Mohawk Industries, Inc. Q2 2010 Earnings Call Transcript

Mohawk Industries, Inc. Q2 2010 Earnings Call Transcript
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Mohawk Industries, Inc. (MHK)

Q2 2010 Earnings Call Transcript

August 6, 2010 11:00 am ET

Executives

Jeff Lorberbaum – Chairman and CEO

Frank Boykin – CFO

Analysts

David MacGregor – Longbow Research

Mike Dahl – Credit Suisse

Eric Bosshard – Cleveland Research

Susan Maklari – UBS

Michael Rehaut – JPMorgan

Sam Darkatsh – Raymond James

Dennis McGill – Zelman & Associates

Laura Champine – Cowen & Co.

John Baugh – Stifel Nicolaus

Stephen East – Ticonderoga Securities

Keith Hughes – SunTrust

Presentation

Operator

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Previous Statements by MHK
» Mohawk Industries, Inc. Q1 2010 Earnings Call Transcript
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» Mohawk Industries, Inc. Q3 2009 Earnings Call Transcript

Good Morning. My name is Sean and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, August 6, 2010. Thank you.

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

Jeff Lorberbaum

Thank you. Good morning and thank you for joining our second quarter 2010 conference call. With me I have Frank Boykin, our CFO, who will review our Safe Harbor statement and the financial results.

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 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 Web site for a reconciliation of any non-GAAP to GAAP amounts. Jeff?

Jeff Lorberbaum

Thanks, Frank. I’m saddened to announce that our Board member Larry McCurdy passed away Tuesday. Larry fought valiantly through his illness and his courage in a face of adversity reminded each of us of the true depth of his character. Larry served on Mohawk’s Board since we went public and he was a key contributor to our growth over the past two decades. He brought an intellect that was keen and helped us with find innovative solutions to the challenges we faced. Our thoughts are with his family and we will miss his good counsel and friendship.

Our second quarter earnings per share of $0.99 were stronger than we had anticipated. Earnings per share were $0.77 excluding non-reoccurring tax benefits, redemption premiums on our bonds and restructuring activities. Our earnings were better due to higher sales in Unilin and proven product mix in Mohawk, price increases and cost reduction programs.

The second quarter sales were $1.4 billion, which were flat with 2009 net sales or a 1% increase on a constant exchange rate. Our operating margin has improved to an adjusted 6.8% which is the highest we’ve achieved in two years. We have a financial position, with free cash flow of $111 million during the quarter and cash of $343 million with an improving debt-to-EBITDA ratio of 2.1 times.

GDP in the U.S. is expected to grow in the second half and private sector employment is increasing. At the end of the second quarter, consumer spending slowed across most categories along with our business. In the second half of the year, residential remodeling market should expand driven by higher disposable income and low interest rates. New home construction remains low but is higher than last year.

The European economy is gaining momentum with positive industry reports, higher consumer confidence and an improved banking outlook.

Our second quarter sales were flat compared to the prior year as residential business improved. Our European business grew in most geographies and product categories with volumes increasing. Commercial markets are declining at a slower rate with expectations of a bottom this year.

In July, we expanded our international presence with a minority investment of $80 million in Sanfi. In China, Sanfi is one of the top 10 ceramic tile manufacturers and provides entry into a large and fast growing Asian market.

Together Sanfi and Mohawk have extensive opportunities to increase market share in China by broadening our product offerings, providing leading style and innovation, improving efficiencies, marketing and distribution capabilities. Sanfi will also supply ceramic tile to Mohawk’s North American flooring business. In 2010, Mohawk expects its investment to be slightly accretive excluding one-time accounting charges.

Frank, could you please give our financial report?

Frank Boykin

Certainly, Jeff. As Jeff had mentioned, our sales of $1.4 billion were flat with last year or on a constant exchange rate up 1%. All of our segments improved from the first quarter and year-over-year comparisons. Unilin’s performance was exceptionally strong and we benefited from carpet price increases. Both the Home Center channel and our Mexican business grew during the second quarter.

Our gross margin at 26.8% was up slightly from last year. However, when we exclude charges, gross margin was 27.1% compared to about 26.9%, so flat to last year. Margin was impacted by price increases, which partially offset raw material increases.

Raw materials in the second quarter of last year, 2009, were at the trough and are much higher now. Restructuring activities that we’ve been putting in place have also benefited our results.

SG&A of $285 million was 20.4% of sales. We improved our SG&A both in dollars and as a percentage of net sales.

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