MHK07/03/07

51
INVESTOR PRESENTATION Charlotte, NC May 3, 2007

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Transcript of MHK07/03/07

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INVESTOR PRESENTATIONCharlotte, NCMay 3, 2007

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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

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WelcomeFrank BoykinChief Financial Officer

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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

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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

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Mohawk OverviewJeff LorberbaumChairman and CEO

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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

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$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

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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

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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

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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

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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

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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

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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

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Unilin PresentationPaul De CockPresident Unilin N.A.

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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)

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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%

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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

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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

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LAMINATE FLOORINGGLOBAL MARKETUNILIN POSITIONING

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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

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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

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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

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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

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Source: National Floor Trends 2006

1. UNILIN REGARDED AS TOP MANUFACTURERBY U.S. RETAIL COMMUNITY

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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

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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)

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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)

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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

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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

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U.S. LAMINATE MARKET

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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

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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)

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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)

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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

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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%

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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

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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

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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)

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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)

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Plant TourProduct Details Technological Highlights

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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

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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

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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

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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

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HDF MANUFACTURING PROCESS (1)

Conversion of wood and chemicals into Raw HDF panels

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Source: Merbok website

HDF MANUFACTURING PROCESS (2)

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CONCLUSIONS

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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)

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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)

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