Mohawk Industries, Inc. (MHK) Q2 2011 Earnings Report, Transcript and Summary

Good morning. My name is Antoneil, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Second Quarter 2011 Earnings Conference Call [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded, today, August 5, 2011. Thank you. I would now like to introduce Jeff Lorberbaum, CEO and Chairman. Mr. Lorberbaum, you may begin your conference.

Good morning, and thank you for joining our second quarter 2011 conference call. With me on the call is Frank Boykin, our CFO, who'll review our Safe Harbor statement and later, the 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 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 second quarter earnings per share were $0.88 as reported or $0.95 excluding restructuring charges, an increase of 23% over adjusted 2010. Sales reported during the period exceeded last year by approximately 6% or 3% on a local basis, with all segments growing and Unilin reporting the largest increase. Our adjusted operating margin improved to 7.3%, an increase of 50 basis points over last year as a result of continued cost reductions, selling price increases and productivity gains throughout the enterprise. Our cash position at the end of the quarter was $285 million and our net debt to adjusted EBITDA ratio was 2.1x. And a 5-year lower-cost bank facility was executed in July to support future growth and investments. U.S. economic growth was lower than expected in the second quarter and most of the comments are predicting slower growth than anticipated in the second half. The U.S. Housing industry continues at a slow pace, though recent reports indicate the supply of new homes is coming into line with historic averages. Residential remodeling has not rebounded as consumer confidence remains challenged due to high unemployment rates, reduced home values and high energy and food prices. Multi-family occupancy rates are improving, resulting in additional investments in remodeling and new construction. Commercial construction remains low, but commercial channels are increasing remodeling to attract more customers and improve business performance. Frank, could you give the financial report, please?

Thank you, Jeff. Good morning, everyone. Net sales were $1,478,000,000 or 6% over last year. All segments were up year-over-year, with the biggest gain in Unilin even after considering the impact of foreign exchange. In the U.S., residential remains weak with commercial continuing to grow. Our gross margin was 25.9%, down from last year's 26.8%. Price increases and productivity improvements partially offset raw material inflation and product and channel mix. SG&A was $281 million or 19% of net sales. SG&A continues to be a good story, as we improved 140 basis points from last year. We declined in dollars $10 million from last year's after looking at SG&A from a constant exchange rate basis. We continue to focus on cost reductions and efficiencies. We had restructuring charges in the quarter of $7 million, all of which were included in the Mohawk segment, $6 million of the restructuring charges were included in cost of goods sold, with the balance in SG&A. Our operating margin was 7.3%, 50 basis points better than last year's 6.8%. Interest expense was $26 million compared to $39 million last year. Last year included $8 million for a bond tender premium. In addition, we were favorably impacted this year by lower interest rates. The income tax rate, excluding charges, was 19% in 2011 and that compares to 14% last year. We expect our rate to be in the mid-to-high teens for the balance of this year. Earnings per share, excluding charges, were $0.95, up 23% from last year, good results in a weak environment. We move to the segments. With the Mohawk segment, sales were $758 million, about 1% higher than last year. We had strong commercial performance. Also, we had one price increase that was fully implemented during the quarter, and then a second price increase that was partially implemented. Operating income, excluding charges, was $38 million or 5% of net sales. That compares to 4.2% last year, an 80-basis-point improvement with price increases and cost reductions offsetting inflation. In the Dal-Tile segment, sales were $379 million, a 4% increase over last year. We had good performance across all of the business in Dal-Tile. Operating income was $32 million or 8.5% of net sales. It improved 80 basis points over last year. As we look forward to the third quarter this year for the Dal-Tile segment, I want to remind everyone that last year, we settled the insurance claim to cover lost sales and profits from a flood that shut down our Mexican plant for about two months. The insurance covered all the $5 million of lost profits. Our operating margin last year would have been in the high single-digit range had the flood not occurred. Moving to the Unilin segment. Sales were $363 million or an 18% improvement as reported. Sales were up 7% on a constant exchange rate basis, with most product categories growing. Operating income was $46 million or 12.8% of net sales. That compares to 13.7% last year. Foreign exchange favorably impacted our results by $5 million in operating income. We were impacted both by raw material inflation and de-mixing in this segment. In our Corporate and Eliminations segment. Our operating income charge was $8 million, and we estimate for the full year that amount will be in the range of $20 million to $25 million which is in line with past years. Going to the balance sheet, cash ended the quarter at $285 million, down from last year, as we used a portion of it to pay down the bonds that were due in January of 2011. Receivables were $798 million, continue to be in good shape, with our DSOs at 45.7 days, an improvement from last year. Inventories were $1.1 billion, up about $95 million from the fourth quarter. Inflation and foreign exchange account for much of this increase. Inventory days improved from the end of the fourth quarter, and we expect continued improvement in days through the end of the year. Our long-term debt ended up $1.608 billion which compares to $1.654 billion, with the decrease in debt coming from free cash flow that we used to pay it down. We put in place a new 5-year $900 million bank facility in July. This provides much better pricing and improved terms, with interest at LIBOR plus 150 and an unused fee at 30 basis points. This provides additional liquidity and flexibility for future growth. We anticipate annual interest running about $100 million under this new facility. Jeff?

Thank you, Frank. We experienced normal seasonal improvement in our second quarter, with the U.S. Residential business remaining soft and the Commercial business continuing to grow. All of our segments reported year-over-year sales growth and our adjusted operating margin was the highest since 2008 at 7.3%. We're driving process improvements and cost reductions throughout the business in all manufacturing, selling and administrative areas. Our Mohawk sales grew about 1%, with improving Commercial business offsetting soft Residential sales. Adjusted operating margins were 80 basis points higher than last year as a result of reductions in SG&A cost, the impact of price increases and improvements in manufacturing productivity. We're performing in line with the industry, with growth in commercial remodeling and lower residential activity. Our customers are trading down to lower-value products to minimize the impact of inflation. The realignment of our Residential brands under our common geographic manager was completed during the second quarter. Our high-end residential products began to show some improvement, reflecting growing brand penetration and increased remodeling among affluent customers. In the multi-family channel, we introduced TriStar which is made of Triexta and provides the best flooring alternative for apartments due to its high durability and stain resistance. Additionally, the launch of our Wear-Dated Revive brand with recycled content has established a premium category of polyester carpets. We grew sales in the Home Center channel, with improved position and higher special order activity. In the third quarter, we will complete the launch of a comprehensive SmartStrand collection at Lowe's. Expansion of our commercial sales force increased our penetration, and we're adding more sales representatives to maximize the category in the third quarter. Our Commercial business posted sales gains, in both the tile and broadloom product categories. Our tile capacity was expanded during the period and further investments were made to support the continued tile growth in the second half. At the annual commercial trade show, we introduced the first commercial products made of SmartStrand and our Lees collection and were awarded the best of show for combining high fashion and performance with environmentally sustainable materials. We also reengineered some of our premium commercial products with our best styling and durability to provide improved value and more competitive price points. These changes have increased specifications of our products by major national accounts by providing solutions that set us apart. The carpet price increase announced in February was fully implemented in the period. The second increase initiated in April will be completed during the third quarter. We continue to review our carpet-selling prices as required by our raw material changes, which remain volatile, following oil prices and international demand for commodity. Our South Carolina expansion of extrusion was completed on time and is operating at expected level. In North Georgia, a smaller expansion will be installed by year-end. Additional investments in yarn processing are being made to support the growth of filament products and to reduce our conversion costs. Due to the value added and performance features, our SmartStrand Triexta and polyester products are growing at the expense of traditional fiber options. During the quarter, we announced the closure of a spinning mill to align our yarn manufacturing with today's preferences for filament products. We successfully shut down a commercial carpet facility announced in the first quarter and moved the production to alternative plants with lower cost without any interruption. Operations group is improving efficiencies, reducing manufacturing costs and enhancing material yields through increased production speeds, innovative product engineering and utilization of alternative materials. The reengineering of our business and simplification of our processes has enabled us to reduce our personnel cost by an additional $10 million annually in the period. Much of the impact will flow through cost of goods sold, as our inventory turns. Dal-Tile sales grew more than 4% this period, with Commercial sales growth exceeding Residential. Sales grew in all channels over the period as we outperformed the overall market due to the breadth of our product line and our superior service. In this period, higher product prices and fuel surcharges were implemented to recover rising transportation costs on products that are delivered to our customers. Our new product introductions are further distinguishing Dal-Tile with our Reveal Imaging technology providing enhanced visuals and new sizes we've added greater than 24 inches. We introduced a new dealer program called Statements by Dal-Tile that provide the completely merchandise ceramic and stone shop with marketing, advertising and promotional assistance. A new installation warranty is being furnished to differentiate Dal-Tile with the consumers. Additional product placements are being realized with major retail groups, Home Centers, national commercial accounts and leading homebuilders. Our American OEM brand is growing with the independent distributors by providing direct shipments to replace offshore suppliers, enhance commercial programs, new stone products and stylized porcelain tiles that satisfy the changing taste and budgets of consumers today. Our business in Mexico is growing significantly as we broaden our product line and satisfy all price points in the market. We're adding more sales personnel in the market to maximize our distribution and we're providing higher level of service in our competition in the market. We've expanded our commercial product lines and sales staff to increase specifications of our project -- products on large projects. Larger-sized tiles from our Chinese joint venture are differentiating our high-end offering. We're investing resources to drive volume and train manufacturing personnel for our new manufacturing plant near Mexico City. The plant will produce non-porcelain ceramic tile at lower cost and improve our margins after it becomes operational in mid-2012. We've improved the productivity of our style plants with lean manufacturing processes, lower setup costs, increased production speeds and improved yields. Our Reveal Imaging technology is being expanded through our manufacturing operations. New trim production has been installed to make higher value products at lower costs. We're making additional investments to increase our wall tile and porcelain floor capacity to meet projected demand. New workforce management systems and increased truck utilization rates and new shipping channels are reducing our freight and distribution costs. In China, our ceramic JV is implementing new product plans, enhancing marketing and sales strategies and adding more talent to expand our business. The Chinese government efforts to control real estate inflation have had a short-term impact on demand, as well as commodity inflation has been a headwind. Price increases are being implemented to offset inflation. We're optimistic about the long-term growth of China supported by the government's commitment to add 10 million new homes. Our Unilin revenues were up 18% as reported or 7% on a constant exchange rate. Sales of our European products were positive, with growth in our roofing systems and panels outperforming our flooring products and impacting the mix of our margins. In most of our European products, our price increases are beginning to catch up with the higher raw material cost. Consumers continue to select more value-priced laminate products at retail, impacting our sales mix. Our European flooring is gaining share in a challenging market by increasing our position in the European DIY channel and growing our presence in the U.K., Russian and Australian markets. Continuing our focus on innovative technology, we introduced Quick Step Elite, which has a multi-gloss finish and creates a more natural look; Quick Step Vogue, which has a highly textured antique character; and Quick Step Gold, which offers a value proposition for the budget-conscious consumer. Our European wood business is expanding and the sales of our premium Quick Step wood products are improving our product mix. The consolidation of our Malaysian wood manufacturing operation is progressing, and additional capacity will be operational in the first quarter of next year. We continue to invest in growing our Russian customer base to support our new plant under construction near Moscow. The plant is expected to initiate production at the end of the third quarter. In the U.S., our flooring sales were impacted by low residential remodeling. We're growing our distribution in the Home Center channel and especially wood channels. Our new product introductions are being well-received, and we're using promotions to address lower price points. In the U.S., we're introducing laminate with more realistic designs made on unique technology in our Belgian facility. Our wood plants have improved their productivity yields and flexibility. In Europe, sales of our roofing systems and panels are up substantially, reflecting greater volume and increased prices to cover higher cost of wood and glue. Our wood panel margins have improved over last year, but our margins are still -- our margins still face pressure due to excess industry capacity. In the period, our installation board sales have more than doubled over the prior year, and we've become a significant participant in our region. We're planning another installation plant to expand our geographic reach and our capacity. We're also completing a small manufacturing operation to produce ready-to-assemble didit-click furniture to begin test-marketing the products in the market. In all segments, we have increased the use of recycled materials in our products and reduced costs through more effective use of natural resources. During the period, Mohawk received the industry's most prestigious award for environmental leadership and was also ranked in the top 5 most sustainable businesses from more than 3,000 of the largest southeastern companies. We recently issued our second annual sustainability report online at www.mohawksustainability.com. Our second quarter results were accomplished despite the weaker-than-expected economies, in both the U.S. and Europe. During this challenging economic period, we've made many improvements throughout our business, resulting in a leaner, more efficient organization. We're introducing innovative products and reengineering existing ones to improve our sales mix and margins. We're continuing to reduce our cost structure, increase our productivity and invest in new products and geographies. We are increasing prices as needed in response to raw material and energy inflation. We're well-positioned to leverage these changes into a more profitable business, as residential remodeling and economy improves. With these factors, our third quarter guidance for earnings is $0.82 to $0.91 per share, excluding any restructuring cost. Our strong balance sheet, improved leverage and available liquidity will support our current strategic initiatives and facilitate future opportunities. We're committed to growing our business with new investments and strategic opportunity, including Mexican and Chinese ceramic, Russian laminate, European insulation boards and click ceramic tile and click furniture. Mohawk's strategies reflect our evolution from a North American carpet business into a larger, more diverse total flooring company operating in a global market. With that, I'll be glad to take questions.

[Operator Instructions] Your first question comes from the line of Ken Zener with KeyBanc.

I just have two questions. One on Unilin. Obviously, a lot of that growth was FX, but of that 7%, can you comment on how much of that was pricing, given the material cost inflation you're seeing?

It's probably around 2% plus. I'm sorry, I'm looking at the wrong line here. Probably around 4% plus.

Okay. And then in, I guess, the other part in noncommercial, in the first quarter, you said that was growing 8%. I wonder if you could just kind of comment on that. And then given the recent April price increase which partially fell in 2Q and the rest will fall in 3Q. Do you expect that will be neutralizing your inflation by the fourth quarter, with margins still being up year-over-year in that business for your 1Q comments?

Your next question comes from the line of Mike Rehaut with JPMorgan.

Just a minute, I'm not sure your reference to the earlier-quarter comments -- where it came from. I think your question is...

On the Commercial growth.

The Commercial in all the categories is growing significantly. It's growing -- I have to remind you that the Unilin segment is all the Residential business, almost all residential replacement and has none, so the Commercial business is all in the Mohawk and Dal-Tile segments in the U.S. business. Both of those have been having significant growth as commercial channels have begun more remodeling in the business, and we see it continuing at this point as people invest to continue improving their business.

Your next question comes from the line of Mike Rehaut with JPMorgan. Michael Rehaut - JP Morgan Chase & Co: First, I was hoping just to drill down on Unilin for a moment. The growth has been a relative bright spot over the last several quarters. As we look into 2012, can you give us thoughts in terms of what type of growth is reasonable in 2012 vis-à-vis what you're doing in Europe and also continuing to build out the laminate footprint in the U.S.?

Okay. First, our anticipation what's going to happen in the economy is no better than yours. You have to guess what's going to happen. What we've had in the Laminate business in Europe, it's been under pressure. We think that we've been doing better than the marketplace by taking share in the different markets and expanding into different channels that we've been in. We are putting investments in Russia to put up a new plant there. The capacity we're putting in Russia is about $100 million worth of sales in Russia. It will take a while to utilize the full capacity. We've been investing money in the short-term, building up the sales that the plant has things to operate under. The roofing and panel businesses have been improving from a low point in volume. On the other hand, they still have pressure in the margins, but those have improved also. We think we'll see continued improvement in those areas from the low point they've been at the last couple of years as we go through. Michael Rehaut - JP Morgan Chase & Co: And I guess just to fill out this question, if you can kind of also -- as you said, the macroeconomy is anyone's guess. But assuming some stability from here, I mean, can you kind of describe the laminate market overall? I mean, over the last 5 to 10 years, laminates have taken share from other flooring categories. Maybe you can kind of update us on how that's gone in the last couple of years. And at least from a relative share standpoint, what are you doing -- what is laminates doing as a category and is this something where you feel you can take share within laminates?

The laminate industry had -- prior to a number of years ago, was growing dramatically faster than the flooring market as a whole. Presently, it's growing relatively in line with the industry as a whole. At the same time, you have that the average price of the industry has gone down as an industry, so that reduction has impacted some of its participation in it. We think that they will continue to grow, our market, plus or minus a little bit, going forward. We think that we're going to improve our position by participating in the do-it-yourself channels in the Europe and U.S. much more so than we have in the past. We've made dramatic moves to participate on both sides of the water, and we think it will help us improve our positions in the marketplace.

Your next question comes from the line of John Baugh with Stifel, Nicolaus. John Baugh - Stifel, Nicolaus & Co., Inc.: Jeff and Frank, I was wondering, staying on laminates for a second, if you could talk, it sounds like laminate volumes in Europe are down. I'm curious first, is that right? Secondly, are laminates performing in line in volume in the United States with, say, carpet, which I know was down residentially? And then you mentioned going after the Home Center channel or DIY more aggressively. That, with everything being equal, I'd think be a lower margin proposition, but perhaps, you're in a low-margin leverage with the increased volume where you'd actually see an increase?

Okay. I'm not sure I heard a question.

The question was the laminate growth in Europe.

Laminate in Europe. Europe used to be a major producer for the entire world, and huge amounts of the European capacity was exported around the world. In the last few years, there has been a buildup of capacity in various local geographies, so the opportunity to export has decreased dramatically. At the same time, that has created significant excess capacity in the European marketplace, which has pushed down the average price of product significantly, along with the reduction in the economy in general. From our business, we focus more in Europe on the mid-to-high end part of the marketplace, and so the pressures are much worse in the opening price points than they are in the differentiated products and where we have brands, so we're not as affected as much. On the other hand, with the marketplace being down, we've been able to increase our market share by offering differentiated products through the DIY channels, which we had very limited participation in prior to the last year or so. In the U.S., the same thing. Most of our business was through the specialty store channels. In the last year or so, we have moved into participating in both wood and laminate in the do-it-yourself, the wood channels, the Home Center channels, and we have made significant progress in those channels which are helping our business. John Baugh - Stifel, Nicolaus & Co., Inc.: So I was trying to get a feel, Jeff, whether your unit volumes in laminate in Europe were a plus or minus and the same in the U.S. And then whether or not the strategy to go into a more DIY Home Center, whether that will hurt your margins in that business or actually help because of the increased volume contribution.

Our business was actually up slightly, our volume was up slightly in a industry that was down, and we think we've done that through expanding the shares and then the mix of products. We're going to participate in the mix of products, and we think it'll be in line with our average across the different channels with lower SG&A cost and other things that go along with it.

Our next question comes from the line of Laura Champine with Cowen & Company.

I've got another follow-up on the growth of the Unilin business because it's a lot stronger than what we expected. I think you mentioned that your insulation is doubling, and I'm wondering what's driving that. And also, Jeff, I think you just said that you expected in Unilin to grow in line with the market, which would be slower than you have been growing. Is that because you're annualizing some of the entry into the DIY channel or is there more to be done there?

Let's start with the installation. Installation is a new business for us, about 1 year to 2 years old. It is a board that you put in construction of either new homes or remodeling to insulate the homes and business so they use less energy. The European government are supporting those things with incentives, so that category is growing significantly. We estimate the insulation board business in Europe to be about $1 billion business. In that, the regions we participate in is about 1/3 of it, so about $300 million. We think the industry's going to grow about 5% to 6%, 7%. We think the polyurethane insulation, which has properties that are better than the others, will grow in the midteens at the expense of the other ones. With that, we're increasing our capacity in the operations we have as we speak, and then we have a plan to extend it further and add other facilities in the future. The European growth, I think what I was trying to say is that we expect the European laminate growth to grow approximately in line with the flooring industry, and our goal is to outdo the industry by somewhat. We've had more pressure on our category because in the last period of time, as the industry and the economies have gone down, people have traded down. And so the lower price points have grown more than the higher price points, and we've been able to overcome that by expanding our distribution channels.

Got it. And then just a clarification, I think, Frank, you answered a question about price in Unilin, saying that it was up about 4%. But I know your mix was not great. Do you have the price mix change year-on-year in that segment?

Yes, that was price mix. We're unable to separate those two lots that I gave, that 4% number.

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

In the carpet and the ceramic tile business, I'm interested in what you're seeing go on with mixed trends, if anything changed in 2Q and what your expectation is for the second half of the year and how that might be playing with what you're trying to do with price, and also within the backdrop of what the material environment is.

The product mix in all the businesses have declined, as the retailers and consumers try to minimize the expenditures that they're putting in their homes, which they perceive as less value. So the mix across all the different channels are lower. Where historically, we would see when consumers come in, they would want to buy the best thing they could afford and trade them up through their own limitations in their financing and/or through the retailers driving lower price points to try to differentiate themselves, the mix is lower. Usually, when you get further along in a coming out of the downturn, people go back to buying higher-value products. We haven't seen that yet.

And then secondly, coming out of 1Q, Jeff, you sounded a little bit more optimistic than now, and I understand the economy grew a little slower in the second quarter. But is there anything else within the business that has you sounding a little bit more conservative at this point than you did 90 days ago?

I think that 90 days ago, we had a view of the economy that we were potentially coming out of the downturn, that the economy was picking up, that we had hoped the employment would be higher along with everybody else, and so we are a little less optimistic given the latest information.

Is there anything within the business, competitively or structurally, that's, is it just an economic issue?

If anything, I think that we've gotten stronger.

Your next question comes from the line of Dennis McGill with Zelman & Associates.

First question, just has to do with, Frank, on gross margins. Once you recover whatever headwind you have from raw materials and price of raw materials normalized out and you incorporate the cost cuts that you've taken through the second quarter, what would you say is the, well, medium-term stabilized gross margin that we can think about moving forward?

Well, Dennis, we're not really -- we don't typically give out gross margin estimates going forward, and we try to look more at stabilized operating margin estimates as we get to a more normalized trend, if that will answer your question. I can't give you those numbers.

Yes, maybe that would be helpful. And then, I guess, just looking for 2012, which is kind of the way you would think about it, relative to where you've been in the past and incorporate the cost cuts, kind of how that works out to be a more normalized margin today.

Well, maybe let me try to answer it this way, and it's not a 2012 answer, it's when we get back to a more normalized environment from an operating margin standpoint. We've said as we think our carpet business is going to get back to the high single-digit range, and then the Dal-Tile business back to the 13%, 14% range and Unilin maybe in the 15% range, but that's when we get back to a more normalized environment.

That's helpful. And as it relates to 2011, if you hold everything constant today, for the full year, will raw materials have been a headwind and implying a tailwind into next year, if you do hold everything constant?

Well, for sure, they'd be a headwind for the full year this year. And if nothing changes, then it should be a tailwind.

Your next question comes from the line of Stephen East with Ticonderoga Securities.

If we could look, first, at what you're seeing with monthly trends as you went through the quarter and into July in your businesses, your demand trends?

If you look at the second quarter, there were some inconsistencies you would expect from week-to-week in different pieces. In general, we saw a relatively seasonal improvement that you normally see. And typically, the business gets a little better as you go through the year, so we saw the normal things we do. If we look back at July, we see a continuation of the similar trends that we saw in July and going forward.

Okay, so that means you're -- seasonally speaking, you saw monthly progression up? Am I understanding that right?

Yes, with some inconsistencies though. It's not like a straight line you'd see in a perfect economy. On the other hand, I have to remind you that Unilin's business slows down with European vacations and things on that basis. So you've got to add all that back together.

Right, okay. And then the second thing, if you look at you've got one price hike in, you're putting another one in right now. Is that it or do you see more on the horizon? And then how is that correlate to what you all are seeing on the raw materials, as far as peaking in the second quarter and going from there?

The 2 price increases we put in will be fully realized in the third quarter. The raw materials reached a peak higher than we probably expected in the second quarter to remind you that second quarter raw material cost flowed through under FIFO into the third quarter. Presently, we're expecting the third quarter to be slightly improved over the second quarter purchasing costs which will flow through on to the fourth quarter. And then as usual, we have our raw material costs that we basically buy very short-term and follow with the cost of market, so they're volatile with all the impact from both oil prices as well as worldwide demand, and they change almost monthly.

Okay. Do you see a need to put through another price increase?

We constantly monitor what's going on, and we'll react as required.

Okay. Frank, if I could sneak one quick one. What do you expect on Unilin, the FX impact in the third quarter?

I think we're in the 141, 142 range somewhere around there.

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

Frank, Jeff, where within the North American business are the biggest opportunities for further cost reductions and productivity?

It's a never-ending battle that you never reach the end. Let's see. We are right in the middle of our strategic plan for next year. I can tell you that this year, each of the division had more than 100 very specific projects to reduce their cost structures, to drive their product mix and drive their management of it, and I can tell you that they're achieving what they did this year and they're putting together similar things for next year. I think they will come up with process improvements, ways of improving the products and driving the production yields. I think that we're getting better at controlling our product mix to the marketplace. I think we have opportunities to improve our product management, the pricing structures in the marketplace. I think that we can get a little leverage in the top line volume. It will flow through all the parts of the business, but I still think there's opportunities in all of them to get better.

Where do you think your capacity utilization rate is right now?

If you look across all the businesses, I mean, we have so many parts and pieces. If I had to give you a broad range, I'd say it's probably 70% to 80% across all the pieces. I mean, that you could have pieces above it, close to 100 pieces below it also.

Just, I guess second question, you talked about the fact that the mix have been negative across all your businesses as consumers are responding to the inflation. I guess my question deals more with your expected elasticity of demand as you push through these price increases, more on volume obviously. But what are you expecting there? What are you seeing maybe in the order book already or maybe just talk about the second half with these price increases going through?

A large part of the price increases are in, and we're pushing them through the back end. What you see in the carpet business is a dramatic change in the makeup of the product. So what you see is that where polyester, not long ago, had a limited share, polyester is growing rapidly because the cost of it on a -- in a product is less. So you see this dramatic shift in quality to lower-priced polyester products. So continually, you're going to see that we said polyester and Triexta because of the values they provide are going to move as nylon and polypropylene are declining. In our ceramic businesses, the margins show that the customers are buying less-value products. And so the compression of margins is much about the change in the use of the products and ceramic and the average prices that are being sold in the marketplace today as anything else. Laminate, same thing. So it's not related to one product category. They're all the same. Our expectations are that consumers will go back to higher-value products though as they get more comfortable and they start spending more money. We did see some indications in some of our higher-end carpet products, that we're seeing some of them starting to sell a little more, but not enough to offset the mix change that's going on.

Your next question comes from the line of Joshua Pollard with Goldman Sachs.

My first question is on your guidance. If you guys look back to 2009-2010, you put a lot of conservatism in your guidance. You guys were beating your guidance by large numbers. That slowed in 2011, and I believe you guys have sort of taken a bit of conservatism out of the way you guide. I'm trying to get an understanding, along that spectrum, where you guys are with the guidance you provided last night. I'm wondering if you guys have started to bake more conservatism in with everything we're seeing or if this is a sort of more of a 2011 like just your view of the world and basically you guys think that the Street estimates are too high for the third quarter?

We account as best we can to project where we think they're going to be. There are a lot of variables in it. When we look at the going-forward piece, you start with the top line where the economies are really hard to guess because they're not forming a straight line. You look at our raw materials, we said that you have about one month view of the raw materials that keep changing. So we do our best to do what -- I think we're pretty good at the guessing. I think if you look back at a thing we'd probably tend to be in the -- around the third quartile. If you look at the range, we tend to end up somewhere in the third quartile, up or down, most of the time. And some of the time, we end up above it and some of the time we end up below it.

You made a comment a little earlier, you said customers are trading down to minimize the impact of inflation. Two questions around that. I wasn't clear if that was a comment being made more so about the Mohawk segment or if that was more broadly across your entire business. And could you talk about your thoughts on margin expansion over the coming few quarters? It seems like -- I'm wondering how best you guys are looking to offset what looks like a mix impact?

I think the answer to the first question is yes, which means we have a mix impact in every product category that we have across every segment. You heard me being more specific about the change that's going on in the raw material and product structure and the carpet one. But the same things are happening at different levels across each of the businesses, as much from retailers trying to create reasons for customers to come in, they tend to be pushing price more. And then it tends to be compacting it even more than the -- I believe, the consumers are really desiring by their focuses. Looking out long-term, we continue to do everything we can to increase the margins. Our goal is to get back to the margins Frank was talking about earlier about, overall, the historical margins. We think that we're putting in place the right cost structures across the business. We're aggressively managing the pieces we can control, and I think we're going to continue increasing our margins and then we're going to get a big lift and we'll get some unit volume to help us.

I guess if I can ask a bit more of a pointed question. I'm just wondering if the next few quarters are more likely to have more stagnant margin expansion, just giving the number of factors that have come up or if you guys have a view that the plans that you're putting together for '12 are likely to actually turn it to material, not materially higher, but higher margins than where you are today.

Josh, if you look at the third quarter for example, we do have price increases that will be coming online by the time we get to the end of the third quarter, but they won't be in place for the full third quarter. We also, as Jeff had mentioned, had the headwind with the raw materials that will be impacting our third quarter on the balance sheet at the end of the second quarter will be flowing through in the third quarter. So we have pluses and minuses in there going both ways as you move from second quarter to third quarter. And then fourth quarter, there's still a lot of uncertainty in terms of what's going to happen with raw materials and mix.

Understood. And If I could just sneak one last one in there that I think will be helpful to everyone. Just your country exposure at this point, I know it moves around a ton with all the different things going on in the U.S. versus some high-growth areas, where are you -- how much of your exposure is to maybe your top 5 or 6 countries if you could?

I think somewhere in the midteens in terms of our revenues outside of North America and most of that's in Western Europe, in Belgium, Netherlands, France, U.K., Spain, we're growing our presence in Russia. And there are few other countries that would be scattered in there as well.

Your next question comes from the line of Bob Wetenhall with RBC.

Just quick question in the Dal-Tile 4% growth, what's the split there between organic versus share gains?

I'm not sure of your question, Bob. One more time?

Is that mostly organic growth or is there any market share pickup involved in that number?

We don't have exact industry numbers. We think the industry, you have to remember now, in the ceramic industry, almost 50% of it historically was new construction, so we think the industry is under significant pressure. We think we are gaining share from imports, as a percent of the piece we're taking share from it and we're growing our share, and we think the industry would be down some number. I don't have the number at this moment.

Got it. So it does sound like you are taking some share. Any update on your expansion plans in Mexico and Russia?

Sure. The Mexican plant should be up and operating about mid next year. It has about $50 million of capacity in the initial phase that's going up. We have been doing making, aggressive investments in our product line, in our sales personnel to increase our distribution. What it does for us in Mexico is that historically, we've had -- we've played in the mid- to high-end of the marketplace because of the making porcelain tile. The majority of the Mexican market is in non-porcelain tile. The plant we're building is outside Mexico City, which is where the majority of the population is, and it reduces the freight costs, the raw materials are nearby it. So this is going to allow us to be a full product line supplier to the industry. We've actually already started selling products in most price points and subsidizing them in the short term. When the plant comes up, we'll move product that's being manufactured in our northern facility to the new plant. We'll more aggressively go after the price points in the lower end of the marketplace, and we'll use the capacity in the north to support more of our U.S. business growth that we expect to happen over time. In Russia, we're putting in a laminate plant outside Moscow. It has a capacity of somewhere around $100 million capacity. We've been growing our customer base there, by shipping in products. We've put in about a year or so ago a local distribution center, so we could get to smaller customers that couldn't import as much. We've been building a distribution in Russia. The plant should be operational the end of this quarter. We've been putting money in it to expand the distribution, as well as train people to operate the plant. As with everything in Russia, you have to make sure and get the permits, which until you finally get them, we can't say you have them, but we think we're all in line with it. And we're optimistic about our opportunity to participate in there also.

So just in a big picture framework even though macro picture's a little bit unstable, just both in Mexico, Europe and China, you're still committed to moving forward with your current CapEx and expansion plans?

It's put in place and being spent. Just a point, Mexico, the economy is not tracking the U.S. at this point. The Mexican economy is doing rather well, and just like other parts of the world, they are behind in housing, and we think that it's doing well at this point.

Your next call comes from the line of Kathryn Thompson with Thompson Research Group.

Your Mohawk segment saw nice growth in the quarter. Two-fold, could you discuss the differences in growth rates for different types of products in the segment? In addition, on a percentage basis, how much did your Commercial grow in the quarter and is it at a same rate as the industry?

I think the industry and Commercial grew almost around double digits. I'm not getting exactly close. I think it was about 10%, with a plus or minus. I think we're in line with the industry in growth. On the Residential side, the industry had a decline and we're also showed a decline, as everyone was expecting the remodeling business to pick up more than it has due to the pressure on the consumer. It hasn't picked up as we had hoped it would by now. We still think there is pent-up demand, and it will increase going forward at some point. What was the other part I missed?

That pretty much mostly covered it, but I guess, carrying along with that, had there been any changes in momentum or trends in your commercial segment in particular?

Not at this -- the trends from the second quarter to now or one month later is continuing along in the same direction.

Okay. And then I know there've been a few questions about the easing of oil prices and what that means to you. But just to follow up two-part question. Assuming lower oil or energy translates to lower raw material prices today, when could you start to see margin expansion due to lower raw materials? And in an environment of falling energy prices, would you be forced to give some of that relief back?

Start out with the third quarter. Basically, the raw materials we bought in the second quarter are the cost we have to have flow-through on the third quarter. So the costs in the third quarter are going to be higher, the costs in the financial statements will be higher in the third quarter than they were in the second quarter. The raw materials do follow the oil prices with some lag, with the exception of they don't follow exactly. And at points in time, they can be running diametrically opposed because what you have is the supply and demand of the intermediate chemicals that flow-through in the different pieces. And with the world marketplace, those things flow across our countries and borders, and the prices in one country impact the prices in the other. So as a general statement, as oil prices go up and down, we will get cost up and down with the lag, depends on different pieces. But they can be -- I mean I've seen them 6 or 9 months apart going opposite directions for periods of time.

So assuming all the intermediate parts, including all do abate say -- just assume that those prices abate, would you be forced to give back some of that pricing that you've gained? Or do you feel like your pricing you have now is secure?

If you look back over time, as the prices declined significantly, the industry starts giving them back through promotions and other things, and they do leak out over time. The difference, at this point, is the industry margins aren't as high as the industry needs to support the investments we all have to do. So hopefully, we would hold on to more of them, but get back to a more normalized margins would be a nice thing to occur.

Your next question comes from the line of Sam Darkatsh with Raymond James. Sam Darkatsh - Raymond James & Associates, Inc.: Jeff, most of my questions have been asked and answered. Just a couple of quick ones. First off, you mentioned capacity utilization earlier about 70% to 80% across the company, although most of your restructuring actions over the past couple of years have been specifically to the carpet industry, the carpet business, what is your -- what do you think your capacity utilization, specifically in the Mohawk segment right now?

I would still put it in at the same range. Again, the carpet industry, the carpet piece we have, a lot of different manufacturing operations that support it. So we have extrusion pieces, which you see us putting more capacity, because the needs are running and we need the capacity. You see us putting in more filament piece because it's running relatively fill. Now what happened is that the change from spun yarns and nylon into Triexta and PET, so you see us changing the structure of those pieces. We have shut down significant parts of the business. Most of them are running on five-day schedules with ability to go up to 7 days, if required, across the pieces. I think we have relatively good position across the businesses today. Sam Darkatsh - Raymond James & Associates, Inc.: One last question. You haven't bought, repurchased stock for several years now. I guess since '06 or so, if my memory holds. With the valuation having come in fairly sharply and your balance sheet in pretty terrific shape right now, what are your thoughts in terms of the use of incremental cash flow going forward?

It's really a decision over can we find the right acquisitions to do to support our long-term strategy versus the value we can add through buying back stock. And the third piece is we have been trying to get our balance sheet in order so that we could get an upgrade in our rating. So we're balancing all 3, and we're willing to push the limits of all of them if we think it's the right thing for the business.

Your next question comes from the line of Dan Oppenheim with Credit Suisse. Michael Dahl - Crédit Suisse AG: This is actually Mike Dahl on for Dan. Jeff, just a follow-up on the answer to the last question. What types of acquisitions would you be focused on? And how should we think about the magnitude and kind of timing of those. I guess what does your pipeline look like today?

We have multiple strategies on the acquisition side. We are looking at tie-in acquisitions in the present geographies and markets we're in. We're looking at opportunities and new geographies in high-growth world marketplaces that we don't participate in. We think there will be opportunities in all of those over the next couple of years. On the other hand, if the stock at the right price becomes an opportunity, that may be better than the others. We have authority to buy back stock from our Board, and we'll consider which ones we want to use. On the other hand, we'd like to have enough flexibility in the future to adapt to changing environments. So it's the balance of the 3. Michael Dahl - Crédit Suisse AG: Okay. And then I guess domestically, do you have any desire to -- specifically on wood, are you happy with your platform there or would you like to grow it, do you see anything?

In the Wood business, we have available capacity to sell in our present business, and engineered wood is the height -- is one category we have excess capacity there. We also have excess capacity on solid woods. So we have significant capacity to grow our business. The question will be is that an acquisition that would help us achieve our goals better, and we always look at them.

The next question comes from the line of Keith Hughes with SunTrust.

Just quickly. Multi-family housing, what percentage of the business that currently stand at?

I don't have the percentage. The industry, at one point, the new construction is somewhere around 25% of all new homes, which that's a part and it's a piece of it. If I give you a guess, it's less than 1/2 of that. At this point, it could be about -- I remember the total being built now, it's about 1/2 and 1/2, apartments and other. And then because they use less flooring for each, I'm just taking a guess, I don't know.

So it's probably single-digit?

Yes. But I mean you just heard me walk through a guess at it.

And it will all concentrated in the Mohawk segment, correct?

No. We will also sell some in the Dal-Tile segment, and then limited pieces in the other.

Your next question comes from the line of David Goldberg with UBS.

It's actually Susan for David. Can you talk a little bit about the promotional environment that you've been seeing? And as you head in the second half and the things -- given the environment that we're in, do you expect that to change meaningfully relative to what we've seen historically for that seasonally for the time of the year?

Promotions are used for multiple objectives in the industry. We use promotions to try to balance out assets with the sales level. We use promotions to try to react to competitive environments. We use promotions to try to create relationships with the customers. All those different things are ongoing at all points in time. I don't see them significantly different than they are at other points.

Okay. So then we shouldn't really expect anything to change meaningfully given sort of what we're seeing from a more macro perspective?

The macro things you're seeing, the reports are coming out, whatever is showing up in the numbers, we've been living with it. It's not a new thing for us. We've been acting in the environment, the numbers are coming out that you're seeing, but nothing's changed from yesterday to today.

Your next question comes from the line of Carly Mattson with Goldman Sachs.

Given the less certain economic outlook and the recent rates rally, would Mohawk consider issuing debt to term out its 2012 maturity early?

We look over those things constantly. And what we have to do is measure the cost of either buying back the old bonds or the cost of having more debt than we need for a period of time versus the long-term savings. And since you've seen us not buyback up to now, what you see is that the economics that come out, the cost of the 2, the savings weren't enough to overcome the other up to this point. If it changes, we'll do it in a hurry.

Okay. And then the second question is with the recent larger credit facility, should we think this is an indication of the size of acquisitions that Mohawk would be willing to execute at this point?

Not necessarily. I mean, we've got a maturity coming up in April of next year, so it gives us flexibility with that as well.

But we have the ability to borrow more money for acquisitions when required.

We have the ability, we have an accordion feature in that bank facility that allows us to add on to it.

Your next question comes from the line of Alex Cook [ph] with Voyant Advisors.

Can you tell me what percentage of the inventory build that relates to raw material cost inflation and what percentage relates to inventory quantities?

Well, the build from the end of the fourth quarter to the end of the second quarter, about 3/4 of it is related to -- about 3/4 of it is related to combination of inflation and foreign exchange.

And then could you also tell me what restructuring charges will be in the coming quarter?

We don't have anything in terms of the restructuring on the drawing board right now. Any charges that do come through will just be carryover from projects that have been started in previous quarters. So it'll be much smaller than what we saw in the second quarter.

And at this time, there are no further questions. So Jeff, I'll turn the call back over to you.

Thank you for joining us. We think we're well-positioned for the changes in the marketplace, and we'll keep working diligently to improve the value of our business. Have a nice day.

Ladies and gentlemen, we thank you for your participation. This concludes today's conference call. You may now disconnect.