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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

Mohawk Industries, Inc. (MHK) Q3 2010 Earnings Call November 5, 2010 11:00 AM ET

Operator

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.

The operating margin excluding charges was 4.5%, up from last year's 3.2%. Margin improvement of 130 basis points over last year was supported by price increases and productivity improvements. In the Dal-Tile segment, our sales were $345 million, down about 5%. This decrease was primarily from the continued weak residential home starts as well as loss sales from the flood in Mexico.

Our operating margin excluding charges was 10.2%, which compares to 8.1% last year. Our Mexican tile plant has fully recovered from the July flood and is currently running at normal operating levels. We settle the $25 million insurance claim during the quarter, which reimbursed us for damage to property and equipment, and replaced profits from sales lost as a result of the flood.

Our third quarter results include the full effect of the insurance coverage, and put our operating profit dollars at the same level as if the flood had not occurred. Our revenues were lower due to loss sales, so our operating margin percent was higher than normal. Our loss profit for the period covered by insurance was approximately $5 million. Our operating margin would have been in the high-single digit range, had the flood not occurred.

In the Unilin segment, sales as reported were $277 million, down about 2%. However, on a constant exchange rate basis they were up about 6% with improvements in most regions outside of the U.S. Our operating margin excluding charges was about 9.2% versus 12.4% last year. The margin decline was impacted by higher raw materials and maintenance cost. Foreign exchange reduced margin by about $3 million this quarter.

If we turn to the balance sheet, cash ended up at $366 million and includes about $195 million in the U.S. with the balance in Europe. Receivables at $698 million had days outstanding of about 46 days, which is in line with the second quarter. Inventories at $996 million are up about $30 million from the second quarter.

About two-thirds of that increase relates to inventory purchase to cover the Mexican plant that was down from the storm, which recovered faster than we had anticipated. We expect to work through the towel inventory in the fourth quarter. The remaining one-third is related to foreign exchange and additional European inventory to support growth.

Our fixed assets at $1.7 billion included capital expenditures during the quarter of $39 million, but depreciation and amortization of $73 million. We're continuing to forecast CapEx spend for the year at $180 million, and depreciation and amortization at $300 million.

Our total long-term debt was $1.655 billion and net debt, net of cash $1.289 billion at the end of the quarter. Cash flow and liquidity remained good, free cash flow was $87 million and our total liquidity was $850 million at the end of the quarter, of which about $300 million will be used to pay down bonds in January of 2011.

We're estimating that we'll probably use about 150 in cash, and then 150 of the bank facility to take care of the bonds when they're due. Jeff?

Jeff Lorberbaum

All of our businesses were impacted by the soft industry conditions during the quarter. We reacted to this by reducing operating cost, implementing product promotions, introducing new products to satisfy market changes and continuing our international expansion strategies in Mexico, Russia and China.

The results of our cost containment and restructuring initiatives are reflected in the lowest SG&A expense recorded in over 12 quarters. Liquidity remains strong with $850 million available, including $350 million in cash. In our Mohawk segment we made progress improving our overall margins in operating performance for the 34% increase over the prior year.

However, some of this progress came at the expense of lower than anticipated sales revenues, which were down 6%. Our efforts to maintain our pricing position through two increases during challenging business conditions, led to lower sales results in residential carpet. During the last price increase, our more firm position on the increase led to some volume loss, to respond with adjusted prices on specific products and are using selective promotions to regain position. We secured additional customer commitment that will positively impact us next year.

Polyester filament products have grown faster than we anticipated, and we've responded by adding additional styles and price points. Production capacity has been expanded in our polyester and additional extrusion is being installed next year to support the trends.

In commercial, carpet tiles are growing faster at the expense of broad length. Our product line is being rebalanced to have a higher portion of carpet tile with greater styling and more price points to align with the trend. We are also adding additional sales resources to increase our market participation.

In commercial, we also have a greater share of the hospitality channel which has had a more dramatic contraction than the other channels. We are presently seeing improvement in most of the areas of commercial remodeling reducing our manufacturing administrative costs, increasing service levels, improving quality and introducing innovative products.

A new SmartStrand campaign using social networking and other media has begun using elephants at the Dallas Zoo to demonstrate the durability and ease in cleaning of our proprietary products. The extrusion expansion in South Carolina is progressing on schedule and we'll get production in the first quarter of 2011 to meet the changing demands of the market.

The Dal-Tile sales were down 5% due to the continuing softness in the ceramic markets and the impact of loss production in our Monterrey, Mexico facility. The reduction in purchases by customers and businesses which began in the second quarter has persisted. We've announced selective price increases for our ceramic products of 3% to 5% to cover increased transportation costs beginning in November.

As an alternative for customers who import tile we're offering limited high volume products shipped direct with lower freight, shorter lead times and reduced capital investments first as their alternatives.

We've dropped an added more products in the period to limit the impact of loss production from our Mexican facility. We increased outsourcing of tile to minimize supply disruptions to our customers. The plant recovered faster than we anticipated, increasing inventory levels which will be adjusted out in the fourth quarter.

New product introductions this fall are focused on residential remodeling and has enhanced merchandizing to maximize sales. Commercial ceramic sales appear to have reached a cyclical bottom with the health care, education and institutional channels outperforming. We've increased the number of large accounts specifying our commercial products for their projects around the country.

Many of our new introductions are utilizing our reveal image printing technology which creates more realistic and random visuals. We've expanded our tiles with surfaces that minimize bacterial growth for residential and kitchen and bath as well as for commercial applications. We've increased the distribution of our stone slabs to maximize our penetration in the market.

The Mexican tile industry is expected to grow about 3% this year and we're expanding our customer base and broadening our product line. A site in Mexico City has been selected for a new tile plant which will manufacture low-to-medium price ceramic for both the Mexican and U.S. markets. The plant should initiate production in 2012 and is located near our raw materials and the major markets.

Our manufacturing team continues to implement cost savings by increasing production speeds, improving productivity and utilizing more localized material. Our new warehouse management system which optimizes labor and proves efficiency was implemented in the period. The system will installed across the distribution network in the first half of 2011.

A hurricane in July caused the flash flood which completely shut down our ceramic plant in Monterrey, Mexico. The plant was repaired in the period and is operating at normal levels. The insurance claim for the damage and disruption was resolved during the quarter with proceeds compensating for damage, repair, lost sales and margin impact.

Our ceramic investment in China was completed during the period. We've begun to developing new products for both the Chinese and American markets. The Dal-Tile brand will be used in China for a high-end ceramic collection. The Foshan plant in the south is running near capacity, while the new plant in the north is still increasing its production.

The new plant expansion and revenues were slowed due to delays in the electrical infrastructure which has been completed now. A new tile line has been started up to provide premium tile for Dal-Tile distribution in the U.S. As anticipated, the Sanfi results were slightly accretive during the period, excluding one time charges for purchase accounting.

Unilin sales decreased 2% as reported, but increased 6% using a constant exchange rate. Business in Europe improved while conditions remained difficult in the U.S. markets. Margins declined in the quarter as prices lagged material costs, U.S. sales slowed and maintenance expense increased.

Presently, material costs appeared to have peaked and additional price increases have been announced. We anticipate our margins expanding next year with higher selling prices and material costs stabilizing.

In Europe, our flooring sales increased in most markets as well as Russia and Asia. Our wooden insulation panels increased in sales while our roofing systems remain weak. Our strategy of participating in the Home Centers channel by providing style and fashion is broadening our laminate distribution.

Our European wood sales including our premium Quick Step branded wood are growing. We're broadening our laminate customer base in Russia to support our new flooring plant which should be operational in mid-2011. Sales of our new insulation boards are rising and we are increasing production to satisfy the demand.

The building codes in Europe are requiring energy reductions, and the market for insulation boards should expand 15% to 20% annually. In the U.S., demand for laminate remains weak across all channels. We're offering targeted products to address the value needs in the market and stimulate demand.

Demand for our wood products has improved, and our wood product mix has increased. We're increasing our flooring sales to national retailers, while broadening our board sales to other industries. The plants are improving productivity and reducing expenses.

We're continuing to introduce innovative products in each category with unique features, including laminate with more realistic patterns, finishes and edge treatments, (clipped) wallboards, new surface technologies in wood as well as bamboo flooring.

The third quarter sales demand and raw material trends are expected to continue through the fourth quarter. Next year we anticipate increased sales growth, higher selling prices and margin improvement as we gain leverage from the changes we had implemented in our business. Our fourth quarter guidance for the earnings is $0.53 to $0.63 per share. The fourth quarter of this year includes four fewer days in the period compared to last year.

We've implemented significant changes in all segments, functions and levels of our business as we manage through the economic downturn. Our costs have been dramatically reduced. The processes have been redesigned. Advanced information systems have been employed. And our infrastructure is more efficient than any time in history. We've demonstrated the ability to adjust to a changing economy, national disasters, and a difficult competitive environment.

We're further expanding internationally with ceramic in Mexico and China, and laminate in Russia. Our capital structure is well positioned with additional liquidity available for growth opportunities. The company is well positioned as the industry improves from pent-up demand and economic growth.

With that we'll be glad to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Dan Oppenheim from Credit Suisse.

Dan Oppenheim - Credit Suisse

Just wondering if you can talk a little bit more about the pricing environment. You talked about that you lost a little bit of volume; it was on the pricing, but then used promotions to regain share. Would it be difficult then to pass on higher cost for raw materials? How do you see that coming through next year? How do you see the pricing environment shifting here?

Frank Boykin

Well, I think that we were a little aggressive in some of our price increases relative to competition in the marketplace, and so we've made adjustments for those. The raw material prices in all the different categories, as those go up they have to be passed through to the customers across the marketplace and that's our intention where it's required.

In our Unilin business, we've announced multiple increases already. And in each of the businesses, we're looking over where they are and making terminations where they have to be done.

Dan Oppenheim - Credit Suisse

Okay, and then secondly I was wondering about, you had commented about an expectation of growth in residential in 2011. Do you have concerns about the lower existing home sales activity that we are seeing now, which then likely translates into reduced repair model activity, at least in the first half of 2011?

Jeff Lorberbaum

We're optimistic about the improvements because they are at very low levels, and we believe that those levels will improve as the economy improves and as people get more comfortable spending money in the remodeling segment which they have been postponing. So we're reasonably optimistic. It's a little early to tell, but it appears that the commercial remodeling businesses, we're seeing some more activity presently and going forward. So we're expecting improvement.

Operator

Your next question comes from the line of David MacGregor from Longbow Research.

David MacGregor - Longbow Research

Pretty tough market out there. I don't know how many ways we can slice and dice this one. Jeff, a couple of messages talk about the emerging market growth, and you've got Mexico, you've got the new plant ramping in China, the Russian distribution, the laminate facility over there. What are you generating right now in terms of emerging market revenues, and how does that grow over the next 3 to 5 years?

Jeff Lorberbaum

In Mexico, historically we've had a limited share of the marketplace; it's been less than 10%. And we focused on using the capacity to support our U.S. business. As the industry slowed down, we started increasing our participation in the marketplace and broadening our customer base. We're making good progress in there.

The market place in Mexico is about half the size of the U.S. market in dollars but it's got similar volume because the average price points are difference on the products. We had been focusing originally before on basically high-end products in the marketplace. In the last year, we have started broadening out. So we compete in all price points in the marketplace, preparing to put more capacity in the market.

We have a site selected down there, and we think that we can continue to increase our participation in the market. The market different than the U.S. market did not drop as dramatically as the U.S. market did. And this year, the market is actually expected to grow about 3% in the ceramic business which is a good sign. So we think we are prepared well for that marketplace and can improve our position with the new capacity and lower cost product that we are introducing and a plant setup to make those.

In China, we have completed the Sanfi joint venture. The marketplace for Ceramic I think is around 75% of the foreign market. The Ceramic is about 60 billion square feet, which is about £25 greater than the U.S. marketplace. The market is fractured; the largest players in it only have 2%, 3%, 4% market shares. There is huge opportunity in growth.

The company we've got together with has just built a new facility. They have one facility in South in Foshan that's about completely filled up. We built a new facility, which they were in the process of completing in the North. The capacity of the two things are close to 600 million square feet, which compared to the U.S. would be a huge capacity in the U.S.

We think there are huge opportunities to improve the product line which they are focused on, basically polished porcelain. The glazed wall tile is a limited part of the marketplace but it's growing rapidly, glazed tile, unglazed tile. We believe we bring them additional styling and design. Way they are improving the operations of the business, we think we can learn from them.

So far we've put in place a lot of discussions that put a new line in, in glazed to high end glazed tile, which is just starting up which we expect to start the season product from. We have started switching some of our polished porcelain purchases to them already.

So we think we are well positioned in the marketplace there in the top ten of the companies. So we think we are in good position. We think that the new plant will turn up profit next year as we fill it on up. Just as a note, the first quarter is the low part of their seasonality as they take extended vacations. And the cold weather, especially in Illinois impacts the building and repair and modeling businesses up there, so the first quarter would be lower. But we think we are positioned well to take advantage of the growing marketplace, as well as a consolidation that we think is going to continue going on there.

The Russian business, we started two years ago by starting to distribute tile into the Russian marketplace. We've built up a core business. We then put in local inventory to support a broader business. Presently we are expanding our customer base broader. And the plant is expected to start-up in mid next year. And we believe there is a huge opportunity to grow that from a very small business.

And we believe the economy in Russian is going to continue growing, and we think we are positioned well for the initial step into that marketplace. I think all of these are good opportunities for us, and some of the will take a year or two before we see the results. So I think we are building a good infrastructure for growth opportunities in the future.

David MacGregor - Longbow Research

Thank you. That's a very thorough coverage of the point. I appreciate that. What would you be generating right now in revenues from those combined markets? And can you give us a sense of what your thought process might be around a 2013 or 2014 number?

Jeff Lorberbaum

Presently they are relatively small. We feel we had less than 10% of market in Mexico. The joint venture only has about 2% of the market there, even though we're like the eighth largest player in the marketplace.

David MacGregor - Longbow Research

Can you talk about in dollar terms?

Frank Boykin

Not at this point, but it is basically a small but growing opportunity for us David in all three of those markets.

Operator

Your next question comes from the line of Michael Rehaut from JPMorgan.

Michael Rehaut - JPMorgan

First question, I was hoping to drill down a little bit more on the Mohawk margins, and you know understanding that there a lot of moving pieces here. But when you talk about kind of now adjusting back prices on specific products and initiating selected promotions, how are we to think about margins for next year in that segment, given that you've come a little bit off the bottom here?

Obviously, it's still a long way back to normal margins. But could we see potentially some margin compression in this segment in 2011 relative to 2010? Or do you expect this giveback on some of the price, et cetera, to be potentially offset or even more than offset by the volume leverage that you're also referring to?

Jeff Lorberbaum

I think the answer is the same for all our businesses. We've spent a lot of time reducing the infrastructure costs across all the businesses. We're expecting volumes improvement in all the businesses. Our plan in all the businesses are for margin expansion next year with volume increases leveraging all the work we've done over the last couple of years. I think the answer is consistent across all of them.

Michael Rehaut - JPMorgan

Okay. And also a couple of number related detailed questions. Frank, can you give us a view for the tax rate for 2011? And also, the $1.7 million of investment, would that run through a particular segment in the operating earnings or in the other?

Frank Boykin

The first question on tax rate is looking in the low and mid-20% range going into 2011. Of course, it's going to depend on how the year turns out and how the mix is between the different regions, because we've different rates in different regions. And your other question was what?

Michael Rehaut - JPMorgan

The 1.7 million of (Shine) investment, where was that in the income statement?

Frank Boykin

Other income.

Michael Rehaut - JPMorgan

Okay. And also just interest expense for 2011, do you have an initial figure for that?

Frank Boykin

It's probably going to be in the $29 million to $30 million fourth quarter range, somewhere around there.

Operator

(Operator Instructions) Your next question comes from the line Sam Darkatsh from Raymond James.

Sam Darkatsh - Raymond James

Two questions. First off, Jeff, your market share of the carpet business a little softer at least than the industry reports would suggest. Specifically, on the residential side, I guess in order of importance, is it more of a reflection of you keeping just being steadfast on price or is that more of a reflection of the PET under-representation? I guess where I'm getting at is, looking forward if you're looking to regain market share, which of those two particular items would be of more consequence.

Jeff Lorberbaum

I think you have the right to. I think that the price onus that we had that we lost some share in some of the opening price commodity marketplace is that we reacted a little slower in the marketplace. We lost some position. And I think that is a part of it.

The second is that we didn't anticipate the polyester gain quite as fast is it's moved. And we are introducing products to gain the share in that that we expect. We have changed the manufacture equipment to support it. We've put in an additional investment in extrusion and will start in the first quarter. We're introducing products actively, and I think we're well positioned to get back where we want to be.

Sam Darkatsh - Raymond James

In terms of order of importance, the PET intros would be less margin dilutive, I would imagine, than cutting price. That's why I am asking the question in terms of the degrees of significance.

Jeff Lorberbaum

I don't know how to put a number on it, one you'd like.

Sam Darkatsh - Raymond James

Okay. I'll move to the next question. Frank, the four shipping days, I'm guessing that was a similar sales impact of 6% that we saw in the first quarter. How should we look at that from an earnings standpoint? Should we look at it from a contribution margin or an operating margin? And are you trying to get the effect of that on EPS?

Frank Boykin

More of an operating margin and the contribution margin. It's seasonality, Thanksgiving, Christmas time, that's going impact both the sales impact and the margin impact.

Operator

(Operator Instructions) Your next question comes from the line of Eric Bosshard from Cleveland Research Company.

Eric Bosshard - Cleveland Research Company

Two questions for you. First of all on pricing. I am interested, Jeff, your perspective on the share issues or the pricing issues in carpet and Unilin, and specifically, if you think there is something structurally different where they're becoming more price-comparative categories, or if you look at it just as a cyclical factor.

Jeff Lorberbaum

On the carpet side, we had the rising raw materials going into the third quarter, and we were trying to read the various marketplaces and what was going to happen. We thought we did the right thing. And add to the fact, we (inaudible) took us a little too long to adjust. In normal cases, you go into these increases and you've to adjust for what's going on in the industry.

I think it's just a normal placing in our aggressiveness to try to manage it. Where we thought maybe we were compressing the margins ourselves, we took a little more firmer stand. So I think that's just a normal course of event.

The Unilin side, there has been a huge upward move in the wood prices as well as the other raw materials being used in it. And that's compressed the margins as we lag it. We thought that possibly we'd be peaking in the second quarter and it's gone up substantially since then. At this point, it does look like it's flattening out, and we have to get the pricing back in line with it. I don't think why they're going to disrupt the long-term view of the business.

Eric Bosshard - Cleveland Research Company

From a Unilin perspective, in terms of the competitive forces impacting that business, it seems like we continue to see lower-priced quality laminate and fake hardwood products competing against laminate. Do you have a thought on how the is profitability dynamics of that business is evolving?

Jeff Lorberbaum

The average sealing prices are coming down in the marketplace and have been. It was anticipated that that would happen in the marketplace. Within that, we typically are not as impacted as much, because we have a very limited share of the commodity products of the marketplace. Typically, the commodity products are more effective. We tend to drive our business through product differentiation, much more so than the average of the marketplace, and we spend a lot of time on innovation.

So they are down a percentile, and we've cut our costs in the manufacturing and infrastructures of the businesses. We have the other segment, board businesses, which are smaller pieces. But as you go through the cyclical downturn, the costs tend to go close to cash costs. You then put back with a rising environment of cost. And over time, we expect them to come back to more normalized levels, but that's typical of where we are in the process.

I think we'd continue to invest in increasing our geography. We will continue to invest in broadening the product lines with new products, the niche products, the insulation board business moving into Russia. We are actually looking in Eastern Europe to do more in those marketplaces. And we're continuing to look at other geographies around the world.

So I think we're well positioned. The margins long term would be hard to hit the high teen margins like we did at one point.

Eric Bosshard - Cleveland Research Company

And secondly, you sound quite optimistic on 2011, margins as well as volumes. And I understand the margin optimism. But in terms of the volume optimism, especially in light of this quarter and what last quarter looked like, I'm just curious what is giving you what sounds like a little bit of incremental optimization about 2011 volumes?

Jeff Lorberbaum

We see that in 2010, we had the new construction business that's still relatively low. Every estimate that we're seeing shows 2011 new construction being better than 2010. We believe that the consumers are getting in better position from a debt basis. We believe that there is a little more optimism in the world. Spending is going up. There is a little more employment. We tend to focus on unemployment. There is a little more employment. So our assumption is that we will see some improvement in the remodeling fees as you go through.

If you look at the commercial business, I think there are lot of signs that possibly we're at a bottom and that remodeling is improving. But if you take major pieces of the business, they all look like next year we will be better. The question is how much and when. Is it more difficult? But to see in the crystal ball, it looks like there is very limited view of it going down, and the question is how much will it improve.

Operator

Your next question comes from the line of David Goldberg from UBS. Your line is now open.

Susan Maklari - UBS

It's actually Susan for David. Given the fact that you're continuing to take some costs out of the business and assuming that most of the low hanging fruit has already come out of that, can you give us some idea of the choices that you're now making and how they relate to the longer-terms goals that you have for the different segments of the business?

Jeff Lorberbaum

The choices in infrastructure or capital investments? I don't exactly know where you're headed.

Susan Maklari - UBS

Where are you headed in terms of the capacity and how you think that positioned you for an eventual recovery and then also in terms of the different investments that you are making in the segments?

Jeff Lorberbaum

On the capacity side, we think we have enough capacity in place to manage the increases in volume over the next couple of years with some capital investment. We're planning to invest more next year than we did this year. This year, I think we put in about $180 million of investments. Next year, we're planning to put more in. Those will do two things. They will gives us improved costs in some places as well as where we think we have limitations in capacity. They will take care of those as we go through.

When you look at the whole marketplace, we think that there are opportunities to participate in world markets better. You heard the explanation over the three in China, Russia and Mexico. We are looking in other marketplaces in different product categories and various ones going through. We haven't concluded in any of them, but we continue to look at those. And I think we're positioned well with the capital support for whatever we need.

Susan Maklari - UBS

And then just kind of building on and I know that it's still maybe a little early, but how do we think about for the CapEx trends especially for next year. Given the investments that you're making, especially like the new Mexico plant, that sounds like it will probably start to be a project that comes next year.

Jeff Lorberbaum

In all of those pieces we've already started investing.

Frank Boykin

The investment like Jeff said, Susan, next year is going to be higher than it is this year. We've not been into budgeting yet. So we don't have a number or an exact number to give you. But as we said, we do have the tile plant that has been started or rather they had found a site and they're going to start on that next year. And so that's probably going to be $65 million to $70 million to build that.

And we are starting, as Jeff had mentioned, the Russian laminate plant and that's probably about $30 million investment in total, with a portion of that in this year and then a portion of it in next year. And then we've got some other projects that we're looking at too. We just need to add them all up in the cycle, we want to go through with or not.

Operator

Your next question comes from the line of Stephen East from Ticonderoga Securities.

Stephen East - Ticonderoga Securities

Jeff, you talked a lot about the forward prices looked like they peaked in Europe. Can you give us little idea of what's going on in the U.S. for the oil based products? Oil started to move up again? Are you seeing anything or have we basically flattened and started to turn down there?

Jeff Lorberbaum

The third quarter were relatively stable, and likely we started to see increases in raw materials at the moment we're watching the oil prices and the chemical prices trying to turn in other long-term impact. At this point, we're still evaluating and then trying to decide what pricing considerations we need to do if any.

Stephen East - Ticonderoga Securities

Frank, I guess this is directed to you. If I look at the fourth quarter, what's your guidance was 53 to 63. From your prior guidance on tax rates et cetera, it looks like about a nickel was coming at it, because of the tax rate. And then four fewer selling days, I just look at it, and is that about $60 million revenue impact. And I was thinking about it 20% to 25% margin hit, which led me to around $0.10 or $0.15 impact in quarter. Am I thinking about those two issues properly?

Frank Boykin

Like I said earlier, with the holiday season at the end of the fourth quarter now and we had just such a difficult time with sales trailing off. I think like we said before 4% to 5%, 5% to 6% less than what it would have been otherwise with the fewer days. And in the margins, they're going to be lower in the second half of the quarter than they are in the first half of the quarter.

Jeff Lorberbaum

We did have to build on a seasonal change as it normally occurs.

Operator

Your next question comes from the line of Laura Champine with Cowen & Company.

Laura Champine - Cowen & Company

Jeff, when you talk about giving up a little bit of share against pricing. Your more aggressive competitors, were they small players, it might be a little desperate at this point in the cycle or was it your larger competitors, who just saw an opportunity.

Jeff Lorberbaum

It's normal that prices move around. It's normal that after you announce some, there are adjustments in the marketplace at all levels. I think we were a little more firm in what we were doing, trying to lead the marketplace and determine whether we were causing it or whether we were following it. And I think it took us a little longer to react than normal. And we suffered a little bit because of it. I think it was a good learning experience.

Laura Champine with Cowen & Company

I know you've been through similar things before, Jeff. I mean, how does it take to regain share and where does that put us in 2011 in terms of share in the Mohawk carpet business?

Jeff Lorberbaum

We'll see some improvements with commitments that we have given on the first part of the year.

Operator

Your next question comes from the line of Dennis McGill from Zelman & Associates.

Dennis McGill - Zelman & Associates

Just the first question, Frank, can you talk sort of longer-term tax rate. I know a few years ago you had some different tax planning impacts that we're going to linger for a couple of years. Can you give us any update on where you might be a couple of years out assuming in a normal mix of international versus domestic business?

Frank Boykin

Yes, a normal mix of international-domestic strategy we have in place assuming that none of the tax laws that changed here are overseas, I mean kind of the low-to-mid 20% range.

Dennis McGill - Zelman & Associates

And secondly, when we think about the different businesses over the next year or two without the cost saving measures you had in place, can you just review what normal incremental margins look like by segment, and how that might differ in the early stages of the recovery?

Frank Boykin

I'm not sure I've got it broken down Dennis right here in front of me in that level of detail for those different time periods, but we can talk afterwards and I can go through it with you.

Operator

Your next question comes from the line of Keith Hughes from SunTrust.

Keith Hughes - SunTrust

As the quarter progressed end of October, have you noticed any changes in the pace of business specifically in residential in the U.S. and in Europe?

Frank Boykin

I can't say that we've seen any dramatic changes in one direction or the other.

Keith Hughes - SunTrust

Second question on the ceramic tile business, Dal-Tile, are you starting to see the upturn there in commercial? I know there are in a lot of things besides office where all the strength seems to be at this point. But as in the hospitality and restaurant, things like that, has that business started to improve?

Frank Boykin

We have started to see improvements in the various channels. You have to understand that the ceramic business versus the carpet business, for instance, there is a significantly greater part of it in new construction. Remember that lags coming in, the ceramic business held up better coming into it and it tends to lag a little more coming out.

We are seeing across broad channels more things going on with people starting putting projects back in and starting to upgrade them. It's just sort of across the board. And that's something that we're seeing in the institutional piece and the educational pieces and we're still seeing other parts of the business improve. So how that translates completely and keeps going, that's anybody's guess.

Operator

Your next question comes from the line of John Baugh from Stifel Nicolaus.

John Baugh - Stifel Nicolaus

Mohawk segment, polyester and this shift, Jeff, is this something that when you look at it? Because you have the exclusive, I believe, on Triexta at least on the residential side, is this something that helps Mohawk, or has the rush to commodity polyester, or assume you don't have the same presence hurt you? And then how much of the CapEx in '10 and '11 is going into polyester via extrusion capacity?

Frank Boykin

There's really in each one of the different marketplace, the Triexta is basically positioned versus nylon rather being positioned versus the PTT. And so the PTT is a separate market that I think we were surprised that the rapidness of its growth we participate in it. And we need to participate in more of the asset that we putting in for exclusion are flexible. And they can make any of the various raw materials required. So as the market shifts, we can shift between them.

Jeff Lorberbaum

The number you had asked for between this year and next year is in the 50 to 60 range for extrusion capacity.

John Baugh - Stifel Nicolaus

Total?

Jeff Lorberbaum

Yes. Both years.

Operator

Your next question comes from the line of Joshua Pollard from Goldman Sachs.

Joshua Pollard - Goldman Sachs

I just wanted to understand your strategy on pricing versus market share in the Mohawk segment? You said that today's prices felt like you did it maybe too aggressively. Are you pulling that back to get your market share in place? If you look at your other two segments, you said that costs started to creep up too fast, had its impact on margins and now you guys are looking to raise prices to recover the margin?

I am trying to understand which is of most importance to you as you look out to 2011 keeping your margins or keeping your market share, I recognize that having both would be great, but in this environment, I would love to understand what the strategy is?

Frank Boykin

The goal is to recover the cost and make sure we positioned well. You have to break the different markets down. And as you go through the different value propositions, the more commoditized the market, the more defines the market is. And so in the lower end of the marketplace, if you want to compete in it, you have to be competitive with the alternatives in the marketplace and we intend to be so.

In the other product categories, it depends on what value you bring in to the marketplace, its style, design, service quality et cetera. And we are supposed to have the prices of the products to reflect the value we're putting in.

Joshua Pollard - Goldman Sachs

And then, I guess, my second question would be, in your prepared comments, you said that you expect material prices to stabilize. Could you give us a bit more detail on exactly which materials are you expecting to remain stable in 2011 within your outlook for higher margins next year?

Jeff Lorberbaum

What's happening is each of the different businesses have different materials and different pieces. The comment there was around the Unilin segment. The Unilin segment has a major part of their costs are based on the wood prices. The wood prices in U.S. and Europe has gone up dramatically, and we believe that those prices are at high levels.

In the short term, we think that will stay at those levels for the near term. And the question is as you move through next year, if the wood supply would move off the peak levels they're at. There's a possibility that our plans at the moment are that they'll stay at those levels.

On the Eastern Europe businesses, they are different ones.

Operator

Your next question comes from the line of Carl Reichardt from Wells Fargo Securities.

Carl Reichardt - Wells Fargo Securities

Jeff, you talked in previous quarters about the trade down in the carpet segment and mix in particular. I am curious if you think that's basically evaded now? And your overall mix in residential, carpet is normalized, like you'd expect to see in a more normal environment, or have you still got a larger mix of the lower end stuff moving through?

Jeff Lorberbaum

There are two separate pieces to the question. One is that in general, the marketplace has pushed more value products to the consumer that they think the consumer is looking forward to. And so all the different levels of the industry are trying to get lower price points to bring customers in to their retail establishments. And so that's impacting the general mix.

There is a second mix question. As the raw materials have gone up, the industry is losing from the historical nylon and polypropylene raw materials more to PET, which is a lower cost alternative to making the same thing. So as the industry moves to more PET, that will be a lower value cost product than the equivalent nylon that we're seeing the trends. And that will continue as long as the differentials between the other categories remain where they are.

Carl Reichardt - Wells Fargo Securities

Is China for you now, the Foshan and Mongolia plant, is this all residential or mostly residential at this point? And what's your expectation of the res-commercial mix as you look out a couple of years there?

Jeff Lorberbaum

I am not sure I have that answer right now. They use a lot of the same products going for both categories. And the biggest part of those direct markets is in Thailand. And they like the way it looks. In the U.S. market, there is the same thing. They're at the high end of the marketplace due labor that's in them. So I don't really know the percent here.

What we look at in both cases is that the amount of homes are increasing, the size and quality of homes are increasing. So that market still has a lot of potential. And in the commercial business, the infrastructure and new businesses continue to expand. They may be trying to slow it down a little bit now, but it's still going to continue at significant growth rate. And we think flooring will continue to grow at a greater rate in the general economy.

Operator

Your next question comes from the line of Bob Wetenhall from RBC.

Bob Wetenhall - RBC

If you had to rank it, are you more concerned in 2011 about weaker volume or higher input cost?

Jeff Lorberbaum

As you heard from the prior pieces, we're fairly confident that volume will improve. The question is how much and when. So the raw material cost, there is tremendous pressure across all commodities today as we've ended up with worldwide markets. And where used to be an island in the raw material and commodity costs to go up and down with the U.S., what we're seeing is that worldwide markets of the U.S., capacities are being exported or being balanced out around the world. And we're going to have to adapt to that in all markets and all product categories.

Bob Wetenhall - RBC

I am just trying to understand more specifically if you experienced a demand recovery, I assume that would be accompanied by more demand for input materials as well, which could put upward pressure on your input costs. And I am just trying to understand if that occurs, I assume the cost would move up before you can take pricing? What can you do to offset that lag?

Jeff Lorberbaum

Off setting the lag is going to be difficult. What you've heard is in the wood business, we believe that increased commodity cost is already here, and we're dealing with it as we speak. You had also heard that in the Mohawk segment, we're starting to see some of it, and it's a little too early to tell what's going to happen to it, because it's been volatile. And so we're evaluating, as we speak.

In the ceramic side, we talked about a large part of our products are FOB destination. So those raw materials, the gas to manufacture it which is still relatively at reasonable prices, and then you have the transportation costs where we deliver locally. And you heard us saying we've announced prices to push through the transportation costs.

So I think that there's potential that have raw material inflation in the Mohawk's segment. But it's a little early to tell where it's going to end up or not. And the other ones we are having it and we are acting upon it as we speak.

Operator

Your next question comes from the line of Alex Mitchell with Scopus Asset Management.

Alex Mitchell - Scopus Asset Management

I just wondered if I could ask you a big picture question. As you expand into other markets around the world, are you all concerned about your ability to control the fluctuations in those markets, as well as you've controlled it here in the U.S. Obviously a very hand on approach moderating up and down production and cost.

Jeff Lorberbaum

Our approach as we move into different marketplace has been to find local management. I think it's probably the most important thing that we have to find, is the right management group that understands it. And I think that we believed that taking the same decision-making processes and overlaying them in different cultures and different environments is a mistake.

And what we try to do is allowing ourselves with management that understand those and then take the philosophies we have that we think are good, and review those with philosophies they think are good. Because many times they have many ideas also we haven't considered. And we try to combine those rather than take a formula and overlay it over the top of anything. And if you look at our European business I think that it shows there how we operate the business and what we do. And I think it's the right approach.

Alex Mitchell - Scopus Asset Management

So it sounds like you're going to more volatile economies than you have in Europe or in the U.S.

Jeff Lorberbaum

Well, it would be hard to be more volatile than we have been in the last three years.

Operator

This concludes today's Q&A session. I will now turn the call back over to Mr. Lorberbaum.

Jeff Lorberbaum

We appreciate everyone joining us. We'll continue to manage the business and take the actions we think are appropriate for the long-term viability of the business. We continue investing in both the U.S. market as well as internationally, and we think we have lot of opportunities going forward. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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