

The Malaysian government has recently mandated wage increases for manufacturing employees and to offset the cost, we will invest more in new automation at our hardwood facility there. In North America, both laminate and wood flooring sales grew significantly across all channels. We expanded our presence in the home center channel with additional laminate placements that offer high-end wood looks accentuated by our GenuEdge Technology.

North American sales to distributors were increased through specific promotions and new laminate products such as reclaimed wood visuals and wide plank formats. We added Scotchgard and ArmorMax protection to selected wood collections providing the easiest maintenance and highest wear-resistant finish in the industry. Two price increases for solid wood flooring totaling 15% were announced in Unilin this quarter to offset the rising lumber costs in the US.

To support continuing growth in our insulation board business, we have begun the construction of a new manufacturing facility in France. As Western European housing contracted, our roof panel sales have declined and reduced our workforce to balance. We have licensed our patents for [click] furniture to additional manufacturers who are introducing new products that will increase interest in the technology.

During the period, a national contractor magazine ranked Dal-Tile number one in the tile and stone category and a national poll of designers recognized Dal-Tile for the best overall business experience. In the US in 2012, we generated approximately one billion consumer impressions about our Quick-Step laminate from more than 5000 special interest and mainstream media articles.

Through product innovation, expanded distribution and process improvements, Mohawk delivered solid fourth-quarter results. We improved our mix with higher value products gaining traction in the market. We are seeing some inflation in our raw materials and taking the appropriate actions in the marketplace to address.

In the US, low mortgage rates, stabilizing home prices, improving employment should sustain the housing recovery. We believe that the US residential remodeling should see improvement in the future and that the European economic conditions are near a bottom.

We anticipate revenue and earnings growth for 2013 as the US market improves and we realize some benefit from recent acquisitions. The first-quarter earnings are seasonally the lowest and represented a little less than 1/6 of 2012's full-year results. With this, our guidance for the first-quarter earnings, which includes Pergo, is $0.77 to $0.86 per share, excluding any restructuring, acquisition costs and interest on new bonds for Marazzi. We will begin including forward estimates for Marazzi and Spano after those acquisitions are closed.

In the second quarter, our carpet price increases will only be partially executed and we anticipate that $5 million to $10 million of our increased costs will not be covered. In the third quarter, we expect carpet pricing will be aligned with raw material costs.

As 2013 begins, Mohawk has transitioned from a defensive posture to a more aggressive growth mode. Our strategy has shifted from managing through the economic downturn to expanding our long-term business. During the past few years, we have strengthened our balance sheet, which enabled us to acquire three companies with outstanding brands and potential. We will drive our business strategies of innovative products, efficient manufacturing and expanded distribution across the enterprise to grow both our existing and new businesses. With that, we will be glad to take questions.

(Operator Instructions). Ken Zener, KeyBanc.

Jeff, Frank, good morning. Your success finding deals in a variety of categories and regions in the fourth quarter obviously was very impressive. Do you think -- is your pipeline depleted and/or -- I mean did you have a specific focus on Europe?

I'm not sure the pipeline is depleted, but we have spent all the money we are going to spend for the near term. We have been talking with many of these companies for a period of years in different places, having discussions over long periods of time and many of the companies, as you come out of recessions, you have to refinance the businesses, so it creates opportunities as the business grows. We think there is more opportunity in the marketplace, but we are going to be focused the next few years or next couple years at least on putting these in a condition we would like them to be.

Okay. And then this is kind of a little more macro, ties in obviously with carpet where you are facing input costs. You are going to ask for price given your history of recovery. In kind of two quarters, I expect you will get it. But from a macro perspective, if it's your wood flooring, if it is the tile in Mexico or any number of other building product categories, it seems like everyone is asking for price. And can you give us a little sense of where your conviction comes from? That pricing on wood, tile really will be flowing through given relatively low levels of demand compared to your conviction in carpet, which is tied as much to industry structure as anything else. Thank you.

We are seeing raw materials move up. In many of the different categories, the raw materials were depressed somewhat during the downturn. So we are seeing inflation in raw materials in many places. In each of the categories, there are different drivers of it. In the carpet side, you have -- oil prices are going up, but there is also additional pressure from chemical costs rising more due to supply and demand and those companies trying to recover their margins as the industries occur.

With that, we have announced a price increase of 4% to 6% to get it back. At this point, all the major carpet players have announced similar increases in those ranges and we believe they are going to go through because the industry needs them to keep the margins at least where they are.

On the wood side, you are seeing something similar, which is, with the wood going up due to the housing recovery, the wood coming out of the forest is in shorter supply and the prices are going up significantly and the industry has to pass those through. We have made announcement of two separate price increases because they increased more than we had anticipated and we don't see any reason why we won't be able to achieve those given the cost increases we are incurring.

Thank you.

Michael Rehaut, JPMorgan.

Thanks, good morning. It's still Mike Rehaut at JPMorgan. How are you? First question on the -- actually I was wondering if we can just do a little bookkeeping for 2013, if possible. What you expect corporate expense, and I know, if at all possible, to include some of this for your expected completed acquisitions of Marazzi and Spano, what you expect full-year corporate expense and also the tax rate to be once those are completed?

Michael, on the unallocated corporate expenses, in the corporate and elimination segment, I think we have historically run about $25 million and I would expect to have that same run rate this year for the corporate and elimination segment. And then on the tax rate for the full year, we are estimating around a 20% tax rate for the full year.

And so neither of those changed, Frank, with the acquisitions?

No.

Okay. Also, on Mohawk, if we could just talk about that for a moment, you had nice 120 bps of margin expansion for 2012 on roughly flattish sales. So I was wondering if you could kind of break down, Frank, what were the drivers of that margin expansion and when you talk about the delay in the price increases coming through, that it really -- you won't fully realize it until the third quarter, you will start to realize it in the second quarter, what that might mean for margins year-over-year. The last couple of quarters, you have had around 150 bps or more of year-over-year margin expansion, what that might mean for the first quarter, in particular, if you might have some higher costs and not an immediate matching of the price inflation. So two kinds of questions there. One on what were the drivers in 2012 of the margin expansion and how that recent expansion might flow potentially without the full benefit of the price increases in '13.

Let me start from an overview of what happened. The mix during 2012 -- again, an improvement. It improved because of the growth in premium products; it got improved because of the shift to soft products in carpet; and it also had a shift in carpet tile, greater carpet tiles from broadloom all improved the mix within the business.

The margins we believe are sustainable and we believe we will continue to see improvements because we believe there will be continued mix improvement this year. We have a lot of things that are still working on productivity and cost saving. We also expect some sales growth initiatives, which should all grow the margins this year from last year.

Kathryn Thompson, Thompson Research Group.

Hi, thanks for taking my questions today. First is on Pergo, as that is integrated into the system, we have a pretty good sense of the revenue flowthrough. But could you help us how we should -- through how we should think about margins, particularly as Pergo is being integrated into Mohawk overall? And if it is going to be seamless or what type of efficiency upside could we potentially see or conversely drag could we see for the short term and first quarter?

We haven't given a specific of how they are going to change. There is a lot of opportunities to improve Pergo. It is complementary to our business with our premium product positions. They have and we have together different from each other design and performance capabilities, which will enhance both portfolios. There are significant opportunities to optimize the manufacturing in both the US and Europe. We have already started making quality changes and productivity changes. There are many initiatives on the table that are going to take a significant period of time to implement during this year and possibly beyond it and it will take a while to maximize those.

There are opportunities to leverage their patents with our licenses. Our license abilities to increase that and have it go beyond all the way through some time in 2020 something. We haven't finalized the timing and the amounts of all the restructuring pieces it takes, the product changes it takes, but they are all being planned and designed so we can go ahead and execute them over the next 12 months.

So as Jeff said, we have got a lot of things we are working on here and expect improvements -- it is going to take some time. However, for the full year, we still are expecting slight accretion from this and it really was not a drag on our first quarter -- in the estimate we gave for the first quarter. It was not a drag on the earnings.

Great. And finally, in the Mohawk segment, could you break out as much as you can the growth rate for volume for residential versus non-res? Particularly we just want to get a breakout, a sense of how your modular business is doing relative to residential and any other changes on the -- we know what was going on in the broadloom side with pricing, but anything on the modular side too would be appreciated.

The residential and commercial growth rates were similar, not much different. What was the rest of the question?

Modular versus broadloom.

What is happening in the commercial business with our business is the modular is growing, but it is moving from the broadloom to modular, so it is offsetting a lot of the growth rate.

And price increases.

Price increases in the commercial -- we talked about the price increase in the residential. In the commercial businesses, the price increases don't to -- a lot of it is done on a specified basis, so it is on a job-by-job basis and you don't see all the time the announced changes because every job has changed as it comes up.

Mike Wood, Macquarie Capital.

Hi, thank you. On the broadloom side, you mentioned that you hope to achieve the cost parody by the end of the second quarter. I am curious in your opinion what you think would be the trigger to get margins back up to their historical average in the sector and essentially get some accretive price actions in broadloom.

Well, to get the margins back up, we are going to continue doing all the things we are doing about cutting costs, managing the SG&A expenses, getting leverage on them if they go up, getting better product mix as they go through, reducing our cost structures. We expect to start getting some top-line growth, which will also help all the pieces and then the price increases -- the price increases are dependent upon what raw material costs are and what the marketplace does and we try to get -- we try to improve our margins as we do that, but it is dependent upon the entire marketplace.

And we have made pretty good progress, Mike, I think over the last two years, three years of improving margins, as Jeff said, through mix and productivity improvements and initiatives. And as we have said before, our goal is to get those margins back up to the high single digit range where they were before we went into this recession and we think, with volume and some improvement in mix, we can get back there. Meanwhile, we are going to continue to work on improving the mix and taking out cost.

Just another comment on the price increase. Some of it is being offset by the change to lower-cost products made out of polyester is offsetting some of the pricing increases the last year or two and will continue as polyester grows.

Okay. Also, on price in the Unilin segment, can you give us a sense by product in Unilin how sensitive each is to the increase in lumber prices and where you can actually proactively substitute out products like potentially in engineered wood to lower-cost substitutes?

The price increases that we announced are in the solid wood category. We haven't raised the engineered wood, which has lower-cost raw materials in it as much and so the other one has the majority of the increases and we are passing them through.

Alternatives to wood, there is all kinds of alternatives. It depends on what you are looking for. There are options in laminate, there is options -- there is actually ceramic looks that are made out of wood for the high-end wood market place that doesn't scratch. There is new products we are introducing and others in LVT as we go through.

There is a lot of options as it moves around. Wood tends to be an aspirational purchase for people, and the people that desire to have the best products tend to like using wood and won't change it. On the other hand, people looking for alternatives have moved already to things like laminate which look a lot like it at lower price points.

Thank you.

David Goldberg, UBS.

It's actually Sue. Looking out maybe a little bit bigger picture, you guys are definitely increasing your exposure to Southern Europe with Marazzi and also your new board facility coming on in France. Can you talk about how you think about the potential sort of opportunities or risks as you get more into this region, especially sort of your ability to adjust as demand changes over time?

Sure. Let's start with the ceramic business. We believe we are entering the ceramic market at what we believe is a low point. We believe there is limited downside. There is potential for downside, but we believe there is much more upside in the ceramic business.

Before we purchased the company, the company had already reduced its capacity and they are running today at about 90% of their capacity. So the capacities are aligned with the business as it is today. We believe that we can impact the business positively by reducing the manufacturing costs further, by improving the product mix in the business, by executing best practices and reducing the overhead structures of the business with it. So we think we are buying at the right spot. There is some short-term downside, but we think it is limited and we think we are well-positioned with number one positions in Italy, France and Spain as we go through.

The other businesses are further in the north, which don't have as much downside to them. The Pergo business has opportunities with our European business of creating greater efficiency, of new product introductions and broadening distribution of both businesses and taking costs out of the business as we manage those. It has a big opportunity to improve our position of both businesses as we leverage them together.

And you have some of the similar things with Spano. Spano is a board business that is in the same communities as we are almost and there is opportunities with Spano to reduce the cost structures significantly with synergies that make us more competitive in the piece. The businesses are complementary. They actually have some different focus on their customer base. We will be able to maximize the productivity of each of the plants by moving products around so we have higher volumes of similar products.

And so we believe again that also we are in a good position to do it. We are going to put more investments in it to throw out the high-cost assets in both of the businesses as we combine them together. And we think there is good potential to be the low-cost provider in the marketplace and maximize our position with the best service in the market.

And I will just add a couple points there too. In Marazzi, if you look at sales, shipments actually made into Italy and into Spain, it represents a little bit less than 20% of the total Marazzi business right now.

And then, secondly, I think you had asked about the French insulation plant and that insulation business is about a EUR1 billion business over in Europe and is actually growing because of energy requirements by the European governments over there. And it has got limited areas that we can sell it in before we start to run into distribution costs that are too high. So the opportunity to grow there is more growing with the industry as we expand out geographically.

The insulation business, our present plant will be just about fully utilized about the time the new plant comes up. So the new plant will allow us to broaden our distribution and keep growing, which we wouldn't be able to without it.

Okay. And so then longer term for -- especially for the Dal-Tile, the Unilin segments, are you still thinking that margins get back to say maybe 11%, 12%, somewhere in that range?

We are anticipating over time we would get the margins back up.

Dennis McGill, Zelman & Associates.

Thank you. Frank, could you look at -- within the Unilin segment, I think volume for the full year was maybe plus 4 on an organic basis. Could you maybe split that out positive and negative across the domestic laminate, domestic hardwood and then the international piece as well just to get the flavor of the puts and takes through the year?

I think if you looked at our North American business, the growth there was strong compared to the European business, stronger.

The European business -- Western Europe is down, could be down as much as 5% to 10% in different categories. The laminate business will be down less and the building product things would be down more. We have a roofing business we talked about. I mean the roofing business is off more than all of those. On the other hand, our US business is growing, as well -- the general business is growing, as well as we are expanding our share in various marketplaces. So we think there is big opportunities in the US.

And within US laminate, how do you think about that category over the next couple of years and your ability to expand it in the face of LVT taking share overall?

I think that the laminate business over time is going to have a difficult time growing much more than market and LVT is going to grow at the expense of a lot of things. The laminate business in general sells at lower price points than the LVT at this point. So they should be able to coexist, but LVT as it grows will take from a lot of different categories.

So is your expectation that your laminate business has to grow through marketshare accumulation?

Our intention is to grow it with the market and to take share. I think that we are in the right position -- we basically focus on the mid to high-end part of the market. Pergo focuses on the mid to high end and so all our assets are structured to have high differentiation to create higher value and we are really not positioned to participate in the commodity opening price points because our assets are set up differently than those. But that differentiation allows us to bring products to the marketplace that make it difficult for other people to bring the same value propositions. So I think that we will be able to grow ours at least with the marketplace and hopefully we will be able to merge the businesses together and create a lot of efficiencies and cost savings.

Dan Oppenheim, Credit Suisse.

Thanks very much. I was wondering, in the Marazzi business, you talked about (technical difficulty) despite demand being relatively low right now. As you think about the next couple years in recovery, what sort of capital requirements do you think there will be in that and how are you looking at that overall?

Is that relative to Europe or the whole business, your question?

I guess you are talking about 90% in terms -- did you mean in Europe or how are you looking at (multiple speakers)?

The 90% was in Europe and in the short term, we are going to invest some more to improve their efficiencies, as well as to be able to improve their mix and those plans are still being put together. At this point, we don't own it yet. We have plans, which we will have to confirm once we get closer to the business. You have the Russian business, which is going to have to continue to have additional capacity to support its growth rate, which is a 10% or low teen rate we think we can sustain over some period of time. And so with that, we are going to have to continue investing to support those growth rates.

And in the US business, we believe that we can grow the US business and our Mexican business, which we use all the assets to support both of those together. If the US business turns around long term like we believe and we can continue to invest in the business, we think that we -- a large part of that business is imported from other countries into the US and we think we can provide greater value to our customers and outgrow the industry by producing more in the United States to support the industry.

Okay, thank you. And then in terms of the Mohawk segment just a little bit, you talked -- you've done a great job in terms of the mix improvements there where the rug category has been certainly lagging. You talked about some sales growth initiatives. Is there anything you are doing in terms of just helping the rug side of the business or is that something where it is just much more focused in terms of the higher price point, higher-margin items or is it the expectation that rugs continue to lag?

So rug sales showed improvement from quarter three to quarter four. A lot of the business is driven by the very large retailers around the country who are still cautious about consumer demand. And with that, they have actually been pushing the product mix in their stores down to try to have lower retail price points. That has been impacting the industry as well.

We have many new initiatives to go into new distribution areas that we haven't focused on as much to grow specific retail categories. We are introducing more fashionable rugs to try to change the retailers' focus on low opening price points and move them towards improving their mix. We have been utilizing new proprietary raw materials to differentiate our products. We expect these things to show some benefit this year.

Eric Bosshard, Cleveland Research Company.

Good morning. First question on the tile business, wondering if you could help us understand a little bit the incremental margin in 2012, which seems like it is a little bit below trend. I am curious where the incremental margin ought to be in that business into '13 and also interested in how you think how the Marazzi margin compares to that margin over time.

As we have said before, Eric, the incremental margin in the tile business runs in the mid-20%s. It was impacted specifically in the fourth quarter though with the plant shutdown costs that Jeff had mentioned that we put in place to control inventory levels. And then also we had higher promotional sales to utilize the capacity and then our Mexican plant, Salamanca, costs are improving, but we have the potential there to get those up even higher.

So if you look at the margin, the dollars actually went up 23%. Incremental margins would have been more in line with where they should have been in the mid-20%s had it not been for those three items. And then there was one other question, I think.

How Marazzi matches up over time with Dal-Tile margins or compares to Dal-Tile margins over time.

We would expect the two to be fairly in line with each other over time. The question is going to be what happens with the European business and when do we recover those margins. We believe that the Russian business has potential to be higher margins and the US business should be in line with ours over time.

And then a second question, the stepup in capital in 2013, can you just talk a little bit about where that is? Is that all legacy, is that inclusive of spending for the acquired businesses?

Capital expenditures plan is about $300 million going into the year, including Pergo's new capital. It doesn't include new capital for the other businesses, which we don't own yet and there is nothing in there for any restructuring activities at this point. Many of the investments are going to support growth in the future. New products and expansion is about 40% of that, maybe a little more. It is going into new extrusion capacity in carpet. It is going to start putting in new ceramic capacity, which takes over a year to put in, so it is going into growth for future. It is insulation plant we talked about and then we are starting to put some investment into participate in manufacturing LVT is going in this year. We have cost-reduction plans of probably another $70 million, $80 million or more and then the balance -- most of it is in different types of maintenance or some small cost-reduction pieces.

John Baugh, Stifel Nicolaus.

Good morning, Jeff and Frank. Good year. I wonder if you could just share with us what you are seeing right now in terms of residential US repair and remodel spend and maybe the same for commercial. And then more or less how you think that may unfold as 2013 unfolds. Thank you.

So far this year, it is difficult to read the carpet side because of two things. One is the price increase last year and the timing of it and now the new price increase, you have pre-buys and stuff going on last year at different times of the year, so it is difficult to read.

In general, we see -- so far this month, it is trending about as we expected through the period of time. We are seeing increases as we go through the period and we think that they are consistent with our estimates going forward that we have built into our earnings.

Do you care to give us a rough guideline of what those revenue expectations are, not necessarily for the first quarter, but as you think about say the resi repair and remodel for '13? Thanks.

The remodeling piece, at the moment, I have to say that we haven't seen a significant upturn in it at this point. Our expectations are that, as the economy and people keep working more and based on the indicators that we see, that people will start spending more, but I can't say that it has taken off yet.

(Operator Instructions). Keith Hughes, SunTrust.

Thank you. I will shift John's question to Europe. How have trends in Europe been and is there any sort of bottoming you are seeing in Western Europe in the Unilin business?

The trends in Europe are still difficult. We started this year and the weather was more difficult in the first part of January, which had a negative impact on the sales. We also had -- in our business, we had some price increases last year, which created a pre-buy in January that affected the comps. So it is making it a little difficult for us to see. I can tell you that the trends are still negative across the business. We talked about somewhere between 5% and 10% across the different business categories with some better and some worse.

The attitudes of our people are that they feel a little better about things going on. It looks like that the banks are keeping liquidity in the business over there and we are hoping it is near the bottom. We will all get to see.

If you look at Eastern Europe, that was a big market for you and you are there with Marazzi in terms of growth. Are we looking at another good growth year in Eastern Europe, specifically Russia in '13?

Russia business continues strong. The Russian economy continues good and the building industry -- there is a shortage of housing and so it continues to go, so we are looking for a strong Russian market.

Thank you.

[Desi Depiro], RBC.

Hey, thanks for taking the question. On the depreciation and amortization guidance, it doesn't look like it includes Marazzi. So what can we expect for 2013 depreciation for that business?

Yes, you are right. It does not include Marazzi. It includes our legacy business in Mohawk and it includes Pergo. Marazzi, we have not finished all of the purchase accounting and stepup for the assets, so we don't have a number going forward. I can tell you though that their historical depreciation and amortization ran about $75 million annually, but it will increase. That number will increase once we complete the purchase accounting.

Great, thank you.

There are no further questions at this time. I'll turn the call back over to Mr. Lorberbaum.

We appreciate everyone joining us. We believe we are well-positioned going into 2013. We believe that the acquisitions that we've put in place will benefit us greatly over the long term and we are well-positioned to take advantage of what is going on in the United States. Thank you very much for joining us.

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