Mohawk Industries, Inc. (MHK) Q3 2012 Earnings Report, Transcript and Summary

Good morning. My name is Felicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries' Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, November 2. Thank you. I would now like to introduce Mr. Jeff Lorberbaum, Chairman and CEO. Mr. Lorberbaum, you may begin your conference.

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

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

Thank you, Frank. Our third quarter earnings per share were $1.01 as reported or $1.04, excluding restructuring charges, reflecting an increase of 25% over 2011 adjusted earnings. Improvement in product mix, pricing, volume and productivity, as well as lower interest expense contributed to our results. Sales increased 2% as reported or 4% on a constant exchange rate. During the period, we generated EBITDA of $179 million and free cash flow of $156 million. Both our debt-to-adjusted EBITDA and net capital -- and net debt-to-capitalization ratios improved to 1.7x and 22%, respectively. Across the enterprise, we have managed to keep SG&A dollars in line with last year, even as we increased significantly more in new product innovation and marketing to improve our future sales and product mix. After the quarter closed, we announced that we had entered into an agreement to acquire Pergo, the most recognized brand of premium laminate flooring in both Europe and the United States for $150 million in cash. Pergo operates manufacturing facilities in the U.S. and Sweden and has generated 2011 sales of approximately $320 million. In the U.S., the acquisition complements our strong Unilin specialty retail distribution with Pergo's strength in the DIY channel. In Europe, Pergo's most significant market position is in the Nordic region, which broadens our laminate distribution. In addition, Pergo will enhance other geographic positions and provide opportunities to augment Unilin's patent portfolio. The combination offers significant opportunity to optimize the assets of both companies, while expanding the product design and performance features of both brands. Any indicators anticipate improving trends for our industry and business, both of which have lagged the overall economy. The U.S. commerce department reported that record low mortgage rates, increasing home prices and limited supply of existing homes have led to the fastest growth in new home construction and building permits in more than 4 years. In October, we set affirmed plans to keep interest low through at least mid-2015. With existing home sales strong, Harvard's leading indicator of remodeling activity is predicting increased growth and renovation spending. The AIA's Architecture Billings Index also moved higher, projecting additional commercial construction. Finally, the consumer confidence index also rose at the end of the quarter after an August dip. Frank, could you give our financial report, please?

Thank you, Jeff. Good morning, everyone. Net sales for the quarter of $1.473 billion were 2% over last year or 4% on a constant-exchange-rate basis with both volume and price driving gross. Gross profit was $373 million or a margin of 25.3%. That's a 50 basis point improvement over last year, resulting from higher volume, productivity initiatives, pricing and mix. In addition, continuing product innovation, cost reduction and process improvements are driving better results. Our SG&A was $269 million or 18.2% of net sales. SG&A dollars were about flat with last year with our percent to net sales improving 30 basis points. Emphasis across all businesses on cost control and lean activities are positively impacting us. We had restructuring charges in the quarter of $4 million, of which $3 million were incurred in the Mohawk segment and the remaining $1 million in the Unilin segment. These were incurred to align the business with the current economic conditions. About half, $2 million of those restructuring charges were cash. Operating income, excluding charges, was $108 million or 7.3% of net sales. This represents a 15% growth in operating income dollars over last year. Interest expense was $18 million, down $7 million from last year. The improvement was due to second quarter payment we made this year of $336 million of the 7.2% bonds, as well as a rating agency upgrade that we improved early -- that we -- upgrade that was made earlier. Other expense improved from last year due to the negative impact of foreign exchange that we incurred last year. Our income tax rate was 20% this year, that compares to an 11% tax rate that we have last year. We're expecting our fourth quarter tax rate to be in the high-teens. Our earnings per share, excluding charges, was $1.04. This is up 25% over last year. We had this increase even with significant startup costs from capital projects that were installed during the year. For the full year, we're expecting start up cost of approximately $8 million. Jumping to the segments. The Mohawk segment sales were $752 million, about flat with last year. We had improving mix and increasing prices, which offset lower volumes. Operating income, excluding charges, was $47 million or a margin of 6.2%. This is 180 basis point improvement over last year, driven by higher productivity and better mix in pricing. In the Dal-Tile segment, sales were $418 million, a 9% improvement over last year or a 10% increase on a constant-exchange-rate basis. All categories across the business grew this quarter. Our U.S. residential, U.S. commercial and Mexican business were all up over last year. Operating income was $37 million, a margin of 9%. Improvement was from volume increases, which were slightly offset by startup costs and some plant volume adjustments. In the Unilin segment, our sales were $329 million, up 9% on a constant-exchange-rate basis. We were favorably impacted by North American volume, Russian growth and the Australian acquisition, all of this offsetting slower Western European sales. Operating income, excluding charges, was $30 million with a margin of 9.1%. Foreign exchange was a drag on operating profit of $4 million. We also experienced raw material headwinds and a lower mix during the quarter. Our Corporate segment had an operating loss of $6 million, which was expected. For the full year, we're anticipating about a $25 million loss. Moving to the balance sheet. Cash ended the quarter at $381 million. We continue to have strong cash flow this quarter with free cash flow of $156 million, improving our cash position and allowing us to continue to pay down debt. Receivables were $817 million, with a slightly higher DSO primarily from channel mix changes. Inventories ended the quarter at $1.1 billion, flat with last year, but with our days improving slightly. We're continuing to focus on improving our turns across all of the business. Fixed assets ended the quarter at a $1.657 billion. This included capital expenditures in the third quarter of $47 million. We're projecting full year capital expenditures of $200 million and we're estimating depreciation and amortization for the full year of $290 million. The Unilin amortization in the fourth quarter is expected to decline by $7 million and an additional $35 million next year as certain intangible assets become fully amortized. Long-term debt, including current portion was $1.525 billion. Our debt is down $86 million from last year. We continue to improve our leverage with our net debt-to-EBITDA ratio of 1.7x. We anticipate using a portion of our bank availability and a portion of our European cash on hand to finance our Pergo acquisition. Jeff, I'll hand it back over to you.

Thank you, Frank. Mohawk segment increased its adjusted operating income margin of 180 basis points, with sales remaining about flat compared to 2011. The gains stemmed from improved pricing and product mix, reduced cost of manufacturing and distribution, increased productivity. Our carpet sales performance was stronger on our specialty and contractor channels, both offset by the timing of product transitions to the home center channel. Our rug sales improved over the prior period though they still remained below last year as retail adjusted their strategies with consumer spending. Carpet price increases implemented during the second quarter continue to benefit our results this quarter. We saw a continued improvement in mix from our industry-leading products, which have redefined the premium carpet market. We launched additional products to broaden our SmartStrand Silk collection and capitalized on the exceptional customer appeal of this innovation. To further expand the customer demand for silks, unsurpassed softness, high performance and proprietary environmental features, we initiated an ad campaign, along with a new retail marketing program. We also integrated a new SmartStrand premium cushion into merchandising our silk offering. Complemented demand for SmartStrand Silk softness, we extended technology to create the next generation of supersoft nylon carpet we brand Wear-Dated Embrace, which is being launched as we speak. Going forward, Embrace will further improve our premium carpet offering for consumers seeking luxurious softness at a lower retail price point without the performance features of silk. In our Mohawk branded hard services, the innovative technology and wood, ceramic, and laminate featured in our recent introductions, increased our sales growth during the period. To satisfy the expending builder multifamily channels, we've recently introduced targeted value products in laminate, porcelain and LVT. During the quarter, we announced price increases to cover the cost inflation in our ceramic and solid wood products. In the commercial category, we also adapted SmartStrand superior stain resistant, an excellent performance with the new broadloom and tile products. We also introduced our new State of the Mind collection, which is made of our exclusive Duracolor technology that redefines premium modular tile by providing stylish products with the ultimate performance at affordable price points. Our nonspecified commercial sales continue expanding with the introduction of new refined products, combined appealing design and durability, the addition of more specialized sales representatives, expanding customer base. Across this segment, we improved our manufacturing, distribution efficiencies, realized productivity gains from our capital investments and reduced our waste levels. During the period, we completed the closure of a yarn plant and integrated the production into an existing extrusion facility, which enhanced our cost structure. Our new customer relationship management tool is increasing our professional approach of our sales personnel, while improving our sales force productivity, increasing customer opportunity and enhancing commercial project management. Dal-Tile sales grew 9% during the quarter or 10% on a constant exchange rate. This segment improved sales in both the residential and commercial categories and continued significant growth in the Mexican market. Margins were enhanced from actions that improve productivity and increased yields. During the period, we announced a 2% to 4% price increase for most products to recover the inflation in our material and distribution cost. Sales grew across all residential channels supported by our new Reveal Imaging designs, fashionable mosaic tiles and larger format tiles. We're leveraging Dal-Tile's traditional strength in the builder channel across all our business segments to expand commitments with regional builders. We've introduced specific value-engineered products to gain position in the growing multifamily category, improving our product management, our introductions are achieving a higher level of success and our SKU productivity is rising. Commercial sales increased during the period with restaurant, retail and hospitality sectors leading the growth. We're aggressively pursuing high-volume remodeling projects in shopping malls and national restaurant chains that were deferred during the previous years. To improve our position in the premium commercial category, we're targeting architects and designers with a new sophisticated collection we call Next, which features contemporary designs, expansive color lines and unique textures. In our American Olean, we've added commercial specification representatives, as well as upgrading some of our distribution partners in key markets. In Mexico, our new Salamanca plant is successfully ramping up and supplying product to satisfy our growing ceramic position. This year, the plant will begin to export its products to the U.S. The ramp-up is progressing faster than we anticipated and creating some temporary plant adjustments. Salamanca continued to incur startup cost at decreasing levels as we move closer to achieving our anticipated cost structure. As a result of our leading design, comprehensive portfolio and local manufacturing, our sales continue to significantly outpace the Mexican ceramic market, which we estimate is growing about 5% this year. By consistently delivering style, quality and value, we're expanding our retail customer base, securing large construction projects and positioning ourselves as a key participant in the Mexican market. During the quarter, Dal-Tile lowered manufacturing cost to improve material formulations, higher yields and lower waste. Our ongoing quality initiatives have reduced cost and lowered customer deductions. To align production with consumer preferences, we announced the closing of our Olean New York facility, consolidation of our unglazed Mosaic production. We reduced our freight expense through improved efficiencies, consolidated shipments and energy surcharges. Unilin's third quarter sales were approximately flat as reported, but grew 9% on a local basis. Gain from sales increases in Russia and the U.S., insulation board growth, and home center channel expansion compensated for the soft environment in Western Europe. Our margins were impacted by raw material inflation. Customers trading down and a higher participation in the DIY channel. We implemented cost reductions, including enhanced operational efficiencies, increased recycled content, improved raw material yield and continued improvement in administrative expenses. Outside North America, laminate and wood flooring sales grew from continued expansion into the DIY channel, increased distribution in Russia and our Australian acquisition. To capitalize on growing European categories, we're introducing a premium LVT plank that features our Uniclic technology for easy installation. Our Russian laminate facility increases production and implemented productivity improvements that reduced our costs. During the quarter, we increased sales on Russia by expanding our customer base and broadening our commitments to existing customers. In Australia, favorable product mix, as well as increasing sales of Unilin produced products, yielded margin improvements. In North America, we grew our laminate and wood products through all customer channels during the quarter. New product introductions increased home center penetration and gains within the builder channel and promotional activity, increased our sales. In our wood category, manufacturing improvements offset a lower product mix, introduced new higher value wood products with fashionable soft scrape surfaces and rich finishes. In the fourth quarter, we announced a 6% price increase for our solid wood flooring. Declining new construction in Benelux and France created headwinds for our roofing panels. To reduce costs in this category, we're consolidating our brand and sales forces, as well as executing process improvements. By helping meet European energy goals, our insulation panels delivered strong sales increases. We completed the expansion at our Belgian insulation panel facility, we began construction of a second plant in France to satisfy our growing demand. In July, Quick-Step was voted #1 in laminate in a survey of North American retailers. In August, both Colombia Wood and Quick-Step laminate were given Manufacturer of the Year Award at another retail sponsored ceremony. Mohawk's third quarter results reflect our strength in delivering innovative products, driving operational excellence and entering new geographic markets. We continue to invest strategically by introducing differentiated products, lowering our manufacturing administrative costs and acquiring new companies that will enhance our results. We've taken the necessary steps to align our pricing with our raw material inflation and we'll react as required. In the U.S., increasing new home construction and improved sales of existing homes provides a positive outlook for future flooring growth. In Europe, soft market conditions due to economic uncertainty and changes in exchange rates are anticipated to be a headwind. Based on these factors, our guidance for the fourth quarter is $0.89 to $0.98 per share, excluding any restructuring costs. Mohawk's strong financial position allowed us to enter an agreement to acquire Pergo, which will benefit our worldwide laminate business. We are well positioned to invest in other opportunities as they arise. We continue to execute our long-term strategy of product innovation, cost reduction, asset maximization and geographic expansion. Each of our businesses is well situated to benefit from the improvements in the U.S. remodeling and construction category which remain substantially below their peak levels. Our organization is focused on bringing value to our customers, while maximizing our results. With that, we'll be glad to take questions.

[Operator Instructions] Your first question comes from the line of Stephen Kim with Barclays.

Frank, I was glad you hear you talk about that amortization. We've been looking for that for a while. My first question, I did want to talk about Unilin and Pergo. I guess, specifically I wanted to see if you could give a little more clarity around the -- what kind of accretion we might see or perhaps coming at it from a perspective of what multiples you may have paid on an EBITDA basis or an EBIT basis would be helpful.

The price was somewhere around 6x EBITDA, but they were depressed earnings level. We expect to improve their results with synergies that we expect to have across the whole businesses. The Pergo business is complementary to our business because we're both going after the mid- to high-end of the premium market of laminate, both in the U.S., as well as in Europe. The sales distribution is incremental to ours, a combination of the design and performance features that both businesses have, we expect to enhance our product portfolio. We see significant potential during the near-term to optimize the manufacturing, both in the U.S., as well as Europe. And then there's also additional opportunity to leverage some of their patents and our licensing knowledge, so we think it's good for the company long term.

That's great. That's good color. The second question I wanted to ask you about relates to your Mohawk division, specifically, in the U.S., you were referring to the home center channel having some transition and some timing issues related to product transitions. Could you be a little more specific there? And help us understand what sort of happened in the quarter. And when you say timing like that, it makes one think that perhaps you might see a rebound in the fourth quarter to sort of make up what was lost in this quarter. Is that the right way that we should be thinking about that?

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

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

Just on the Pergo, what was there? Can you be specific with respect to synergy expectations?

We've just recently signed the documents and the agreement. We have meetings going on and it's going to be a while before we have details of all the changes. We have a long list of opportunities relating to the things that I talked about before. But some of it's got to do with the 2 brands and how we manage the brands in the marketplace. We think that there's going to be -- both companies are driven by innovation, and we think that both combined are stronger than they were before. The plants are very similar. We think that we have some knowledge that can help them and they help us. On the other hand, they have been starved for capital for a while and we see that as being helpful to both. We believe there's ways of optimizing the plant utilizations between both plants and use the plants to manufacture different brands. It also helps vertically integrate Pergo and we think there's opportunities to improve the administrative functions. We're not going to do all this on day one, though.

Okay. You're still waiting to get your arms around sort of the quantifications of the synergies?

David, we still expect it to be slightly accretive in the first year. You're going to start to move through some of those synergies.

Jeff, you've made a lot of progress in terms of penetrating the home center channel in North America with your laminate product and I'm just wondering if there's cannibalization concerns here?

Well, the Pergo products in the home center channel are in a branded category. They're separate from the rest. We see there's opportunity to do it. Again, though, the market share will go up so it could limit the long-term growth potential because we can't take it from Pergo anymore.

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

We haven't broken out that level of detail, David.

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

That's about the capacity of the plant. There's no import to support it.

The next question comes from the line of Dan Oppenheim with Credit Suisse. Daniel Oppenheim - Crédit Suisse AG, Research Division: What are you doing in terms of the introduction of Embrace there? I think SmartStrand has been great in terms of the higher price point in carpet and helping the margins also getting away from commodities. When you think about Embrace, how much room do you think there is in sort of the higher price point market in carpet and how deep that segment is for the customer there?

I think that what we've started with, the beginning of the year with what we called silk. We have changed the premium part of the market place. What's going on at retail is that softness is becoming the rationale for buying higher valued products. And my expectations would be that by a year or so from now, a majority of the premium products the marketplace will have that. By us leading with silk with higher -- it has more features to help the customer and we've come back with Embrace, which we're going to retail at a price point slightly under it with less features, we think that we're positioned to maximize our part of the marketplace. And in both cases, we believe we have -- we're leading the entrance of the products, which is a good place to be. The market is still going to change rapidly. Daniel Oppenheim - Crédit Suisse AG, Research Division: I'm just wondering how much of your -- of the carpet sales do you see that segment going, that portion of the carpet sales going to?

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

Your next question comes from the line of Michael Rehaut with JPMorgan. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: First question on the Mohawk segment. Obviously, this year and the last couple of quarters specifically from a margin standpoint, you've been able to show some nice improvement. Just trying to get a sense on a year-over-year basis, how much of the improvement year-over-year. I mean, you kind of broke out, for example, this quarter, mix in price kind of offset volume. Out of 180 basis points, is the mix in price roughly equal positive contributors? And how do you see that flowing through on any type of incremental basis over the next year?

I think most of the pricing, there was pricing in it, but most of the pricing was to cover material inflation is it. So the majority of the improvement in margin came from productivity increases, mix changes in the marketplace, improvements in operations. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: And going forward, I mean, that mix, would you think that you could get another 50 or 100 bps lift into '13?

Our goal is to keep raising the margins going forward and to keep improving it. We're not satisfied the margins in the segment. We think that through mix and continued productivity, we can keep improving it. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Okay. And also on the product transition in home centers in Mohawk, I believe you said, Jeff, that you expect some of it to come back in 4Q and some in the first quarter as well. But can you just give us a sense of, on a revenue, on a dollars basis, what impact that was to sales growth in 3Q?

We don't break it down to that detail level but it did impact the business and we expect to be back in line or better with the industry. We think that all of things that we're doing in the high-end part of marketplace, in pushing products there -- across the business, we think, we've improved the execution of our sales force and we think the business and the economy is going to help us a little bit. I think we're well positioned.

Your next question comes from the line of Ken Zener with KeyBanc.

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

Let me start with the inventory thing. The inventory, what happened is we go into the period and we estimate the sales and that we align the production to meet the sales of that period. And what happened is what we estimated Salamanca to produce, we were able to achieve it coming up faster so we've made some adjustments in the inventory to make up for those. And so there were some shut down costs related to that. Frank, give them some numbers.

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

And now is that $2 million start up, that's, obviously in the reported EBIT and then was there an associated -- is that also including the inventory impact?

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

Above that?

Yes.

Will that carry into 4Q?

No, I don't think so.

Okay. Again, very nice -- Pergo, what a nice fit for you guys. Considering the margin mix you're seeing in carpets, an area which -- very good industry structure there for the industry, how large, given your product innovation, a, how large is that kind of that high-end of the market if you want to think about in terms of what volume and dollars, I would appreciate that or percentage of volume, a. And then b, what you're doing with silk because you learned how to manage the Triexta material. How do you think about that in terms of sustainability versus just being more commoditized over time?

The first question was?

How much of the market is high end in the carpet.

The high end in Pergo...

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

In carpets.

Yes, yes. That's where you're, obviously, getting good mix out of.

Well, listen, we have so many different product categories in markets. I don't remember all the numbers. If you'll call Frank, he'll get you an estimate of the percentage of the business. But we believe that the long-term piece is that these will become fundamental parts of the marketplace, that silk will be the premium end and that the Embrace products will be here. We're leading the market, we're getting to market faster than the rest so we think we'll be able to improve our positions. Over time, the industry is going to move there as fast as it can and then the softness that's been going over the last 3 or 4 years, getting softer and softer, so this is the next step in it. We think the industry will try to catch up with other alternatives over the next year. We think it's sustainable. There will be more competition in the marketplace a year from now than there is today.

The next question comes from the line of John Baugh with Stifel, Nicolaus. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Could you comment on are there -- first of all, any capacity constraint issues relating to SmartStrand or silk? And then some thoughts, if you have any, towards the SG&A component as we move into 2013, do you anticipate it going up, going up less than sales? Any color on that?

Constraints, we don't see any constraints on raw materials. We continue to add extrusion capacity in to support the business. During the downturn, significant parts of the industry changed raw material types which it used for the excess capacity the industry had and we had in [indiscernible], as well as well in polypropylene. There is limited excess capacity in the industry going forward because we obsoleted it so much of it during the downturn. And due to consumer preferences changing, the valuations of different products.

On the SG&A, John, this year, as we've said, when we get to the end of the year, we expect the full year to be, in dollars, flat with where we were a year ago. Going into next year, depending on what you use as your estimate for sales, I mean, it's not going to go up at the same rate of sales. But it would be hard to keep it flat, if you assume some improvement in the top line next year. And we said though, as you know, we are laser focused on reducing SG&A. We got lean initiatives across the organization. We've got every function looking at the different activities and how they can improve the activities and reduce cost. So we'll continue to be focused on it but there probably would be some increases as we go into next year with sales going up.

This year, you're not seeing all the activity that actually happen. The inflation in our SG&A, which occurs from -- on downtown, we have 200-and-something warehouses that typically go up, a few presenting all the personnel pieces. We have absorbed those and then we increased significantly the amount of new product introductions at all our different divisions. And so we took the cost down and supplemented them with what we believe are investments in new areas which are going to help the long term. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Just quickly on Pergo, could you comment at all whether there's any sales trend there up or down going into this merger and maybe FX adjusted? And then also on your Western European business, which is, obviously, down year-over-year, is there a light at the end of the tunnel or a slowing of the rate of decline year-over-year for your Western European revenue?

The Pergo business has been -- the trend lines that are less than positive, they've been taking actions to improve the profitability of the business and change the mix of the products. So they have improved some of the margins over the time, they're still not where they need to be. In Western Europe, if you just segment out our historical business and take out all the new actions, I would guess that Western Europe is probably down about 10%, if you take it on an apples-to-apples basis in the different product categories and pieces in all the positive initiatives out of it, we don't see any trends that are going to change it tomorrow.

The compares don't get easier at some point?

I mean, if it quits declining, it will get easier.

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

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

If you assume that they're about $750,000 this year, that's about a 15% increase in that category, it makes up about 20% of the Mohawk business, maybe a little less now, I don't know. Could be less than that now with where it went to. So there's growth in it. The big opportunity is in consumer confidence, and housing prices reaching a point where people start remodeling the pieces in addition to that. The remodeling side really hasn't done what we had anticipated. We still believe that people want to live in nice places and as they get more confident about the prices of home stabilizing, we expect improvement in the remodeling piece, too.

And we think there's a good bit of pent-up demand on the remodeling side. If you look at the carpet industry, it's been down for 5 or 6 years and people just haven't been replacing carpets. As Jeff said, once the economy starts to show some improvement, consumers become more confident and start spending again, we should see a nice impact from that.

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

Got it. So you have a mixed biased towards -- on Dal-Tile specifically, you guys had a very strong quarter saleswise. Given current trends, repair and remodel spending is a bit softness as you noted, what do you think is driving that big move up? Is just the fact that you're gaining steam in Mexico and you have momentum there? Or what's the core driver of the better performance there?

Well, part of it as we just talked about, they have a larger part of the new construction business. The new construction business is up about the same 15% we're talking about next year. We have a broad product offering, a differentiated product line. We have the distribution strength in the marketplace that combined with -- we have the technology and design over the last few years has moved to new digital printing that we lead the industry in what we call Reveal technology in style and design technology taking benefit of those things. And so the combination of all those things are improving our U.S. business. The Mexican business is growing rapidly but from a small base. So it can't impact the business as much.

Your next question comes from the line of Dennis McGill with Zelman & Associates. Dennis McGill - Zelman & Associates, LLC: First question, just around the hardwood business, I think you mentioned that product mix was a drag in the quarter. Can you just talk big picture about what you're seeing in price and mix and maybe separate those 2 within the industry and just talk about the drivers there as far as what's causing that both on the quarter and how you think about that playing out as residential construction recovers?

The wood business is highly impacted by the new construction business. A lot of the things we're talking about new construction, remember that the flooring is one of the last things to go in new home constructions. So what happened through the year in starts, we put in, in the last month of the building process. So it's still flowing in. We think that wood segment will be positively impacted by it because they're so -- such a -- wood has the highest percentage in new home construction than any of the other product categories. There is some of changes -- the raw material side of the wood business as it picks up, a huge part of the infrastructure to cut the trees down and cut them up was taken out during this downturn. So as its picked up, there's pressure on pricing. And so the solid wood side, which has the most -- the largest use of the wood per square-foot there's pressure on it, which is why we've announced a price increase to cover the prices in it as we go forward. Dennis McGill - Zelman & Associates, LLC: So looking back, realizing you have a price increase announced and coming, have you seen price pressure in the business within the builder channel or is it just the mix between builder and remodel that's driving that?

There's pricing pressure in all marketplaces today with the industry still at lower levels, we're not past the pricing pressure, if anything. The builder side of it, given the pressure on the building prices, they're trying to buy more moderately priced products. In our business, we're trying to keep improving the cost structures of what we have. If we can get a little more volume through the place, we'll do quite well. Dennis McGill - Zelman & Associates, LLC: Okay. Frank, as we fold in Pergo next year, can you just give us a little bit more detail on what the D&A will look like once that closed? And then maybe just clarify the revenue side. Is the $320 million a good number to assume for 2012 or is that lower year-over-year?

Well, on the D&A said, we're not prepared. We're still kind of going through that process of assigning the values in purchase accounting, so I'm not prepared to give you a number on that yet. And on the revenue side, think we said there about $320 million and they've had some headwinds here over the last 9 months or so. So it's probably going to be down at least initially a little bit from that. Dennis McGill - Zelman & Associates, LLC: Okay. And then just one last one. Within the carpet, I think the last couple of quarters, there's just been some issues with both mass merchants and home centers this quarter. If you excluded those customers, what would volumes look like year-over-year within the carpet segment just roughly?

Sorry, I'm not sure what you want to...

I think your question is if we excluded rug business, what would the volumes look like, is that it? Dennis McGill - Zelman & Associates, LLC: Well, but then you also have the home center business this quarter. I guess, if you just exclude the mass merchants and home centers in total, what would volumes look like?

Well, I mean, if you exclude the 2 pieces, those 2 pieces, the balance of the business would have been up by -- several percent higher than the average of the business.

Your next question comes from the line from Sam Darkatsh with Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: A couple of questions. Most of my questions have been asked and answered. Specific to pricing, I know you're talking about wood and ceramic price increases having gone through, are you seeing input cost pressures on the carpet side? I think Honeywell mentioned raising prices on caprolactam and nylon 6. I was wondering whether that was becoming more pervasive to the point where you'd require some pricing increases there incrementally?

I think we're a little early in the point. So far, the material costs haven't changed significantly. There are signs of potential cost pressures. But we're not sure what will happen at this point. Our raw materials are influenced by the chemical supply and demand, as well as oil prices and we're watching it. At this point, we haven't announced anything. Depending upon what happens, we'll adjust if necessary. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And my last question. Frank, I think you were answering a prior question regarding Dal-Tile and the impact of the Mexican business being small because it's coming from a small base. Could then we assume then that the U.S. growth in Dal-Tile roughly approximates the 9% growth that you saw in this segment?

A little less, but not... Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Not appreciably less?

Yes.

Your next question comes from the line of Susan Maklari with UBS.

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

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

And we think there's a good many opportunities for us to stay focused on flooring.

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

As you would expect, the places we look at, primarily are the ones that are growing higher. So if you go around the world, you have Eastern Europe, you have Russia, China, Australia, Brazil and then India is a little difficult for people to figure out. But we would have interest under the right set of circumstances. It doesn't mean we won't look at other places either. I think Mexico is surprising, how it sort of separated itself from the U.S. and I think Mexico has a lot of potential in the future.

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

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

There may be a little confusion. In what we call our insulation piece, sometimes -- we have a roofing business, which are insulated roofing panels and that goes into new construction remodeling went down under pressure and it's mostly a regional business in the Benelux area. We then started about 3 years ago with a new business that we called -- with a product we called insulation boards. And those insulation boards are used to help meet European energy expectations. That industry is growing double digits and we basically started with no business and with similar technologies that we have and we built a nice niche business. The plant that we built has about $100 million worth of capacity in it. We expanded it to that. Lately, we're running it and so now we're looking for the next step, which is broadening. We have to put up more capacity. We have started building a site in France. We are presently selling into that area from where we are, and we expect it to be up and running the end of next year.

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

Yes.

Okay. And as you look forward in that businesses is that share gain, specifically in the new business, is that going to continue or is there a limit you're going to reach here near-term?

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

EUR 1 billion.

EUR 1 billion. That's growing 10% or more. So we think there's a significant opportunity in it. At the other side, we're not the only competitor in it, there are other people are trying to grow at the same time.

If we exclude those 2 businesses out with the Unilin segment numbers on constant currency, would they be higher than what you reported?

North America is up. If you excluded those 2, trying to do the math here in my head, yes, the Unilin total, total Unilin business would be higher.

Your next question comes from the line of Mike Wood with Macquarie.

This is Adam for Mike. Just a quick question in Unilin. How much room do you guys have left in the DIY expansion? And when do you start anniversary-ing this, if that's kind of the way to look at it?

We talk about it like it's one thing. But what happens is you have DIY, which is called home centers in the U.S. and there's DIY in Europe, which is smaller, more regional businesses, and we actually have different approaches in both continents. In the U.S., if you go back 2 or 3 years, we had, I think, probably close to 0 being sold as laminate through the home centers and the home center channel controls somewhere around 50% of that category of product. But we started building the business in it. The Pergo acquisition, which is good for us, is that their primary sales are through those channels and so it complements where we were going, just gets us there faster. In the European side of the business, we have a different approach where we are putting together -- we are adding to most of them a premium branded segment on top of it but we're doing it with limited distribution strategy so it fits us and them and gives them a differentiated feature and 2 different strategies, both of which have been working so far.

[Operator Instructions] Your next question comes from the line of Eric Bosshard with Cleveland Research.

I was just wondering in the Unilin segment, with a growth of 9%, ex currency, what's the sustainability of the benefits in Russia, in the U.S., in Australia offsetting the weaker euro?

Yes, the Australian acquisition, we're anniversary-ing this quarter so we won't see the same kind of benefit next quarter, next year as we had in the past for that. And the others, Russia continues to grow. We continue to take market share. Insulation continues to grow, so we should see continued help from both of those as we move forward, as well as DIY growth.

And then we've said before that the Western European businesses are down around 10%, give or take. And we don't know if it's bottomed out or it will keep going down and work more.

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

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

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