Mohawk Industries Management Discusses Q2 2012 Results - Earnings Call Transcript

Mohawk Industries (MHK)

Q2 2012 Earnings Call

August 03, 2012 11:00 am ET

Executives

Jeffrey S. Lorberbaum - Chairman and Chief Executive Officer

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

Analysts

Stephen Kim - Barclays Capital, Research Division

Mike Wood - Macquarie Research

David S. MacGregor - Longbow Research LLC

Eric Bosshard - Cleveland Research Company

Michael Rehaut - JP Morgan Chase & Co, Research Division

Susan Maklari - UBS Investment Bank, Research Division

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

Kathryn I. Thompson - Thompson Research Group, LLC.

Dennis McGill - Zelman & Associates, Research Division

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

Daniel Oppenheim - Crédit Suisse AG, Research Division

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

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Good morning. My name is Stephanie, 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. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded today, August 3, 2012. Thank you. I would now like to introduce Jeff Lorberbaum, CEO and Chairman of Mohawk Industries. Mr. Lorberbaum, you may begin your conference.

Jeffrey S. Lorberbaum

Good morning, and thank you for joining our second quarter 2012 conference call. Joining me on the call is Frank Boykin, our CFO, who will review our Safe Harbor statement and later, our financial results. Frank?

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 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?

Jeffrey S. Lorberbaum

Thank you, Frank. Our second quarter earnings per share were $1.06 as reported, or $1.14, an increase of 20% over 2011, excluding restructuring charges. Selling prices offsetting raw material inflation, productivity gains, product mix improvements and lower interest costs all contributed to our results.

Sales increased 2% on a constant exchange rate, with commercial sales continuing to outpace residential sales. We continue to control SG&A costs while increasing new product investments across all businesses.

During the quarter, we generated adjusted EBITDA of $187 million, free cash flow of $96 million and paid off $336 million of senior notes. U.S. commercial activity continues to expand as it has for some time.

The residential multifamily category is improving with the rising occupancy and additional construction projects. Residential new construction is rebounding from a low level as reflected by the National Association of Home Builders confidence index reaching its highest level in 5 years.

Residential remodeling continues to lag due to concerns by consumers about the general economy and compressed housing prices. As the second period progressed, the flooring industry slowed along with retail in general.

Frank, could you give the financial report, please?

Frank H. Boykin

Yes. Thank you, Jeff. Good morning, everyone. Net sales for the quarter were $1,470,000,000, down 1% as reported or, as Jeff pointed out, up 2% on a constant exchange rate basis. Higher prices and better mix offset lower volumes in the quarter. Overall, commercial and sales outperformed residential.

Our gross profit margin was 26.4%, an improvement over the 25.9% last year and up 70 basis points over last year, excluding restructuring charges. SG&A was $281 million or 19.1% of sales. We held dollars flat to last year, with emphasis on cost control placed across all of our businesses. We're focusing on reviewing all functions to apply Lean principles throughout the business to continue to control cost.

Restructuring charges were $8 million. They included $7 million in the Mohawk segment and $1 million in the Unilin segment. We closed a yarn plant and consolidated other operations in our carpet segment, and then we've also announced an additional carpet plant closure for the third quarter.

Operating income was $116 million with a margin of 7.9%, excluding charges. Operating income improved 7% over last year as a result of our many efforts over the business. Interest expense was $19 million and improved $7 million over last year. These results was -- the improved results were from rating agency upgrades, as well as lower rates realized when our 2012 bonds were rolled over into the revolver. We expect similar results in the second half for our interest expense.

Other expense was down, primarily due to foreign exchange. Our income tax rate, excluding charges, was 18%. We expect a rate of 19% to 20% in the second half. Earnings per share, excluding charges, was $1.14 per share, which was a 20% improvement over last year.

If we jump to the segments, the Mohawk segment sales were $734 million, down 3% from last year. Carpet price increases implemented in the first quarter are holding up well, mix improving with more activity, and premium products also benefited our sales. Rug continues to be impacted by lower retail activity.

Operating income, excluding charges, was $45 million or 6.1% of sales and improved 110 basis points from higher pricing, better mix and productivity. In the Dal-Tile segment, sales were $404 million or up 7% over last year, 8% up if you look at it from a constant exchange rate basis. All categories and geographies performed well.

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