Mohawk Industries, Inc. (MHK) Q4 2010 Earnings Report, Transcript and Summary

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industry's Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to introduce Jeff Lorberbaum, Chairman and CEO. Mr. Lorberbaum, you may begin your conference.

Good morning and thank you for joining our Fourth Quarter 2010 Conference Call. With me on the call is Frank Boykin, our CFO, who will review our Safe Harbor statement and later, the financials.

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 risk 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.

Thanks, Frank. Our fourth quarter earnings per share of $0.66 exceeded our expectations. Sales, as reported in the period, were 6% lower than last year but were approximately 2% ahead after equalizing the number of days and exchange rates. Our European revenues continue to grow, with U.S. residential business stabilizing and commercial remodeling beginning to improve. Our operating margin of 6.8% improved from last year due to enhanced manufacturing efficiencies, reduced costs, improved process consistencies despite rising raw material costs. Our cash position liquidity remained strong, with over $500 million available after we retired $300 million of bonds in January 2011. Our net debt to EBITDA ratio is 2x, and our net debt to total capitalization ratio is 26%, positioning us well for additional opportunities. The U.S. industry decline experienced over the past few years appeared to have reached bottom, with some markets showing signs of improvement. The predicted 3.5% growth of the U.S. economy this year reflects sustained improvement in consumer confidence and increased business spending. Although U.S. housing activity remains low, forecasts anticipate improvement in home sales as we move to a normalized level. Commercial remodeling is already growing, as business investment increases with higher economic growth. Commercial construction should pick up as indicated by the Architectural Billing Index, which is at its highest level in three years. Frank, could you give the financial report?

Thank you, Jeff. Good morning, everyone. Net sales, as reported, were $1.262 billion, down 6% from last year. Our fourth quarter sales in 2010 had fewer days than last year, resulting in a 7% impact on sales. As Jeff reported, sales were up 2% using constant days and a constant exchange rate base. European business continued top line growth, and we had stronger U.S. commercial remodel end market. The U.S. residential business is at the bottom and should improve. Our gross margin was 27% and flat compared to last year, after adjusting last year for restructuring charges. We were able to offset the higher raw materials with manufacturing improvements. The SG&A was $256 million, or 20% of net sales. SG&A declined after adjusting last year for restructuring charges by over 10%. All segments are reducing cost while improving their service. Our fourth quarter SG&A is the lowest it's been, in dollars, since 2005. Operating income was $86 million or 6.8%, which compares to 5.7% last year, after adjusting for restructuring charges. We had no restructuring charges in the fourth quarter of this year. Operating income is up over 10% compared to last year, as our strategies across the company continue to benefit us. Interest expense was $30 million. It's down $5 million from last year's result of the $200 million bond tender that we did earlier this year and lower rates that we were able to negotiate on our bank revolver. We anticipate interest expense to run between $28 million and $29 million each quarter in 2011. The income tax rate for the fourth quarter was 19%. We expect the rate to be in the low-20% range during 2011. Earnings per share were $0.66, up 18% compared to last year's earnings per share, excluding charges. If we move to the segments, the Mohawk segment sales, as reported were $667 million, down 10% from last year. Sales were down 3% using a constant number of days. The commercial remodel business is improving as residential is still soft. Our operating income was $49 million or 7.3%, which compares to 4.9% last year. Our margin percent was the highest since before the industry decline several years ago. The margin improvement was driven by manufacturing improvements and cost reductions throughout the segment. Dal-Tile sales, as reported, were $317 million or down 4%. Sales were up 4% using a constant number of days and a constant exchange rate. Our commercial and Mexican businesses both performed well. This is the best sales performance since 2006, and year-over-year improvement for Dal-Tile. Our operating income was $20 million, or 6.3% of net sales. We were able to hold the margins flat in our year-over-year comparisons. The Unilin sales came in at $297 million, and were flat as reported. However, sales were up 14% using constant days and exchange rate. All regions grew with the Northern European, Russian and Asian regions growing the strongest. Operating income was $21 million or 7% of net sales, down from last year at 8.5%. Our raw material inflation in this segment was a headwind, and we're continuing to increase prices to offset it in the first quarter. If we jump to the balance sheet, cash came in at $382 million, with about half of that in the U.S. Our receivables, at $615 million, had a slight improvement in days sales outstanding compared to a year ago. Inventories were $1,007,000,000, were up due to inflation, pre-buying ahead of the cost increases and higher sales volume. We expect to have lower inventory levels and to improve our turns by the end of the first quarter this year. Fixed assets were $1.687 billion and included capital expenditures of $156 million for the year. A portion of the $180 million original 2010 CapEx estimate will be spent in 2011. Our capital expenditures estimate for 2011 is $280 million. This estimate includes projects to support growth, such as our Russian laminate plant facility, our Mexican ceramic tile plant and additional fiber extrusion capacity. We're estimating our depreciation and amortization for the year to be $300 million. Our long-term debt ended the year at $1.653 billion. In January of this year, we paid $300 million of bonds that came due. We used about $170 million of cash and $130 million of bank financing to pay the bonds. We have another maturity in April of 2012 of $400 million. We're continuing to look at different alternatives there to refinance those bonds that include a combination of cash and bank financing, or cash and bonds. The financing markets remain good for us today. Jeff?

Thank you. During 2010, our focus on innovation, new products, manufacturing improvements and cost reductions have benefited our margins and increased earnings. Our product enhancements and introductions such as Reveal Imaging, SmartStrand, installation boards and hardwood with Uniclic technology are growing as we adapt to current trends. SG&A reductions this year reflect improvements in distribution, marketing and sales expenses. Higher material yields and improved information processes have benefited our operating results. Investments in China, Russia and Mexican flooring markets are expanding our international presence to help provide platforms for future revenue and profit growth. The consensus among economists is that these markets will outperform the more mature U.S. and Western European flooring markets. In the period, our Mohawk segment sales after adjusting for the lower number of days decreased 3% but achieved the highest level of operating margins in two years despite increasing raw material costs. Manufacturing costs, material yields and process controls have improved our focus on efficiencies, quality and energy reductions. These improvements have increased customer satisfaction. Our sustainable manufacturing practices have reduced our waste streams, lowered costs and improved margins. Our market position, after adjusting for the days in the period, stabilized in the fourth quarter as we accelerated key introductions in new residential polyester carpets and commercial carpet tile products. We implemented a 7% to 10% carpet price increase in February to offset our raw material inflation. Sales of our commercial carpet tile continue to grow, supported by a broader product offering and an expanded sales force. We've improved our carpet tile manufacturing efficiencies and increased capacity to meet higher demand levels in the future. We continue improving our sales and customer management systems to enhance our execution and increase efficiency. Improved planning and inventory processes have raised our service levels with reduced delivery times and costs. Our extrusion expansion is progressing as planned, and will support the changing trends in product styling. Dal-Tile sales declined 4% in the quarter, as reported, but increased 4% after adjusting for the number of days and the exchange rate. In the fourth quarter, we began implementing a price increase of 1% to 2% to recover rising costs of transportation. We've added sales personnel focusing on large commercial accounts and housing contractors to maximize participation in the markets as they improve. We've updated our retail merchandising vehicles to enhance the consumer selection process and better convey the product benefits. We've introduced a new ceramic boutique shop for dealers that will raise their retail mix and sales while making product selection and visualization easier for the consumer. Dal-Tile is leading the industry with advances in decorating technologies created by Reveal Imaging. This process creates more sophisticated visuals and improves manufacturing productivity. We're introducing products with greater distinction between individual tiles in larger sizes, more natural visuals, stronger colors, and new textures. We've also revised our collection of fashionable tile accents, with richer colors and a greater variety of shapes and textures. We expanded our value tile offering to satisfy the current trends in the new home market. We've also broadened our engineered stone countertop line, complementing our natural stone offerings. Our Mexican tile plant has fully recovered from the flood that occurred during the beginning of the third quarter. Production has returned to normal levels, with limited impact to our customers. We're increasing our Mexican sales and customer base by expanding our product selection and sales force. We've purchased a site near Mexico City and begun construction of a new plant to manufacture moderately priced tile for the Mexican market. The product mix and location will allow participation in the higher volume segment of the Mexican market in addition to the premium category we have focused on to date. We anticipate the plant will begin operations in 2012. We've increased our efficiency, quality and production levels with new procedures, higher production speeds, lean manufacturing techniques and use of alternative raw materials. We are improving material yields with new formulations, waste recycling and reduced setup times. Enhancements in our distribution strategy and systems are improving our service and efficiencies. Our joint venture in China is broadening its product offering, implementing new production technology and supplying tile through existing Mohawk markets. Our new glazed porcelain line has successfully initiated production of floor tile. Products are being shipped to Dal-Tile's U.S. and Mexican markets. New glazed floor tile products have been developed for the local Chinese market and will provide opportunities to markets we have not participated in before. We are developing new international customers to distribute our Chinese product lines. The plant in the South is running near capacity and we are moving production to the new plant in the North, but we're broadening our local product line. These changes should reduce costs and expand our customer base. Seasonal shutdowns and lower volume will impact the first quarter. We anticipate our investment in China will be accretive to earnings this year, and will position us long term to take advantage of a huge market that should grow about 10% per year. Our Unilin revenues were flat, as reported, but increased 14% after adjusting for the number of days in the period and the exchange rate. Our margins remain compressed as our material costs have continued to escalate. We implemented price increases in our European board products in the fourth quarter and are executing additional price increases in our boards, laminate and roofing in the first quarter to recover continued inflation and improve margins. Our flooring business is increasing, with Northern Europe, Russia and the Asian Pacific outperforming. In the retail specialty channel, our Quick Step program now covers a broader range of laminate price points. We are expanding our home center participation by levering our technology and styling leadership. The introduction of new furniture finishes and high-definition technology continues to affirm our leadership in laminate technology. Product innovation is also differentiating our wood assortment and textures, finishes and colors. Our Wood business improved from last year. We're utilizing our Quick Step brand on premium wood products, introducing innovative visuals, improved insulation systems, and expanding into new geographic areas. Our costs have been reduced by increasing our conversion efficiencies and material yields. We're presently consolidating our Malaysian wood plants, and production there is being expanded to reduce costs and support our European and Asian Pacific business. Both our European board and laminate businesses are under pressure from rising raw material prices. Even though we raised prices in 2010, we have not recovered the significant material inflation, which continued upward in the fourth quarter. Our forward selling prices were increased about 15% last year, and we've announced additional increases of 10% to 15% for the first quarter. European laminate prices are also being increased from 4% to 6% due to raw material pressures. We believe additional industry board capacity in Europe will be shuttered, reducing excess supply. U.S. raw materials for wood and laminate peaked earlier last year but still remain high. Our Russian Laminate business continues to mature with new customers and broader geographic penetration. We've purchased an existing building close to Moscow, and are upgrading it to manufacture laminate flooring. We anticipate production in the third quarter, assuming permits are obtained as expected. Economic recovery and stronger consumer spending will positively impact our industry in 2011. The seasonally slow first quarter is being affected by harsh weather and increasing raw material costs, offsetting prior savings from our cost initiatives. In our Chinese joint venture, extended holiday shutdowns will unfavorably impact the first quarter. Residential remodeling market will improve with increased consumer spending and higher home sales. Commercial remodeling is growing as businesses invest to maximize their operating results. For the balance of 2011, we anticipate an improvement in our results, as price increases are implemented, volume expands and the recovery continues. With these factors, our first quarter guidance for earnings is $0.36 to $0.44 per share, excluding any restructuring charges. We remain committed to enhancing our organization to drive innovation in product, processes and costs. Advances in our marketing, products, efficiencies and service should yield higher profitability. We're investing in new systems that heighten our visibility and execution capability. This year, a higher level of capital investments will improve our productivity, support new product trends and expand our global reach. We have managed through a challenging period, and our efforts during that time have laid the foundation for the company to deliver greater results during the recovery. With that, we'll be glad to answer any questions.

[Operator Instructions] Your first question comes from the line of Kathryn Thompson of Thompson Research.

The first is on, I want to dig a little bit deeper on your Mohawk division upside in the quarter. If you were to look past, at your other divisions, Unilin, eight out of 12; led a upside in your Dal-Tile -- three out of 12 previous quarters that led the upside. But what's different in this is this is the first time that Mohawk really led the upside on the margins, and as you noted in your prepared comments, it's the best quarter on a margin basis since Q4 of '07. My question to you is, what is driving the upside to the EBIT margins in the Mohawk division? When you were reducing SG&A, was most of this focused on the division? Just help me understand the big move. And also, further clarifying, does this bode well for Mohawk going forward? Or is this more of an indication of what's going on, maybe on the negative side with Unilin and Dal-Tile?

We've been working continuously on improving the bottom line of all the businesses. We've been reducing our cost structures. We've been introducing new products to help the sales. We have been enhancing the productivity of all the different parts of the businesses. And in the fourth quarter, you're seeing some of the results of that. In all of the businesses, including Mohawk, our goal is that the earnings will continue to increase as we go through this year. We believe we'll continue to get benefits from all the pieces we put in place. And I don't think it's any one specific thing.

Yes, it's kind of, it's spread across the business from manufacturing improvements that we've made, quality improvements that we've made, efficiencies we've put in place, cuts we made through SG&A, lower claims. And sometimes, all the stars just align, and that's really, we've worked real hard to get where we are and everything worked out just right this quarter.

If I'm hearing you correctly, essentially, the sequential 300-basis-point swing and 100-basis-point swing year-over-year on an adjusted basis, what you're saying is, we should expect, excluding weather impacts and raw materials, we should expect similar type momentum going into 2011?

You have to make sure to look at the yearly numbers quarter-to-quarter that swing a little, but we expect the yearly numbers to improve.

Okay. Also, digging a little bit more into your CapEx, I know you outlined three major initiatives that you're working on this year. But it is a pretty big swing from CapEx, $280 million from $156 million. How much of the roughly $124 million increase is for those projects that you outlined? And how much of it is changes in your other business, for instance, maintenance CapEx?

Out of the $280 million, approximately $120 million is on the three large projects, being fiber extrusion, Mexican ceramic and Russian laminate are the three pieces of the $120 million. Roughly about $100 million, or a little less, is maintenance. And the difference is on a whole host of smaller projects, all of which are going to either reduce costs or give us revenue opportunities.

Your next question comes from the line of Eric Bosshard of Cleveland Research.

First of all, the 1Q guidance, the 4Q result was quite strong and you just talked about strength in the Mohawk segment. Why does 1Q look worse? I understand weather in China, but are there any other factors that help us understand a little bit of why 4Q is good, 1Q's not so good, and then things get better from there? Can you give any color on that?

I mean, you have in the first quarter, the softer revenues have always occurred during the period and the weather is impacting it. Other than that, the inventories, we're going to reduce a little bit in the first quarter to get them more in line with where we'd like them. We raised them a little bit in the fourth quarter, due to what we saw coming forward in front of us. I think you have the raw material impact, which is going through and we're would have to catch the prices up. We have actions in every business, in every area to get in front of the raw material increases. We've announced major increases in almost every product category, which we're implementing as we see. We typically take a while to catch those, but those will impact the first quarter and part of the second quarter as they get implementing, as you go through. Frank, anything else you want to add?

Well, we're investing in new products and introductions and earlier shipments, and we generally have higher marketing costs in the first quarter than we do in the other quarters.

Great. And then secondly, with the pricing actions across the business, I'm curious on what your experience and what you're thinking is showing you on product mix. Some of the market share erosion I think you saw in carpet was from some trading from higher-priced to lower priced. What are you seeing in terms of the appetite for mix? Are people back to trading up? Is it stabilizing? Or is mix an issue that's a challenge to, not only the price increases, but rebuilding the margins in these businesses?

The product mix has declined as we've gone through the downturn. Almost every one of the businesses has a lower product mix than they had before, as customers were trying to minimize their investments. Typically, as you come out of recessions and people's confidence go over, nobody strives to have low-quality merch parts in their home. So typically as you go through, and the confidence rises, the mix also increases as you go through. We anticipate that occurring over the next year or so also.

Your next question is from the line of Keith Hughes of SunTrust.

On Dal-Tile, this is the first positive revenue on the adjusted basis we've seen in some time. Is that coming primarily from their commercial markets? Or have their residential markets been assisting?

I think it's both. The remodeling part of the commercial markets are showing improvement in all the different businesses. On the commercial side, people postponed it; as their businesses are improving, they're trying to invest in those. I think that we're having some share gain in certain of the other markets. Our Mexican business is improving. So as we look forward in all the businesses, and that one is no different, we're anticipating that the flooring industry, which is a very low point, that we'll have growth this year. And the question is will it be a little or a lot more, is the question we're going to ask. It depends on the timing of when things kick in this year.

Okay. Second question, you talked about bringing production rates down a little bit to bring inventory in the first quarter. Is that true across all three businesses? And were you running faster production in anticipation of pre-buy before price increases, is that correct?

I think that we probably start out with anticipation that the volume would be a little stronger than we had in most of the business. I think that we tend to try to reduce inventory when we shut down, and some of it hits in the end of the fourth quarter, and some of it hits in the first quarter, just to do the vacation schedules. So some of it's just a timing issue of how it hits and when the holidays hit.

Your next question is from the line of Bob Wettenhall of RBC.

Wanted to touch base on how much of your price increases have been realized, because they're kind of sizable, and what the customer response has been? And I'm specifically speaking to the price increases at Mohawk and Dal-Tile.

The Mohawk increases are just being executed in the market place. Nobody likes increases. We don't like them, and our customers don't like them. I think that the marketplace understands that there's a dramatic increase in raw materials across all categories. So they're moving through the marketplace, and it takes a period of time to get them all implemented and executed. But they're going in. The Dal-Tile products are really only increasing 1% or 2%, and most of those increases have been for, we sell products in Dal-Tile FOB local destinations. So we do, as the freight rates change, we have to change the pricing to cover the freight.

Understood. And I think you touched on both higher freight costs and higher raw material costs affecting Unilin. Could you kind of specify on a margin basis how much of a headwind you're expecting from higher input costs, in the next quarter and the year?

Well, on the carpet side, we put in a 7% to 10% increase to cover those. The Unilin side in Europe, which is where most of the pressure is because of the wood prices in Europe have escalated dramatically and continued to do so throughout the year, I mean we're putting through 10% to 15% increases in the board businesses, which are fairly low-cost products. And then we're putting in a 4% to 6%, 7% increase in our Laminate products, all that we think will take to cover the raw material increases.

Yes. The plan is, when we put the price increases in, is that they will basically cover the cost increases, the price increase that we actually realize. We generally realize a little bit less than what we actually announce.

Your next question is from the line of David Goldberg of UBS.

My first question was actually, I know there's been some questions about Mohawk and Dal-Tile. I wanted to know about Unilin and the price increases you're putting through. And what I wanted to kind of focus on was the competitive environment. Are you seeing, I know when you used the word cooperative, but are you seeing competitors trying to put through similar prices? Or is there been more of an acceptance of lower margins in the business as you try to put through price increases now?

In Europe, most of the business that's going through the downturns in the industry have had very depressed margins, us included. So the industry, as the raw materials have come through, we can't absorb those pricing increases, and we and competition have announced price increases to try to recover those raw material changes. In addition, in the board businesses, there are capacity that has been shut down, and we anticipate additional capacity to reduce the excess production in some of the different product categories over the near term, all of which should help. Again, when you come through downturns where the margins have been compressed, there's no way to absorb the raw material increases which are occurring.

All right. My second question, Jeff, I think you mentioned in the comments that you're now shipping tile back into China, to the U.S. and Mexico, if I understood correctly. And I'm just wondering what the cost structure is. Is it relatively less expensive, all-in when you look at it to be producing in China, relative to your U.S. and Mexican operations? And do you think you're going to kind of eventually be producing more and importing more from China?

The products we're importing from China are high-end commercial products that tend to have a lot more labor in them. And so it's a very specific market that those things make a lot of sense in. It's not in the major parts of our business. The joint venture in China, we really believe the big benefit is going to be maximizing our participation in the Chinese market. The Chinese market, on a unit basis, is about 25x to 30x larger than the U.S. marketplace, and the exports around the world presently are around 20% of their capacity and our goal is to expand our local participation and where it makes sense to import stuff for the Mohawk sales.

Your next question is from the line of Mike Rehaut from JPMorgan.

This is actually Jason Marcus in for Mike. Just a follow-up on the Unilin segment. Assuming that you're able to get most of the price increases through, do you think that you'll be able to get to a double-digit margin in 2011?

We're going to try to improve -- the margin will improve from where it is right now, but we're not going to give out specific guidance on margins for this year.

Okay. And then just regarding the Chinese joint venture extended holiday, is there any way to quantify what, from an earnings perspective, the impact will be in the first quarter?

I'm sorry, ask that one more time.

What's the impact…

The earnings impact from the Chinese joint venture extended holiday?

Again, we're not prepared to give out information at that level of detail. But it's going to depress earnings from where we were with China, from where we were in the fourth quarter.

Your next question is from the line of Dennis McGill of Zelman & Associates. Dennis McGill - Zelman & Associates: The first question, Frank, just wondering, you guys kind of touched on all the moving variables within the Mohawk segment, whether you think about it for the quarter or for the year. Can you maybe split out the benefit of, or detriment of raw materials versus price, and then the cost savings from all the other initiatives that you've talked about?

We generally put that out in the 10-K, Dennis, and I'm not sure I have the exact numbers. But we had significant improvement in the quarter as a result of the restructuring activities, the benefits from the restructuring activities and the SG&A cost cuts that we did. And raw materials, that more than offset obviously, the headwinds that we had from raw materials net price. Dennis McGill - Zelman & Associates: Okay. I wanted to ask you about working cap in 2011, but just a follow-on to that. Would you still have a tailwind as you enter 2011 from some of those initiatives? Or have most of those run the course?

I think we'll still have some opportunities going into 2011, from the initiatives we were working on in 2010, to realize the full benefit. You want to say anything else on that, Jeff?

Also, we have a large list of additional opportunities. So some of them haven't annualized yet, so you'll have to get benefit from there and then there's a significant list of new opportunities this year that each organization has defined, measured and is aggressively pursuing.

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

My question is on the Mohawk side. When you look at your raw material costs, in terms of what flowed through your P&L in the fourth quarter versus what the market price of your raw materials increased and then how that relationship might look in the first quarter?

The question is the spread between price and raw materials Q4 to Q1?

Well, yes. Really, in terms of what flowed through. In other words, you're purchasing raw materials that are escalating, I assume, starting in October, November and have continued. Yet what you've ran through your P&L with FIFO accounting was lower than that. And I'm just curious what that relationship was in Q4 and then what that looks like in Q1.

Well, we had year-over-year raw material inflation in Q4 and offset a portion, but not all of that, with price in Q4. But we're going to have higher raw material inflation in Q1 running through our P&L and then into Q2.

Any quantification on that or no?

Not at this point.

And then, it sounded like the Mexican facility will not come online until '12. Does that mean that in terms of P&L impact, that startup costs, we're really only looking at Russia impacting '11? Or were there -- because I assume the extrusion capacity really won't be terribly disruptive to earnings. Or are there any major cost startup issues to think about in '11?

I mean there are always startup costs with every project, so we have a long list of projects. On the other hand, we're expecting to get benefit from the ones that implement during the first half of the year. We're supposed to see positive benefits during the year. You're correct that the startup costs from the Mexican plant, most of those will go into cost of the facility, other than some of the labor and training we'll have to do towards the end of the year to get ready. I don't know, Frank, any more color?

So the largest impact, like you said, John, on startup costs this year should be from the Russian laminate plant.

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

I wonder if you can just help us understand, if you bundle together everything you've got, I realize some things start up sooner then later. But if you bundled all the emerging markets: China, Mexico, Russia enterprises together, what's the revenue contribution in 2011? And I realize it's a bit early, but can you give us some sense of what you'd expect in 2012?

It's kind of a mix. I mean if you looked at our total international business revenues, I think it's in the kind of high-teens. Remember that the Chinese joint venture is one line in our P&L, so the sales aren't consolidated there. So it becomes a little bit difficult to answer your question, as you're posing it. But what we're doing is we're growing significantly from a small base in these emerging markets, Russia, China and Mexico.

Maybe another way to ask it, what would that international fraction be, come 2012, based on your projections today?

'12, we're not ready to answer.

Can you try to ballpark for us? I'm just trying to get a sense of proportion as to how fast that's growing and – you're not able to do it…

Let's see if we can give you any color. You have the capacity, Frank, with the different pieces? In Mexico, I believe it's going to be around 90 million square feet of capacity, is going to put in the Mexican marketplace, in ceramic. I believe that we're going to put in an additional, in Russia, do you have the number?

No, it was 50 million or 60 million square in square feet. David, I can get the capacity numbers for you. We don't have them right here in front of us. Maybe that will help with what we're putting it in some of these emerging markets, how about that?

Your next question is from the line of John Fox of Fenimore Asset Management.

I was going to ask about the CapEx, maybe which was asked in the first question, drill down a little bit. The $120 million, which kind of the investment in the three big projects, can you kind of talk about the expected benefits of those? Whether it's lower cost or whether building something in Russia allows you to sell more since you're on the ground in the country? And just talk about the benefits from those investments.

Let's start with the Mexican ceramic. In Mexico, the plant in Mexico makes higher value porcelain products that we have today. So we participate in the high-end portion of the market only, which is a relative small part of the total Mexican marketplace. The new plant, which is located near Mexico City, which is where the populations are, to reduce freight costs, as well as it's located near different body materials, will allow us to produce moderately-priced tile and compete in the top of the bell curve of the marketplace. So in Mexico, we have less than a 10% market share, and we believe we can start participating as a full line supplier across the business. We are adding salespeople, we are adding product lines in order for us to participate in that. The Mexican marketplace this year grew 3%, it's anticipated to grow about 6% next year. So we believe it's a good market to be in. We have management talent there that understands how to operate the plants, and understands the customer base. And we will invest this year, broadening our distribution, and in some cases, selling the products that we have into the marketplace and they'll be replaced by new ones when the plant – or converted to the new plant when it comes up. In the Russian market, we've been importing ceramic laminate from our European plants. A year ago, we put in a distribution center in order that we could improve the service level and get prepared for putting a plant in it. We have spent the last year broadening our sales, using that local distribution center to increase the sales, to get to a different customer base. All that will continue this year, and that will allow us to participate in Russia. And also, by importing the difficulties in getting things across the Russian border, it impacts service, as well as costs. And so that will allow us to participate in a greater basis there. In the Russian marketplace, we will be aimed at, similar as we do in Europe, in competing in the mid- to high-end with differentiated products in it. In the Chinese market, with our joint venture, and it's a huge market, estimate about 60 billion square feet. The largest company has, I believe, no more than 3%, 4% market share in it. It is usually fractured. The business, we've put in significant investment. At the time we purchased our share in the joint venture, had just put a new plant in the North, in Mongolia. It's far enough away that the transportation costs, you can't compete from one to the other, puts us in a totally new market. We've put significant capacity in that marketplace. We are developing the customers, broadening our distribution. We are, in China, we brought together glazed floor tile technology, which the first line has already been started up in China. We're helping them develop products. We're helping them improve their merchandising and marketing, and the combination of those pieces, we believe that we can grow our share, both from an internal standpoint. And then longer-term, it would give us the base to possibly start consolidating the market over time and put us in a position to significantly participate in the market over time.

Okay, terrific. So I mean, a number of these investments are to grow the top line going forward?

All of them.

Your next question is from the line of Kalpesh Patel of Jefferies & Company. Kalpesh Patel - Jefferies & Company, Inc.: I wanted to ask about the contribution margin or the operating leverage in your business model. Obviously, you've taken out a lot of costs over the last few years. What sort of levels of operating leverage should we think about, in terms of the three different segments?

I think what we've tried to do in the past there, is to give you an idea of fixed cost in the different segments. And if you look at fixed cost in the Cost of Goods Sold section of the P&L for the Mohawk segment, fixed costs are in the, I'd say, mid-teens level. And then in the Dal-Tile segment, they'd be close to 20% and higher, maybe 25% in the Unilin segment. And then across all the businesses, SG&A is probably 50% fixed. Kalpesh Patel - Jefferies & Company, Inc.: Okay. So you want us to kind of use those numbers to get to the operating leverage numbers?

Yes. Kalpesh Patel - Jefferies & Company, Inc.: Okay. And then my follow-up question, you said in your press release that you, I guess, gained market share in the carpet or it improved. Did you lower prices there, in your commodity products? Is that what happened? Or what sort of changed from last quarter or the last two quarters?

What we said was that we thought our position had stabilized, that we'd been losing some share, that the marketplace had moved in the product-to-polyester faster than we anticipated. As the prices went up, the market moved to lower cost raw materials faster and that we needed to increase our polyester introductions. We started doing that in the third quarter and those introductions are gaining traction. At the same time, the other area that's growing is the commercial carpet tile. We've also increased the number of the commercial carpet tile introductions. We've increased the capacity of our carpet tile, and it's growing significantly. And we think both of those will continue and help get us where we want to be.

Your next question is from the line of Laura Champine of Cowen Company.

It's Rob Simone stepping in for Laura this morning. We were wondering if -- you talked about inventories before and, I mean in dollars, your inventory balance is up 13% year-over-year. But we were wondering if you could just kind of segment what portion of that growth came from the different components, so like inflation, the demand component that drove your inventory growth, and whether or not your prior period's inventory growth was trailing or ahead of how demand developed in Q4?

If you look at the increase, about almost 40% came from inflation and pre-buy, where we're trying to get out ahead of the cost increases. And then the balance of it was just increased volume in quantities. Both of which were, as we said earlier, planning to reduce the inventory levels and improve the turns back to more normalized historical levels by the end of the first quarter.

There are no further questions at this time. Presenters, do you have any closing remarks?

Yes. We appreciate everyone joining us. We believe that this year that the industry will see improvement and that we're well-prepared to participate in it. We're taking the actions we need to cover the raw material increases, and we'll keep reacting to them as the circumstances change. Thank you very much for joining us.

This concludes Mohawk Industry's Fourth Quarter Earnings Conference Call. You may now disconnect.