Good morning. My name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. [Operator Instructions]. As a reminder ladies and gentleman, this conference is being recorded today, July 20th, 2007. Thank you. I would now turn the conference over to Mr. Jeff Lorberbaum, Chairman and CEO. Mr. Lorberbaum, you may begin your conference.

Thank you. Welcome to Mohawk second quarter conference call. With me I have Frank Boykin, our CFO. Would you please read the Safe Harbor statement?

Sure. 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 is subject to various risks and uncertainties, including, but not limited to, those said forth in our press release in our periodic fallings with the Securities and Exchange Commission.

Thank you. I am pleased with Mohawk second quarter results given the difficult environment the US flooring industry is experiencing. The second quarter net earnings were $115 million, and earnings per share was $1.68, both about 4% below last year. Net sales for the period were about $2 billion, a decrease of about 4%. The Company continues to generate strong cash flow paying down debt of $208 million and improving a debt to capital ratio to 38%. The US flooring industry continued its cyclical downturn with soft sales in both the residential new and remodeling categories. US commercial business continued performing better than the residential business. We do not see any indications presently of a significant change in the US industry. Many of our US manufacturing facilities are operating at low capacities, generating unabsorbed overhead cost. We are controlling production levels to match sales and inventory requirements. The European business maintained its strong growth and performance, partially offsetting the cyclical downturn in the US market. We raised prices in many product categories in both the US and Europe to past through rising material, energy, and transportation costs. The unpredictability of future costs and demand make the outlook difficult to predict. Frank, would you give our financial report, please?

Okay.Our net sales for the quarter were $1.977 billion or 4% down from the previous year. Our Unilin segment continued this growth with Dal-Tile coming in flat, but improving sequentially from the first quarter. Mohawk sales were down, continuing to be impacted by residential flooring. Our gross profit came in at 28.2%, down from 28.8% in the prior year. This decline was primarily due to lower volume in the US and higher raw material cost in our carpet segment. SG&A came in at 18.1%, up slightly from the 17.9% of last year. Our dollars were down but we had a slightly higher percentage of net sales and that was impacted by the amortization of the Unilin goodwill, as well as less leverage on lower sales this quarter. Operating income came in at 10% versus 10.8% last year with interest and other expenses coming in at $36 million compared to $44 million last year. Our interest was down due to continued debt pay down. Other income and expense was more favorable this year due to foreign exchange gains. We did not receive any refunds from US customs in this quarter. Income taxes came in at $46 million or an effective tax rate of 28.8%. This was an improvement over the last year's rate of 33.4%, due primarily to the difference in mix between our North American and our European businesses. We are currently estimating that our effective rate for the full year will be at about 30%. Our earnings per share come in at a $1.68, 4% below last year. The Mohawk segment sales at $1.1 billion were 10% below last year, as I have stated before, impacted by the softness in the residential new and remodel business. Operating income at 5.4% of sales compares to 8% last year, down due…

Thank you. The US economy is expected to continue with reasonable growth for the foreseeable future. Employment levels remain high with growing income levels. Mortgage rates are historically good but the lenders are tightening requirement. Home selling prices are still under pressure with slow new and existing home sale. The Mohawk segment is continuing the trends from the first quarter. The carpet industry's rate of decline may have stabilized during the quarter. Our comps in the third quarter will become easier as the third period last year started the industry's dramatic decline in sales. Residential new construction is still suffering from excess housing inventory and remodeling is declining from slow existing home sales, falling home selling prices, and lower discretionary remodeling expenditures. The environment is reducing the average mix and increasing the promotional activity. Commercial sales are stronger then residential with modular tiles continuing to gain share. This increase in modular is raising the average unit price and is an alternative to broadloom. We are expanding our modular offerings with our new Encycle back to capitalize on these trends. As raw materials have increased commercial prices new engineered products are being introduced to maintain price points and meet existing budgets. The Mohawk segment is focused on controlling expenses, inventory, and maximizing productivity. Raw material costs increased during the quarter and we announced a carpet price increase in May of 4% to 6% which we began implementing in June. We announced price increases in many of our hard surface product to cover higher distribution costs. To reduce our logistics costs, many initiatives are being implemented such as increased direct shipments to customers, consolidation of distribution points and improved inventory management. The Dal-Tile segment for the quarter was slightly below last year. Sales were slightly below last year. We believe we are…

[Operator Instructions]. Management requests that you limit your questions to one primary and one follow-up. [Operator Instructions]. Your first question comes from the line of Eric Bosshard with Cleveland Research.

Hi. Good morning.

Good morning.

Good morning, Eric.

Jeff, can you first talk about demand momentum. You comment that the guidance assumes weak results, but I think you also commented that you thought things would stabilize. Just tell us a little bit about what you are seeing within the business right now, and where you think it goes from here in terms of demand?

When we look at the industry over the last nine months, it does look like that we bottomed out in the rate of decline, and so based on that we are assuming we are at the bottom and we are hoping it will improve as we go forward, but we'll have to see how does it happen. At the moment, we are basically seeing a continuation of what we saw in the second quarter, there is some ... as you put in price increases it makes a little difficult to see the incoming business volume because usually there is an up tick in business and then there is a slight decline after it starts going in, to make up for, because the customers don't need anymore product. So that's all being going on. But we are assuming at this point it's going to continue as we have been seeing until we see a significant change in our results.

Secondly, within Unilin again the business performs better on the margin line and again you comment on that it's not going to be sustained at this level; something we've heard before. The upside in margin in the quarter; can you talk a little bit about what contributed to that and why it isn't going to be sustained at this level?

I mean, we first started out with the European economy was growing better than we expected and with strong growth in Europe; that's resulted in a stronger volume growth. It resulted in the ability to pass through price increases that we have. The overall sales in the category were up double-digits which helped cover the overhead structures better which helped us there. All the product categories, they've improved within the pieces, we look at it. And so the combination of all those things resulted in an extremely good quarter. Now, normally you don't have all parts of the business and all pieces doing well at the same moment. And every part of the business showed increases both in sales and margins, and it's difficult to assume those things will continue on an ongoing basis.

Your next question comes from the line of Michael Rehaut with JP Morgan.

Hi. Good morning. Thanks.

Good morning.

The first question just to look at Unilin from another angle, if I could; you did about excluding the foreign currency translation or gains in the margins. You had about $16 million or $17 million of incremental profit on $11 million of increments on sales if you look at 2Q versus 1Q, and none of this is the exact right way to look at it but what's going on with that variance to get such an incremental pop on margin from incremental sales, is there ... are there mix differences that typically you sell different types of higher margin product in the second quarter or are you getting just tremendous pricing or what are the some of the bigger gives and takes there?

One of the ... pricing was a big impact on it. Mix you are right, different product categories was a big impact, and Fx you took out and that was also a big impact. Those were the top two or three that come to mind for me.

Okay.

Agreed.

Your next question comes from the line Dan Oppenheim with Banc of America.

Hi. This is actually Mike Dawn [ph] for Dan. Just a couple ... how are you, also? Just a couple of questions on kind of what you are seeing on the pricing side. Looks like you implemented the, the price increases and it seems from at least our conversations with others that competitors followed suite. Have you seen anything on the ... have you seen any customers start to push back on that as we continue to see weakness on housing and are we seeing any of your competitors also begin to cut back on pricing in an attempt to grab market share here?

I think you have to separate up the general conditions and the price increase. The general conditions, with the pressures on it, their have been throughout the year, more promoting going on and pricing pressures which are continuing basis for the business given the environment we are in. Second to that, there was a price increase announced and the price increase we announced in May to start implementing in June. All indications that we have from customers we talked to is that our competitors are implementing price increases that are similar. Those price increases are flowing through the marketplace and we don't see any change in that as we speak.

If you look at pricing on a net-net basis if you take into account the promotional activity; would you say that it's still up or would you say that the promotions are having the effect of coming out to flat net-net pricing?

That is the promotions were going on at the same rates before the price increase. So the pricing increase is on top of whatever was going on in the marketplace. As we announced it, so I haven't seen a significant change in the promotions. On the other hand all the pricing is on top of those levels.

Your next question comes from the line Keith Hughes with Suntrust.

Thank you. In the carpet business where do you stand now in carpet inventory, either sequentially or year-over-year?

Well Keith, I think we'll have to dig out the numbers.

Okay, let me ask you another question, while you are dig that out. The carpet industry do you have any feel in dollars units, what they did in the second quarter?

Your first questions Keith was the carpet inventories were up or down versus a year ago?

Right.

Yeah they are down.

Was it down similar to what sales was down?

Not quite, but close.

I guess my real question is fundamentally, we are at a point now in inventory where if what Jeff had said earlier, demand stage, roughly where it is, we will ... you won't have to be taking any more inventory adjustments, manufacturing time adjustments?

There is two parts. One is if the level stays where it is, we won't have to reduce the base inventories. The second piece is, if it stays where it is, we still have much more capacity ... we have more capacity than we need to operate at the sales levels of the industry.

Okay. That answers it. And do you have the ... the industry ... do you have those numbers?

From the industry, I think, was down on average about 9% in unit for the second quarter.

Your next question comes from the line of David MacGregor with Longbow Research.

Yes, good morning, gentlemen.

Good morning, David.

Good morning.

Can you just talk about the extend to which Columbia Forest Products is losing money at this point, and what the magnitude of loss would be that you'd have to absorb until you get that to an accretive stage?

Yes. I think that our estimates on the first year, and it's fairly broad at this point, is that the loss is going to be somewhere between $7 million and $15 million in the first year, as we take the various initiatives to get it in place moving forward. We are going to do a lot of different things in the strategy out of it. We are going to broaden out some of the product offerings as they go. We think that we can increase the amount of product they are producing from Mohawk. We think that we can improve their cost position and quality position in the marketplace. We are going to have to put some additional capital into the business to improve the cost position even more. We think we can introduce their products and there is a channel they are not getting to, as well as improve some of their design and technical capability as we go through. And various things ... again, some of the things will take it up to two years to execute.

Those were pretax numbers, David.

Those were pretax, understood. But, you have a fairly high level conviction that you can get this to an accretive stage within, I guess, the second year?

Correct.

Okay, good. And then the other question I had for you. If you just could give us a breakdown on each of the three segments what your commercial versus residential revenue mix might be ... might be helpful? Thanks.

And we don't have that in front of us, just a minute, we don't give it out by segment. Historically, it's around 25% of the total, and at high level, the Unilin business basically doesn't participate and it's the laminate business does not go into the commercial segment, today, the Dal-Tile business has a higher level of commercial than the Mohawk does, it would be higher than the average and Mohawk would be somewhere less than the average.

Okay. Your next question comes from the line of Laura Champine with Morgan Keegan. Laura A. Champine - Morgan Keegan & Company: Good morning.

Hey Laura. Laura A. Champine - Morgan Keegan & Company: By buying Columbia, I think you now have a high single-digit percentage share in the wood business. But typically, your preference has been to operate it closer to 30% share. I mean, should I look at the Columbia acquisition as completing what you need to do in hardwood or are you still looking at that segment for potential acquisitions?

Our goal is to have a large share of the wood business. We believe this is a big second step. One was we have been selling product the last few years. This will give us a vertically integrated position. The capacity had underutilized significantly which will allow us to participate and grow the business in the category with the assets that we own. Other alternatives could be to look at other higher-end businesses. They participate in more of the medium to lower price product category. So there is still opportunity in the higher end category that we haven't covered at this point other than from a distribution standpoint.

Your next question comes from the line of John Baugh with Stifel Nicolaus.

Thank you. Good morning. And let me be the first say good job, in an obviously tough environment. Can we drill down on Mohawk division 5.4% EBIT that's certainly low relative to your standards for the seasonally second quarter, how much ... if you can break it out to some degree, is under-absorption, how much was the raw material increase versus the relief you got in pricing because I know that lag and any other factors in there. Or put another way, how do we look at EBIT margins in the second half of that year in light of the fact that the year-over-year declines in revenue should lessen with what happened a year ago. You've got pricing more in place, etcetera?

I think that our internal expectations are for the margins to improve as we go through the year that unless we get some big surprises, we are expecting the margins to go up from here. We have more controls over our SG&A costs and more controls over our sampling. We did, significant drops of product in the first half trying to get the business more balanced with the present conditions that are going on. So I mean our internal pieces without giving you an exact number show improvement as we go through the year.

And is commercial, which now is performing better, but is commercial within the carpet segment showing year-over-year gains in the profit margins in carpet? Is it flat? Is it down less than what residential is down?

The commercial business as you look ... we believe the industry is flat to down a little bit in units, and that most of the growth is going into the modular category. So that the broadloom piece is ... some of the broadloom is being shifted to modular. So, depending upon your mix of each of the pieces as you go through, you can end up with a different answer. Our modular piece is less than the industry average, we are growing it. Over the past year we are growing it, and we continue to grow it, and we think it's got a lot of potential to grow even more. And we are putting more investments into new bags, new capacities, new product categories as we go through. And so we think that it has an opportunity to grow much faster than the piece.

Your next question comes from the line of Shaheen Shaheen with Mohawk Industries.

I want to congratulate you on the great job you are doing. Where are the Columbia plants located in this country?

There are plants in Holland, but most of them are in West Virginia, Arkansas, and then one plant in Malaysia.

And how do you see the wood business compete in the total business of laminate, the carpet, tile and so on?

The wood business is the last category that we have that we aren't vertically integrated. So, it gives us a vertically integrated position. We see that there are synergies between it and all the various other parts of the business in broadening our offering to all the various customers, that in many cases we think that we can market and merchandize the wood in conjunction with our laminate business which is why we put it under the Unilin operating business in the United States and then on the long term we see that wood, looks like it's ... at least the pre-finished wood is going to continue to grow at fairly strong rate, once we get through this cyclical downturn.

Will it have the click feature that ... the patent that the Unilin feature and that as well as how you are planning on that?

Today the click systems in wood are being utilized. They are still a small part of the total wood business in the industry but they are growing and we do license other options to ... to other companies to sell wood as well.

Your next question comes from the line of Chris Benon [ph] with Wachovia Securities.

Hey guys. How is it going?

Hey, Chris. Good

Couple of questions here. Just wondering if you could quantify or maybe give us a better idea of Unilin's top line growth like domestically versus that of Europe ex Fx gains?

Most of the growth in the quarter was in the European business. If you look at the laminate business, it's also through the residential business which is under great pressure in the industry. We don't have any industry numbers to know exactly what the US industry is growing. But we know that all the pieces are under great pressure. And our belief is that they are all negative, and we are not sure whether laminate is flat or negative a little bit or up a little bit. We don't have any data, but it's going to be impacted by the same pieces.

Okay. And then if you could just comment a little bit, maybe you give us a little bit more color on how business trended in the quarter on some of the major product categories, i.e., something like carpet, ceramic tile and maybe laminate? Did you saw any difference from the beginning of the quarter towards the end; you know that kind of stuff?

On the carpet side, some of it was obfuscated by the price increase; when we announce price increases you get a lift of some people who try to buy ahead of it, so it's difficult how to interpret that into the long term trends till after it flows through, which will take us a little bit more time to have a clear view of it. The other businesses, I think, that we're expecting them to be better in the second half but we are still waiting to see, and we are hoping that they are going to be better. We really don't have any clear indication to that at this moment.

[Operator Instructions]. And your next questions comes from the line of Steven East with Pally Capital [ph].

Good morning, guys.

Good morning.

Just going back to John's question on the Mohawk raw materials, if you look at about a 250 basis point drop in that margins, how much of that would you all characterize between under absorption versus last year and increased raw materials versus last year?

We don't have those numbers in front of us, the raw materials were going up and so that did impact it. They have all kinds of changes, not only do you have those you have the mix shift from different product categories, you have a degrading of the quality that's going on. You have the pressure on the ... as you would suspect, there's more pressure on the low to medium price point for the category. There is a change in products as nylon staple has declined moving to other categories. You have polyester, as the values increase, polyester is growing. You have polypropylene that's tending to play in a narrow range of products than it has historically. So you have not only the industry conditions, you have a dramatic shift in the mix of products that are being sold through the industry all impacting the pieces. At the same time, we more aggressively drop products during the first half in the carpet industry and we push those through the ... the discounting of pieces to move to various products as you go through. We think we've put in place management techniques to manage the sampling expenses better as we go into the second half and keep those versus historical, more in line. And we are managing through the industry cycle as best as we can.

Okay, if you just had a look at it from a gut perspective and say, all right, it's throwing mix into the equation -- we are down; we've got mix; we've got raw material cost. We have got under absorbed, overhead, etcetera. How would you sort of rank order those is the most important impact say year-over-year?

I think I would give the ... unabsorbed overheads would be the most significant ones. I would put some of the cost pressures of either pricing or mix ... I mean they are all pricing mix, promotions for the whole industry is probably the second piece altogether and the lifting of others.

You have a follow-up question from the line of David MacGregor with Longbow Research.

Just a couple of quick things. You talked about the 46% price increase in the carpet segment. You did allude to pricing initiatives are Dal but you didn't quantify those for us, can you give us a sense of what it was you were pursuing, what you think the traction was?

It was the price increase in Dal that we actually initiated was on selected products. It wasn't across all the various product categories. So I would assume that it's limited in the total, maybe 1% because you have to average it out across all the pieces, but in the Dal-Tile side, we ... a large part of the costs that go up are because of the weight in the transportation, and we have surcharges that we add to the product that we started sometime ago when the transportation cost started going up and energy cost. And so each period we recalculate how those do and those allow us to pass through the changes in a lot of the cost outside the price increases.

You also have a follow-up question from the line of John Baugh with Stifel Nicolaus.

Yeah, the follow-up is basically when you look at the pricing environment that we are in today in the wood category. What do you think, the wish along range pieces on wood pricing as we look at imports, the engineered versus solid ... I understand solids are under a lot of pressure, and how does that affect your strategy with Columbia or anything else that you are going to be doing?

Okay the solid wood category, first, as you have the unfinished marketplace which is flat and will probably decline and continue declining as a proportion of the total business split. So, that piece, we will still not participate in on a going forward basis. So most ... you have a lot of pressure in it because there is no differentiation and it's sold as a commodity. We believe that the solid wood piece that is pre-finished will hold its own, maybe grow a little bit but not most. And most of the growth will be in the engineered category going forward basis which we think will well position to participate in both from a US manufacturing point as well from an offshore manufacturing point, and we continue to purchase product from other suppliers where it makes sense around the world.

Thank you. We have reached the allotted time for questions and answers. Are there any closing remarks?

We are in a difficult cyclical environment that the business ... we tend to end up with pent-up demand as we go through the cycles. We don't have any indications of when the cycle is going to end, but as historical, it will end and we think we will be well positioned as we move on to the next stage of the economy and environment. Thank you for joining us at our second quarter conference call.

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