Mohawk Industries (MHK)

Q4 2011 Earnings Call

February 24, 2012 11:00 am ET

Executives

Jeff Lorberbaum - Chairman and Chief Executive Officer

Frank H. Boykin - Chief Financial Officer and Vice President of Finance

Analysts

Michael Rehaut - JP Morgan Chase & Co, Research Division

Susan Maklari - UBS Investment Bank, Research Division

Jarrod Rapalje - Longbow Research LLC

Daniel Oppenheim - Crédit Suisse AG, Research Division

Dennis McGill - Zelman & Associates, Research Division

John Coyle

Steven Bachman - RBC Capital Markets, LLC, Research Division

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Unknown Analyst

Tom Mahoney

Presentation

Operator

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Good morning. My name is Kathy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded, today, February 24, 2012. Thank you. I would now like to introduce Jeff Lorberbaum, Chairman and CEO. Mr. Lorberbaum, you may begin your conference.

Jeff Lorberbaum

Good morning. Thank you for joining our fourth quarter 2011 conference call. Joining me on this call is Frank Boykin, our CFO, who'll review our Safe Harbor statement and later our financial results.

Frank H. 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 a 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 Lorberbaum

Thank you, Frank. Our fourth quarter earnings per share were $0.62 as reported or $0.72 excluding unusual items, an increase of 9% over 2010. Volume and price increases, as well as cost reductions, contributed to our earnings improvement over last year. Sales grew by 9% as reported or 10% on a local basis with all segments showing sales growth over the last 3 quarters. Price increases across many product categories are being implemented in the first quarter to offset higher costs. Excluding unusual items, we reduced SG&A to 18.9% of sales, holding spending flat with last year by overcoming inflation and specific growth investments.

Our leverage is at historically low levels with a net debt to adjusted EBITDA at 2x, and we have liquidity of more than $900 million available to redeem our 2012 bonds and provide flexibility for future opportunities. In the U.S., both our residential and commercial categories expanded, but the commercial category continued to expand at a faster rate than residential. Builder sentiment rose in January for the fourth consecutive month. In 2012, forecasts for existing home sales expect growth of 5% and for new home starts improving about 15%. The trend has been improving for both U.S. consumer confidence and employment. Our long-term outlook supports a rebound from the present low level -- sales levels experienced by the flooring industry with future growth projected to outpace the overall economy. Frank, would you give the financial report, please?

Frank H. Boykin

Sure. Thank you, Jeff, and good morning, everyone. We ended the fourth quarter with net sales of $1.378 billion, 9% up over last year. Sales increased in all segments with both residential and commercial gaining over last year. Our gross margin as a percent of sales was 24.3%, down from last year's 27.1%. Raw material inflation impacted us during the quarter, with price increases that were going to be implemented in the first quarter of 2012 to offset the inflation.

SG&A was $269 million or 19.5% of sales as reported. It included noncash charges for an estimated change -- included noncash charges for an estimated change in lease accounting and restructuring activities. Excluding the charges, the fourth quarter SG&A improved by 140 basis points over last year. Our team did an excellent job of managing SG&A. Our full year dollars were actually flat with last year. We were able to offset inflation with productivity improvements. Our emphasis on cost control continues to benefit the business. Charges included $8 million for restructuring and $6 million for a lease accounting change. Dal-Tile results included $3 million of the charges with the balance going into the Mohawk segment. $5 million of the charges were included in cost of goods sold and the remaining $9 million in SG&A. Our operating margin excluding charges was 5.8% compared to 6.9% last year. Interest expense was $24 million, an improvement over last year's $30 million. We had better rates and a new bank facility that resulted in a lower interest expense. We're estimating our 2012 interest expense to be approximately $90 million. Income tax rate excluding charges was 9% during the quarter. We're estimating our full year rate in 2012 to be 20%. Earnings per share excluding charges were $0.72 compared to $0.66 last year, representing a 9% improvement.

If we turn to the segments, the Mohawk segment sales ended the quarter at $724 million or a 9% improvement. We had a strong fourth quarter this year with improvement in both volume and price. Our SmartStrand and polyester products both performed well. Operating margin excluding charges was 5.7%. The margin was down as a result of higher raw material cost, which impacted our results. We've got productivity improvements that partially offset these higher cost.

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