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Transcript of MHK07/03/07
INVESTOR PRESENTATIONCharlotte, NCMay 3, 2007
Certain of the statements in this presentation, particularly anticipating future performance, business prospects, growth and operating strategies, proposed acquisitions, and similar matters, and those that include the words “believes,” “anticipates,” “forecast,” “estimates,” or similar expressions constitute “forward-looking statements” within the meaning of Securities Act of 1933 and the Securities Exchange Act of 1934. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions which involve risks and uncertainties. The following important factors could cause future results to differ: changes in industry conditions; competition; raw material prices; timing and level of capital expenditures; integration of acquisitions; introduction of new products; rationalization of operations; and other risks identified in Mohawk’s SEC reports and public announcements.
SAFE HARBOR STATEMENT
WelcomeFrank BoykinChief Financial Officer
INTRODUCTIONMohawk Management Team
Chris WellbornChief Operating Officer
Jeff LorberbaumChairman and CEO
Roy Foster, V.P. SalesUnilin Flooring N.A.
Robert Leahy, Sr. V.P. Sales Mohawk Hard Surfaces
Paul De CockPresident Unilin N.A.
Frank BoykinChief Financial Officer
Randy Smith, Plant Mgr.Unilin Flooring U.S.
Roger Farabee, V.P. Marketing Unilin Flooring N.A.
Guenter HeyenPresident Unilin U.S. MDF
Frans De CockPresident Unilin
Thursday, May 3rd – Marriott Charlotte Center in Charlotte, North Carolina
7:00 a.m. to 8:15 a.m. – Management presentations: Jeff Lorberbaum, Chairman and CEO; Frank Boykin, CFO; Paul De Cock, President Unilin North America
8:15 a.m. to 3:15 p.m. – Tour of the Unilin manufacturing facilities in Mt. Gilead, N.C.and Thomasville, N.C. Buses will be provided to both facilities. Box lunch will be provided.
3:15 p.m. Following tour, bus transportation will be provided to Charlotte Douglas International (CLT) and Piedmont Triad International (GSO – Greensboro) Airports
AGENDA
Mohawk OverviewJeff LorberbaumChairman and CEO
Total Flooring Product Offering
Leading Market Positions In All Major Flooring Categories
Strong Brand Identity
Pervasive Sales Coverage
Flexible, Efficient and Vertically Integrated Manufacturing
Superior Distribution Infrastructure
Consistent Financial Performance and Disciplined Management
Mohawk Carpet
MOHAWK HIGHLIGHTS
$3.55
$5.49
$4.62$4.39
$3.00$2.61
$1.86
$1.30
$6.06
$6.70
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
Sales EPS
Net Sales 17% – AGREarnings Per Share 20% - AGR
Not restated for pooling.
37%
43%40%
15%
18%
24%
$1,992
5%
$2,407
$3,185
$3,401
$3,441
$4,517
$4,999
19%
$5,880
10%
$6,620
(1,2)
(1) Adjusted $22 million after-tax for one time non-cash charge for purchase accounting inventory in 2005(2) 2005 and 2004 restated to reflect favorable impact of change from LIFO to FIFO ($0.43 and $0.03, respectively)
(2)
$7,906
11%
FINANCIAL DISCIPLINEConsistent Financial Performance
37%$8.5$8.9Hard Surface
100%$22.8$24.2Total Flooring
5%1.21.3Laminates
11%2.42.6Hardwood
12%2.82.8Vinyl & Rubber
9%$2.1$2.2Ceramic Floor Tile
63%$14.3$15.3Soft Surface
12%2.72.9Area Rugs
51%$11.6$12.4Broadloom Carpet
Share 20042005
MarketSales(Dollars In Billions)
(Source: May 2006 Floor Focus)
Mohawk Rugs
U.S. FLOORCOVERINGMarket Overview
Total Industry 5%
Broadloom Carpet 2 – 3%Area Rugs 8%
Hardwood 8%Ceramic Tile 8%Laminate 10%Vinyl 0
Consumer Advertising
(Source: Management Estimates for future growth)
FLOORCOVERING GROWTH
2%
17%
57%
24%
2005
Diversified Customer BaseOver 30,000 Customers
(Source: July 17-31, 2006 Floor Covering Weekly)
Other
Contractors
Specialty Stores
Home Centers
Consumer Advertising
FLOORCOVERING RETAILERS
BEST IN CLASS DISTRIBUTION NETWORK
Over 2,300 sales representatives in North America
300 distribution points
State-of-the-art logistics system
1,000 trucks
1992 to 2000 Focus on Soft Surface Acquisitions
2000 Added Hard Surface Sales Force
Began Sourcing All Hard Surface Categories
2002 Acquired Dal-Tile – Leading Ceramic Position
2005 Acquired Unilin – Leading Laminate Position Karastan
MOHAWK GROWTH STRATEGY
BUSINESS CLIMATE
Business Environment• Slowing GDP growth
• Housing contraction
• Credit tightening
• Positive business investment
• Cyclical downturn
• Commercial growth
• Postponed remodeling investments
• New housing construction decline
• Escalating material costs
• Trading down (change in price & mix)
Cycle Management• Right size infrastructure
• Increase management effectiveness
• Maximize inventory turns
• Enhance distribution efficiency
• Improve productivity & technology
• Reduce sales & marketing expenses
• Improve service & fill rates
• Build organizational excellence
U.S. Economy
Flooring
Unilin PresentationPaul De CockPresident Unilin N.A.
2006 Revenues(Before Corporate Elimination)
2006 Operating Income(Before Corporate Elimination)
28%10%
10%Mohawk59.9%
Dal-Tile24.5%
Unilin15.6%
Mohawk44.4%
Unilin24.5%
Dal-Tile31.1%
Total : $ 7,906 M Total : $ 839 M
OVERVIEW OF UNILIN (1)
OVERVIEW OF UNILIN (2)
Geographical Revenue Split(Excluding IP)
Product Revenue Split
28%10%
10%Non-US78.0%
U.S.22.0%
Flooring68.0%
Non-Flooring
32.0%
193.0
302.0
437.0
17.3%16.3%16.4%
FY2004 FY2005 FY2006
($ in
mill
ions
)
$ 294 EBITDA
$ 332 EBITDA
$ 348 EBITDA
Remarks ; FY 2004 and FY 2005 Pro Forma for acquisition related statements
$ 993
$ 1,102
$ 1,237
SALES CAGR : 11.6 %
EBIT
Mar
gin
(%)
UNILINHistorical Sales and EBIT Margin Evolution
Foundation of the Unilin Group as a flax board manufacturer located in OoigemLaunch of wood chipboard production
19601960’’ss
Diversification into the production of roofing systems19701970’’ss
Start of production of melamine-faced chipboardsStart of production of laminate flooring in Wielsbeke
19801980’’ss
Launch of Quick·StepInvention of the Uniclic glue-less systemStart of production of MDF boards in Bazeilles
19901990’’ss
Development in the U.S.: - Acquisition of a laminate flooring production plant and of a MDF/HDF plant in North
Carolina- Second green field laminate flooring plant built In Thomasville, NC- Acquisition by Mohawk in 2005
20002000’’ss
A BRIEF HISTORY OF UNILIN
LAMINATE FLOORINGGLOBAL MARKETUNILIN POSITIONING
History of Laminate Flooring
High Pressure laminates (HPL) are developed for furniture applications
1950s 1980s
Laminate flooring developed in Sweden as a new application of melamine HPL
1989
Pergo becomes first significant dedicated laminateflooring company
Unilin also becomes a major competitor following introduction of DPL technology
Mid-90’s
Very fast laminate flooring growth in Europe
Laminate flooring introduced in North America
2000s
Large flooring manufacturers-Shaw, Mohawk, and Manningtonlaunch product line in this booming segment
Early 90s
European wood-panel manufacturers enter the laminate business, in particular Kaindl/ Kronotex, Egger
Witex also enters the market and plays a part in promoting the product
LAMINATE FLOORING HISTORY
Laminate manufacturing has historically been linked to the production of wood panels
192298 305
390 425 479 528 551
157120770
100
200
300
400
500
600
700
800
900
1000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Europe N+S America Asia/Australia
82 136
186 243
365 395
533
620
730
815878
• Europe is the largest manufacturer of laminate products - 551 M m² in 2006 ; + 4 % compared to 2005.
• North American production is growing at a healthy rate (+16 % in 2006, + 21 % over the 2002-2006 period)
• China manufactures the largest proportion of Asia originating products• The share of North American manufactured goods is increasing steadily and represents 8 % of
global production in 2006.
Source: Munksjo Paper
GLOBAL PRODUCTION OF LAMINATE FLOORING
0
20
40
60
80
100
120
140
160
180
200
Chi
na
US
A
Ger
man
y
Brit
ain
Turk
ey
Fran
ce
Can
ada
Pol
and
Iber
ia
Net
herla
nds
Rom
ania
Rus
sia
2004 2005 2006
• China is the largest consumer of laminate products, followed by the U.S. and Germany
• These countries have also shown the largest growth over the 2004-2006 period
Source: Munksjo Paper
CONSUMPTION (M²) OF LAMINATE FLOORING IN THE TOP 10 COUNTRIES
1.1. Superior positioning:Superior positioning: Unilin benefits Unilin benefits from strong brand recognition with a from strong brand recognition with a very good positioning, recognized by very good positioning, recognized by the floor covering dealer communitythe floor covering dealer community
2.2. Product innovation:Product innovation: UnilinUnilin is is recognized as the innovation and recognized as the innovation and product leader with a strong patent product leader with a strong patent portfolioportfolio
3.3. Vertically integrated producer both Vertically integrated producer both in Europe and in the U.S., in Europe and in the U.S., allowing allowing bestbest--inin--class industrializationclass industrialization
4.4. StateState--ofof--thethe--art manufacturing art manufacturing footprintfootprint, allowing best, allowing best--inin--class cost class cost positioningpositioning
5.5. Wide coverage of distribution Wide coverage of distribution channels:channels: UnilinUnilin enjoys a very strong enjoys a very strong presence in all distribution channels, presence in all distribution channels, both in Europe and in the U.S.both in Europe and in the U.S.
Key competitive Advantages Key competitive Advantages Strategic PositioningStrategic Positioning
UnilinUnilin is the worldis the world’’s most s most respected laminate flooring respected laminate flooring designer, manufacturer and designer, manufacturer and
marketermarketer
UNILIN FLOORING5 Key Competitive Advantages
Source: National Floor Trends 2006
1. UNILIN REGARDED AS TOP MANUFACTURERBY U.S. RETAIL COMMUNITY
Embossed in-register
Used for both stone and ceramic look tiles and for a wide range of wood grainsIndustrialized byUnilin
V-groove or jointBevelled edging in wood look laminatesCreates indentation between tiles or planks to give the appearance of a real jointPatent application (2000) and industrialization byUnilin
Direct Pressure Laminate process (DPL)
Straight forward and more cost-efficientDeveloped byUnilin
Glue-less jointsFaster installation (up to 50% time saving)Most laminate floorings have are now glue-lessPatented by Unilinas the « Uniclic »joint which has become the industry standard
New surface technologies
Being developed by most pure-play competitorsQuick·Step a leader in new surface technologies
2000-02 2002-041989 1996 2004-06
History of key laminate flooring innovations
Source: Unilin management
One-step process
2. UNILIN IS A RECOGNISED INNOVATION LEADER IN LAMINATE FLOORING
1. Unilin is the only fully vertically integrated manufacturer in the U.S. controlling all steps from R&D, HDF supply, chemical development, paper saturation, pressing, cutting, milling to distribution.
2. As a consequence Unilin can innovate at every step of the manufacturing process.
3. All these innovations are blended together into every product and this makes it very difficult for competitors to imitate the product advantages.
4. All innovations are patent protected. Patents and the protectionthrough intellectual property (IP) are an integral part of the innovation process.
5. Patent lawyers and analysts are part of every innovation very early in the product development process and check world-wide IP conflicts and patent filing possibilities.
3. UNIQUE INDUSTRIALIZATIONPROCESS (1)
6. All R&D and manufacturing skills come together in the transfer of the innovation into an efficient, scalable and cost-effective manufacturing process.
7. The capabilities of innovation, protecting the innovation and industrializing the innovation give Unilin a distinct advantage in the marketplace.
8. Summarizing : • Unilin is the world’s most sophisticated laminate manufacturer• Unilin handles very high degrees of development and
manufacturing complexity • Unilin is very cost-competitive
3. UNIQUE INDUSTRIALIZATION PROCESS (2)
1. Superior industrial footprint:• 13 production facilities located in
Belgium, France, the Netherlands and the U.S.
2. Competitive scale• The second largest MDF/HDF plant
in the world (Bazeilles - 541,000 m3)• 4 laminate flooring plants – each
with specific focus• The only HDF plant in the U.S.
focused on thin MDF and HDF manufacturing
3. Significant investments made in the recent past• High level of automation• State-of-the-art equipment
4. Optimal location, close to raw material sources and main customer base
WielsbekeWielsbeke(Laminate Flooring & Melamine)(Laminate Flooring & Melamine)
BazeillesBazeilles (MDF & Chipboards)(MDF & Chipboards)
4. STATE-OF-THE-ART PRODUCTION FACILITIES
Overview of UNILIN Laminate Flooring Channel Coverage
Specialty stores through independent distribution
Specialty stores through Mohawk direct distribution
Home Centers and Warehouse Clubs
• National presence through Mohawk Sales Force
• Captive audience with Mohawk Aligned dealers
• Increased focus on alternative segments: commercial, new home construction
• National Presence through a network of 12 regional distributors in the U.S.
• Participating in all major specialty buying groups
• Focus on differentiated products
• Growing importance
• Private Labeling
• Interesting growth opportunity for Unilin/Mohawk
Multiple branding options – account
specific
5. U.S. CHANNEL STRATEGY TO SUSTAIN GROWTH AND GAIN MARKET SHARE
U.S. LAMINATE MARKET
U.S. LAMINATE FLOORING REVENUE GROWTH
$340 $632 $737 $768 $868 $968 $1,226 $1,361 $1,514 $2,438
13.0%11.5%
26.6%
9.9%11.2%
4.2%
11.0%
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
1997 1999 2000 2001 2002 2003 2004 2005 Est 2006 Est 2011 Fcst0%
5%
10%
15%
20%
25%
30%
Revenue (Millions $) Growth (CAGR)
Source: Catalina Research
0
50
100
150
200
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
North Americanimport
North Americanproduction
• The North American Market is still very import driven (58% mainly out of Europe and China in 2006 compared to 63% in 2002).
• North American production is growing faster than imports in 2006. This will continue as more capacity comes on stream domestically and existing capacity is fully utilized.
• This trend will mitigate some of the margin pressure going forward because import duties and logistical costs are significant.
Source: Munksjo Paper
STRUCTURE OF NORTH AMERICAN MARKET (M²)
Source: Catalina Research
Typical adoption S-curve indicating that Europe is approaching its target penetration level, while penetration in the U.S. is still low and has
room to grow
PENETRATION IN THE U.S. MARKET IS STILL LOWER THAN IN MOST EUROPEAN COUNTRIES
France
UK
US
Germany
Belgium
Netherlands
Spain
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 20040
5
10
15
20
25%
Laminate flooring market share of flooring market (% of total volume)
Source: B2B 2003, expert and retailer interviews
LAMINATE PRICING EVOLUTION
Price decrease in Europe began when laminate penetration reached an inflexion point.
Prices remain stable or decrease slightlyStrong price
decreasePrices remain
stable
France
UKBelgium
Netherlands
90 91 92 93 94 95 96 97 98 99 00 01 02 03 040
5
10
15
20
25%
Laminate flooring
market share
U.S. LAMINATE TRENDSSales by Channel
46.0% 44.0% 40.0%
50.0%50.4% 50.0%
1.0%2.6% 4.0%4.0% 6.0%
0.0%
25.0%
50.0%
75.0%
100.0%
1997 2006 2011
Specialty Retail Home Center Internet Builder Supply Dealer
Source: U.S. FLOOReport – 2006 & Internal Analysis
$330 MM $1,514 MM $2,438 MM
0.3%
82.0%
48.8% 45.3%
15.0%
31.5% 33.2%
2.0%
13.2% 14.3%
6.5% 7.2%
0%10%20%30%40%50%60%70%80%90%
100%
1997($330MM)
2006E($1514MM)
2011E($2438MM)
CommercialRes NewRes Remodel DIYRes Remodel Pro
Source: U.S. FLOOReport 2006
1.0%
U.S. LAMINATE TRENDSSales by Segment
The 5 main objectives for the North American laminate business are:1. Grow the Mohawk business well above category growth rates using
direct distribution advantages and product technology leadership.2. Establish Quick•Step as the brand and market leader in the
Specialty Retail distribution channel.3. Penetrate new market segments by using Mohawk/Daltile
relationships and distribution advantages:– New Residential– Commercial
4. Obtain significant new business in the Home Center Channel, an underdeveloped channel for Unilin.
5. Use product differentiation based on technology and smart product management to generate higher ASP’s and better operating margins than the competition.
KEY STRATEGIC OBJECTIVES IN NORTH AMERICA
1. Established new U.S. Based Management team 2. Transferred Unilin North America Headquarters to Dallas to
leverage Daltile infrastructure:• New marketing team led by VP Marketing Roger Farabee (formerly
Mohawk Ceramic) consisting of Daltile and Unilin marketing professionals
• New VP Sales – Roy Foster (formerly American Olean) reorganized and strengthened distributor sales force
• HQ Finance, IS and HR functions in Dallas• Promoted Supply Chain Director internally to support multi-channel
growth strategy• Use Daltile HQ support to set up specific projects and leverage existing
capabilities (credit, supply chain, etc …)3. Developed brand new Mohawk product line which will be introduced
over the course of 2006/2007
KEY ACCOMPLISHMENTS SINCEACQUISITION (1)
4. Initiated business in the Home Center Category• Launched first products to Home Depot• Making presentations to other Home Centers
5. Realized significant cost savings (both for Unilin and Mohawk/Daltile) in logistics and supply chain by combining Unilin and Mohawk buying power• Unilin domestic freight is managed by Mohawk national transport group• Unilin trans-Atlantic freight is managed by Daltile international transport
group6. Integrated UNILIN into the Mohawk financial reporting process
• Sox compliance• Financial processes
KEY ACCOMPLISHMENTS SINCEACQUISITION (2)
Plant TourProduct Details Technological Highlights
THE DPL PROCESS
Newer technology (~20% cheaper than HPL) introduced by Unilin in 1989Now accounts for almost all of the laminate market
Product performance increasingly close to HPL at more attractive price points
Overlay (protective layer)
Decorative paper
Core layer
Stabilizing layer
• The layers are assembled all at once, pressed together in a single step
• Core layer is made of HDF (High Density Fiberboard)
• Direct pressure products are manufactured using 20-35 bar of pressure
Layers Composition Key characteristics
Protective layerMelamine plastic with aluminum oxide particles
Abrasion resistance
Decorative layer Paper, with a printed image of decorative motif
Color, pattern
Core High-density fiberboard (HDF)
Thickness (6-10 mm)Resistance to waterMechanical propertiesGrooves and edges for assembly, machined into the core
Stabilizing Melamine sheet Dimensional stabilityWater resistance
Soundproofing Felt or other soft material
Only on some products (tend to be high-end): reduce the sound level, and save laying separate sound-proofing material
Hot-pressed together in a single step
Optional
DPL: GENERIC PRODUCT COMPOSITIONINTO FIVE LAYERS
Product charac-teristics Low-end product
Protective layer
Regular abrasion resistance
Decorative layer
Simple photograph of motif, no surface effectsRepetitive patterns
Core 6-7 mm thick, providing basic mechanical resistance
High-end product
Superior abrasion resistance, suitable for intensive passage area
Complex finish aspect (matt + glossy); depth of coloringNumerous surface effects: V-groove, wood grain, etc. (embossed registered)Numerous motifs to avoid repetition
High thickness (>= 8mm), providing high resistance
Other Limited range of accessoriesNo integrated sound layer
Full range of accessories (skirting boards, etc.)Sometimes integrated sound layerReal plank look, feel and sound
Basic productRetail price ~ USD 0.99-1.99 /ft2
High-end productRetail price USD 1.99-4.99 / ft2
Thicker than DPL and more resistant due to higher pressure in manufacturing processLess choice than high-end DPL
Fewer producersLess volume
High thickness (>= 8mm), providing high resistance
Essentially the same as high-end DPL
DPLHPL
Niche productRetail price > ~USD 4.00/ft2
LAMINATE FLOORING QUALITY VARIES, RESULTING IN LARGE PRICE DIFFERENCES
Vertical integration guarantees Unilinmanufacturing excellence and undisputed quality
VERTICAL INTEGRATION
• In-house R&D, design, innovation• In-house chemical development• In-house MDF/HDF production [Bazeilles (Fr) and Mount
Gilead (USA)]• In-house impregnation• In-house pressing• In-house cutting, milling, packaging• In-house distribution
HDF MANUFACTURING PROCESS (1)
Conversion of wood and chemicals into Raw HDF panels
Source: Merbok website
HDF MANUFACTURING PROCESS (2)
CONCLUSIONS
Unilin - definitely the best positioned player in the U.S. Market with great profitable growthopportunities:
1. Participates in the fastest growing flooring category in the U.S.2. Is very highly regarded by distribution and retail community3. The undisputed innovation leader4. The only vertically integrated manufacturer in the U.S.
• With great cost position • Excellent control over product innovation • Unique industrialization process
CONCLUSIONS (1)
5. A clear strategy to grow the Mohawk laminate business at above market growth rates • Responding to market trends• Leveraging unique product knowledge• Using excellent access to distribution channels
6. The management team is in place to implement the strategy7. Leveraging Daltile/Mohawk synergies will further optimize (cost,
channel access) Unilin’s position as we move forward
CONCLUSIONS (2)