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Mohawk Industries (MHK)

Q4 2010 Earnings Call

February 23, 2011 11:00 am ET


Frank Boykin - Chief Financial Officer and Vice President of Finance

Jeff Lorberbaum - Chairman and Chief Executive Officer


Kalpesh Patel - Jefferies & Company, Inc.

John Fox - Fenimore Asset Management

John Baugh

David Goldberg - UBS Investment Bank

Kathryn Thompson - Avondale Partners

David S. MacGregor

Bob Wettenhall - Royal Bank of Canada

Dennis McGill - Zelman & Associates

Jason Marcus

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Keith Hughes - SunTrust Robinson Humphrey, Inc.

Eric Bosshard - Cleveland Research



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Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industry's Fourth Quarter Earnings Conference Call.

[Operator Instructions]

I would now like to introduce Jeff Lorberbaum, Chairman and CEO. Mr. Lorberbaum, you may begin your conference.

Jeff Lorberbaum

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

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 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 our press release at the Investor Information section of our website for a reconciliation of any non-GAAP to GAAP amounts.

Jeff Lorberbaum

Thanks, Frank. Our fourth quarter earnings per share of $0.66 exceeded our expectations. Sales, as reported in the period, were 6% lower than last year but were approximately 2% ahead after equalizing the number of days and exchange rates. Our European revenues continue to grow, with U.S. residential business stabilizing and commercial remodeling beginning to improve. Our operating margin of 6.8% improved from last year due to enhanced manufacturing efficiencies, reduced costs, improved process consistencies despite rising raw material costs. Our cash position liquidity remain strong, with over $500 million available after we retired $300 million of bonds in January 2011. Our net debt to EBITDA ratio is 2x, and our net debt to total capitalization ratio is 26%, positioning us well for additional opportunities.

U.S. industry decline, experienced over the past few years, appeared to have reached the bottom with some market showing signs of improvement. The predicted 3.5% growth of the U.S. economy this year reflect sustained improvement and consumer confidence and increased business spending. Although U.S. housing activity remains low, forecast anticipate improvement in home sales as we move to a normalized level. Commercial remodeling is already growing, as the business investment increases with higher economic growth. Commercial construction should pick up as indicated by the Architectural Billing Index, which is at its highest level in three years.

Frank, could you give the financial report?

Frank Boykin

Thank you, Jeff. Good morning, everyone. Net sales, as reported were $1.262 billion, down 6% from last year. Our fourth quarter sales in 2010 had fewer days than last year, resulting in a 7% impact on sales. As Jeff reported, sales were up 2% using constant days and a constant exchange rate base. European business continued top line growth, and we had stronger U.S. commercial remodel end market. The U.S. residential business is at the bottom and should improve. Our gross margin was 27% and flat, compared to last year, after adjusting last year for restructuring charges. We were able to offset the higher raw materials with manufacturing improvements.

The SG&A was $256 million, or 20% of net sales. SG&A declined after adjusting last year for restructuring charges by over 10%. All segments are reducing costs while improving their service. Our fourth quarter SG&A is the lowest it's been, in dollars, since 2005.

Operating income was $86 million or 6.8%, which compares to 5.7% last year, after adjusting for restructuring charges. We had no restructuring charges in the fourth quarter of this year. Operating income is up over 10% compared to last year, as our strategies across the company continue to benefit us. Interest expense was $30 million. It's down $5 million from last year's result of the $200 million bond tender that we did earlier this year and lower rates that we're able to negotiate on our bank revolver. We anticipate interest expense to run between $28 million and $29 million each quarter in 2011. The income tax rate for the fourth quarter was 19%. We expect the rate to be in the low-20% range during 2011.

Earnings per share were $0.66, up 18% compared to last year's earnings per share, excluding charges. If we move to the segments, the Mohawk segment sales, as reported were $667 million, down 10% from last year. Sales were down 3% using a constant number of days. The commercial remodel business is improving as residential is still soft. Our operating income was $49 million or 7.3%, which compares to 4.9% last year. Our margin percent was the highest since before the industry declined several years ago. The margin improvement was driven by manufacturing improvements and cost reductions throughout the segment.

Dal-Tile sales, as reported, were $317 million or down 4%. Sales were up 4% using a constant number of days and a constant exchange rate. Our commercial and Mexican businesses both performed well. This is the best sales performance since 2006, and year-over-year improvement for Dal-Tile. Our operating income was $20 million, or 6.3% of net sales. We were able to hold the margins flat in our year-over-year comparisons. The Unilin sales came in at $297 million, and were flat as reported. However, sales were up 14% using constant days and exchange rate. All regions grew with the Northern European, Russian and Asian regions growing the strongest. Operating income was $21 million or 7% of net sales, down from last year at 8.5%. Our raw material inflation in the segment was a headwind, and we're continuing to increase prices to offset it in the first quarter.

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