Mohawak Industries CEO Discusses Q3 2010 Results - Earnings Call Transcript
Mohawk Industries, Inc. (
)
Q3 2010 Earnings Call
November 5, 2010 11:00 am ET
Executives
Jeff Lorberbaum - Chairman and CEO
Frank Boykin - CFO
Analysts
Dan Oppenheim - Credit Suisse
David MacGregor - Longbow Research
Michael Rehaut - JPMorgan
Sam Darkatsh - Raymond James
Eric Bosshard - Cleveland Research Company
Susan Maklari - UBS
Stephen East - Ticonderoga Securities
Laura Champine - Cowen & Company
Dennis McGill - Zelman & Associates
Keith Hughes - SunTrust
John Baugh - Stifel Nicolaus
Joshua Pollard - Goldman Sachs
Carl Reichardt - Wells Fargo Securities
Bob Wetenhall - RBC
Alex Mitchell - Scopus Asset Management
Presentation
Operator
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Mohawk Industries, Inc. Q3 2009 Earnings Call Transcript
Good Morning. At this time, I would like to welcome everyone to the Mohawk Industries third quarter earnings conference call. (Operator Instructions)
I would now like to introduce Jeff Lorberbaum. Mr. Lorberbaum, you may begin.
Jeff Lorberbaum
Good morning to the Mohawk third quarter 2010 earnings call. Thank you for joining us.
With me on the call is Frank Boykin, our CFO, who will review our Safe Harbor statement and later, the financial results. Frank.
Frank Boykin
I would like to remind everyone that our press release and statements we make on this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which is subject to various risks and uncertainties, including but not limited to, those 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 press release at the Investor Information section of our website for a reconciliation of any non-GAAP to GAAP amounts. Jeff.
Jeff Lorberbaum
Thank you. Our third quarter earnings per share of $0.74 is in line with our expectations, with sales of $1.3 billion, down 5% from 2009 or 4% with a constant exchange rate.
Our operating margin of 6.8%, excluding unusual items, improved from the prior year. We have a strong financial position with free cash flow of $87 million and an improving net debt to EBITDA ratio at 2.0.
The industry slowdown that began this second quarter continued into the third quarter and affected our revenue growth. Although the short term industry conditions are soft and difficult to predict, the long term future for both the economy and the industry remains good.
The U.S. economy has bottomed, and is expected to continue growing at 2% to 3%. Consumer spending is expected to improve, with higher employment levels and longer work weeks. Consumers continue to defer large expenditures on their homes.
Credit markets and availability are better, and the consumers' balance sheet is improving. The outlook next year is for both new housing remodeling to grow, while commercial investments recover.
Our third quarter sales were down from last year, while our European businesses grew in most categories. Our U.S. residential sales declined, as spending remained slow. Commercial markets appear to have bottomed, with business remodeling starting to gain some traction.
Frank, would you give our financial report please?
Frank Boykin
Good morning everyone. As Jeff had mentioned, net sales came in at $1,310,000, 5% down from last year or 4% down on a constant exchange rate basis.
Our U.S. residential sales were soft, with commercial approaching a bottom. We are seeing some improvement in the commercial replacement business. And our European business continues to grow, although at a slower rate.
Our gross margin came in at 26.3%, which compares to 26.7% last year. We had higher raw material cost with lower volumes impacting that, and they were partially offset by price increases and restructuring improvements.
Our SG&A expenses, which is a bright spot came in at $260 million or 19.8% of net sales. Compared to 21.8% last year, SG&A dollars are down 14% from last year and improved 200 basis points over last year as a percent of net sales. Overall, our spend was well controlled, and the many initiatives that we put in place over the last year-and-a-half have had a positive impact.
We had $3 million of restructuring charges during the quarter with about $1 million in each segment of restructuring charges. Operating income, excluding charges, was $89 million or 6.8% of net sales.
The increase in operating margin was driven by SG&A actions and improvements in manufacturing productivity and quality. Interest expense at $30 million was down from last year due to the purchase of $200 million of bonds earlier in the year, and partially offset by increased pricing and fees for our bank facility we put in place earlier.
Other income includes about $6 million in a U.S. Customs refund. This is for excess duty charged on Mexican tile that we shipped into the U.S. where Customs improperly classified the tile. We estimate that possibly there would be an additional $10 million to $20 million of refunds, but we can't be certain whether we will receive that or when we will receive that.
Our income tax effective rate was 13% during the quarter, and we are estimating that the rate for the fourth quarter will be in the mid-20% range. Our earnings per share, excluding unusual items, was $0.74 a share, up 16% from last year. This is the same as our GAAP earnings per share.
The items after tax all net to zero and include a $4 million Customs benefit, offset by charges of $2.3 million for restructuring and $1.7 million for one-time purchase accounting related to our Chinese investment.
If we jump to the segment information, the Mohawk segment sales came in at $713 million, down about 6% from last year. The overall decrease was driven by softness in the residential category, while the commercial rate of decline is improving with positive modular growth.
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